[Editor's Note: Today's WCI Network post comes from The Physician Philosopher and is a great summary of the basics any attending should follow in order to get started on the right financial path.]
One of the most important financial moments in a young doctor’s life is the transition between finishing training and their first job. We have discussed what to do with the first attending physician paycheck, avoiding keeping up with Dr. Jones, and a simplified approach to investing. Today, let’s discuss 10 financial tips for new attending physicians that will set them on the right path.
For a full synopsis, I’ve also written The Physician Philosopher’s Guide to Personal Finance, a book that discusses the important financial steps along the way to becoming a doctor.
1. Make Intentional Goals!
Apparently, it is a tedious and difficult task learning to condition the body to accomplish such a challenging feat. During the ascent, people often feel lightheaded, uncomfortable, and nauseous. Oxygen deprivation can even cause delirium.
Yet, people push through, because they know that once they arrive at the precipice the view is going to be worth it. And they will have accomplished something that few others can claim.
Personal finance is analogous. The road to financial independence can be tedious and difficult. Climbing the mountain of money is no easy feat.
If you don’t know the “why” behind your money decisions (i.e. the “precipice” you expect to see after your disciplined financial journey), it often becomes impossible to maintain the financial discipline it takes to achieve your goals.
This begs the question: What are your goals in life? This is a tough question for many to answer.
Fortunately, there are tools that exist to help you think through this process. To answer these tough questions, I suggest using the Three Kinder Questions.
You might find it strange that my first tip for new attending physicians involves discussing the big picture, but you’ll have to trust me when I say that if you don’t picture the Mount Everest of your financial life first, you won’t make it past base camp.
…you’ll have to trust me when I say that if you don’t picture the Mount Everest of your financial life first, you won’t make it past base camp. — The Physician Philosopher
Now that you have spent some time determining what is most important to you in life, you get to have a little bit of fun. But this fun needs to happen in a way that doesn’t hurt your financial future.
Before we get to the fun stuff… recognize that if you have a negative net worth (Assets – Debts = Net Worth), then you don’t need to make your financial situation worse.
You wouldn’t expect a panhandler on the street with a net worth of zero to buy a $1 million home. If your net worth is negative, you are less wealthy than the panhandler. So, you probably shouldn’t buy the $1 million home either.
All work and no play makes Jack a dull boy, though. So, I want you to look at the difference between your post-tax take-home pay at the end of training. Then, I want you to look at your anticipated first paycheck as an attending physician.
Next, I want you to use The 10% Rule.
In a nutshell, take 10% of that increase in take-home pay, and spend it on whatever your heart desires. In other words, if your take-home pay goes up $10,000 – then take $1,000 and spend it on whatever your heart desires each month. This is your allowed lifestyle inflation after training.
I won’t put you in a box here. There are no rules other than that it cannot cost you more than 10% of the increase in take-home pay.
Then, take the other 90% of your money and use it to build wealth through the next 8 steps outlined in this post.
If you use the 10% rule for 2-3 years after you finish training, you will be amazed at the progress you can make. We used the 10% rule to enjoy some deserved lifestyle inflation while I paid down $200,000 in student loans in 19 months, and increased our net worth ~$500,000 in two years.
3. Build an Emergency Fund
The very first thing that 90% increase should go towards is building an emergency fund. The purpose of an emergency fund is to bridge any gap that might be created by an unexpected major expense. Most experts recommend an emergency fund of 3 to 6 months worth of living expenses.
What sort of major expenses am I talking about? Let’s look at a personal example. As I write this, our air conditioning is currently zapped from a power outage and subsequent electrical surge.
Outside of home repairs, other financial catastrophes include job loss, medical bills, emergency pet care, or car repairs. One of the most important reasons for an emergency fund is to bridge the gap between the time you might get disabled and when your long term disability insurance kicks in.
Having the peace of mind that an immediate emergency fund provides is crucial to financial success. Otherwise, you risk being tempted to sell retirement savings that should be considered untouchable.
Great, so you need 3 to 6 months' worth of living expenses saved. Figuring out the exact sum you will need requires you to figure out how much money you spend.
This brings us to our next point…
4. Make a Backwards Budget
Personal finance is simple. Earn a good income. Spend less than you make. And use the difference to invest money in the market (hopefully, via the Pareto Principle) so that it will grow with compound interest. Earn, save, and invest. That’s it.
While it might be simple, personal finance is not easy.
It is human nature to spend the money that we see in our bank account. For this reason, we need to know exactly where our money is coming from, where it is going, and to create a purpose for each dollar.
This is called a budget. I absolutely hate budgeting.
An alternative to budgeting involves tracking spending using products like Mint. Tracking spending is better than budgeting, in my opinion. This is what we originally used to determine how much we needed for our emergency fund.
After we tracked spending for a year or so, we started using a backwards budget. This is what we have stuck with over the last year.
Backwards Budgeting Primer
Instead of creating a typical budget (which is a great tool, if you can stomach it) where you outline every single line expense item, backwards budgeting takes a big picture view.
Backwards budgeting involves deciding to put money towards the things that are most important first. Then, you get to live your current life with whatever money is left.
Some people call this “paying yourself first.” By this, they mean paying your future self first with automatic payments by investing for retirement, and your current self last with any remaining money. Hence, the backwards budget.
