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Personal Financial Management after Your Residency

Personal Financial Management after Your Residency. Chris Lamoureux, PhD Head of Finance Estes/Neill Professor of Finance University of Arizona. First & Foremost: Do No Harm. Finance is a tool—not an end unto itself.

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Personal Financial Management after Your Residency

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  1. Personal Financial Management after Your Residency Chris Lamoureux, PhD Head of Finance Estes/Neill Professor of Finance University of Arizona

  2. First & Foremost: Do No Harm Finance is a tool—not an end unto itself. Most “Financial Advisors” are selling something—your interests are not in mind. Develop a plan of conservative management, and stick with it. Personal Finance for MDs

  3. Congratulations! By becoming an MD you have already made the best investment I know of: education (human capital). The returns on this investment far outweigh any risks, and I encourage you to support education throughout your lives. Make this an on-going investment. (Can you tell I’m a university administrator?) Personal Finance for MDs

  4. What’s Easiest Avoid debt! Credit Card debt is worst. Never use credit card for borrowing. Interest Paid is not tax deductible, interest earned is. If you’re in a 40% tax bracket, consider the effect of paying off 12% credit card debt. It’s equivalent to earning 20% on a risk free investment. (Not bad when 2-Year Treasury Bills are yielding 2%.) Personal Finance for MDs

  5. The Easy Stuff 2. Payoff student loans as soon as possible. Never speculate. A reporter asked me the other day: “With the stock market so low, shouldn’t we borrow as much as we can and buy stocks?” I was aghast. Avoid hedge funds. Personal Finance for MDs

  6. The Easy Stuff 3. Fully insure. (This is a corollary of the last point.) Try to diversify. This is often violated: • Dentists investing in equipment. • Farmer buying Caterpillar stock. • You buying Merck (you’ve heard about a promising new drug, . . .) Personal Finance for MDs

  7. The Easy Stuff 4. Buying a house has been historically an excellent investment. • Mortgage interest and property taxes are deductible expenses. • Mortgage is a collateralized, standard loan so rates are reasonable. • 30 year mortgage is paid off before retirement—affording reduced housing costs at a good time. Personal Finance for MDs

  8. Buying a house? (Cont’d.) • Housing prices have risen steadily over time. But: • House is an illiquid asset. • Current concern about asset price bubble. So: I prefer to think of buying a house as more of a consumption decision rather than an investment decision. (Buy a house if you want to. Don’t blame me when you figure out the maintenance costs!) Personal Finance for MDs

  9. The Easy Stuff 5. Start saving for retirement. Probably don’t want to count on social security. Contributions to (qualifying) retirement plan are pre-tax (i.e., you can avoid paying taxes on that income). Personal Finance for MDs

  10. The retirement spreadsheet Compounding has big effect over time. Base case: $200,000 annual income, 4% earning on portfolio (My recommendation TIPS), monthly contributions of 14% of gross salary. Amount in account on retirement: Over $2,247,000. This would require a lump sum of $533,000 today under the same market conditions. Personal Finance for MDs

  11. Retirement Don’t count on partnership value to insure your retirement: Arthur Andersen. Personal Finance for MDs

  12. How to Contact Me. Chris Lamoureux Head of Finance and Estes/Neill Professor of Finance Eller College of Business University of Arizona Tucson, AZ 85721-0108 www.bpa.arizona.edu/~finhome/lam/lamhome.html (520) 621-7488 Personal Finance for MDs

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