As a physician, your income provides the opportunity to accumulate enough wealth to support an enviable lifestyle and bring financial security to your family. But wealth is not guaranteed, and doctors are not immune to making costly financial mistakes, no matter how accomplished they are as MDs. Here, we suggest 10 strategies to help physicians achieve and preserve the wealth the profession can offer.
Most of these strategies could be summed up by the maxim, “First, do no harm.” In other words, as a high earner, building wealth is primarily a matter of avoiding mistakes. That means sticking to basic principles and letting go of the idea that there are some unique “investment opportunities for the elite class” that will provide great returns with little risk, time, or effort required on your part; because there is no such thing. With that said, here are 10 wealth-building strategies physicians should pursue, whether you are a new resident or a senior physician in your practice.
Live below your means
This idea is essential at all stages of your career. Many doctors fall prey to the “keep up with the Joneses” mentality. If a colleague drives a fancier car than you or regularly takes high-end vacations, we hope that person lives below his/her means, but that behavior should have no impact on your choices. Living below your means allows you to convert a portion of your current income into long-term wealth, which you cannot do if you spend all of your income (and sometimes more), leaving nothing to invest. Note that cars and vacations, while enjoyable, do not increase wealth – they consume it.
Pay off debt
First, spend the time and energy researching your opportunities and the potential costs and benefits from refinancing your existing loans. If you still have debts with interest rates above about 4 percent, pay them off. Attack loans with higher interest rates first, regardless of the amounts owed. Avoid carrying balances on your credit cards at all costs – they charge incredibly high interest rates, and you have better things to do with your money than paying interest to credit card companies. However, it’s essential to keep in mind that many people feel a great sense of freedom and security by reducing and eliminating debt. This means that aggressively paying off loans with low interest rates, such as home and car loans, can be a good choice even though it’s not the best choice from a strictly mathematical perspective. That gap does tend to close if you are willing and able to save and invest more than you otherwise could have once the loans are gone, and the corresponding monthly expenditures are eliminated.
Postpone certain purchases until you can pay for them in cash.
This point is related to #1 and #2. Put aside money each month toward smaller purchases you know you want to make, such as a home movie theatre or going on a big international trip. If you do not have all the money today, then wait a few months rather than carrying a balance on a credit card or borrowing against your HELOC. Saving for purchases rather than borrowing to buy things is a necessary discipline that will help you build and keep your wealth over time.
Don’t forget the importance of liquidity.
Emergencies happen, and you do not want to have to sell some of your investments or use credit cards to cover them. An emergency fund is money held in a liquid account, such as a money market fund that pays a low interest rate but does not fluctuate in value. You should have enough to cover your household expenses for six to nine months if you lose your job or become unable to work. While doctors do not experience layoffs as often as people in many other lines of work, it can happen. If you are in private practice, the business might fall off to the point where it becomes difficult to cover your expenses and pay yourself what you are accustomed to earning. You may need that emergency fund until you figure out how to see more patients or decrease costs in the practice.
Don’t allow yourself to become “house poor.”
The housing market can be frenetic at times, and it is easy to get caught up in that frenzy. People can convince themselves that they have to buy something now or be left with nothing, so they stretch to buy more house than they can afford. Buying your dream home can lower your quality of life because there is no money left over each month to spend on fun and enjoyable experiences. As a general rule, spend no more than 28% of your monthly pre-tax income to cover a mortgage payment (including property taxes and homeowners insurance). Another simple metric says that you can safely spend approximately 2 to 2.5 times your annual salary on a home, but that guideline doesn’t scale particularly well.
Be wary of being sold insurance you don’t need.
Doctors need life insurance and disability insurance – get as much as you can through your employer, and then strongly consider buying additional coverage. Be aware that physicians are often easy marks for sales pitches for “whole life” insurance (there are other names for it) that pay a certain amount when you die and involve some type of investment account. Mixing insurance and investing into one product is a bad idea. You want Term Life Insurance that pays a set amount to your beneficiaries if you die before a specific date. Physicians often want enough so that if they die prematurely, the mortgage will be paid off, daily expenses will be covered, and there will be money to help their children pay for college. If your mortgage is already paid off, your children are grown, or you have accumulated sizeable wealth, then you may no longer need life insurance.
