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I have been very fortunate to meet another quite remarkable Millennial, who runs the website Young And The Invested, through interactions on Twitter as well as comments on this blog.
Riley, who happens to be married to a physician, offered to write a multi-part series of posts that chronicled the financial lessons that he and his wife have picked up both as individuals and as a couple.
Don’t let the “Young” in Young and the Invested fool you.
Riley already has some serious firepower in his financial resume, including being a CPA, earning a masters in economics in a high ranked graduate school, as well as being a senior financial analyst in a Fortune 500 company.
On his website he has some great insights on Public Loan Forgiveness, dealing with student debt, as well as other investing matters.
So please show him some love and check his blog out.
This Gen X’er is now going to step aside and let this young gun of finance have the stage:
Some of my fondest childhood memories involved clipping coupons with my mother on Saturday mornings.
While Shaggy and Scooby investigated a spooky mansion, I’d sleuth through coupons in search of products I recognized from our kitchen.
When we finished cutting, we’d sort them into her accordion-like binder, go shopping, and tally up our savings afterward.
My wife had a similar routine with her mother looking at weekly sales promotions.
At the time, we had no idea these activities would shape our way of thinking.
For me, I did it for the enjoyment of matching products to pictures, filing coupons into a binder, and maximizing savings numbers on receipts.
For my wife, she made it a quest not to pay full-price.
We didn’t do this with the intent to learn but as it turns out, these activities instilled some strong personal finance lessons in us at an early age.
Learning About Personal Finance
I’m happy to report some 25 years later, we’re young adults and we still look forward to sorting through the coupons and sales promotions in the mail.
And what excites me even more is when my wife tells me not to recycle them until she has had a chance to look through them.
Talk about teamwork making the dream work!
Both of us inadvertently learned about personal finance by watching our parents.
We continued to learn more over the years and feel it would be nice to share some of those lessons with you.
Specifically, this post lists three financial lessons my wife learned during medical school and residency (the remaining components of the trilogy will list three financial lessons I learned while in college and graduate school, and three we have learned together since getting married).
Medical School Takes You to the Limit
My wife recently entered her final year of her dermatology residency and can’t wait to begin practicing.
Like many doctors, she’s worked hard and walked a long road to get through residency.
She finds her work rewarding, enjoys connecting with patients and practicing her cosmetic dermatology skills.
But her education hasn’t always been this rosy.
My wife describes medical school as a trying time in her life.
She speaks of prolonged periods of sleep deprivation, tight schedules, challenging course material, and generally feeling stretched too thin.
When she looks back on her medical school experience she feels happy knowing those times have passed and better days lay ahead.
Many of you reading this know the feeling and can likely relate.
While in school, she had to make smart decisions with her finances and live within her means.
She did this because she wanted to avoid unnecessary expenses and taking out more loans than she needed.
Part of this involved finding ways to cut expenses and manage a budget.
Here are some lessons she learned.
1. Share Expenses Whenever Possible – She Lived with Four Roommates
Many medical students choose to live alone because it provides them greater freedom, privacy, and solitude, all of which are particularly important when it comes time to study.
Doing so, however, comes at a higher price point than housing with roommates.
My wife chose to live with four other girls while in medical school.
She did this because doing so saved her money, made her lifelong friends, and afforded her a nicer house than she could by herself.
Living with roommates allows you to share expenses, namely utilities and rent, and have a lower cost per roommate.
For example, a luxury 1-bedroom apartment in her neighborhood during medical school currently costs $3,000 per month, whereas a 2-bedroom unit in the same complex costs $4,300.
By opting for the 2-bedroom, you receive the same location and quality of housing but pay $950 less in rent per month or $2,150 per month in total.
Additionally, you split utility expenses.
| Apartment Options | # of Bathrooms | Rent/Month | Size |
|---|---|---|---|
| 1 Bedroom | 1 Bathroom | $3,000 | 626 sq feet |
| 2 Bedroom | 2 Bathroom | $4,300 | 987 sq feet |
| 3 Bedroom | 2 Bathroom | $5,500-$6,000 | 1627 sq feet |
These costs per person scale favorably as well.
