Financial Planning for Doctors

On a forum that I visit, a poster asked whether it was worth taking a big trip to Europe after finishing Step 1 of the USMLE.  What the person was really asking is…. Is being frugal worth it?  Should he take the trip, or is it better to be frugal with his money? This is difficult to answer, but I think we can wrap our minds around the question if we take certain things into consideration.

This was the first post in a series of posts specifically geared towards residents.

Setting the Scene

As many of you know, finishing Step 1 of the USMLE is a big, big deal as this score determines (more than it should) what specialties will be available to you as a career.  Most people celebrate this exam being over.  My wife and I were no different. We took a trip to New York after Step 1 to celebrate.

The question of whether this sort of trip is “worth it” is tough to answer because really two distinct questions are being asked.  First, is being frugal worth it?  Should a financially prudent person go on a trip with loaned money from medical school debt that someday you’ll have to pay back. Second, will the happiness the trip produces be worth the lost money?

The second question is obviously more difficult to answer.

Unfortunately, I do not have a crystal ball.   I don’t know what will or won’t make each person happy.  However, I do have some tools I’d encourage you to use to find the life you want.

For that reason, we are going to discuss some ways of answering the first question and focus on whether being frugal is really worth it during training.

Is it really just a “drop in the bucket”?

I used this phrase (“It’s just a drop in the bucket“) so many times during medical school and residency that I should have been paid by whoever coined the phrase.  Any added debt felt so insignificant compared to my student loan burden, it didn’t seem like adding more debt would matter.  I’d be a high-income earning physician someday, right?

The drop in the bucket philosophy is common when you are deep in debt. It somehow makes you feel better about the insurmountable mountain that you haven’t even started to climb. But is it really just a drop in the bucket?  Let’s see.

A Trip to New York

As I previously, mentioned, my wife and I took a trip to New York after Step 1.  [In full disclosure, please remember that I didn’t have my personal finance “enlightenment” until the end of residency in 2016.  After all, I used to invest money in stocks when I was accruing debt at 6.8% interest].

This trip cost us around $3,000.  The emotional side of me looks back at that trip fondly.  We saw Wicked live on Broadway (I’d recommend it to anyone to this day; what an incredible show!).  We ate at some nice restaurants.  Walked the city.  Went to some famous spots and Dylan’s Candy Bar.  We slept in a really cozy bed in a hotel right in the middle of time square.  It was great.

You’re probably thinking, “wait… I thought he was going to tell me why it’s not just a drop in the bucket.” You are right.  I am going to tell you that, but I also want to be fair and recognize that our trip to New York was great and one of our favorites trips.

Looking back, it is hard to determine if being frugal would have been worth it. The trip made our hearts happy. However, we cannot forget about the head (financial aspect of things). So, let’s look at the math.

We took that trip back in 2010, or 9 years ago.  There are two different ways to look at this. How much would I have made if I invested this money and how much more debt did I accrue because I spent this instead of giving it back?

Opportunity Cost 1:  Investment Approach

Given my passive index fund view on investing, let’s take that $3000 and put it into Vanguard’s Total Stock Market Index Fund (VTSMX).  We took this trip in April of 2010, but would have paid for it likely in February or March of 2010. On February 19, 2010 the VTSMX was valued at $27.50.  Today the value is $71.69, which is 2.6 x the original value in February 2010.  Therefore, my $3000 would be worth $7,820 today (as of this writing).

I don’t think this is really the best way to look at this opportunity cost, though.  I wouldn’t recommend any student in debt to put money into the market when their debt is accruing at 6.8% interest.  That’s just bad advice no matter how you look at it.

So, let’s look at how much more debt I accrued because of this decision.

Opportunity Cost 2: Increased Debt

I don’t think Student Loan Refinancing Programs during residency did not exist when I was in training.  If they did, I didn’t know about it.

For this reason, I didn’t refinance my loans until fellowship in 2017.  Therefore, my debt accrued at 6.8% interest from February 2010 until I refinanced my loans in July of 2016 to 3.6%.  I refinanced at a variable rate, but to make these calculations a little simpler I am going to use a fixed 3.6% rate for my fellowship year.

[By the way, I recommend a variable rate as a fixed rate is really just a variable rate with a built in insurance policy cost from your refinancing company].

We then paid off our loans in November of 2018.

So, where does that leave us?

That $3000 as of today (2/15/2018) has compounded to a little less than $5,000. Another way to look at this is that it added one extra month of loan payments, because we paid around $5,000 per month from our backwards budget.

A Hybrid Theory

The problem with considering opportunity cost 1 or opportunity cost 2 alone is that it doesn’t take into account that your accumulated debt would have decreased your total payment by that same amount. Once your debt was paid off, you’d use that money the next month to invest.  Presumably you would be taking that current monthly student loan payment and put it into an investment account once your student loans were paid off.

Let’s make a conservative estimate.  Let’s say that we took 50% of that total accumulated debt ($5,000 = $2500) and invested that instead.

If we invested $2500 one time and it grew over a typical 30 year career and earned 6% real interest, it would be worth $9,555.  Now THAT is one expensive trip to New York.

Is Being Frugal Worth It?

Hindsight is 20/20.

Despite not saving anything during residency, we are still going to be able to reach financial independence in our mid 40s.  I could have done it much faster if I had been saving during residency, but at the time I was just trying to make it one day at a time.

We had a great trip to New York, but that trip cost $3000. After considering our student loan debt burden and investing approach, it really cost us between $5,000 and $10,000.

