Tiffany Johnson, MBA, CFP®
We are well aware of all the work, time, sacrifice, and passion it takes to become a doctor. Once you land your first job as an attending physician, you may feel a sense of financial relief. It is human nature for us to believe that a significant increase in income can help solve all of our financial problems. However, more income calls for more intentional planning and making the best financial decisions for you and your future self.
After all, no doctor wants to feel like they are in a financial bind after sacrificing years of income to reach this point in their career. In this article, we discuss six of the common financial mistakes we see many young doctors make.
1.) Waiting too long to purchase disability insurance, term insurance, and malpractice insurance
Insurance can often be overlooked by young doctors. The first type of insurance that young doctors should get as early as possible is individual own-occupation long-term disability insurance. In fact, physicians can take advantage of this insurance during residency when they are eligible for lower premium rates. Many of these policies offer a Future Increase Option Rider that doctors can take advantage of. This rider allows doctors to increase their coverage as their income increases without needing an entirely new policy (more expensive).
Term insurance is another type of insurance that is cheaper to purchase the earlier and healthier you are. Young doctors need to consider their cumulative student loans when trying to figure out the death benefit of their term life insurance policy. Finally, many employers offer malpractice insurance to their new doctors so check to see if this is part of your employment contract. If you are starting your own practice, malpractice insurance is the first insurance you need to make sure you have in place.
If you are interested in learning more about the advantages of disability insurance, please check out Disability Insurance: The Greatest Asset To Invest In and Protect is Yourself.
2.) Not negotiating employment contracts/benefits
As with any employment contract, it is essential for young doctors to review, negotiate, or revise their employment contracts if there are unfavorable terms or compensation. Make sure that you truly understand your base salary as well as the terms of any bonus. If the metrics required to earn your bonus are unreasonable for a young doctor who has not yet established their practice, it may be in your best interest to negotiate a higher base salary.
The best place to start when it comes to understanding a reasonable salary for a starting physician is to perform market/industry research. Check with your peers, if they are willing to discuss, and do some online research to see what is typical for a starting physician. You can even get a more accurate estimate if you are specialized. There are many other facets of your employment contract that you will want to review and negotiate beyond just salary, including call hours, vacation time, insurance, etc.
3.) Lifestyle Creep from an increase in income
Lifestyle creep is real and it can wreak havoc on your financial plan. For many individuals that have such a significant income increase, they tend to just throw their budget out the window. Why cut back when your income is completely different now? This is where many young doctors get it wrong. With a higher income, there are typically higher expenses.
Maybe you decided to buy a home and now have to pay a mortgage, property taxes, and maintenance fees. Your student loans are also something that you will need to pay back now. This could mean additional monthly expenses of thousands. You have certainly worked hard to get to this point, so you should adjust your budget accordingly; however, you can still live a better lifestyle without putting your financial future at risk. It is always important to know where your money is going no matter what your income is.
4.) Using additional cash flow to pay off student loans and neglecting retirement
Many people have been told that they need to pay off debt first before saving or investing. This is a false statement and it can easily sway a physician’s retirement plan. In addition to having a later start to saving for retirement, many young physicians have racked up hundreds of thousands of student loans. It is important to create a savings and debt repayment strategy that will allow you to pay down your loans without having to compromise your ideal retirement plan.
Something else to consider is if the interest rate on your student loans is lower than the rate of return you are likely to get from investing for retirement. Even more, if your employer is offering a retirement plan match, you may be leaving free money on the table by not saving for retirement. It is important to speak with a financial advisor to figure out your ideal retirement so that you can create a balanced strategy that works for you.
5.) Waiting too long to seek help from a trusted source (Financial Advisor, CPA, etc.)
Have you ever heard someone say, “if only I knew this sooner”? Like most other preventative measures in life, most people wait to seek help from an advisor, tax expert, or financial coach until it is too late. As a doctor, you spend so much time serving others that your financial goals are the last thing on your mind. Whether you just want a one-time plan to make sure you are on track or you want a confidant that will help guide you through life’s financial decisions from year to year, a financial advisor can provide a ton of insight and guidance.
In addition, it is important to understand your taxes now that you are in a much higher tax bracket. Working with a CPA or tax professional can help you understand what tax planning strategies or deductions can allow you to lower your tax bill.
6.) Struggling to qualify for conventional mortgages
Many young doctors starting their careers have to face the reality that it is much harder for them to qualify for traditional mortgages. With little savings, limited credit history, and a large amount of student loan debt, many lenders are hesitant to approve physicians. However, physician mortgage loans are available for medical professionals who have a later start in their career and high-income years.
These physician loans have little to no down payment requirements, no PMI (private mortgage insurance), and lower debt to income ratios. Before agreeing to a physician mortgage loan, it is important to understand the terms of this loan. These loans typically have higher interest rates and it may not have a fixed interest rate throughout the term of the loan. Also, make sure you understand your refinancing options with this type of loan.
Final Thoughts
Don’t just base your financial decisions based on what feels right at the moment. In order to transition into your first attending position with confidence, it is important to have a plan and understand your different financial options and goals. If you would like to start your financial planning journey today, feel free to schedule a free consultation by clicking HERE.
If you have any specific questions, please send an email to tiffany@pieceofwealthplanning.com
Disclosures
None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.
