You’re a committed physician with years of training and experience physician with years of training and experience, eager to see the payoff for your hard work. Rightfully so. You’ve earned what you’ll earn because of your preparation and responsibilities.
But here’s the caveat: No matter what your employer is willing to pay for your commitment and skills, if you don’t spend and save wisely, your paycheck will yield diminishing returns. In other words, it won’t be enough over time to cover your bills or satisfy your goals, much less secure a comfortable retirement.
So how do you ensure that you’ll prosper both now and in the future? Below are six financial mistakes to avoid—with advice for achieving sound fiscal footing.
Mistake 1: Ignoring the tax bite
You may have a generous salary in hand, but how much money will you really have at your disposal? Too often, say experts, physicians focus on what they’re earning, rather than what they’ll have left after Uncle Sam and the state take their share.
In fact, a common mistake many young physicians make is to ignore the tax burdens for earning what they’re earning and living where they want to live. Both can have a significant effect on your disposable income. Fortunately, you can avoid the sticker shock that comes with reality.
GET REAL ABOUT NUMBERS
For starters, always make sure that you’re working from actual numbers and not just assumptions. For instance, that $200,000 guaranteed yearly salary you’ve just accepted may translate into $120,000 or so after everyone takes a chunk. That means the monthly $16,500 or so that you were counting on as a comfortable margin for your living expenses dips to around $10,000— less than you might have imagined for covering all your necessities and dreams.
“All of a sudden, you’ve got a hug gap between what you think you can spend and what you can afford,” says Michael Lovelace, M.D., MBA of Derby City Direct Primary Care in Louisville, Kentucky. “Once you understand the real numbers, you have a good context or baseline from which to make your decisions going forward.”
Check out the income tax structure in the states you’d like to call home. As a physician, you pretty much can work anywhere you want to work, particularly if you have a specialty everyone wants. But there’s a difference between California, which is known for its high income and other taxes, and Florida, Texas or six other states that don’t demand a slice of your income.
BE CONTRACT SAVVY
Once you have an offer in hand, make sure that you understand the tax implications of your contract. Don’t assume, for instance, that front-end items such as sign-in bonuses or moving allowances are free money. They’re taxable income.
The good news is that there may be ways to structure an agreement so that you don’t get hammered initially, but perhaps can spread the pain over time. For example, it might be worth your while to extend bonus payments another year so that Uncle Sam doesn’t hit you up immediately for his share.
Whatever the case, make sure you have a financial advisor or tax professional in your corner.
Mistake 2: Stalling on student debt
Nothing can cripple your financial freedom quite like student loans. Experts agree that prioritizing debt reduction—some even suggest over savings—is critical to both your financial flexibility and solvency. It may be tempting to delay repaying your loans, but it’s important to deal proactively with them.
Indeed, the longer you carry your debt, the more it’s costing you, particularly if you’re saddled with the high price of borrowing substantial money. If you’re among the many students graduating today not only with debt levels of a half a million dollars, but interest rates on that money at 6 or 7%, you understand the predicament. As Christopher Jones, cfp, founder and president of Sparrow Wealth Management, notes: “That’s like a very expensive mortgage.”
BE SMART AND PROACTIVE
Don’t jump into a job just because the organization is repaying your student loans. Instead, make certain that you not only select wisely, but also understand the repayment terms of your contract, especially as they apply to an early departure. As Michelle Sullentrup, ceo for myDermRecruiter, notes: “We don’t recommend that physicians take a job that offers loan repayment unless the time that they must stay for the repayment to be vested is not overly cumbersome.”
Second, consider refinancing your portion of the debt for a better deal. Obviously, you want to know the pros and cons of different options since these waters are complicated and varied. For instance, refinancing a federal loan to a private lender may achieve a lower interest rate but reduce eligibility for possible loan forgiveness or other plusses. But developing a new strategy that fits your circumstances can make your debt more manageable.
Third, consider pursuing a public service loan forgiveness track. You’ll have to contend with eligibility criteria, and not every program willsatisfy your goals. But if you’re open to a short stint or even a career move, you may find substantial debt relief. “It might be financially advantageous,” Jones says, “sincehaving to pay off a half-million-dollar student loan debt can be very overwhelming.”
Finally, prioritize retiring your debt. If what you might be earning in investment returns is equal to or less than what you will be spending in interest, Jones advises squaring away your debt first. “It’s good to get in the habit of saving, but paying off debt is a form of saving,” Jones says. “If the interest rate is high enough, you’re financially better off paying the debt than investing the money.”
Mistake 3: Living beyond your means
There are plenty of fiscal pitfalls to avoid, beginning with doctoritis, the term one expert coined to reflect the transition from not having a lot during training to wanting a lot now that you’re working.
It pretty much describes the lifestyle creep that emerges when you finally have resources and a pent-up energy for spending. You’ve put your life on hold for many years, so it’s your time to play catch up. For some, that means buying a home that’s too expensive, vehicles beyond budget, or any other tangible reward for their hard work. Admittedly, you’ve earned a few indulgences—and it’s tempting to buy everything at once.
But overspending is overspending.
As Pueblo, Colorado-based Veterans Affairs internist Jacob Mathew Jr., d.o., notes: “Young physicians often look at their colleagues and see a certain quality of life that they think they should be living. But probably the biggest financial mistake that they make is to get this new money and then want that new lifestyle.”
Whatever your age, you never want to stretch yourself so thin that you’re going paycheck to paycheck. In fact, the people you admire for their nice things may have incurred horrible debt to have what you want to have.
