Personal Development Session 9: Financial Wellness I (Savings and Budgeting, Investing Basics and Real Estate)

Transcription

1 1 Fundatins f Emergency Medicine Fundatins III: Guided Small Grup Experience Persnal Develpment Sessin 9: Financial Wellness I (Savings and Budgeting, Investing Basics and Real Estate) v Agenda and Learning Objectives Case Part I Savings and Budgeting (10 min) Review the imprtance f saving Develp an apprach t saving Develp an apprach t budgeting and practice Case Part II Investing Basics (15 min) Review basic retirement accunts Develp an apprach t priritizing yur savings tward debt versus investing Case Part III Real Estate (5 min) Review the prs and cns f renting versus buying Review physician lans Small Grup Activity Budgeting Exercise (10 min) Review sample budget f Dr. Hmans Practice an apprach t priritizing savings Case Cnclusin and Teaching Pints (10 min) Nte t Facilitatrs This is a sessin cvering savings and budgeting, investing basics and an apprach t real estate. It is the first part f a tw- part series n physician finances, the ther sessin will cver insurance and lans. It is primarily a questin guided large grup discussin thugh there is als an included budgeting exercise which will take 5-10 minutes. It is ffered near the end f the case and the instructrs are at the end f this Instructrs Guide. T include this activity, yu will need t print ff several cpies f the resident prtin f the wrksheet t hand ut during the sessin. A white bard (r blackbard) may als be useful fr writing up calculatins, tables r the answers t the small grup activity. Fr preparatin, we ask that yu review the backgrund facilitatr reading at the end f this instructr guide and cnsider reading the pre- reading suggested t the residents n the Fundatins website. Remember in preparing fr this sessin that these tpics are nt naturally in ur wheelhuse, cmpared with a tpic like wrking up undifferentiated shck, s plan accrdingly. v Case Part I Savings and Budgeting (10 min) Tday we are wrking with a senir resident, Jhn Hmans, wh is taking a jb next year with a lcal cmmunity hspital. He currently has $250,000 in medical schl debt frm the federal gvernment and has signed a cntract t make $250,000/year. Jhn is excited abut getting his

2 2 first attending paycheck but wants t make sure he has a financial plan befre he starts his new jb. v Discussin Questins with Teaching Pints What are savings cncerns specific t an early career physician? A physician just starting their career is very behind their peers wh started wrk right ut f cllege. Let s imagine Jhn has a twin brther wh went int engineering and gt a jb right ut f cllege. Fr the last 7 years his twin has been filling his 401(k) t $18,000 annually. Let s assume the returns n his retirement accunt have been 7%. His twin will have accrued $147,000 in his retirement accunt. In this scenari, Jhn has a net wrth f negative $250,000 and his twin has a net wrth f psitive $147,000 fr a net difference f $397,000. This is hw far behind Jhn is in savings relative t his brther. It will take sme planning fr Jhn t clse this gap in net- wrth. What is wrking fr and against Jhn in his quest t catch up with his brther? Wrking fr Jhn His incme He will likely earn mre annually than his peers in incme. The trick is t save enugh f that incme t build assets and pay dwn debt. His lifestyle He s been living as a resident fr the last several years. If he can live cnservatively a little while after finishing residency, then he can use that high incme t catch up. Wrking against Jhn Interest n debt Over time interest will cntinue t increase the size f Jhn s debt, while interest n his twin s retirement accunts will grw them, causing an nging widening f the financial gap, adding urgency t the need t catch up. Being 7 years behind n savings Jhn is relatively behind n saving. The earlier yu invest, the mre return yu get n that investment. Take this example: Persn A invests $10,000 in an accunt with a 7% rate f return at the age f 25. At 55 he ll rughly have $76,000. Persn B wants the same end result f $76,000 at age 55, but he desn t invest his mney until age 30. He ll have t invest 40% mre mney, r rughly $14,000, fr his accunt t grw t $76,000. If he desn t invest his mney until 35, then that number grws t $2,000, which is 100% mre. Running n the financial hednic treadmill Yur hednic set pint is yur general baseline level f happiness ver yur life, which yu generally will trend t despite temprary psitive r negative changes in yur life.

