As a physician leaving residency, your primary focus has probably been limited to medical topics. That's as it should be, of course, but many practitioners, both seasoned medical professionals as well as new doctors make the mistake of not dedicating enough of their time and energy to understanding financial matters.
What you don't understand about your finances can have a lasting impact on your wealth later on. Finance can be confusing, but it doesn't have to be. Here are six tips designed to help you cut through the confusion, positioning you for a greater likelihood of success with your financial future:
1. Wait to increase your spending
Your income should get a much-needed raise when you transition from residency. However, many new doctors make a big mistake when their income is suddenly increased: immediately increasing their spending. For many new doctors, the drastic increase in their income means more money to spend on things: a bigger house, a new car, fancy vacations, etc.
Many physicians don't realize that if they just continued to live like a resident for a few years they could significantly increase their chances of retiring early or on time. Taking just a year or two before increasing your spending as a new physician is often the wisest choice.
Another reason to be careful is that physician incomes can and do drop. It is not out of the question for your income to drop as much as 10% in a given year through no fault of your own. For these reasons, as a new doctor a little financial patience can go a long way in helping you achieve your financial goals.
2. Insurance matters - review and adjust as needed.
Insurance is not the most fun thing to think about or talk about, but having adequate coverage in place is critical for any new physician.
Of course, you'll need to cover your things with property insurance, but you'll also need to cover your most important asset: your ability to earn an income. Talk to an insurance professional about options for disability income insurance and life insurance.
As a medical professional, it's also important to have adequate levels of liability insurance, including malpractice insurance and tail coverage.
3. Plan to manage and reduce your debt.
Few doctors leave residency without debt. But, if you don't also have a plan for paying off that debt, you can find yourself stuck in a cycle of paying too much interest. That means less money to pay for insurance, investments and to fund your lifestyle.
Be smart about any new debt you're accumulating; financing new furniture at 19% interest probably isn't a smart financial move, long-term.
Your financial professional can help you evaluate your current debt and determine a balance for managing and eliminating it over time as part of a larger financial planning strategy.
4. Understand taxes.
Don't worry; you don't need to immerse yourself in the tax code or spend hours reading IRS publications. However, it pays for new doctors to be informed about tax matters.
For example, for self-employed physicians, making quarterly estimated tax payments and withholding for employees' taxes are not only important; they're required.
New physicians can also benefit from learning about the tax benefits and consequences of various investment vehicles, decisions to buy or sell real estate or other investments, and how the tax features of retirement accounts can help increase the likelihood of reaching retirement goals while minimizing taxable income.
5. Make an investment plan.
After making plans to reduce debt and manage risks through insurance, new attending physicians should talk to their financial planning professionals about investing. Taking advantage of retirement plan opportunities is just one way to save for future financial goals. Investing assets in a manner that's consistent with your goals and with a level of risk you can be comfortable with is a smart way to plan for the future.
Your investment professional can help you understand how concepts like asset allocation and diversification can reduce risk of loss, and can explain how various investment products work. There's not a one-size-fits-all investment solution for doctors; your plan will depend on your personal financial situation and goals.
6. Don't forget about estate planning.
Last, but not least, new doctors should work with financial and legal professionals to craft an estate plan to handle the orderly distribution of assets after death, and during periods of incapacity. Anyone with minor children needs to do at least some basic planning, to establish and document wishes for guardianship and asset management in the event of premature death. As your financial situation improves and your net worth grows, it's important to adjust your estate plan to meet changing needs and goals.
Don't let this list overwhelm you; you don't have to tackle everything on it in your first month as a new attending physician. However, you should make a plan to address each of these areas. It's also important to revisit these tasks periodically, as your financial situation changes and as life events occur.
Your financial planner can be a valuable resource as you work through the list, helping you understand each of these items better and helping identify what steps you'll need to take to reach your goals. You don't need to trade your white coat for a calculator, but having a basic understanding of what makes up a healthy financial picture will go a long way in helping you protect what's most important to you and helping you accomplish what you want to do with your finances.
Gold Medal Waters is a fee only financial planner located in Boulder, Colorado that specializes in serving the unique needs of physicians and high net worth clients. Coordinating a great financial plan isn’t easy. Learn more about what sets us apart, or talk to an advisor and get a free meeting to see if we are the right firm for you.