We’re more than halfway through this discussion of building wealth, and we have not yet talked about investment strategies. As noted above, a big part of building wealth is avoiding mistakes (remember, first, do no harm). Now, we turn to investing.
Maximize your tax-deferred/tax-free savings.
Invest the maximum in your 401(k) and a Roth IRA before investing in a taxable account. Physicians may also be able to participate in a “mega-back door” Roth contribution – consult with a qualified independent financial advisor to see if this applies to your situation. The savings/funding order that best maximizes your wealth is mainly contingent on your current and expected future tax brackets along with opportunities available through your job.
Don’t be enticed by risky investment ideas.
The Fear of Missing Out (FOMO) is relatively widespread in the medical profession when it comes to investing. Doctors may think there must be some way of earning better income than what is available from the stock and bond markets. That makes you susceptible to well-rehearsed sales pitches but remember – returns are positively correlated with risk. If the return from an investment seems excellent, there is very likely some risk(s) that a salesperson may be downplaying.
Doctors are often pitched passive investment opportunities that claim to generate income with no effort on your part. That sounds great but read the fine print. For example, doctors are often drawn into private “syndicates” that develop real estate that can generate income and appreciate in value over time. While it may make sense to hold some real estate in your investment portfolio, these syndicates often involve capital calls (you are obligated to invest more money over time), and they are highly illiquid. If you want to pursue something like this, be sure you are dealing with reputable providers. Look at disclosures (or lack thereof) on their websites. An investment offered by an unregulated entity can involve a great deal of risk or even fraud. Understand how those who are offering you an excellent investment are being paid. What are their financial incentives? These aren’t necessarily or inherently bad investments; you just need to understand that while they offer higher potential returns, there is a commensurate level of risk along with the lack of liquidity. Therefore they should represent only a tiny amount of your total investment portfolio if you go down this road.
Owning a car wash or laundromat are other ideas that come up from time to time since they are expected to generate income and seem simple enough. However, you either have to find and oversee someone trustworthy to manage the operation, hire and fire employees, complete repairs, keep the books, and so much more; or learn how and spend the time doing it yourself. Do you want a second job, even if it is part-time? Furthermore, if you decide at some point that owning and managing one or more of these businesses is not for you, it may not be easy to find a buyer. Similar considerations apply to owning rental properties. The truth is there is no easy way to generate passive income without taking on risk, and often ideas that seem “passive” on the surface are anything but.
Invest in stocks and bonds, but don’t overreach.
It is difficult to find an investment that outperforms a diversified portfolio of stocks and bonds over time. Sure, at any particular moment, some stock will go “to the moon,” but unless you have perfect foresight, it is impossible to know which one will zoom and which one will crash. FOMO kicks in here again – a colleague is bound to tell you about a stock that “went crazy,” which makes you feel foolish for not taking more chances in your portfolio. With that said, it’s becoming increasingly apparent that cryptocurrencies are a blooming new asset class and should be given the requisite acknowledgment. As a general rule, no more than approximately 2% of your investable assets should be in crypto because of their massive volatility. Never invest more in crypto than you can afford to lose.
If you live well within your means, have an emergency fund, and tolerate some risk, it is okay to put a small percentage of your savings into riskier investments. You can “scratch the itch” and maybe earn a higher return than the overall market, but if things go the other way, it won’t cause severe damage to your nest egg. Taking on so much risk that it might compromise the lifestyle you want is simply not worth it. It’s okay to swing for the fences with a small portion of your savings if that is your preference, but don’t gamble with your financial future.
Invest in yourself by investing in your practice.
Physicians in private practice often can invest in the equipment or the real estate where the practice is located by pooling their money with other physicians in the practice. This decision can be a good investment, primarily if the practice is eventually sold. However, it’s often not very clean or straightforward as there are lots of people with a vested interest that have varying opinions.
At Gold Medal Waters, our goal is to help our clients develop a strategy for using their financial resources to enjoy their lives and achieve their wealth-building objectives. For a no-obligation consultation, please reach out to us.