2. Having no high-level financial plan
As physicians, we have atypical financial circumstances. Our earning power is very high but begins late and is usually accompanied by large amounts of student debt, high taxes, and considerable professional liability risk. Moreover, individual circumstances can change considerably with time, so financial planning must be dynamic as well as comprehensive.
If a budget is a tactical, boots-on-the-ground plan for how to allocate your money today and tomorrow, a comprehensive financial plan is a strategic, 30,000-foot look at where you are, where you want to be, and how you’re going to get there. It addresses large issues with long-lasting implications – How will you handle your debt? Will you prioritize paying off debt or investing for retirement? When should you become a homeowner? – and thus is crucial in preparing for lifelong financial freedom. Done properly, a comprehensive plan informs and guides the decision-making process that goes into creating and amending your budget.
However you decide to do your financial planning, whether alone or with the assistance of an advisor, be clear about your target destination as well as why that destination is important to you. Only by having a truly meaningful goal can you remain motivated and disciplined as you make financial choices year after year.
3. Not delaying gratification
As I said above, the career pathway we physicians have chosen is one in which we postpone acquisition and enjoyment of a great many things while dedicating time and energy to a protracted period of training. And when that period comes to an abrupt end, we are likely to transition just as abruptly into reckless spending as we are finally able to indulge in the gratification we have delayed for so long.
To get where we want to be as physicians, we must put off the things we want now in favor of the things we want more. The physicians who are most successful as they move into the realm of high earners are those who take those good habits and apply them to financial decisions going forward. They prioritize what matters most – usually the paying down of debt and accumulation of assets for important goals such as homeownership and retirement – and live below their means.
4. Mismanaging debt
It’s extremely common – even expected – for young physicians to come out of training with substantial amounts of student loan debt. Other sources of debt, including auto and home loans, credit card balances, and personal loans may also add to their financial burden. Appropriately planning for debt elimination is imperative, and success comes from securing the best possible loan terms and interest rates while controlling cash flow.
If you’re burdened by multiple loans and their various payments, you may wish to consolidate your loans. This can relieve the stress of tracking so many accounts while simultaneously lowering your interest rate. Take the time to look at different consolidation options. Longer repayment terms allow lower monthly payments but include higher interest rates, increasing the amount of money you pay over the lifetime of the loan. Find the right balance to pay debt down aggressively while still maintaining the financial liquidity to meet your needs and short-term goals. Ensure that your loans have no penalty for early payoff. Make extra payments against your loans when you can. And when you do, make sure to prioritize the loan with the highest interest rate, not the one with the largest balance!
In determining how and when to pay down debt, don’t forget about Public Service Loan Forgiveness (PSLF) programs. These programs allow for forgiveness of massive quantities of public student loan debt for those who meet specific criteria.
At the end of the day, debt elimination strategies are as diverse as the people who require them. As you work to eliminate your debt and achieve financial freedom, consider engaging the services of a professional financial advisor to tailor the strategy that best fits your life and goals.
5. Preparing inappropriately for retirement
A shocking number of physicians put no or insufficient money away for retirement, many of them opting to wait until other financial priorities such as debt and lifestyle maintenance have decreased. The problem with this thinking is that retirement investments need as long as possible to grow and accumulate value, so kicking them down the road today can lead to major financial setbacks in the future.
It’s wise to start saving early and then to ramp up savings and investments as various expenses go away. Physicians, who must generally wait until their late 20s or early 30s to start investing in meaningful amounts, may want to consider putting away 15% or more of their income each year to prepare for retirement. Many types of retirement investment accounts are available, including traditional and Roth IRAs, 401(k)s, 403(b)s, and 457(b)s. Take the time to research these accounts and what’s offered by your employer. If your employer offers matching on retirement investments, make sure you contribute enough to take full advantage of the match – it’s free money for your future! Since many of these accounts also offer tax advantages, contribute as much as you can to them.