REMEDY AT YOUR FINGERTIPS
Getting control starts by prioritizing your spending so that you have the money to pay immediately for the things you truly want. Of course, your house and car are big-ticket items that you probably can’t cover with cash. But for everything else, experts suggest employing a little self-reflection first.
Finally, keep in mind that before you put money into things, realize that those things aren’t going to be there forever or help you achieve your long-term goals. “If you live within your means and put money away though,” Mathew says, “by the time you get to 65, your 65-year-old self is going to thank you.”
Mistake 4: Putting your future on the back burner
You may think that you’re too young to worry about retirement. But now is the time. You have a finite number of years — likely about 30 — to earn and save. The earlier you invest, the bigger the window for achieving your financial goals. More importantly, you’re in the best position possible to ride out the cyclical ebbs, flows and volatility of the investment market.
“Planning for retirement is extremely important. If you try to do it when you have 10 years left as opposed to when you have 30 years, it will create absolute chaos,” says Fred Horton, president of amga Consulting. “You don’t want to squander those years.”
Adds Loralie Ma, M.D., PHD, and president of MedChi, The Maryland State Medical Society: “You should think about your retirement now rather than later. You might be able to put it off for a few years, but don’t put it off too long.”
You can build a portfolio, Mathew says, by using the power of incremental investing or putting a small amount away once a month. He suggests remembering the adage, “time in the market beats timing in the market.”
FINE-TUNE YOUR PLAN
Obviously, your success depends on a good strategy. If your new employer offers a matching 401(k) plan, for instance, enroll and maximize your contribution. You want any money offered to you to start working for you ASAP. In fact, since a 401(k) offers tax-deferred and other benefits, it’s the logical first tier of a multi-tier plan including other assets. “The first step is to maximize what’s available to you at work,” Horton says. “It’s easy money.”
From there, you want to employ a diversified investment approach. By spreading your exposure over various asset types, it minimizes your risks while maximizing your rewards, so that over time you make money. Balancing those risks vs. rewards is easier, say experts, when you have time on your side to develop and adjust that portfolio.
As Jones notes: “My favorite analogy is the tortoise and the hare. You’re the tortoise. Because you’re investing in a diversified long- term approach, you’re not going to lose money over time. There’s still volatility. But if you follow that plan, you’ll reach your goal and eventually can retire.”
Mistake 5: Going it alone
Don’t let the diplomas on the wall—or your ego—lull you into a false sense of security. Medical knowledge does not translate into financial knowledge.
“You shouldn’t overestimate your skills unless you happen to have an MBA or other financial training,” says Ma.
STAKES COULDN’T BE HIGHER
A financial advisor can assist you in making good choices while protecting you from the bad ones. Keep in mind, now that you have serious money, you’ll likely be approached constantly with promising opportunities that turn out to be duds.
Michael J. Searcy, founding advisor of the Overland Park, Kansas-based Searcy Financial, recounts sad story after sad story of physicians who’ve invested in “crazy stuff” and lost their entire outlay.
Wherever you are in your career, enlisting the right financial advisor or fiduciary can be a prudent investment in yourself. He or she not only should help you make those sensible decisions, but also keep you moving forward on a reasonable path. This person’s bigger role is to organize a financial strategy that puts you in good stead for now and the future.
“When most people do this on their own, they get caught up in the emotion of investing and they don’t have anybody to give them perspective,” Jones says. “We’re going to help them make those unemotional decisions.”
Mistake 6: Thinking your income will be forever
Worrying about having money may not be your first concern. But it’s a mistake to think that the income stream will flow forever. “Physicians assume that money is guaranteed,” Mathew says, “but nothing is ever guaranteed.”
Mark Douyard is senior physician recruiter for Dover, Delaware-based Bayhealth Medical Center. He agrees, adding: “People don’t realize that they are subject to the whims in many cases of the marketplace.”
Indeed, whether by choice or circumstance, your career in medicine may ebb and flow just as it does for others. Whether your salary ends abruptly or just changesdramatically, you have a better chance of navigating those shifting winds with your student debt in check, good purchasing habits in hand, and money in reserve. As Ma notes: “That’s not really insurance, but it is insurance in the sense that when things happen in your career, you have an opportunity to ride it out. The more conservative you are in your spending, the better prepared you’ll be for it.”
Granted, you can’t predict the future, but you can take a few other steps to protect yourself. First, make sure that the organization courting you has financial stability and a decent roadmap and reputation for withstanding marketplace ups and downs. Second, never select a position based exclusively on compensation, especially if it’s above market price. You may be offered top dollar because the work environment is difficult, or the expectations off the charts. Third, understand the compensation package, particularly any production and/or collection metrics that kick in after the first years of your guaranteed salary base. You don’t want to cultivate an expensive lifestyle now that will depend on you hitting higher performance numbers just to keep up later.
As Nicole Gillard, senior director of medical staff development for Community Health Systems, notes: “If you’ve been spending more than you should, it could come back to haunt you because you won’t have the energy to see enough patients to keep up your income and standard of living.”
There are any number of items that will affect your budget in some way, shape or form. The better you are at controlling your finances, the better positioned you’ll be.
“You don’t want to be on either extreme, spending money on everything versus spending money on nothing,” Lovelace says, noting that whatever priority tickles your fancy, you want the resources to enjoy it. “It shouldn’t be that you can’t do anything for yourself that’s good or fun. You shouldn’t be precluded from rewarding yourself from working so hard to become a physician.” •