3 3 Accrding t the financial hednic treadmill mdel, as a persn makes mre mney, expectatins and desires rise in tandem, which results in n permanent gain in happiness. The takeaway is t take time t deliberately think abut hw yu spend yur mney, and what yur expectatins are in return. Getting a huge bump in incme This is where the hednic treadmill principle becmes imprtant fr a new attending. Yu have t balance enjying yur new incme with yur lng term financial needs. There s ften the impulse t spend a lt f that new incme since mst residents have been lking frward t it fr s lng. What can Jhn d t catch up? Jhn can catch up by grwing int his incme slwly and maintaining a strng savings rate. We ll prpse a plan f attack here Have a strng savings rate Plan t save 20-25% f yur grss incme. Jhn is behind in savings. Remember it takes mre mney invested t hit retirement gals the later yu actually invest it. Of nte, yu can mre frmally calculate yur savings gals based n yur desired age f retirement and desired retirement lifestyle. There are resurces nline that can help guide this calculatin. Grw yur lifestyle methdically We suggest hlding ff n increasing yur standard f living r making large item purchases right f residency. Make and meet yur savings gals fr at least six mnths befre setting yur pst- savings leftver mney t any fixed expenses. This means car lans, mrtgage payments, etc. After six mnths, yu ll knw if yur budget is hlding true t frm. Yu ll als knw hw much yu really have left ver cnsistently mnth t mnth after meeting yur savings gals à this will allw yu t apply this mney t ther wants withut impacting yur ability t save. Remember yu ll be able t affrd mst things, but yu can t affrd everything. Hw d yu create a budget? Nte t Facilitatrs: We will practice budgeting at the end with a sample budget. Fr nw, keep this as a general discussin abut the resurces available fr residents t create a budget. Yu can use example budgets nline and fill them ut. Fr yur fixed expenses, lk back at yur last 3 mnths f living t help fill them ut. Fr variable utilities, check yur bills ver the last 12 mnths fr a rlling average. v Case Part II Investing (15 min)

4 4 Jhn nw has a savings budget and he wants t knw what t d with his mnthly 20% f grss incme savings. He needs t knw where t put it. [Of nte, we will nt be talking abut what kind f investments t select within an investment accunt. This infrmatin is beynd the scpe f this sessin] What are sme different types f investment accunts cmmnly available t Jhn? Can yu describe them? 401(k) and 403(b) plans In these accunts, yur mney ges int them untaxed where yur mney grws until yu take it ut in retirement. Yur mney is taxed when it is taken ut. Many emplyer s ffer what s called a match where they will put mney int the accunt as well. Mst f the time this requires sme minimum cntributin frm the emplyee. 457 plans These are deferred cmpensatin retirement plans ffered by sme emplyers. Yu can set aside mney in them pre- tax, much like a 401 (k). Yur mney is taxed when it is taken ut. There are tw types f these plans: gvernmental and nn- gvernmental. In nn- gvernmental 457 plans, the mney in yur plan is still technically yur emplyer s until yu take yur mney ut in retirement. Because it is technically yur emplyer s, the mney is ptentially subject t yur emplyer s creditrs. This risk is small, but gd t knw if yu use ne f these plans. Check with yur HR fr details. Health Savings Accunts (HSA) There are savings accunts tied t certain health insurance plans. Yur mney is invested in them pre- tax. Yu can withdraw frm them fr any medical expenses tax- free. If yu still have mney in them at age 65, yu can withdraw frm them fr nn- medical expenses as well but will be taxed n thse like a 401(k). 529 Plans These are state administered savings plans fr educatin expenses. Many states ffer sme srt f tax deductin fr cntributing t them. This is state specific. They can be withdrawn frm tax free when used fr eligible educatin expenses. Taxable Investing Accunts These are accunts where yu can invest in stcks, bnds, mutual funds, etc thrugh a brkerage firm, like Vanguard r Fidelity. They are referred t as taxable accunts because yur investments are nt prtected frm taxes like the retirement accunts abve. It s just an investment accunt. IRA s and Rth IRA s These accunts are either unavailable t yu r nt advantageus fr yu t use nce yu are making a full physician s salary. One caveat is that yu can indirectly put mney in what s referred t as a Backdr Rth IRA at

5 5 higher incmes. The wrkings f this strategy are beynd the scpe f this sessin. Hw des Jhn start t invest with his savings? Hw d yu priritize where t put yur mney? The fllwing is listed in rder frm higher t lwer pririties fr applying yur savings. Yu can cnsider changing the rder fr items that are relatively clse tgether depending n yur financial gals. Pririty List Fill up an Emergency Fund Save 3-6 mnths f living expenses in the event yu becme unemplyed. This may be clser t 6 mnths if yu have n supprt, r clser t 3 mnths if yu have a wrking spuse, assets yu can access, r family help. Fill yur Emplyer Prvided Retirement Plan enugh t maximize yur emplyer s match (401(k), 403(b), etc.) Fund yur emplyer- prvided retirement plan t receive the emplyer s matching cntributins. High- interest Debt Pay ff high interest debt with a greater than 8% interest rate. Tax- deferred Retirement Plans Maximize these plans available t yu, like yur emplyer s 401(k), 403(b), 457. If yu already cntributed enugh t get the match with yur emplyer, fill it the rest f the way up. Health Savings Accunt If the health insurance yu use has a HSA, fill that up. Mderate interest debt Pay dwn debt with interest rates frm 5% t 8%. 529 Cllege Savings Plan Save sme mney in these fr the kids. These ften qualify fr state tax deductins, depending n yur state. Save fr a huse dwn payment (mre n this later) If yu re nt using a physician lan, save fr a dwn payment f 20% f yur hme purchase. This shuld g in a lw risk accunt, like a savings accunt, certificate f depsit, r mney market. Taxable investing accunts Invest in these after using up all yur accunts with tax advantages. Lw- interest debt Pay dwn debt with lw interest rates 3% and less. Des Jhn invest his mney r pay dwn debt?

6 6 Remember if yur emplyer is matching yur cntributins, yu d nt want t leave this n the table. After getting yur match, it depends. There is bth math and psychlgy invlved in answering this questin. The Math If yu cmpare paying dwn yur lan t paying int an investment, cmpare their interest rates. Let s say Jhn has a lan with a 5% fixed interest rate. In rder t cmpare t an investment, flip t thinking f this lan as an investment itself, with a 5% rate f return. If the investment has a higher rate f return, invest in it, if it s lwer, pay dwn debt. v Case Part III Real Estate (5 min) The Psychlgy Sme may chse t pay dwn debt even if the interest rate is lwer than the rate f return n an investment. It des have advantages. First, if yu eliminate a debt, yu als eliminate yur mnthly payment and therefre a fixed financial cmmitment. Secnd, there is als peace f mind in ding this. Hw much this is wrth depends n yu. Jhn has created a budget and a savings plan fr what t d with his mnthly savings. He nw wants t lk int where he s ging t live next year. What are gd reasns t cnsider renting? This is a gd ptin if several f the fllwing fit yu: Yu dn t knw the area well yet. Where yu want t live may change as yu grw t knw a city. Yu anticipate there s any reasn yu wuld need t mve within the next 5 years. It generally takes at least 3 years, but mre realistically 5 years, fr any ptential increase in value f yur hme t cver yu fr the csts f buying and selling it. Reasns fr needing t mve include: Jb changes even in twn Mving t a new city Mving t a better schl system fr yur kids Having mre kids and utgrwing yur hme Yu dn t want t deal with hme maintenance. What are gd reasns t cnsider buying? It s yur hme and yu can d what yu want with it. Yu may be able t deduct the interest n yur mrtgage and deduct yur prperty taxes, althugh this is less likely than it used t be after the 2017 Tax Law. It depends n what state yu live in. See the tw caveats belw:

