It’s no surprise to any resident that debt is a large contributor to stress. We have high debt levels that continue to rise1, and less job security as employment and career opportunities become harder to secure. We rarely talk about money during our training, and there is little discussion of income and debt management in medical school curricula. We hope that this post will help shed some light on the matter as we dive deep into this ‘financial black hole’. If none of this is news to you, congratulations! You’re doing better than most of your peers! What this post is NOT: a foray into the world of investing, tax-free savings accounts, incorporation, registered retirement savings plans, or insurances.
Before we begin, remember that we all differ in our risk tolerance when it comes to finances so do what is best for you. Additionally, I have no financial training or disclosures and this is not meant to be an in-depth analysis (entire books exist on this topic!), so please take it with a grain a salt (and make sure to do your own research too).
Money doesn’t grow in trees – but interest does
One of the hardest concepts to grasp is compound interest. This is often explained as “interest on interest”3, which is great for your investments but works against you on a loan. Simply put, the more you spend and the longer you are debt, the more you lose in the long term. This is because you are charged interest on what you currently owe in principle AND accumulated interest.
Your interest rate is often reported as an annual percentage rate, which essentially means how much interest you pay over a year. The standard rate for a professional line of credit (LOC) is currently prime minus 0.25% (pro tip: If you are not getting this rate from your bank, call your financial advisor ASAP!). Compounding refers to how often interest is applied to your loan, and the more often it is compounded, the larger the amount of interest you owe. For us, interest is calculated DAILY, compounded MONTHLY, and automatically added to the principle you owe. As a result, the amount of daily accrued interest (or principle) will continue to increase each month you are not paying down the principle or any interest. For example, if you spend $2000 for a vacation at the end of first year medical school, you’re paying over $2600 for it by the time you finish residency. Although the numbers seem trivial, when your LOC is at 200K, the gap widens significantly as the global amount of interest climbs over time.
How can you use this information moving forward? Compound interest affects your finances the most when you are unable to pay interest payments, and you subsequently draw more funds from your LOC to pay said interest. This can be very difficult in medical school when most people have no income, so everything comes off your LOC. Once you hit residency, you should try and get as much money onto your LOC as possible to decrease the total amount of daily interest accrued against you. You should also remember that purchases right now will cost you an extra ~4% per year that it stays on your LOC, and use this to influence your spending.
The Taxman cometh
If Albert Einstein described taxes as “too difficult for a mathematician” then there is probably little hope for the rest of us, or me at least. Doing your own taxes during medical school is usually quite simple, but once you start making a salary in residency things change. One big question that gets tossed around is whether or not to use your tuition credits upfront to stop taxes from being collected on your pay cheques.
To properly compare which option is better, I did some math. Assuming your medical school debt and income tax return are constant, and you do NOT touch your LOC otherwise, how much could be saved if you reduce your upfront taxes versus the lump sum? In total you would end up saving ~$180/year. This makes sense because as you add money to your LOC, your total funds owed decreases and the amount of interest also decreases.
However this makes a LOT of assumptions that are simply not true (mo’ money, mo’ problems). You may be able to put more funds onto your LOC than what I have listed. You also may have more costs that can creep up (hello LMCC, goodbye money). This doesn’t include other sources of income, so if you get paid to teach or are moonlighting, that income still needs to be taxed, so you’ll end up owing income tax.
Personally, I preferred the lump sum because I am not someone who is good at putting away monthly payments. If you can be good about it, power to you and you’ll probably save more than what I have calculated. It is also important to note that unless you pursue further schooling, typically tuition credits run out by third year for most residents.
The process to do it requires you to complete a Form 1213 for both provincial and federal taxes for your employer.
BONUS General Tax Things:
- You can file your taxes online for FREE using UFile if you are a student (Enter the following Canadian Federation of Students “Free for Students” special offer code: CFS198)
- Don’t forget to claim your licensing exams (LMCC, Royal College etc) as tuition
- Some companies or accountants offer discounts on doing resident taxes. Ask around!
- If things get tricky (buying a home, investments, etc), get an accountant!
A penny saved is a penny earned – consolidating debt
It is advisable for all* residents who have multiple forms of debt to put “all their eggs into one basket” where the basket is the lender with the lowest interest rate. Government loans5 are currently charged at prime plus 1.0-2.5%, while LOCs are prime minus 0.25%. I would recommend moving all your debts over to your LOC ASAP (keeping in mind some provinces give a 6 month grace period on interest).
*If you are planning to do a Return of Service contract and enter the Resident Loan Interest Relief Program this may not be a concern. However, if you end up breaking that contract, you have to pay the government everything they paid, plus interest and a $4000 fee. Think carefully!
Show me the money! Cash-Flow analysis
It is important to keep track of how you are utilizing your finances. I will admit that during medical school my thought process was along the lines of “I’ll be fine, I’ll get that staff money”. This is a dangerous and somewhat lazy mindset because you may not actually be getting as much disposable income as you think you will – higher taxes, overhead costs, loans go into repayment, and lifestyle creep.
One of the simplest ways to track your finances is to create a monthly budget. I’m not saying you have to STICK to the budget, but making a budget or using budgeting software explicitly lays out your spending habits. Pro tip: Determine your anticipated disposable income after you have budgeted for all your usual expenses. This allows you to make informed decisions when debating about that vacation or another round of drinks at the bar. If that is too much, then you should review your finances at least annually to see where your money is going.
A recent study from the Financial Consumer Agency of Canada7 revealed that people who use budgets have significantly better finances. They were able to pay off their debts quicker, develop emergency funds, and increase their long-term savings. These sound like things we could all benefit from. There are different budgeting apps or online tools you can use, links are in the reference section.
Bonus tips: the best things in life are FREE
Canadian Medical Protective Association (CMPA) fees are not insignificant, and they start coming out of your bank account your first day of residency. However, almost every province has some form of Medical Liability Reimbursement program, whether through your provincial association (ex. Alberta) or government (ex. Ontario). Most of these programs will happen automatically so you may not realize you are even getting this back! However, some provinces, like Ontario, require you to complete their form to get these benefits. You only have to do it once, and it rolls over annually and continues when you become staff until eligibility criteria expire. Make sure you are signed up because everyone likes free money!
Similarly, don’t forget to submit your call stipends, and to use up all your vacation days in residency. Otherwise, you are essentially working for free (and when you are already working for less than minimum wage, that’s a killer!)
- Compound interest https://en.wikipedia.org/w/index.php?title=Compound_interest&oldid=875535836
- Physician Financial Independence (Canada): https://www.facebook.com/groups/303157906773998/
Budgeting software: You Need A Budget, Mint, free templates on Excel or Google Sheets, Reddit’s financial advice subreddit has tons of tools (links references 8-10).
There are no interests to disclose and no affiliations exist with any of the companies mentioned. Note of caution for services that accesses your accounts FOR you, as in you have to give them your banking and login information. For some/most banks, that VIOLATES the terms and conditions such that if there are any compromises to your account/credit cards, you will have a much harder time claiming fraud if you gave out your password