Extra money as a med student - what to do?

[The JockDoc]

I saved a lot from my job while living with my folks before med school began. I managed to saved up a good chunk of money (about $18k or so) that I've put into an emigrant account at 5% interest as my emergency stash. Luckily, I haven't had any emergencies since school began and the cash is still there, sitting and gaining interest. My problem is that I'm not sure what to do with it.

I still receive max loans form my school to pay for tuition and living expenses, which come out to about $55k/year. This is a lot of money and I'm worried about paying it off when I'm all done. But I also appreciate having a safety blanket of cash just in case, and there are some expenses that I can see coming - for example, my car is getting old. However, I am insured well enough that I can cover the premiums in case anything happens to me, and I dont think i need as much money as I have for an emergency fund since I live in a low cost of living area.

What's the best that I can do with my money? Keep it liquid and safe it where it is, invest some of it, or use it to pay off some loans right away. Or, should I save it until the end of med school and then pay back my 8.5% interest loans? I'm also interested in a Roth IRA because I heard that I can take money out of it penalty-free to buy my first house, and that would be great.

Thanks for your suggestions. By the way, I'm a ms2.

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[Doctor Bagel]

I don't think you can do a Roth IRA right now because you need to earn money to qualify to put money in one. As for what to do other than that I think it really depends on your risk tolerance. Investing it would definitely be in the higher risk category, while either putting it in the highest interest savings or money market (check on risk for those, though) account you can get or setting aside a reasonable emergency budget fund and using the rest to reduce your loans for the next year.

One thing to note is that the interest on student loans even GradPlus is not capitalized until you enter repayment so you're not getting stuck with interest piling on interest while you're in school or deferment. That personally would make me lean more toward holding on to the money for now and then using whatever might be left of it to pay all the interest that's accrued once repayment hits. I might invest some but would probably keep the bulk of it in savings, but that's just me.

One other thing to watch out for is you get jacked on the FAFSA if you have any short term capital gains. For some entirely idiotic reason, short term capital gains throw you into the same EFC calculation you would have if you make too much money to file a 1040 EZ or A form -- the big difference with the more stringent EFC calculation is that they include your savings in determining your EFC, something that normally is not done for all people who earn less than $49k. So avoid short term capital gains like the plague while in school.

 

[Doctor Bagel]

Editing to add that you could put money into the Roth IRA now or I think through April 15, 2008 if you made money in 2007. So yeah, that might be a good deal. Actually, though, a traditional IRA might be good, too. It depends on how much you'll be earning if you want to take the money out and what your tax burden for this year is. If you want to get it out when you start residency, the tax advantage of the Roth IRA won't be that great since you won't be making much money then. But then your tax burden for 2007 will probably be very small, so yeah, maybe Roth is still the best bet.

 

[Sol Rosenberg]

I don't think that you can withdraw from a traditional IRA without a penalty, except if you meet certain conditions (one of which is that you are a full-time student, which I don't believer that you are once you enter residency.) You can always withdraw your CONTRIBUTIONS (but not earnings) from a Roth IRA without penalty.

 

[Doctor Bagel]

I don't think that you can withdraw from a traditional IRA without a penalty, except if you meet certain conditions (one of which is that you are a full-time student, which I don't believer that you are once you enter residency.) You can always withdraw your CONTRIBUTIONS (but not earnings) from a Roth IRA without penalty.

Yeah for some reason I thought buying a house was an allowable withdrawal from a traditional IRA, too but I have no clue really. Editing to add that I just looked it up, and I think it's allowed if you're a first time home buyer.

The other thing to note is that you can only put $4k/year in an IRA, so that leaves the op with $14k. I personally wouldn't put all of that remainder on a car even though I know the op mentioned that his car's a little iffy.

 

[mindquick]

you can donate your money to me!!!