7 7 The standard deductin n yur taxes is nw duble what it was in the past. T get the mrtgage interest deductin, yu have t itemize yur deductins instead f taking the standard deductin. If yur itemized deductins d nt exceed the standard deductin, then effectively yu cannt take the mrtgage interest deductin. The new law makes it mre difficult t exceed the standard deductin with itemizing. There is nw a $10,000 limit n the deductins yu can claim fr the cmbinatin f state incme tax, lcal tax, prperty tax, and mrtgage interest. As a physician, particularly in states with a state incme tax, yu ll likely hit this $10,000 limit befre getting int yur prperty tax r mrtgage interest. Yu get the appreciatin in value f yur hme, althugh, smetimes the value can drp. Generally real estate values increase ver time, but smetimes they can g dwn, s there is sme risk yu culd lse value. Hw d I budget buying a hme? Yu will have t get a mrtgage unless yu are buying it utright Start by deciding hw much yu can budget mnthly t yur hme payments withut impacting either yur savings r ther quality f life (travel, eating ut, etc.) Then pick a mrtgage that is fiscally respnsible. The gld standard here is a fixed rate 15- year mrtgage with yu making a 20% dwn payment. Yu can d mrtgages with lnger repayment terms and/r less dwn payment, but the mre yu d this the mre the brrwing csts. See the fllwing example: v Case Part III Cntinues Dr. Hmans wants t lk at buying a hme. He thinks he can budget $2,000/mnth t his huse payment. He went nline and gt sme rugh mrtgage prjectins. He s lking at buying a $350,000 hme. v Questins and Teaching Pints Hw des nt having a dwn payment and using a lnger mrtgage term affect his verall brrwing csts ver the life f the lan? Nte t facilitatrs: It may be useful t write this chart n the bard t help residents see the difference in mrtgage terms and hw it affects rates. Mrtgage Interest Rate Mnthly Payment Ttal Interest 15 year 20% dwn 3.82% $2,626 $88, year 20% dwn 4.46% $1,992 $228, year 0% dwn 3.93% $3,156 $113, year 0% dwn 4.64% $2,383 $299,099 Yu can get mrtgages with 0% dwn thrugh smething called a physician lan, but yur interest rates with these will be higher cmpared with the same lan with a dwn payment. Yur brrwing csts, r ttal interest paid ver the life f the lan, g up t because yu are brrwing mre mney.

8 8 Ntice abve hw lengthening the repayment term f the lan and changing the dwn payment affects the ttal interest csts. v Small Grup Activity (Budgeting Exercise) Dr. Hmans had budgeted being able t spend abut $2,000/mnth n a hme. After running calculatins, he saw that he wuld benefit frm saving fr a dwn payment and put ff the immediate purchase f a hme. v Questins and Teaching Pints Hw des Jhn create a budget? Let s practice. Nte t Facilitatrs: The last 4 pages f this dcument are practice budgets fr ur case. Yu can spend 5-10 minutes f the sessin practicing creating a budget if yu have time. See the last pages f this instructr guide fr an example budget fr ur fictinal Jhn Hmans. We have cnstructed a theretical budget that Dr. Hmans put tgether t guide his spending when he starts as an attending. Fr a review, we are turning this int an exercise. On the wrksheet at the end f these materials will be the budget he created fr his first 6 mnths ut f residency. He plans t save 20% f his grss incme. Again, we are advcating hlding ff n any big- ticket purchases r lifestyle increases until living in yur budget fr six mnths. This t verify the accuracy f the budget. There will be extra mney every mnth that yu can then slwly use t increase yur lifestyle withut sacrificing savings. In the sample budget, there is still $5,606 left ver after meeting expenses and saving. Finally, we are asking that the residents fill ut the wrksheet, priritizing Dr. Hmans s savings based ff ur recmmended pririty list in the lessn. v Case Cnclusin Dr. Hmans is able t find a beautiful apartment t rent. He sticks t his budget fr 2 years and is able t save up enugh fr a dwn payment n his dream huse. v Sessin Teaching Pints Summary Savings and Budgeting A graduating resident has a lt f catching up t d in regard t grwing wealth relative t many f their nn- healthcare peers. Mst have been frced t delay significant savings and many are als lking at having t repay significant student lan debt. A yung attending can jump start their lng- term financial health by creating a budget and grwing int the habit f regular saving. It is best practice t get in the habit f regular saving befre grwing int the rest f yur incme. A 20-25% savings rate f grss incme used t invest and pay dwn extra debt shuld suffice t put a yung attending n a path tward strng financial health.