A 3-bedroom apartment costs $5,500 and comes to $1,833 per person, saving $1,167 per person as compared to living alone.
My wife took full advantage of these economies of scale and came out of school not only better off financially, but with some amazing friends.
Win-win.
She learned the importance of getting a little help from her friends and how economies of scale lead to lower costs.
2. Credit Cards – How to Manage Them, Not Rely on Them, and Use Them to Her Advantage
Managing finances can be tough on a shoestring budget.
You constantly face decisions about how best to spend what little you have.
It’s made all the more difficult when you see others living lifestyles like they’re already doctors.
In the medical field, where most graduates stand to make a sizeable income, some folks justify borrowing more money now in order to finance the lifestyle they see down the road. [Ahem. Guilty as charged.]
Why wait when an eager lender will finance your fabulous life now at the low cost of 7.99% interest per year?
Or sometimes, medical students come from families with doctors and can live on a more comfortable budget.
Neither of my wife’s parents worked in the medical field and she chose the prudent path of avoiding excess debt.
She decided to live within her means and not borrow heavily against her future.
She did this by not only minimizing her student loan debt, she also made it a point to use credit cards responsibly.
She applied for her first credit card through her bank and used it to build her credit.
She knew one day she would like to buy a house and would need a good credit score to receive the best loan terms.
She made most of her purchases on her debit card and would rarely use her bank’s credit card.
She didn’t want to become dependent on easy (and expensive) credit and managed never to carry a credit card balance nor pay interest on her purchases.
My wife learned the importance of not comparing yourself to others and living beyond your means.
Credit cards come direct to you in the mail and can easily lure someone into making purchases they don’t need.
She applied for a credit card for emergencies and used it to diversify her credit history.
3. She Would Have Contributed to her Roth IRA Sooner
One lesson my wife wished she would have learned earlier was how to get ahead financially by investing in an individual retirement account (IRA).
My wife would describe herself as goal-oriented and enjoys planning for the future.
We both do.
IRAs help make those plans reality by setting aside money in a tax-advantaged account to compound over many years.
She realistically only missed out on a handful of years’ worth of eligibility, but she still regrets not taking advantage of her chance sooner.
I’m happy to report in the past few years, she’s chosen the balanced approach of both investing in her tax-advantaged accounts and paying off her student loan balance.
She has come to understand the advantages given to retirement accounts by the federal government and wants to contribute the limit each year going forward.
She didn’t have access to a 401k plan while in medical school or now in residency but plans to exhaust every tax-advantaged account available to her going forward.
She learned this lesson a little too late in her opinion, but still ahead of most.
I’ve made up for lack of early contributions by maxing out my IRA accounts each year for the past 6 years and coming close on my 401k during this time.
For the first time this year, I will max out my 401k.
Next year, we plan to max out all of our tax-advantaged accounts, including our Health Savings Account (HSA).
Lessons Compound with Time
My wife managed to avoid learning some lessons others have to experience the hard way.
Some don’t learn important lessons on smart money management, living within their means, or how to manage debt until they’ve made a costly mistake.
They’re often left attempting to minimize the damage instead of maximizing their opportunities.
Fortunate for my wife, she developed good financial habits by being born to great parents, having exposure to their good financial habits, and always looking to improve her position in life.
She’s worked hard to get to where she is in her residency and sees the next step as finally reaching some semblance of a reward.
In addition to her hard work, she’s managed to avoid unnecessary expenses, use credit responsibly, and invest in her future.
She’s set herself up for a great life.
All of this work and these traits have compounded with time and only look to continue.
Be sure to look for the next part of this post which details three financial lessons I managed to learn while in college and graduate school.