 

[Doctor Bagel]

So I missed that you were an MS2 -- I'm guessing you probably didn't earn much money this last summer, and that's really all you can put in an IRA. Another thing to think about is that you're probably going to need extra money your 4th year for interviewing expenses and for moving to wherever you go for residency. So keeping a good chunk of the money in a readily accessible place might be a good move. I know lots of people take on cc debt or other private loans to cover those expenses.

 

[The JockDoc]

Thanks for the advice. I have been thinking about the additional expenses for boards and applying during 4th year, and I know that a lot of 4th years take extra loans just for that. So I have justified my decision to just stick it in a high interest savings account to cover myself for those types of expenses.

Yes, I'm an ms2, and aside from a research grant for my work last summer and the interest I got from my savings, I haven't made a lot of money this year. So it may be an obstacle to put a lot of money into a Roth. Additionally, I didn't know about the short term gains ruining my efc. I wouldn't invest for a short term gain anyhow (buy and sell w/in a year) to avoid capital gains taxes. Maybe I can shove a bit into an index fund and then withdraw it when I graduate as a present to myself . At that point I wouldnt have to worry about the damn fafsa anymore.

 

[Stroganoff]

Great job on saving the $18k!

I would personally keep most of it (at least $10k) in Emigrant. I like the idea of saving it for boards and travel expenses, emergencies, and car repairs. I guess since you haven't really been employed this year, an IRA is out. I guess you could stick a couple G's in a taxable investment account to play around with index funds or whatever...

Honestly, I'd just keep most or all of it the way it is and forget it even exists. It'll be a great start to a 6 (or 8 or 12) month liquid cash reserve or you could set your goal to get it to 50k when you're in residency.

Maybe (if you like micromanaging) you could divide the 18k into several different online savings accounts (boards account, general emergency fund, new car fund, vacation fund)...

 

[cyclingmo]

Are you currently accruing interest on your current loans? Because if your money is gaining 5% and you're paying 9% loan, you still losing 4% annually. But if you can put it in a portfolio that will earn you around say 12-15% (which is reasonable, i'm a bit into financial investing) then will be better.

But again, I read the argument about avoiding short-term gains since FAFSA looks down at it. Good thing about investing is that it's still pretty liquid, so you still have your safely net.

 

[The White Coat Investor]

1) if you can put it in a portfolio that will earn you around say 12-15% (which is reasonable,

2) i'm a bit into financial investing

IMHO these two statements are contradictory. I think 7-9% is a reasonable estimate for equity returns OVER A LONG INVESTING HORIZON. Over the next 5 years, the average per year return could range from -20% to +20% per year.

 

[LADoc00]

no1 would have to be stripping/exotic "dancing" for the ladies.

 

[Tenesma]

don't touch it... leave it where it is...

there is a lot of security in having liquidity and it may be worth the 3 point differential between 5% and 8% loan.

in fact try to grow that savings account to about 50k by the time you graduate from med school... the way to do that is to save every penny, don't buy bottled water, don't buy a new car, don't spend ...

with a 50k cushion going into internship will make a HUGE difference in how you manage your money

 

[The JockDoc]

don't touch it... leave it where it is...

there is a lot of security in having liquidity and it may be worth the 3 point differential between 5% and 8% loan.

in fact try to grow that savings account to about 50k by the time you graduate from med school... the way to do that is to save every penny, don't buy bottled water, don't buy a new car, don't spend ...

with a 50k cushion going into internship will make a HUGE difference in how you manage your money

How would you grow it to 50k without touching it?

 

[Tenesma]

well - drink tap water, eat ramen noodles, never go out and never buy yourself anything... and just study...

that should do the trick

 

[etf]

well - drink tap water, eat ramen noodles, never go out and never buy yourself anything... and just study...

that should do the trick

and hope that you never get hit by a bus and basically have lived a miserable life for nothing.

 

[Tenesma]

yeah... pretty much

or you could spend and live it up, and start residency with credit card debt and no safety blanket -