Managing one’s personal finances is a vital skill. In the case of pre-med and medical students, many of who are projected to become high earners, the basics of personal finance can be broken down into maximizing your resources, being frugal, and investing early and wisely. Here I share some simple habits you should adopt as a student that will set you on the road to financial responsibility and security. This is by no means an exhaustive list; instead, I highlight fundamental, high-yield principles that every student and young adult should understand and utilize.
Maximize Your Resources
1 | Track Your Expenses and Create a Budget
If you want to maximize your resources, you must first understand how your resources are allocated in granular detail. In other words, you must track how much money you spend and budget accordingly.
If you haven’t already been tracking your expenses, start immediately. There are many apps out there (e.g., Mint, Wally, Goodbudget) that not only track your expenses but also double as budgeting apps. If you are less tech-savvy, a simple Excel spreadsheet should suffice. Make sure to split your expenses into categories (e.g., rent, groceries, pleasure, savings, etc.) and do some simple analysis (e.g., determine what percentage of your expenses each category represents). Finally, create a budget based on your expense analysis and try to stick to it. Make sure to review your expenses on a weekly or bi-weekly basis.
2| Get A Credit Card (Or Five)
Using credit cards with associated rewards is a great way to maximize your limited budget. If you do not already have a credit card, get one immediately. Almost all major banks (e.g., Chase, Bank of America) and many major companies (e.g., Amazon, airline companies) offer credit cards. It is important to get a credit card early and start building your credit. Many credit cards also have generous rewards associated with their use. Instead of using your debit card or cash to pay for your expenses, consider using credit cards so you can earn rewards.
If you are new to the world of credit card rewards optimization, I would recommend checking out NerdWallet or The Points Guy for more information on how you can game the credit card rewards system to earn some miles and/or points.
3| Milk Being a Student for All It’s Worth
Being a broke student sucks, but there are some perks like free stuff and discounts and deals. University campuses have an abundance of free food and events, so find them and load up on calories. It is a good policy to always check if there is a student discount when you are purchasing something.
Being frugal can be achieved in many ways. Here are my top three:
1 | Cook for Yourself
Cooking for yourself requires some cooking skills and time spent shopping for groceries and preparing meals. However, in return, you eat healthier and save money by minimizing eating out or paying for meal plans. If you are new to cooking and have limited time, give services like Blue Apron or HelloFresh a try.
2 | Minimize Alcohol
Abstinence from alcohol is a great way to save money (and your liver and overall health). However, if drinking is a necessary lubricant for your social life, make sure to pregame hard and avoid starting a tab when you go out to bars or clubs.
3 | Purchase Stuff Used
Craigslist, college/university Facebook pages, and thrift stores are all great places to find used and discounted textbooks, electronics, furniture, clothing etc.
Invest Early and Wisely
By investing early and wisely, you can take advantage of compound interest and begin growing your nest egg. Your savings can be subdivided into three categories based on temporality: short-term, intermediate-term, and long-term. Before we delve into these categories, make sure you are familiar with the following terms:
- Asset Allocation: choosing what assets (e.g., stocks, bonds, cash) you want to invest in.
- Diversification: putting your money into varying types of investments, which lowers your financial risk (i.e., don’t put all your eggs in one basket).
- Leverage: using borrowed capital (e.g., loans) to make investments that yield returns (e.g., mortgage for a home).
- Liquidity: how easily and quickly you can convert your investments into cash while minimizing any potential ramifications and costs (e.g., you are diagnosed with a major illness and need to liquidate all your stocks so you can pay for treatment).
1 | Short-Term Savings (Rainy Day Fund)
This pot of money is allocated for unforeseen or emergency expenditures (e.g., your laptop gets stolen and you need a new one) and therefore must be accessible. I would recommend putting this money into an online savings account with a high APY (annual percentage yield). Many banks offer a savings account linked to your checking account. However, the APY on many of these savings accounts are abysmally low (e.g., 0.03% for Bank of America). Compare that to (free) online savings accounts like Barclay’s Online Savings account (2.05% APY) or Ally Bank (1.90% APY). It only takes a few business days (and $0) to move cash between these online savings accounts and your checking account, giving this pot of money high liquidity.
2 | Intermediate-Term Savings (Wish List)
This pot of money is allocated for your big-ticket wish list items, like a house or that year traveling the world. Most medical students are busy and may not have the bandwidth to invest in figuring out the complex world of financial investing. If this is the case for you, try consulting trusted individuals (family and friends) for financial advice and consider entrusting your money with brokerages like Fidelity or Vanguard. They can help you choose assets (stocks, bonds, exchange-traded funds, mutual funds, etc.) in which to invest so that you have a diversified portfolio.
While it might seem counterintuitive to invest money as a student who is taking out loans, it is important to realize that such deferred educational loans can be leveraged. For example, if you invest any leftover money from your loans in a stock that gives a 7% annual rate of return, you will actually make money. Furthermore, the 7% rate of return is greater than the 5% interest rate on most subsidized federal loans. Loans are like lemons: if leveraged properly, they can be made palatable.
3 | Long-Term Savings (Retirement Plan)
This pot of money is allocated for retirement and ideally should not be touched until you retire. Some of the more popular and well-known retirement plans are the 401K and the individual retirement account (IRA). 401K’s are offered through your employer, whereas you can open an IRA through one of the aforementioned brokerage firms. Basically, the idea is to start saving for retirement early (i.e., in your 20s or even earlier). While it might seem jarring to consider saving for retirement when you haven’t even become a real adult with a real job yet, the goal is to take advantage of compound interest accrued throughout your (hopefully long) life.
Knowing how to manage your personal finances will give you financial security and freedom, resulting in overall increased happiness. While managing one’s finances is a highly individualized and complex process, the basics we present here are applicable to many people operating in the US financial system. Subscribing to these core concepts will ensure you have a solid financial foundation that can be built upon when you start earning a physician’s salary.