Part 1: Should I be investing during residency?
The first step in answering this question is to create a detailed budget that accounts for all income and expenses. It is important to budget at least a small amount of money “left over” after expenses each month to allow replenishing of your emergency fund after an unforeseen expense—maintaining a full emergency fund is a top priority. In times where your emergency fund is full and you do not have unforeseen expenses, this surplus of income can be used for other purposes, such as investing or making supplemental student loan payments.
If you have money left over after paying expenses and your emergency fund is at goal, the next step is deciding whether this leftover income should be invested, used to pay down education debt, or used for another purpose. We will assume that residents want to use these funds for wealth building and therefore will focus on the decision between investing and making additional payments toward student loans. This line of reasoning also assumes that there is no high-interest debt (>8%) to which funds should likely be applied before considering investing or making additional loan payments.
The decision whether to invest or pay down student loans is complex and does not have one “correct” answer, but there are a few guiding principles:
Table 1. Situations favoring investing vs. supplemental student loan payments
Situations favoring investing
Pursuing Public Service Loan Forgiveness
The benefit of the Public Service Loan Forgiveness (PSLF) program is greatest when you pay as little as possible toward your loans in the 10-year payment period (See: Education Debt).
If your employer has a match (i.e., if your employer will contribute extra money to your retirement account when you contribute a portion of your paycheck), the appeal of investing at least enough to get the full match is significantly increased.
The lower your student loan interest rate, the more likely it is that investing will turn out to be the best decision for your net worth. This is by no means guaranteed; there is always the risk of low returns (or even losses) when investing.
Residents without student loans or other significant debt should strongly consider investing.
Situations favoring supplemental student loan payments
If your student loans have a high interest rate (i.e., more than ~8%), it is likely that making additional student loan payments will turn out to be the best decision for growing your net worth. This is assuming you are not pursuing PSLF (See: Education Debt).
Desire for Guaranteed “Returns”
When making properly-applied supplemental loan payments, you are guaranteed that the principal (i.e., the amount of money that is collecting interest) will go down. This guarantees a “return” of your payment amount at the loan’s interest rate (e.g., $500 at 6.8%). There is no telling what would happen to that same amount of money if you invest it in the stock market—it could perform the same, better, or much worse.
There is value in a guaranteed return on investment.
Each of the above factors needs to be considered in the context of personal risk tolerance and overall financial profile in order to decide whether to invest during residency. While many residents will decide they can’t afford to invest or choose to use their extra money for other purposes (e.g., paying down education debt), some will choose to start investing. The remainder of this chapter will discuss the basics of investing with a focus on types of investments and investment accounts that are suitable for residents.