For as long as I can remember, All I wanted to be was a doctor. I studied a lot and memorized so many diseases, medication names, and biochemical pathways, stayed up for long lonely hours perfecting my diagnostic and presentation skills, sift through countless EKGs, X-rays, and CT scans to make sure I am confident enough to treat and help my patients.
I did all that, and now I am a practicing physician! but something doesn't seem right, I realized I have almost zero financial knowledge! 401Ks? School debt repayments? Interest rates and compounding effect? all this seemed like complete gibberish to me, but why? Why am I so unequipped to understand the basic principles of personal finance? would I have gone into medicine if I knew the financial truth behind committing to a life of medical training?
Let me take off my attending hat and put on my math teacher one for a second and bear with me if I am horrible at math (I am doing my best here out of my element) and let me try to explain how money affects our lives.
Let me introduce you to my 4 friends who are going to help you navigate the complexities of student loans, repayments, compounding, and investing. Jack is a doctor, Betty is a lawyer, Mark is a pharmacist and Katty is a physician assistant. All my friends went to an undergraduate school for 4 years before starting their respective schools.
Jack wants to be an internist, went to medical school for 4 years then trained for 3 years in his dream residency program. Betty went to law school for 4 years before landing an amazing associate job at her desired law firm. Mark did his 3 years of pharmacy school then one year at pharmacy residency then started his clinical pharmacist job at the hospital of his choice. Katty did 3 years of PA school then went out to practice in family practice to help her patients in her area.
Student loans as you have never seen before
All of my lovely friends took the average student loan at the basic federal annual interest rate of 4.3% and for the sake of simplicity wish to fully repay their debts after 10 years of finishing school, and we end up with these numbers:
For example, Jack the doctor took the average medical school debt of $215,900 with an annual interest rate is 4.3% and plans to repay it in 10 years, plugging those numbers into the super magical debt repayment calculator spits out the monthly payment needed to achieve his goal, which is $2,127. As you can see from the table, due to the compounding interest effect he is going to pay almost $50,000 in interest payment, the more he delays his timeframe of repayment, the more money he is going to pay. Compared to Katy the PA, she gets a lower student loan, hence pays fewer monthly payments with less interest accrued.
Compounding is an elusive concept that sneaks up on you
My friend Jack the doctor knows he is not going to start repaying his loan fresh out of medical school, he has to train first (duh!). When it came to deciding what he wanted to do, he decided to weigh multiple factors in his life, as he wants to get married and have a kid soon, and financial freedom was always a dream of his, so he wants to get rid of that pesky debt as soon as possible, so we came up with this table to evaluate his options depending on the length of training:
The $215,000 student loan he took does not stop compounding just because he is training and unable to pay for that period, it just silently accumulates. Let’s look at Jack, he chose to finish internal medicine training for 3 years and then start working as an internist after graduation. The loan that he has to pay is now worth $244,965, applying the same method as the prior table, we get a $2,515 monthly payment with a whopping $56,000 interest accrued on his principal!
But wait a minute, Doctors make so much money afterward! It will all be worth it! right?
Not so much, my lovely reader, the answer is complicated but let me try to break it down here.
We keep missing one important factor here and that’s why keep falling for the same fallacy, we just don't understand how compounding works! let’s see what that means.
Using the Occupational Outlook Handbook from the US Bureau of Labor, let’s find out the median annual salaries of our friends, Jack, Betty, Mark, and Katty. In addition, let’s assume they plan to contribute to their retirement through their employer-sponsored 401k account.
In this calculation, I am using multiple basic assumptions to be able to compare their wealth at retirement, those assumptions are :
- Depositing max contribution
- 3% Annual salary increase (matching inflation)
- An annual growth rate of 12%
- The employer contributes 50% to a max of 6% of the salary
- Plan to retire at the age of 65.
Too many numbers? I know, just take my word for it and look at the table below:
As you can see, time is the most important factor in determining the growth of the money that you invest in retirement. Jack the doctor, despite having a higher annual salary compared to his friends, still made the least because he started to invest in his retirement later in life.
Come on, I will become a hotshot orthopedic surgeon or a cardiologist! those people make so much money!
I know my friend, as I said you can still make more money than others, but know it's not an easy feat to accomplish.
The highest paying MD jobs go for people who train the longest, Cardiology for example needs 7–8 years of training post-medical school, 6–7 years with Orthopedics and Neurosurgery, and 5 years with general surgery.
Let me introduce you to Tony, a friend of mine who wanted to become an interventional cardiologist, he loves what he does and would never choose to do anything else. He trained for a total of 7 years after medical school, his student loan compounded to an astounding $290,000 before paying a penny, but he landed a lucrative job at his community hospital where he is going to make around $500,000 yearly!
Now we are talking! This is so sweet! he is going to make so much money, he will blow all of the others out of the window!
Hold your horses, my friend! let’s do the calculations first, as you can see, he started paying his debts and depositing money later in life, at age of 34 to be more specific.
If he pays $3,000 a month towards his loan, then he will repay it fully in 10 years at the age of 44!
At the same time, he is financially conscious and deposits the maximum amount of contribution into his retirement account, but sadly the IRS caps this amount at $19,500 (as of 2021), so starting at age of 34, and retiring at 65, he will only accumulate around $8 million, Shocking I know!
Wait a minute, he can invest in a separate individual account and get all that sweet money, right?
Yes, you are right, but just to keep up with his friend Katty the PA, he needs to deposit an annual investment of $30,000 for 31 years until retirement to match what Katty gets from her retirement account only!
So Tony, the highly paid Cardiologist, needs to invest in his retirement and also invest 6% of his annual salary for 31 years to match others who get paid way less than him but started earlier in life!
We all came into medicine with dreamy eyes and hopeful souls, willing to go above and beyond for academic excellence and patient care, but few of us consider the financial burden of becoming one.
I love medicine and I love what I do, but we need to educate ourselves better to better plan our professional and financial life and not fall prey to those who take advantage of our aspirations!