Medical school education begins with learning the basics of science and medicine. By the end of your second year of medical school, you’ll be preparing for the United States Medical Licensing Examination® (USMLE) Step 1 examination (also simply called Step 1 or the Boards). Similarly, it’s never too early for future physicians to prepare for and learn the basics of personal finance and debt management. These basics are much easier to understand than pathology and anatomy—yet, changing habits and making decisions based on those personal finance basics is the real challenge.
Credit scores help lenders measure how likely you are to repay a loan. There are several institutions that track and report credit scores, so it’s possible to have a range of scores. These numbers are based on your credit history, or rather how much money you’ve borrowed in the past, how many lenders you borrowed from, whether you repaid the money (and in what amount of time), and whether you’ve been reported to collection agencies.
Does taking out student loans negatively affect your score? Not exactly—in fact, lenders see educational debt as a positive investment. So long as you pay your other bills on time, you can improve your credit score during medical school.
Keeping a good credit score is important because it will affect the interest rates you pay on other items in the future, such as a mortgage. Employers, landlords, and lenders can pull credit scores when considering applications.
Setting up automatic bill payments can help you stay on top of your payments and avoid having a negative mark on your credit score. Avoid shopping around for credit (by opening a lot of credit cards), which can reduce your score and lead to debt.
To monitor your credit score, take advantage of the free report you are entitled to from each of the major credit reporting agencies.
Capitalized interest and compounding interest are both terms describing the process of interest that is being paid on interest. Interest is a big factor in the final cost of your loan. It starts adding up, or accruing, on day one of the first disbursement.
Any interest that is unpaid once you have graduated (or when your deferment or grace period is over) will capitalize. That means you will start to owe interest on your principal and all the interest you accrued while in school or while you were in deferment.
Compound interest usually refers to the more favorable interest being paid on interest. You receive interest paid on an initial principal and the accumulated interest on money borrowed or invested. This adds money to your total balance, which earns you greater interest payments. Your money “compounds” over time whether you contribute more to your balance or not.
Budgets can be empowering and eye opening. They are especially important when taking out student loans intended to cover your cost of living. Unlike regular paychecks, which might be received by employees weekly, loan disbursement happens in lump sums. Without careful planning, it’s easy to spend down the cash in your personal account too quickly.
Budgets need to be updated and revisited at regular intervals so that you can adjust spending, project where you need funds, and track your progress. As you make your budget, consider which items you might be able to cut back on and identify personal priorities that will help guide your saving goals. For example, if travel or shopping is important to you, find a strategy that makes it possible to have money left over for the things you enjoy. Keep in mind, there are many non-tuition expenses related to your medical school career, such as conference and registration fees and travel for Step 2 Clinical Skills.
There are several online budgeting tools available to help you start a budget and stick with it. A simple spreadsheet or worksheet can also help you develop a plan for tracking your spending. The Association of American Medical Colleges’ (AAMC) FIRST program offers several tools and suggestions to help you figure out a budget.
Building wealth and developing good financial habits take time. Don’t bank on financial strategies that promise quick or overly simple solutions for making or saving money.
Knowing these four finance basics will help as you continue learning about money as a medical student and resident.
These concepts are covered in more detail in the recorded webcast “The Science of Personal Finance for Med Students.” Resources and tools from the webinar are also available for you to explore.
In one study of medical students, even a percentage point of additional financial literacy was associated with a higher likelihood of investing for retirement and lowering debt.
Start by learning some basics about interest, credit, and budgeting, and keep reading to become informed about: