For new docs, hefty IOUs tough to shake

Debt-snared med grads must learn to pay now, spend later

By Ryan Bergen


"Suck it up," says finance guru Gail Vaz-Oxlade of Til Debt Do Us Part
Photo credit: Til Debt Do Us Part

Nine out of 10 residents are over $150,000 in debt when they finish their medical training, according to a 2006 survey. "That's not just debt, that's humungous debt," gasps Gail Vaz-Oxlade who's made a career of helping people with their money woes.

Her 20-plus years of experience and firm but folksy style have earned her a weekly television show, Til Debt Do Us Part - think Dr Phil for the financially wayward.

When it comes to climbing out of debt, the promise of a healthy income may be a beacon of hope, but, says Ms Vaz-Oxlade, young docs shouldn't forget the squeeze of being in the hole.

She doesn't waste time with sympathy. Med school, she says, is a choice, and with a "suck it up" — her tough lovin' refrain — at the ready, she lays out the way to mastering debt:

1 Shed student habits
Whether by habit, or a feeling of need, paid residents who are still dipping into their professional students line of credit they need to smarten up, she says. "If you can't live on $50,000 a year without accumlating debt you are going to have a tough time the rest of your life."

2 Chart your debt like a disease
If debt is a problem, then address it like one. Document income, expenses, interest rates. "If you had a patient, and every single day you went in and took that patient's temperature and blood pressure and whatever vital signs you needed and you didn't chart it, no other doctor on this earth's surface would think you were a smart kitten, would they?"

3 Plot your payment course
Create a montly budget - and follow it. It's not sexy, but it helps to keep track of the periodic expenses that can sometimes be forgotten, but must be paid.

4 Give yourself just a little credit
Treat consumer debt like the plague - avoid it. "You don't deserve [a purchase] if you can't pay for it." Credit card balances, usually the most expensive of debts, should be paid off first. More than two credit cards is too many.

5 Don't live on a prayer
Plan for the future, but live in the present. "It's one thing to say 'I am in hock up to my eyeballs to get this education, but I can ammortize that over 15 years.' It is another thing altogether to say that 'while I am a resident making 50,000 frickin' dollars I feel entitled to driving a fabulous car and eating out regularly.' You are still paying your dues, man."

6 Make like a squirrel
Remember to save a little, too. Ms Vaz-Oxlade recommends a minimum of 5% each month. "You have to have an emergency fund…the next time something happens and you have no stash of cash it pushes you back to your credit."

7 Better shop around
Apply the law of supply and demand. "It behooves [young family physicians] to find a community that wants them and negotiate the payment of their student loan as part of their compensation package. There are communities that are willing to do this."

8 Pawn it off on someone else
Consider getting a financial planner. It's their job to know the arcane but clever financial products that can put idle savings to work.

Friday's Personal Finance stories

If someone handed you $600 right now, what would you do with it?

That's question on lawmakers' minds as they debate whether to inject a fiscal stimulus into the economy in the hopes that cash in consumers' hands will prime the economic engine. As one economist in our lead story today says: "Give the average consumer a check for $50 and he knows what to do with it."

Now, I'm happy as the next person to be handed a few hundred dollars. But do you ever feel as though the double standard is a bit too much to bear sometimes? Americans are exhorted to stop loading up their credit cards and berated for living beyond their means, yet once again the government appears ready to beg us to spend.

Consumers were happy to oblige in 2001, the last time the government handed out a cash stimulus. Still, some economists say consumers are less likely to embrace their inner shopaholic this time, given stagnant wages, steep credit-card debt and, for some, mortgage woes.

Read consumer writer Jennifer Waters' story today for more on what consumers are likely to do should the fiscal stimulus plan come to pass, plus see which companies and government agencies are working to recruit older workers, and find out how the IRS is reacting these days to frivolous tax arguments, all on today's Personal Finance pages.

The dispiriting fact about this stimulus plan is that it's the lowest-income people who are likely to spend the most, while higher-income people can afford to save. So, I'd like to suggest an alternative idea for fiscal stimulus. Rather than the government spending tons of money to encourage poor people to spend, let's leave the little guys, and even the middle guys, out of it. Simply ask a few hundred multi-millionaires to spend an extra grand or two in the next couple of months. Buy their Christmas presents now, maybe. They could even get a special tax deduction for making a gift to the U.S. economy. That'd likely cost our country less. And it would leave the rest of us better able to focus on being savers, rather than consumers.

Andrea Coombes, assistant personal finance editor

Quicken Online Delivers New Personal Finance Service for Internet Generation

Intuit Inc. (Nasdaq: INTU) announced the availability of Quicken® Online – a new Web-based personal finance service that makes it easy for people to instantly see how much money they have coming in, how much they are spending, and what's left at the end of the month.

Quicken Online gives people access to information across all of their accounts, including checking, savings, and credit cards – regardless of their financial institution. This provides a unique and powerful view of their "real" financial picture, helping them make better decisions with their money. With Quicken Online, bank account information can be accessed wherever there is an internet connection from a PC or Web-enabled mobile device.

"With Quicken Online, Intuit continues to do what it has done for years: change the lives of millions of people by providing powerful tools to manage their dollars and cents," said Rick Jensen, senior vice president at Intuit. "We took a fresh approach to designing Quicken Online, combining the newest Web technologies with 25 years of experience to deliver a service that gives people the insight, functionality and tools they need with the security and quality they demand."

Quicken Online comes at a time when Americans are failing Personal Finance 101. A recent study by CareerBuilder.com found that 41 percent of adults in America live paycheck to paycheck. Compounding matters, debt is reaching a younger segment of the nation's population. According to the Richmond Credit Abuse Resistance Education Program, the number of 18- to 24-year-olds declaring bankruptcy has increased 96 percent in ten years. Not only that, the Project on Student Debt found that today's college students are graduating with an average of $20,000 in debt.

A New Financial Approach for a New Generation
Designed to address the basic personal finance tasks in the easiest, most time efficient and secure way possible, Quicken Online is available for a monthly subscription fee of $2.99. The goal is to provide customers with quick answers to important financial questions, such as:

How much money do I have? - Quicken Online connects to more banks and financial institutions than any other solution in the marketplace. This means users now have the chance to view their checking, savings and credit card accounts from any of the 5000+ financial institutions Intuit works with – all in one place. Gone are the days of logging in and out of numerous sites just to find out how much money has been spent, or how much is left for the rest of the month. Additionally, Quicken Online shows the RealBalance™ – a view of the current account balance plus any reoccurring deposits and manual entries to help keep people from spending beyond their means.

Where is my money going? – Quicken Online takes the work out of organizing and categorizing spending reports. Customers just login to see where their money is going. Building on the power of the Web, Quicken Online suggests the right category for transactions based on the most frequent categories selected by other users.

Quicken Online balances user-based knowledge with specific customer preferences, allowing customers to define how they want to see their information. For example, Quicken will remember if you've chosen to categorize the local Coffee Shop as "Java" instead of "Groceries."

When are my bills due? – – Doing the work for customers, Quicken Online automatically displays a list of upcoming bills on the user's homepage based on previous payment history. Going a step further, customers can be sent bill reminders via e-mail or text message to help avoid late fees and higher interest rates from credit card companies.

Added Benefits from a Trusted Brand
As part of the Intuit family, Quicken Online offers benefits no other online financial management solution can match, including:

Security – Protecting critical data is the top priority. Quicken Online is the only offering of its kind that uses multi-factor authentication – an additional step in the sign-in process – for added security. Intuit is subject to the same stringent auditing and technology requirements used by the world's major financial institutions including banks, stock exchanges and brokerage houses.

Support – Live, in-product support is available from the Quicken support team as well as other users. The Quicken Community, an online group of users, also shares personal finance tips and expert advice via podcasts, blogs, and live chats and events at www.quicken.com.

iPhone Optimization – Managing money on-the-go is even easier. Quicken Online is available on the iPhone®, making it easy to get your bank account balance and enter transactions while on-the-go.

Data Storage – Quicken Online lets users store up to five years of transactions for easy reference.

Expanding Industry Leadership
To further extend Intuit's effort to help younger consumers get off to the right start with money, Intuit has been selected as the exclusive online personal finance solution for Higher One, one of the fastest growing financial services companies in the country. The agreement will provide the hundreds of thousands of students, faculty and staff at distinguished public and private higher education institutions across the country that use Higher One with Quicken Online as the preferred solution for managing their banking services and debit cards. More information can be found at www.higherone.com.

Quicken Personal Finance Product Availability, Pricing

Quicken Online is available direct from Intuit at www.quickenonline.com for a monthly subscription fee of $2.99.

Put Your Savings in Hyperdrive, Part 4: The Expensive Coffee-Related Drink Factor

I’m on a quest to determine a number of financial moves that will accelerate savings beyond the typical snail’s pace. I’ve written so far about opening a high-yield account, keeping your change creatively, and automatic your savings. These are all basic concepts that can be applied in interesting ways with a little bit of attention.

Many people disagreed with me when I railed against The Latte® Factor, David Bach’s trademark catchphrase and program which prescribes dropping your expensive morning coffee drink and depositing the value of each day’s savings into some sort of magical account that will return 10% annually after taxes and fees for forty years and end up with close to $1,000,000 more than you would have otherwise.

I’ll address my issues with David Bach’s program below. Nevertheless, a system similar to David Bach’s suggestion has merits for some people, thus I have a fourth tip for putting your savings in hyperdrive.

4. The Expensive Coffee-Related Drink Factor.

Obviously, I don’t want to call it The Latte® Factor, which is a registered trademark and a signature selling point that drives millions of dollars in books in seminars. Since I don’t drink coffee, I’ll use the therm ECRD to refer to any habit that requires a frequent expense but is easily controlled or replaced by another, less expensive habit. The savings from the elimination or switch can be accumulated and deposited into a high-yield savings account.

Problems With The ECRD Factor

It is important to remember that all of this is pointless if one doesn’t make smart decisions about the larger issues in life. You can forgo the daily coffee from Dunkin Donuts, but if you still eat two doughnuts every day, you’re spending money on something that you may pay for in health care costs later on. You can switch from premium gasoline to regular gasoline, but if you buy new cars every three years, the savings from the gasoline are ten or a hundred times lost by the unnecessary expense of buying new cars so frequently.

The scenario David Bach paints—an after-interest, after-fee, after-tax increase of almost $1,000,000 in 40 years from dropping your daily latte is an extremely unlikely scenario, both mathematically and behaviorally. Bach makes some serious assumptions that don’t have much validity in the “real world.”

• You probably won’t earn 10% in an account for forty years after taxes and fees.
• To invest in an account that earns even 8% over forty years, you will lose a lot of your money due to transaction fees. A $4 transaction fee, like the one charged by ShareBuilder, on a $150/month investment is a 2.7% fee right off the top. That’s not a wise investment.
• Without your daily dose of caffeine, you may miss out on career opportunities while asleep at your desk. This sounds like a stretch, but if you quit cold turkey, you could see adverse effects in your productivity and you may miss an opportunity without knowing it.
• It’s also quite possible that you enjoy your latte, understand the consequences and future savings you are giving up, and have decided your enjoyment is worth the potential loss.

So The ECRD Factor can have mixed results when you deal with variables in the real world. Don’t expect the kind of wonderful returns David Bach promises, but the frequent expense reduction or elimination that forms the basis of this tip can be a significant part of your saving strategy if the rest of your financial decisions are sound.

Making The ECRD Factor Work

What’s your ECRD? It’s probably best to pick something to which you do not have a physical addiction without appropriate support. While I would always suggest eliminating an addiction to heroin or alcohol, there are more immediate concerns in these cases than saving money, namely staying alive and healthy. It’s best to choose a daily expense that can be eliminated or replaced immediately without any significant withdrawal symptoms. The daily coffee-related drink might be a good candidate, particularly if you buy such drink from an expensive store like Starbucks. The good news is you won’t go through withdrawal if you simply replace the expensive drink with your own freshly brewed concoction.

And if you eliminate the drink entirely over the span of a few weeks, or replace it with water, you will get used to the change in chemicals in your brain within a few weeks.

Caffeine isn’t the only option. A coworker of mine has stopped buying lunch every day, opting to bring in a homemade sandwich instead. If not lunch, I know someone who used to eat out at an expensive steak restaurant every week. If you work in New York City, there’s the temptation to go out to the bar for happy hour with your coworkers. Do you smoke? Slowly cutting back will improve your health and save you thousands of dollars even before interest.

How about the news stand in the morning? If you pick up a newspaper on the way to the office to read on the train, consider this your ECRD. Replace the newspaper with a free news podcast if you already own an mp3 player. If you really like the newspaper, consider subscribing. You’ll save quite a bit off the newsstand price. The difference in price is your ECRD.

Apply Your Savings and Earn Positive Returns

If these are habits, cutting back (without affecting your networking experiences) and intentionally depositing the money you save will add up over the long term. It doesn’t have to be perfect. The three previous hyperdrive tips come in handy here. If you’re used to spending $4.50 in cash every morning for your latte and are ready to eliminate the drink entirely, put that $4.50 in your coin jar before you leave for work for later deposit into a high-yield savings account. Not a cash user? If you spend about $100 for your chosen ECRD a month, set up an automatic transfer from your checking to savings account for that amount. If your bank allows you to create separate goal-related accounts, like ING Direct’s subaccounts, create one specifically for your ECRD savings and transfer your monthly savings there.

Your high-yield savings account is not earning the 10% promised by David Bach. Forget about that rate and use the money saved for short-term goals. The more you save, the more you’ll also have available for long-term goals like retirement and legacy. So keep making good decisions all around—especially on the bigger expenses like real estate, vehicles, and education—and these seemingly small savings will add up over time. It starts off slowly, but compounding interest is the key to putting you savings in hyperdrive.

Put Your Savings in Hyperdrive, Part 2: Keep Your Change

Whether you’re trying to establish an emergency fund or putting money away to take your dream vacation, you can reach your goal faster by putting your savings in hyperdrive. Unfortunately, scientists have not yet perfected time travel. When they do, saving for retirement might only entail traveling back to the 18th century to deposit $1,000 in a national bank and popping back to the present to reap the rewards of three hundred years of accumulated interest.

Until modern technology catches up to science fiction, savers are relegated to more traditional forms of accelerating their income from interest. Yesterday, I wrote about opening a high-yield savings account, a set-it-and-forget-it task. The next suggestion involves creating a daily habit.

2. Keep your change. At first glance, focusing on your daily pocket change may seem like a lot of effort with too little payoff. For example, I’ve seen people who are so focused on picking up pennies from the ground by keeping their eyes down that they miss the dollar bills right in front of their faces. That’s a prime example of being penny wise, pound foolish.

Nevertheless, I’ve also seen coin jars add significantly to savings. A coworker of mine emptied her jar recently and counted $500 from the past year. This type of savings may not be worthy of your retirement plan, but it can mean the difference between renting an economy car and a convertible on vacation. A mason jar may not support your children’s education, but it might pay for internet service for a year so your kids can research their assignments online. This is significant, and the beauty is in the simplicity.

The concept is simple, but the execution is not as easy as it used to be. Back when dimes were 90% silver, cash was king. Almost all everyday transactions were handled with cash. Inflation from the last 50 years hadn’t yet eroded the value of coinage, so when you dropped your coins in a jar at the end of the day, you knew it was worthwhile.

Now, fewer transactions are handled by cash, and you have less change in your pocket when you arrive home. The change you do have has decreasing purchasing value, as well. Keeping your change in the 21st century now takes more than filling a piggy bank with your coins.

That’s not to be overlooked however. The only material needed is a jar or piggy bank, and the best placement is near your front door, perhaps right next to the spot where you leave your keys when you walk in at the end of the day. It’s quite simple to make this a habit: check your pocket or purse as you put down your keys or hang up your coat. Perhaps you won’t have anything most of the time, but it’s a habit worth creating anyway.

Once a month, or more frequently if you desire, bring the coins in the jar to your bank to deposit into your savings. If your bank has a free change counting machine this process may be easier. My girlfriend enjoys rolling coins into wraps so I don’t deny her the fun. Don’t forget that this deposited accumulated change will do much more for you in a high-yield savings account than in the standard account offered by your local bank.

Unfortunately, with the decreasing use of cash, the “analog” coin jar may not be enough. In a world where debit cards and credit cards rule financial transactions, a high-tech piggy bank equivalent may make the difference. One example was corporate-sponsored. A few years ago, Bank of America created the “Keep the Change” account offering.

Every purchase you make with the debit card is rounded up to the nearest whole dollar. When the debit card is used to make a purchase, the amount deducted from your checking account is the rounded up number. For example, if at item is purchased for $15.25, $16.00 is deducted from the account.

Of that $16.00, the difference due to rounding, $0.75, is transferred directly into your Bank of America savings account, where presumably it will earn some interest. Of the remaining $15.25, Bank of America keeps about $0.25, a standard merchant transaction fee, and the merchant receives the remaining amount, approximately $15.00.

Similarly, One from American Express is a credit card that will deposit 1% of your purchases (plus a $50 bonus after your first purchase) into a high-yield savings account.

There’s no reason for this type of cumulative saving to be tied to certain debit cards, debit cards, bank accounts. While they make it easy for you, it would be worthwhile to use all of your credit and debit card accounts as well as a better-paying savings account.

If you’re ready to put your savings in hyperdrive, then you must already track your account balances and activity in software like Microsoft Money, Quicken, or any number of web-based offerings. You’ve also presumably followed yesterday’s suggestion of opening a high-yield savings account. On a weekly basis, take a look at all your debit card and credit card transactions. Round each expenditure up to the nearest dollar. Total the excess amounts and transfer the sum from your checking account to a special high-yield savings account earmarked for whichever goal on which you happen to be focusing.

This process may be too involved for daily attention. If you review your financial activity every few days, keep a spreadsheet going with the tally and transfer the sum of the remainders to your high-yield savings once a week or once a month. The idea is to create a habit at a rate that works best for you, and everyone has different preferences.

Do what’s best for you, but don’t ignore the power of doing more with your change—and letting your extra change do more for you.

Put Your Savings in Hyperdrive, Part 1: Open a High-Yield Account

Hyperdrive, also known as warp speed or a number of other terms in science fiction, refers to traveling faster than light. While theoretically impossible for objects due to the special theory of relativity, moving at this incredible pace is possible for your money. While you have a savings account earning continuous interest, you are becoming slightly richer not every second, not every microsecond, but every infinitesimal portion of time. That’s fast.

If your money is earning 0.25% yearly interest in a standard brick-and-mortar savings account, you are not making the most of your money. For no more risk you can be earning up to 20 times as much. Savings, whether in a high-yield account or not, is among the safest of all investments. Here is the first tip for putting savings into hyperdrive. Keep in mind that the terms “savings account” and “money market account” (not “money market fund”) are interchangeable.

1. Open a high-yield savings account. Many banks are getting away with murder. They know that most customers are fine letting their money sit without looking for better alternatives. Comfortability plays a role.

If you’ve been with a bank for 15 years, you feel comfortable with them and are less inclined to feel the need to shop around. This is acceptable behavior as long as you understand that you could be missing out on significant interest income. Take a look at this list of high-yield savings accounts or look for the lists on BankRate.com.

Many of the banks that pay the highest interest do not have brick-and-mortar branches. These branches are expensive to run. Without having to manage branches, banks can theoretically save more income and pass that savings onto account holders in the form of interest.

There is no reason to feel nervous about opening an account with a bank that only exists online. As long as they are insured by the FDIC—and all the banks listed here are—you have the same protections you have with a traditional bank. Also, you’re safer sending your information over a secure, encrypted internet connection than you are traveling to a branch with your money.

Opening a high-yield savings account is a no-brainer. With a $10,000 balance at the beginning of the year and no further deposits, a savings account with an annual percentage yield (APY) of 4.5% earns $450 in interest, $425 more than the typical savings account offering 0.25% APY.

Put Your Savings in Hyperdrive, Part 3: Automate Your Savings

If you’ve ever run from one point to another, you’re probably aware that there is a limit to your speed. With “analog” equipment like the bones, muscles, joints and tendons in your legs and feet, there are physical limitations that prevent you from going too fast. Don’t worry. Thanks to recent inventions, it’s quite easy to get around this problem. Bicycles and cars allow your muscles to exert much less effort while resulting in faster movement. Sometimes machines and computers are required to break through limitations.

As you might imagine, saving money follows the same concepts. Picking up your paycheck from your mailbox, endorsing the back, and bringing it to your bank is like walking from one point to another. (Even if you drive to the bank, for the purpose of this metaphor, you’re a walker.) Once the teller confirms your identity and the validity of the check, he or she might give you the sum of the check in cash. Perhaps you cash only a portion of your check—the money you’ll need for the upcoming week—and deposit the rest into your checking or savings account at the bank. Congratulations, you’re now moving at 25 miles per hour.

You’ll still need better equipment to make the jump to hyperspace.

3. Automate Your Savings. With your savings on autopilot, you have less to worry about. While you’re not looking, money is transferred to your bank account—a high-yield savings account is best but a checking account may be a necessary intermediary—and begins earning interest. There is no need to waste gasoline on trips to the bank. There are several parts to automating your savings.

Direct Deposit

Direct Deposit is one of the most positive developments in saving. Rather than cashing your pay check and depositing only what is left over, you can instruct your employer to transfer your after tax salary each payday directly into your checking or savings account. Large companies usually make this an option when you first accept the job. Otherwise, you may need to get in touch with your human resources department. Smaller companies may not offer this feature, but it wouldn’t hurt to suggest to those whose make these decision that the company implement the service.

There are a number of benefits. Most immediately, you don’t have to worry about finding time for traveling to your bank. You reduce the risk of losing your paycheck in transit. In most cases when you receive your funds via Direct Deposit, the money is made available to you on the date the check is deposited rather than being subject to a holding period as you would be for other deposits. Direct Deposit also allows you to split your paycheck among a number of accounts, so you can immediately designate a portion for savings and begin earning interest on the day of deposit.

What are the drawbacks of Direct Deposit? If you still use cash for transactions throughout the week, you’ll need a way to get the cash out of the bank. These withdrawals should be done from checking accounts rather than savings accounts. Savings accounts are limited to six withdrawals or outgoing transfers per month—so most of your transactions should take place in a checking account. You can use an ATM card to get the cash you need. You should be the last entity to touch your money—let the interbank technology take care of as much of these transactions as possible.

Automatic Transfers

In most cases, your paycheck is best deposited into a checking account, and from there, you can set up automatic transfers into savings and cash withdrawals. The best high-yield savings accounts can be linked to your checking account. This will let you transfer money directly within the same bank or from one bank to another without writing checks. For example, if you choose to open accounts at ING Direct, you could set up a link to your local checking account into which your paycheck is Directly Deposited.

You can then create automatic savings plans, instructions to periodically transfer money from your checking account to the high-interest savings account. Set it and forget it. While I am citing ING Direct as an example, they are not the only bank that allows customers to create automatic periodic deposits. Find a bank you like and review the options they offer.

With all your money moving behind the scenes, from your employer to your checking account to your savings, you are earning interest without knowing it. When the money is not passing through your hands, there’s less temptation to spend it right away. More money ends up in your savings, accruing interest for the future. Effectively, each time you feel you need cash, there is an obstacle of going to the bank or ATM. Some may decide that the expense is not worth the hassle and simply leave the money in savings.

Automation allows more of your money to find its way to your savings account quicker and remain there, earning interest.