As a medical student or medical-student-to-be, I’m guessing you were one of the best readers in your elementary school class. You probably still read constantly—albeit mostly on technical topics nowadays. But despite how much reading is required to earn a medical degree, few students graduate from college or medical school with sufficient financial literacy to effectively manage their adult responsibilities. Only 17 out of 50 states require high school students to study personal finance. But 70% of studentswho go on to college take on student loans. Among other implications, that means that millions of college-bound seniors likely take on substantial student loan debt without even understanding how interest payments work. What’s more, a college education is no guarantee of financial literacy either. A 2019 study by Everfi, a technology company that seeks to drive social change through education, found that fewer than 35% of college graduates take a personal finance course while in school. But 46% of them already had credit cards in their wallets, and more than a third already had debt in excess of $1000.
Becoming financially savvy may not be a top priority for you right now. We get it. Medical students and the physicians they become have many demands on their time. But prioritizing financial literacy is a critical step in securing your future. Financial literacy is correlated with higher net worth—as a cause, not just as an effect. And according to numerous studies, being on top of your finances can improve your mental and physical health.
Foundational Concepts of Financial Literacy
If you feel less than confident in your ability to understand and manage financial matters, I have some good news for you. Compared to what you’re studying, the basic concepts that make up financial literacy are a lot easier to master than, say, organic chemistry. And there are just a few of them. Nonetheless, they are empowering concepts than improve your financial decision making and provide both short-term and long-term benefits:
- Making a budget and sticking to it
- Building your savings
- Understanding interest rates
- Developing an outstanding credit profile
- Managing debt
Budgeting: Not So Fun but Pretty Simple
You only need two things to budget effectively: basic arithmetic and discipline. Budgeting is generally done monthly because that’s how frequently most bills come due. The first part of budgeting takes almost no time: you just have to note your guaranteed monthly earnings. The second part takes more time: making a very accurate list of your monthly expenses. Expenses can be sneaky. Some of the smaller ones are apt to slip our minds but can add up to a significant sum of money and throw your budget off-kilter. Your next job is to characterize your expenses. How many are fixed and unavoidable? Rent, health insurance premiums, and student loan payments are some expenses that will fall into this category. Which expenses qualify as discretionary? Dining out and clothes shopping sprees come to mind for me, but you probably have quite a few of your own you can name.
Some experts recommend a very helpful budgeting framework for beginners called the 50/30/20 rule. Here’s how it works. Your essential expenses should comprise no more than 50% of your monthly earnings. Limit your discretionary spending to no more than 30%. And sock 20% of what you earn in the best high-yield savings account you can find or other fully liquid account. By liquid, we mean money you can access in an emergency without paying a financial penalty. While a relatively small number of people actually have adequate emergency funds—28% have no emergency savings at all, and only 25% could not cover three months of expenses with their savings—make sure you are one who can.
Balancing an Out-of-Whack Budget
If you discover your expenses exceed your income, there are steps you can take to balance your budget. Look first at your discretionary spending. How many streaming services and subscriptions do you need? Check out thrift stores instead of buying new clothing and housewares. Substitute a few brown-bag lunches for take-out or dine-in.
Essential expenses are difficult, but not impossible to reduce. Here are a couple of tactics you might employ to lower yours:
- Drive a less expensive, more fuel-efficient car
- Consider carpooling to school or work
- Pay your bills on time to avoid late fees
- Keep credit card balances low to save on interest fees
- Reduce your utility bills by conserving energy wherever you can
- Increase the deductible on your auto insurance policy for lower monthly payments
- Eat a plant-based diet, or at least a couple of meatless dinners each week
Some financial experts recommend a reverse budgeting technique that you can layer on top of the 50/30/20 rule. It’s known as “pay yourself first” and simply involves automatically saving 20% of your earnings before paying any other expenses. Paying yourself first is an effective way of managing discretionary spending. It works under the theory that if the money you earn isn’t in your checking account, you won’t spend it. If you find it hard to find the discipline to segregate your funds into separate savings and spending accounts, there are plenty of digital tools to help you achieve your savings goals. Most online banking accounts offer an automatic savings feature that you can adjust to your needs, scheduling both the size and frequency of your savings deposits. In recent years, mobile personal finance apps have proliferated. Some are quite sophisticated and include stock trading, tax tracking, other capabilities, but pretty much all of them include a basic budgeting and savings framework.
Why Be Interested in Interest?
Interest can help and interest can hurt. So it’s important to understand it. Think of interest as rent on money. When you borrow money for a period of time from a commercial creditor—as opposed to your relatives, who may be more generous—you are renting it from a creditor in exchange for a fee called interest. By the same token, when you deposit money in a bank, you loan the bank money to use as it sees fit. You are the creditor, and you earn a fee. That’s called interest, too.