If that trip had initially cost $10,000 instead (like the original poster’s Europe trip) that money would have compounded to an even larger number. With the same hybrid model above (investing 50% of what we would have already paid off), that number comes out to $56,330.

Is being Frugal Worth it?  I’m not sure… but some solid math should be involved in making that decision.

Essentially for every $1 I spent back then, it was going to cost my future self more than 150% ($1.50). However, that $1.50 would have been invested and would have grown over a 30 year career. That is where it really gets expensive (1$ turns into $5) because it takes you that little bit longer to pay off your student loan debt and prevent you from investing in your next step (for us a taxable account).

Take Home

Is being frugal worth it?  Like any other answer, it depends.

The take home is that your decisions while under significant debt need to be properly weighed.  Any substantial costs you incur (car payments, fancy vacations to New York or Europe, bigger houses than you need, etc) are going to cost you big in the end.  There is no reason for financial decisions to make your burnout worse!

By all means, please enjoy some trips during training!  But, make sure that it is truly worth it to you.  I cannot tell you what that means, but as in everything else, be intentional in your spending!

What do you think?  Did I over estimate the cost?  Underestimate it? What am I missing?  Would you tell the student to take the trip to Europe if it would cost $10,000?

TPP

10 thoughts on “Is Being Frugal Worth it?”

  1. I’ll take a contrarian stab at it. So this NY trip was an investment in your marriage. If you take occasional trips and do date nights, those go a long way to mitigate “growing apart”, “resentment”, and eventual divorce. We all know divorce is expen$ive. Think ‘half’ of all assets plus some.
    The trip alleviated stress and charged you up for the next part of your medical education. This may have led you to do better on Step 2, and matched you to a better residency, and got you a higher paying job. Cha-Ching!
    I’m being facetious here, but I think the trip was well worth it and it’s still paying dividends.
    Best.

    • Thanks for the comment, MD!

      I don’t know that you can offer a contrarion view to this one as I am all about intentional decisions. As long as people have the actual information you need (i.e. how much it will actually cost) and make an intentional decision, I’ll never fault someone for that.

      I completely agree with your assessment. Our New York trip is still top 3 for trips we have taken at this point. I cannot put a number on how much our marriage is worth, but we have invested into that time and time again despite some of those trips/dates/outings costing us some money.

      I think this post gets at the fact that things cost you more than they appear when you are under a significant amount of debt. If you can keep costs down and take an equally enjoyable trip for less money (that’ll invest in your marriage equally), that’s a better idea. Common sense, really, but this post helps reinforce that idea.

      Thanks for stopping by!

  2. I think you need to factor in the other opportunity cost here. That is, how many opportunities in your life do you have to be young, free, and able to travel to Europe on a whim? Especially in the medical profession with residency approaching and then life slowly taking over. Marriage, kids, morgages, etc. While it’s important to think about saving for the future, if you have your heart set on seeing the world, do it while you can! There’s ways to reduce the cost. Travel responsibly. Do it backpacker style on dollars a day. There’s no way to calculate it, but the returns you’ll get on your experience – a broader world view, new perspectives – are usually way worth the expense.

    • I don’t disagree with that line of thinking at all, actually. And I rarely give my opinion on what others do with their money, because it isn’t about “what” they do… It is about “why” and making intentional decisions.

  3. Great post – I wrestle with this myself. Here’s what I personally tell my residents: their main priority is to read/educate themselves financially over the course of 3 years. It’s important to live like a resident and avoid extravagant spending (i.e. first class flights, luxury car purchase, etc).

    However residency is also tough enough without memorable friend/family experiences. And most savings they make in residency pale in comparison to what they can do as a first-year attending.

    So what I tell them is to spend intentionally, not wastefully, but to find a balance and create experiences. And above all, resist the temptation to fall into bad spending habits, because (to me) that’s the real risk of overspending in residency.

    So I’m in favor of your NY trip. It sounds like it added to your relationship with your wife, and that’s a smart investment. lf one of my residents came to me and proposed the idea of a similar trip, I would tell them to take it. To maybe stay further away from Times Square and decrease the hotel expenditures, but to enjoy the experience and create memories. I would not, however, say the same thing to the resident who wants to drop $10-15k on a Eurotrip. It’s all about perspective and balance, and for a resident making $60k a year in 300k of debt (or a broke medical student) a $10k Eurotrip is just wasteful. There are cheaper (read: domestic) ways to create memories.

    I tell my residents they don’t want to be the richest person in the graveyard or the low net-worth doctor nearing retirement age. There’s a middle ground. So I’d say being (relatively) frugal is worth it, and is most important for the first 2-3 years out of residency, while at the same time living life and creating reasonably-priced experiences.

    • Off nights finally. Sorry for the delay in response.

      Completely agree! I think being moderately frugal is the key. I’ll be the first to admit that I have a classic weakness for vehicles. But I don’t think this weakness will sink our financial future. In fact, we will still get to our number in our mid 40s despite it.

      P.s. the New York trip was definitely worth it!

  4. We took frugality to an extreme at the beginning of residency. Friends invited us to go skiing for a week in Vermont. We get there and can’t afford the lift tickets so they went skiing and we hung out. I always thought about it from my perspective but now I think about it from their perspective. What duds we were. We should have declined or gone all in. We had never taken on any debt. We started to feel deprived. Then one of those $30k doctor loans shows up in a flyer at work and that started many years of living beyond our means with credit card debt even as an attending. One trip is fine but watch for the snowball effect. One trip to Europe becomes one a year.

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