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Interesting. People are always quacking about “maxing out the IRA” and the HSA and the 529b. Getting some money in a HSA is probably a good idea for someone young. It’s advantage is tax free growth (not tax deferred for medical expense) over decades and can be used to pay for Medicare later. I have enough in my HSA to pay for Medicare for my wife and myself for about 15 years into retirement. Can’t really see an advantage to HSA beyond that. The IRA is not tax free it is tax deferred and it will be forced into annuity… Read more »
Thanks for the great advice. I think they say that a couple age 65 will need 250k in medical expenses. Ideally it would be nice to have that set aside in an HSA which is triple tax advantaged.
The problem is flexibility in removing the HSA money if you don’t use it, so some money in HSA is good too much hinders, it’s the enemy of good is better. You can’t use HSA to pay for medicare supplemental except for some HMO’s and HMO’s tend to have physician and travel restrictions so if you like the physician panel and never leave town a HMO is a good deal otherwise if you want to travel the country a regular PPO kind of policy is a better deal since you can use it if you get your heart attack in… Read more »
Thanks for sharing your thoughts. You’ve given me a lot of food for thought. I knew there was a breaking point where it didn’t make sense to continue contributing to a HSA or retirement accounts but haven’t put pencil to paper on the math. Because we’re so young, it’s doubtful to be soon for us. I also planned to use a slightly early retirement to roll over funds from Traditional IRA/401k accounts to Roth IRAs when our income would presumably be lower later in life and have lower tax implications. I’d also make use of an after-tax account to provide… Read more »
I actually cash flow my medical expenses and leave my hsa contribution alone. I figure this will give it the best chance to grow so I can use it when I will need it most in old age
I think it’s something we plan to do as long as we can. I’ve got a post discussing this practice coming out at some point. Would love to get your thoughts and any others who practice this strategy when I do. If you can afford to do take advantage, it seems like a no-brainer choice.
So you just ignore the tax benefits of paying for expenses out of your HSA now because you can afford to do so (aka still working)? I have had discussions with several that feel this way, but my argument back is let’s say it’s $30k of medical bills over the years, taxes on that $30k is not insignificant. Imagine if it’s $60k, etc…
True, for me I can cash flow most medical expenses because my family is relatively healthy and most years would total $5k or under.
A major expense may give me pause and see which one gives me the best long term bottom line. But now since I am earning quite a bit, I am trying to protect future self who will not be able to have as large an income (and thus needs as much financial padding as possible).
But, but… Math!! There’s an argument to be made for ability to pay and the fact that taxes are historically low right now. However, I just find it odd that most who choose to cash flow the expenses and disregard the tax impact as irrelevant also invest countless hours analyzing ways to save on taxes in other areas.
I suppose I can find solace in the fact that you save your receipts…
I was actually thinking what am I missing in terms of the tax impact you were suggesting and then I remembered the ability to deduct medical expenses on your income tax return. Unfortunately this option is not really an option for me as the IRS says you can only deduct the amount over 7.5% of my adjusted gross income. This means I would have to have medical expenses of over $70k before a single healthcare dollar counts towards a deduction. Knock on wood but my healthcare expenses for my daughter and I typically are under $5k/yr (braces etc make the… Read more »
I meant the taxes paid when you cash-flow the expenses.
Withdrawing $5k from your HSA for qualified medical expenses will cost you exactly $5k (pretax money). Cash-flowing $5k per year means it has “cost” you $6-7k when you factor in the taxes paid. This is where I see the benefit since it adds up over years of cash-flowing, even if it’s just $1-2k / year.
Thanks for the clarification C-S. That actually is a very astute observation on the financial impact of cash flow or not. I am not sure I have come across anyone writing about that particular tidbit. Thanks for bringing my attention to it. I may have to whip out the calculator now and see the pros and cons of both. Based on your observation it looks like the highest margin tax people (and the ones most likely able to cash flow medical expenses) are the ones hit hardest.
I enjoyed the conversation, it’s always interesting to understand where others are coming from. It helps me learn and grow as well. I’d be interested in seeing a post with your analysis if you get around to it. Take care!
But we live in a world where the default is after-tax. The money coming from a HSA is the exception which must be shown in a comparable light to the reality we face.