9 9 Investing Establish a hierarchy fr where t invest yur savings and pay dwn yur debt. Fr example: fill yur 401(k) t the match, then fill an emergency savings fund, then pay dwn high interest debt, then fill the rest f yur 401(k), and s n, until yu ve used up yur savings budget. Real Estate As with all financial matters, take cautin when hearing things like renting is thrwing yur mney away frm prfessinals with a financial interest in yur decisins. Fr many renting may be a better chice, especially fr an initial residence ut f residency. If yu d chse t buy, then first wrk ut what yu can affrd mnthly in yur budget withut affecting yur savings r yur liquidity tward ther lifestyle desires (eating ut, travel, etc.). Use yur mnthly husing budget t wrk backward n mrtgages with gd terms t figure ut the ttal amunt f huse yu can buy. If yur mnthly budget is frcing yu int bad mrtgages t affrd the huse yu want, then yu need t buy less huse r rent.

10 10 v Facilitatr Backgrund Infrmatin Physicians cming ut f residency are in a psitin where they are financially behind many f their nn- medical peers and are ften in significant educatin debt. Many have nt had enugh dispsable incme t get int the cmplexities f what t d with extra savings and hw t budget fr lng- term financial health. Financial stressrs t physicians can affect their wellness and impact their flexibility t take n fellwships and academic psitins. As part f an initiative t address physician wellness, we are putting tgether these tw financial sessins t help address sme f the immediate financial cncerns a physician may have cming ut f residency. Cmpared with a persn wh takes a jb after cllege and immediately starts saving, a physician has delayed having incme fr at least fur years f medical schl befre having ne in residency. In this time, they nt nly have missed pprtunities t save fr retirement, but they have ften incurred educatin debt that cntinues t grw ver time due t interest. This ften creates a large gap in net wealth between a physician graduating residency and their nn- medical peers wh wrked right ut f cllege. Physicians als have a large increase in salary very suddenly when they take their first jbs ut f training. Having a basic apprach fr hw t handle this incme increase can have lng lasting implicatins fr their financial wellness. What we wuld like t encurage is t avid the trap f grwing directly int yur incme by buying expensive huses and cars right ut f training, but t delay gratificatin fr lng enugh t grw int ne s incme respnsibly. We are advcating cntinuing t live like a resident fr the first several mnths ut f residency while applying 20% f ne s grss incme tward savings. The mney left ver after this is what we advcate using t increase yur lifestyle after training, but nly after having lived in yur budget fr six mnths. We are als hping t give a primer n different types f investment accunts available t physicians where they can apply these savings. In this sessin we are admittedly fcusing n retirement accunts prvided by emplyers rather than peple with an independent cntractr status. We elected t d this due t the cmplexity f discussing all f this in a relatively shrt sessin. We are als prpsing a basic apprach t priritizing where t put ne s savings. Specifically, which accunts d yu fill first? When d yu start deciding t pay dwn debt versus invest? We are nt ging int specific types f investments, like stcks, bnds, and mutual funds. We feel this is t cumbersme t fit int this sessin. Finally, we are addressing renting versus buying a residence. We are mainly addressing the prs and cns f renting versus buying prperty. Our hpe is that after this sessin, the learner is nt primed t think they have t buy prperty right ut f residency. We d nt think buying is a bad idea, but it might nt be best fr everyne. We briefly review mrtgages and suggest an apprach t figuring ut hw much hme yu can buy. We als review the implicatins n the brrwing csts yu incur with a mrtgage when yu lengthen their terms and decrease the dwn payments yu apply t them.

11 11 v References Authr: Dr. Sean Dyer Secndary Authr: Dr. Gerge Leach Editr: Dr. Natasha Wheatn Expert Editr: Dr. Jim Dahle (Editr in Chief f The White Cat Investr) References: Dahle, Jim. Live Like a Resident The White Cat Investr. 12 Jun Web. 06 Jun Dahle, Jim. The White Cat Investr: A Dctr s Guide t Persnal Finance and Investing. The White Cat Investr, LLC, Dahle, Jim. Dn t Buy Stuff Yu Cannt Affrd The White Cat Investr. 19 Jun Web. 06 Jun Dahle, Jim. Dctrs Need t Budget T The White Cat Investr. 02 Jul Web. 06 Jun Dahle, Jim. The Dctr Mrtgage Lan The White Cat Investr. Web. 06 Jun Hednic Treadmill. Investpedia. Investpedia, LLC, 11 Jun Pirtte, Matthew. Shappell, Eric. Investing MD in the Black. Web. 06 Jun 2018.