Interest is critical in borrowing and investing matters, from mortgages to medical school. If you can’t expect to earn more by taking out a student loan than you will have to pay your creditor in interest, it’s probably not a great move to take out that loan. Most students take out educational loans based on the assumption that their earning power will increase when they gain skills and earn a degree. That’s a pretty safe bet when you attend medical school and earn your MD. But depending on the type of medicine you intend to practice, where you practice, and other factors, your earning power may vary. That’s one reason to consider where you attend medical school carefully. Private medical schools are a lot more expensive than public universities. And a private school degree may not increase your earnings enough to balance the amount of interest you will pay over the lifetime of a student loan.
There are two different types of interest: simple and compound. Simple interest is calculated by applying a percentage to the original amount (principal) you borrow from a creditor. If you take out a loan at 10% for $100, in three years, you will owe $130. That’s the type of interest you pay on student loans.
Compound interest works a little differently. Under a compound interest arrangement—such as the one attached to most credit cards—you will owe interest on both the principal and the interest that accrues over the life of your loan. Let’s take that same $100. If interest is compounded daily on your balance, after three years, you’d owe $134.98. That may not sound like much. But if you have credit card balances of, say, $10,000, it adds up quickly. That’s one reason to keep credit card balances low.
Before you take out a student loan, be sure to examine the interest costs of borrowing under several pay-back scenarios. Some lenders offer more lenient pay-back terms and permit you to put off paying against your loan for some years after graduation. But the longer you hang on to debt, the more you will pay for the privilege of borrowing. Weigh the opportunity costs of borrowing under several scenarios before deciding which is the best student loan for you.
The First Step Toward Reducing Your Interest Payments
Lending institutions don’t like to gamble. They want to make sure they get the money they loan back and make money while they’re doing it. Managing risk is a key principle in banking. One risk management strategy lenders use is to try to loan money to the most creditworthy individuals. To a great extent, they rely on students’ credit profiles to determine where they can invest their money with the least risk. Does that mean you won’t be able to borrow money for med school if you don’t have a high credit score? Nope. But it does mean that you may pay a premium in higher interest rates when you borrow. To secure your best student loan rate, make shining up your credit profile a priority before you apply. Not sure where your credit stands? Download a free copy of your credit report from all three credit reporting bureaus. It takes just a minute to do it online.
It may seem counter-intuitive, but having some debt isn’t necessarily a disadvantage in the student loan game. People who have never shouldered any debt and, therefore, haven’t demonstrated they can handle it responsibly typically don’t have very high credit scores. If you’re one of them, establishing a positive credit history is an important step to take before applying for a loan. Open a store credit card, use it, and pay off your balance at the end of each billing cycle. Open a general credit card account and use it to pay for things you would normally buy with cash, like gas and groceries. Pay off your entire balance, and you won’t pay any interest. But you’ll be establishing the track record of successful debt management lenders look for before they offer their best loan interest rates.
If you already have some outstanding debt, the best you can thing for your credit profile is to pay your bills on time, every time, without exception. Banks like borrowers. They just want them to behave predictably. Learn to do so and you’ll likely be offered lower loan rates over the course of your financial lifetime. You can use the money you save on borrowing to secure your retirement—yes, you should already be thinking about retirement savings—or make income-generating investments.
Investing Isn’t Just for the Wealthy
You may be focused on the important goals of paying your bills on time and building your emergency savings fund right now. But it isn’t too soon to start investing a small amount of money, even under those circumstances. Why? Because it’s a good long-term habit to get into. While all investments come with risk, economic history demonstrates that people who invest in the stock market for the long term are likely to make money, even taking into account the market’s ups and downs.
Once upon a time, small investors came up against cost-prohibitive minimum investment thresholds, high brokerage fees, lack of access to investment advice, and other barriers. But the digital age has changed all that. Today there are mobile apps that round up your debit card purchases to the nearest dollar and automatically invest the difference for you. Some of these apps are free, and others charge a truly nominal monthly fee: less than the price of a latte. For investment counsel and trading mechanics, you can rely on a low-cost robo advisor instead of a live one. Robo advisors use the same algorithms that live advisors use to make recommendations but don’t charge nearly as much for their service. Some are even free. So before you dismiss yourself as not wealthy enough to invest, learn a little bit about the new, democratized world of investing.
The Starting Point of Any Financial Plan
We’ve been talking about matters of dollars and cents. But pay attention to matters of the heart, too. Align your financial goals with your values and your most cherished vision of the future. The discipline you need to reach your goals will be easier to find, and the rewards you reap will be measured not just in numbers but in moments of pride and personal satisfaction.