6. Making poor investment decisions
Even the smartest physicians can make poor investments. Stick with trusted financial advisors over well-meaning friends and family. Do your homework and consider the incentives of those managing your funds. Is their pay based upon commissions, in which case they have a compelling reason to sell you expensive investment products? Or are they paid by fees that give them a percentage of the gains they actually produce for you? Are you investing with a company that charges exorbitant investment management fees or one that limits the fees it collects in order to maximize your financial gains?
When working with your advisor, you’ll be asked to make general decisions about where and how to invest your funds. Focus on low-cost index funds. Diversify your investment portfolio by including both domestic and international stocks, bonds, and other investment vehicles; and consider investing some of your money in real estate. Avoid volatile, risky investments and remember that you, as a physician, probably don’t have the time to appropriately research individual stocks and currencies to be a successful day trader. Stay the course during market downturns and take the long view of things, gradually moving away from stocks and toward bonds as retirement approaches.
7. Having inadequate emergency plans
As we’ve seen, a physician’s high salary isn’t a guarantee of perpetual prosperity, and the future is only as secure as you plan and prepare for it to be. That’s why it’s essential that physicians preemptively decrease their future risk by having adequate savings and insurance. Create an emergency savings fund separate from other accounts and gradually add to it until it contains enough cash to cover at least three – and preferably six – months of your expenses. Keep in mind that it doesn’t need to have 3-6 months of your base salary: this is money that has already been taxed, so you don’t have to account for taxes when depositing to it.
Additionally, take the time to research, understand, and purchase insurance to cover you against all sorts of potential scenarios. Long-term disability insurance is very important in allowing you and your loved ones to continue enjoying your lifestyle should you become unable to work for an extended period. Consider an umbrella policy, too, to protect you against a wide range of potential scenarios and developments.
And don’t forget life insurance! Understand the true difference between term versus whole life insurance. Insurance agents love to tell you that term life is just “renting” your life insurance and is money lost if you outlive your policy’s term. Whole life is presented as being a superior product because a portion of it is invested and remains yours. While this may look enticing at first, there are a couple things to consider. First, the purpose of an insurance policy is not to prepare for retirement or build wealth; it’s to allow you to offset your risk by paying a third party to assume it in your place. Second, whole life policies are not effective and lucrative investment strategies. Their premiums are much higher – 6-10 times higher! – than comparable term policies, and many investment plans offer far greater rates of return over the course of time. Bottom line: you should avoid any product that ties investments to your life insurance.
8. Not negotiating employment contracts
Most residencies do a great job preparing us to practice anesthesiology but few provide much training in how to negotiate their employment contracts. But contract negotiation is a critical part of ensuring that you receive the pay and perks necessary to enjoy the life you’ve worked so hard for. Many parts of a physician’s employment contract are negotiable, including salary, vacation time, call hours, bonuses, and the presence of non-compete clauses. And bonuses themselves can be tricky, as many contracts predicate the bonus upon metrics and deliverables that are nearly impossible to achieve.
Always speak with a trusted advisor before entering into contract negotiations, and have an attorney specialized in contract negotiation review your employment agreement to ensure that its terms are in your favor. Before negotiating, do your homework and look up the standard compensation rates in the area in which you’re applying. This is especially important as you transition from residency into practice, as many new physicians have jumped at an eye-popping initial offer only to learn that they’re actually making significantly less than their peers.
Between contracts, make sure to document your accomplishments, and bring those to the table when it’s time for the next negotiation. Be able to demonstrate the value you’ve brought to the practice, and be willing to advocate for yourself!
Conclusion
As physicians, we have economic resources that, if employed well, can sustain us through a lifetime of financial health. By determining our own goals and desires, creating short- and long-term plans, and making our financial decisions with discipline and foresight, we can make our money work for us. We can live well, retire well, and avoid many of the headaches and worries that plague individuals who are unprepared for the future. So put in the work and make your future what you want it to be!