12 12 Facilitatr Handut fr Budgeting Exercise

13 13 Parameters fr this exercise: Dr. Hmans will save 20% f his incme annually, r $50,000/year. Dr. Hmans has $17,500 in pre- existing savings. He des nt have a wrking spuse r family help fr emergencies. Remember t exclude the savings and tax allcatins t calculate mnthly expenses fr an emergency fund. Yu can rund t the nearest multiple f $1000. He has $9,000 in credit card debt. He has $80,000 in private student lans at 6% interest. His ther lans are in the public service lan frgiveness prgram and nt lans he ll be verpaying. He has access t a 401(k) (max cntributin f $18,500) that will match the first $15,000 he puts int it. He has access t a 457 plan (max cntributin f $18,500) and a HSA plan (max cntributin $6,900 fr a family) at wrk. The fllwing is the pririty list fr savings frm earlier in the sessin. Remember that the exact rder can be changed accrding t persnal preferences and values. 1. Fill up an Emergency Fund 2. Fill yur Emplyer Prvided Retirement Plan enugh t maximize yur emplyer s match (401(k), 403(b), etc.) 3. High- interest Debt 4. Fill remainder f tax- deferred Retirement Plans 5. Health Savings Accunt 6. Mderate interest debt Cllege Savings Plan 8. Save fr a huse dwn payment 9. Taxable investing accunts 10. Lw- interest debt Dr. Hmans Year 1 Accunt Amunt Applied Mney Remaining ($50,000) Dr. Hmans Year 2 Accunt Amunt Applied Mney Remaining ($50,000)

14 14 Facilitatr Answers fr Budgeting Exercise Nte t facilitatrs: Sme f the answers belw will legitimately be different based n the persn. Use any differences as a pint f discussin with the grup. Belw are ur suggested answers. Dr. Hmans Year 1 Accunt Amunt Applied Mney Remaining ($50,000) Emergency Savings $17,500 $32, (k) t the match $15,000 $17,500 Credit Card debt $9,000 $8,500 Rest f 401(k) $3,500 $5,000 HSA $5,000 $0 Dr. Hmans Year 2 Accunt Amunt Applied Mney Remaining ($50,000) 401(k) t the match $15,000 $35,000 Rest f 401(k) $3,500 $31,500 HSA $6,900 $24, $18,500 $6,100 Extra student lan payments $6,100 $0

15 15 Resident Handut fr Budgeting Exercise Review the fllwing budget and use this t priritize savings fr Dr. Hmans s first tw years ut f residency. After filling ut the wrksheet, share yur answers with the grup and discuss.

16 16 Parameters fr this exercise: Dr. Hmans will save 20% f his incme annually, r $50,000/year. Dr. Hmans has $17,500 in pre- existing savings. He des nt have a wrking spuse r family help fr emergencies. Remember t exclude the savings and tax allcatins t calculate mnthly expenses fr an emergency fund. Yu can rund t the nearest multiple f $1000. He has $9,000 in credit card debt. He has $80,000 in private student lans at 6% interest. He has access t a 401(k) (max cntributin f $18,500) that will match the first $15,000 he puts int it. He has access t a 457 plan (max cntributin f $18,500) and a HSA plan (max cntributin $6,900 fr a family) at wrk. The fllwing is the pririty list fr savings frm earlier in the sessin. Remember that the exact rder can be changed accrding t persnal preferences and values. 1. Fill up an Emergency Fund 2. Fill yur Emplyer Prvided Retirement Plan enugh t maximize yur emplyer s match (401(k), 403(b), etc.) 3. High- interest Debt 4. Fill remainder f tax- deferred Retirement Plans 5. Health Savings Accunt 6. Mderate interest debt Cllege Savings Plan 8. Save fr a huse dwn payment 9. Taxable investing accunts 10. Lw- interest debt Dr. Hmans Year 1 Accunt Amunt Applied Mney Remaining ($50,000) Dr. Hmans Year 2 Accunt Amunt Applied Mney Remaining ($50,000)