CHAPTER 7

Decide which competing financial priorities to tackle first: pay off high-interest debt, establish an emergency fund, and decide whether to focus on paying loans or investing.

Gandhi had it right- “action expresses priorities,” or in other words, what you spend your time and money on is a pretty good expression of what you care about and prioritize. The same is true with your finances- once you have figured out your paycheck and established some insurance policies, it’s time to decide how you are going to channel your money to serve your intentions best.

Hopefully, by following our exacting financial advice, you have been able to create a budget, establish a side hustle, you have adequate insurance, and you still have a little extra cash on the side. Good for you! Now for the big question…

What should you do with the extra money?

At times, it can be a little confusing to decide where your savings should end up. And if you’ve read a little bit about investing or had your grandfather talk your ear off about bond funds or been pummelled with ads for banks and loans and refinancing, it can even be a little intimidating because there are all kinds of things you can do with that extra money. Some of the things you may have been advised to do include…

1. Put money in a Roth IRA
2. Put money in a traditional IRA
3. Put money in a hospital-sponsored 403(b)
4. Put all of your savings in a taxable investment account
5. Stash it in a 529 for your child
6. Pay off your Federal unsubsidized loans
7. Refinance your loans
8. Buy a bunch of gold bars and stick them under your bed
9. Buy an investment property and become a landlord
10. Leave $15,000 sitting in your checking account

Does that list give you anxiety? It gives us anxiety. These decisions are confusing and you may have barely any time to think about them at all. Picking between the vast array of options out there can be challenging. But when we wrote the book Advanced Wallet Life Support: How to Resuscitate Your Finances (And Your Sanity) During Medical Training that this advice comes from, we had a mission. We want to show medical residents a straightforward path to cut through all the noise and come up with a simple plan that will maximize your future financial success.

The short answer is this… use your money to:

1. Get rid of high-interest debt;
2. Then create an emergency fund;
3. Then put money towards your loans and/or your investments.

1. High-Interest Debt
   The first thing to do is make sure that you aren’t bleeding money anywhere. Take a good, hard look at the current state of your finances. If you have any of the following: current credit card debt, car loans, high interest student loans (e.g. >8%), or other immediate expenses (e.g. medical bills), stop here. No advice we can give you on frugality and investing will outpace these high cost obligations. All of them need to be addressed first and in full before you start putting money into investments. For example, if you have any high interest loans (e.g. credit cards), you should focus all of your extra money on paying these off as quickly as possible. There is no (legal) investment in the known universe that will reliably earn you more than the 20-25% that you are paying in credit card debt. Pay this as soon as you possibly can!
2. Emergency Fund
   In addition to addressing any high-interest debt, another important goal should be to accumulate an “emergency fund” of several months worth of expenses. Some people say three months, some people say six, but definitely at least one to two months. This is in case the worst happens and you can’t work at all, have no income, and only expenses. (Remember, there will almost always be at least a 90-day period before your disability insurance starts to send you a check). You’ll need to pay your rent, eat, and keep the heat on while you figure out what you’re going to do next.
   Put this money into an account which is reasonably “liquid” (e.g. you can access it with minimal work).  A good idea for these accounts is an online savings account. These accounts are currently offering something like 1.6-2% interest on your money. Some of the best interest rates are available from online banks and lenders such as Ally and SoFi. Nerdwallet is a great resource to find up-to-date rates and compare various options to figure out the one that is right for you. The emergency fund is designed for a reason: emergencies! As in, your other brother calls from a Vietnamese jail and needs you to fly out today and bail him out in cash. He’s not going to be very pleased if you have to wait for a check to clear from your brokerage before helping him out.
3. Loans & Investments
   After you have eliminated high-interest debt and accumulated your emergency fund, then you can start to think about investing.

The first investment we want to talk about is your loans. That’s right, your medical school loans make up an important aspect of how you should think about investing. Not only do they represent literal investments in your future, they will also factor significantly into your overall strategy.

Specifically, you should think about your student loans as an investment with a guaranteed return based on your interest rate. For every dollar you pay against the loan balance, that dollar won’t be accruing interest over the life of the loan (which you would owe). In a similar manner, every dollar you invest in a money market account or bond or stock would accrue interest over time that represents extra money for you.

The decision to put money towards loans or investing (or both) gets a little complicated. Here’s the short version.

If you have a typical amount of loans at a typical interest rate, these are probably accruing interest at close to 7%. At best, maybe 5%. This is reasonably hard to consistently beat in the market. Every time you make a payment on the principal value of your loans, you are getting a guaranteed return on investment (in the form of not paying interest on that portion over many years). If you invest your money into other sources, you might do better than this but you also might do worse. With this in mind:

1. If you have high-interest loans (>8%), you should work on paying these off (option 1).
2. If you have low-interest loans (<4%), you should work on saving (option 2).
3. If you have loans that fall somewhere between, you can do either, or a mix of both (option 3).

There is a lot more information that goes into making this decision, as well as plenty of considerations for each option. To determine which option is best for you, check out Chapter 7 of our book Advanced Wallet Life Support: How to Resuscitate Your Finances (And Your Sanity) During Medical Training.