What I Should Have Told Myself When I Became a Resident

By Francis Bayes, WCI Columnist

For many interns, residency is their first full-time job. They have to learn about taxes, retirement contributions, and different types of insurance. But personal finance often takes a backseat to their work as they adapt to calling consults, entering orders, and writing notes (in that order) while returning pagers, replying to EHR messages, and updating their senior (in any order).

I was fortunate to become interested in personal finance during medical school because my wife and I earned incomes. During the PhD portion of my MD/PhD program and my fourth year of medical school, we created a financial plan, set up different retirement accounts, and bought disability and term life insurance policies. I wanted us to be on autopilot with our finances during residency.

With my intern year now under my belt, I have some feedback for my financial plan. Some of its aspects have been more compatible with the demands of residency than others. Below is some advice that I would have given myself before I started residency.

A Letter to Myself

Dear Francis,

I am so glad that you did the following actions because you would have either missed the timing or not had the time to do it.

Positives

Refinancing Your Wife’s Student Loans

You refinanced your wife’s student loans at a historically low interest rate. When the government announced another extension of the forbearance in 2021, you could have postponed the refinancing. But you refinanced regardless. A mere year later, the Federal Reserve had quickly raised the federal funds rate, and by the time my intern year was complete, they had not lowered it.

I applaud you not because you predicted correctly, but because your process was correct. Your financial plan expected an annualized rate of return of 5%, so you refinanced the loans that had interest rates above or near 5%. The interest rate of all the loans is now around 3%. Although the monthly payment was higher after refinancing, it has served as forced savings. So far in residency, we have not needed the extra cash flow (now that we are parents, our feelings about this may change!). I also have not had to deal with regret or anxiety about future rate cuts.

Consolidating Your Financial Accounts

Like many others, you had savings and brokerage accounts with various firms. A few were from before financial enlightenment, whereas others were opened for higher APYs or signup bonuses. You also wanted to maximize the advantages that some firms have over traditional firms, such as Vanguard or Fidelity. You could have continued to rely on your spreadsheet and online software (e.g., Empower) to manage all of your financial accounts.

But you consolidated your cash and investing accounts so that you have accounts at fewer financial firms. I do not have to track down as many tax forms, and I can worry less about scams when my personal information is probably available on the dark web. I like that you stopped chasing after higher yields and started using a money market fund with the same firm where you have most of your retirement accounts.

The difference of $50 for every $10,000 is not as attractive during residency. It will be even less attractive in the future when you have to spend hours emailing or calling customer support to transfer assets between firms (see below). No gimmicky offer can tempt me to open a second Roth IRA account anymore. Accepting that you do not have to optimize everything and appreciating the value of your time are important steps in our journey to financial independence (and as I explain below, our maturation is not complete)!

More information here:

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Neutral

I do not feel strongly about this one because it works for our circumstances.

Keeping Your Asset Allocation Simple Enough

You decided on an asset allocation that is easy to follow using the retirement accounts that we have. The US and international small cap value equities ETFs are in our Roth IRAs, while total US and international stock market index funds or ETFs are everywhere else. After I calculate how to allocate our lump sum Roth IRA contribution in January, I do not have to worry about where the new savings should go.

But a simpler asset allocation would have been just fine, if not better. I cannot ask you to change our financial plan that is now five years old. If you were about to start investing, I would have asked you to ignore what the Fama French followers are saying and consider choosing a one- or two-fund portfolio (e.g., “VTSAX and chill”). If I had to contribute to our Roth IRA monthly, I would be even more inclined to change our asset allocation, as I will soon explain.

More information here:

From Fourth Year to the Real World: Transitioning from Med School to Residency

From Fourth Year to the Real World: An $80,000 Wedding Causes a Downward Spiral

Negatives

The following are what I wish you hadn't done before you started residency.

Owning ETFs in Retirement Accounts

Buying ETFs in our retirement accounts every month—as opposed to every year—would have been challenging during residency. ETFs are difficult to trade during normal business hours and especially so on the West Coast, where the trading window ends at 1pm. You can order trades in advance, including limit orders. But executing market orders when the market opens is rarely a good idea, whereas limit orders might not be executed at all. I am not sure if I would have had the bandwidth to trade ETFs in between talking to consultants and writing notes.

Instead, I now prefer index funds in retirement accounts. I can buy and sell them at the Net Asset Value (NAV) price that is equivalent to the value of their underlying securities, regardless of when I order trades. I can schedule monthly purchases of index funds (but not ETFs), so I can truly set it and forget it.

Common advice is that we should decide on an asset allocation and then choose the index fund or ETF for each asset class. Better advice might be that you should not invest in an asset class if 1) you do not like the index fund options and 2) you are not willing to trade ETFs. In our case, we did not like the index fund options for domestic and international small cap value equities. If we had the foresight about the friction involved in trading ETFs, we should have excluded the asset classes from our asset allocation.

Rolling Over the Old 401(k) to an IRA

You rolled over the wife’s 401(k) with her previous employer to a rollover IRA in medical school. You knew you would have to roll over the IRA to her new employer’s 401(k) when we would have to start doing the Backdoor Roth IRA. But you wanted to save on the 401(k) plan administrator’s fees in the meantime. The easy rollover process also lured you because her old 401(k) was with Fidelity, along with our other retirement accounts.

I regretted your decision once I looked into what I needed to do to roll over the funds to her current 401(k). We had to first notify her 401(k) plan administrator that we would be initiating the rollover and then submit forms asking Fidelity to mail a physical check to the current 401(k) plan administrator. The process took more than five business days, during which her funds were not invested in the stock market.

In order to save about $50-$75 in cumulative fees, I spent at least an hour in actual time and more if I consider the mental energy that I expended. I worried about the physical check getting lost and the stock market hitting all-time highs while the funds were not invested. I would have understood your decision if her old 401(k) had terrible investment options. But it had low-cost index funds that were equivalent to what we have owned in her rollover IRA and current 401(k). What we have saved in fees was not worthwhile.

I would NOT recommend that you roll over the wife’s old 401(k) because you know you would have to do the Backdoor Roth IRA during residency.

That’s all for now. I am glad you chose a well-paying hobby because your early investments in building a financial plan based on the WCI’s principles have paid off so far. I’ll write you another letter after my first year as an attending when our “time and life energy” will be even more precious.

Sincerely,
Francis

What did you do financially during residency that was a positive? Anything that was a negative? Is there anything different you'd do?

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