So that $5k you take out from your HSA might seem like $5k, but it’s actually worth $5k/(1-marginal tax rate). To get that equivalent amount of money from an after-tax account would require the higher sum.
Interesting perspective that I have never heard / considered before. I am late 20’s and have just a couple thousand in my HSA (was able to contribute, then wasn’t, now am eligible again). I plan to consistently max my HSA going forward and utilize the funds for medical expenses as they occur throughout the years. I also hope to have a hefty sum decades later to cover medical expenses. If I remember correctly, there isn’t a time limit on claiming for medical expenses so couldn’t you technically save the receipts and claim the medical expenses later? An in depth analysis… Read more »
As far as I know there is no time limit for use of HSA funds either. They can be used triple tax advantaged with qualifying medical expenses. Some people say it will be a pain to store all of the medical receipts throughout the years which is true however bear in mind that as you get older you will likely generate ongoing medical expenses that will likely be enough to get all the money out anyway without saving decades of receipts (I still save mine though)
No need to put in more than you can calculate as need and then work backward to the right amount of funding. Close is good enough and over funding goofs up the tax picture later at least that’s my take
Hmm, a great perspective for me to ponder… Since I’m only 29, I would calculate my “need” as large and contribute the max for the foreseeable future. I would rather overfund than under since there are decades of unknowns and, worst case, it ends up as a TIRA if I do not encounter those medical expenses later in life. For now, that’s good enough for me to continue maxing as I haven’t really modeled how RMD’s would affect my portfolio (probably should do so). I suppose if I’m blessed to amass a large balance, I’ll revisit the subject in a… Read more »
I totally would love a guest post from Gasem on the subject (I wish I was analytical as he is). I am not sure if you are aware but Gasem started his own blog (and thus may not be as willing to do guest posts anymore (it was fun while it lasted).
His website, in case you are interested is: http://mdonfire.com/2018/12/03/liar-liar-pants-on-fire/
He goes by MD on FI/RE
Ha, great news! In that case I will rephrase…Gasem, please let us know when you complete that post! I’m sure it will be a hit and your friends in the PF community would send traffic your way…
As I mentioned above in response to Gasem, having access to an HSA right now and having close to zero medical costs makes my wife and I contribute to my HSA while we are on a high deductible plan. As our family grows or medical expenses accrue, it might make sense to switch to a low-deductible plan, thereby losing access to an HSA.
I’d agree with that. Close is good enough. For the time being, we’re trying to allow those funds to compound since our medical expenses are negligible to nill. As we age, have a family, etc., our costs are likely to increase and we may lose access to an HSA altogether when it makes more sense to be on a low-deductible health plan. If we find it more cost-effective to make that switch, we’d lose access to an HSA. That’s another reason why were cashflowing any medical expenses now and allowing the HSA to accumulate funds. You have access to an… Read more »
You’re analysis is sound as far as it goes but has assumptions. At 30 7K/yr @4% grows to 400K @ 60 and 1.3M @ 90. The rules are at 65 you can withdraw as a TIRA and pay ordinary income tax. No RMD: oooh baby oooh baby. Here is a scenario the average couple uses 250K in health care in a lifetime so president Hilly Warren signs a law the first 250K is treated as health need the rest RMD’s You now have a 1M account with a tax liability. 1M RMD’s 36K the first year and 51K the 10th… Read more »
Yeah future tax law changes can put a wrinkle in any plan. Do you have a top # HSA you were going for to reach at time you retired?
I had HSA access only late in my career so I have about $75K which is enough to pay deductibles and Medicare for a long time. It will continue to grow over the course of my retirement, so I figure for 2 people I can pull 6K/yr tax free for about 16 years which will take me to age 83. I am using my Roth to self insure so I have other tax free (not tax deferred) money available in case of disaster. 7K/yr in a HSA is a good deal but 5.5K in a Roth after the HSA has… Read more »
Appreciate that analysis Gasem. I think I’m right at 70k (age 47) so probably on track to your guidelines. Thank you.