Here is what our backward budget looked like after we finished training:
- 10% Tithe to Our Church
- $5,500 to my student loans (plus 90% of bonuses per the 10% Rule)
- We maxed out my monthly 403B ($1,583.33 per month in 2019)
- Maxed out my wife’s monthly governmental 457 ($1,583.33 per month in 2019)
- Placed additional money into wife’s 401K
- Backdoor Roth IRA money
The remaining money is what we had left to live on.
Once our student loans were gone, our focus turned to our annual savings rate. To be financially independent by 45 (this is our goal, which doesn’t have to be yours), we realized we needed to be saving ~$115,000 annually.
This savings rate is actualized by planning our financial goals first so that we can achieve that life we designed in Step 1 above. Then, we get to spend whatever money is left.
[Note: We live a great life right now, too, and don’t feel like we are “sacrificing” to get to our future goals – we know more money won’t make us happier].
If you budget this way, you don’t have to worry about nickle and diming every single expense. If your financial goals are being achieved, then it doesn’t matter what you do with what is left. Spend it lavishly on whatever you’d like!
5. Set up your Student Loan Repayment Plan (& Other Debt, too)
Speaking of backwards budgeting, a student loan repayment plan should be one of the first items in the backwards budget for the 80% of new attending physicians who have student loans. Another 21% of physicians need to include credit card or consumer debt in this discussion.
If you have high-interest consumer debt (>8% interest) pay that off first. I’d argue that you should plan to deal with this before making an emergency fund.
If you have $10,000 in credit card debt at 17.5% interest, you already have an emergency.
After you tackle any high-interest consumer debt, you should aim to attack those pesky student loans.
Hopefully, you’ve determined whether you are pursuing Public Service Loan Forgiveness or have privately refinanced your student loans. If not, stop now. Do not pass go. Do not collect $200. Go and figure out your student loan repayment plan.
When it comes to this goal (and all financial goals), I encourage you to make SMART financial goals. “SMART” is an acronym for Specific, Measurable, Achievable, Relevant, and Time-bound.
For example, my wife and I anticipated paying back $200,000 in student loans. So, we made a goal to refinance our student loans with a 7-year variable rate. We then followed our pay down progress through quarterly net worth calculations. Finally, we put a time stamp on it. Our loans were going to be paid off in 24 months. We made this goal from the very beginning.
Our SMART goal sounded like this, “We are going to pay off $200,000 in student loans by paying $5,500 monthly payments and using 90% of any bonus money in 24 months.”
Then, we exceeded our goals by paying off the loans 5 months early. However, this would not have happened had we not made SMART financial goals that had a purpose – to become debt-free.
6. Create your Investing Plan
After determining your life goals, the most important key to financial success is sticking to the plan. This implies that you know the plan…
You can read my post on practical investing to get you started.
Then, sit down and write out an investor policy statement. If you need an example of that, Dr. McFrugal can hook you up. He wrote a great post on Creating an Investor Policy Statement.
The point is that you need to have clear goals. Here are some examples:
- How much money are you trying to save each year?
- What kind of funds will you invest in? Actively managed or passively managed?
- What will your asset allocation be for your investments? In other words, what percentage stocks to bonds? Large-cap, mid-cap, small-cap? How much international exposure? Will real estate or other asset classes be involved?
- How often will you rebalance your funds if they stray from your intended asset allocation?
Either way, it is important to have a plan. If you are interested in making a full financial plan, you can consider using the Fire Your Financial Advisor Course by White Coat Investor. It is pricey ($499 as of this writing), but much cheaper than what a full financial plan would cost from a financial advisor.
7. Get Adequately Insured
Every new attending physician needs to realize a couple of things.
First, you are upside down in debt. So, you do not have a ton of assets to protect (which is why the next section on estate planning will be short). What you do likely have is a high-income earning potential. You need to protect that.
The second thing you must realize is that your income is not guaranteed.
If you don’t already have disability insurance (ideally purchased in residency/fellowship or within months after training), go ahead and take care of that.
However, make sure to buy disability insurance the right way. I was led astray when I tried to get mine, and now I am unable to get personal disability insurance to this day.
Don’t be me.
Term Life Insurance
If you have a spouse or children, you also need adequate term life insurance (Note: I did NOT say whole life, permanent, or cash value insurance).
I recommend using the following formula to figure out how much life insurance you need. Make sure your payout can help your loved ones cover all of the following (i.e. add all of the following together):
- Any debts you currently have (mortgage, car loans, etc)
- Potential college for children (estimate $150,000 – $200,000 per kid)
- Your annual income for the next 10 years (e.g. $250,000 income x 10 = $2.5 million)
For most physicians, this will result in life insurance coverage between $2 million and $5 million.
This is a ball-park number for the amount of life insurance you need. Subtract whatever you get from your workplace, and that is how much you should have for your personal term life insurance policy death benefit.
Other Insurance Products
Umbrella insurance is also a good idea for most physicians.
If someone comes onto your property and breaks their leg on something (e.g. like your trampoline), you want to be able to cover that in case it becomes necessary. Or what about some insurance that would help cover you if your teenage kid drives off the road and hits a pedestrian while they are texting and driving (despite you admonishing them not to do this)?
This is what umbrella insurance does. And it is dirt cheap.
I think my wife and I pay something like $50 per month for a $2 million umbrella insurance policy, though they do make you raise your minimum coverage on other policies to make it less likely to need the umbrella insurance.
Obviously, you also likely need home and auto insurance.
On most other things, I started self-insuring once I built up my emergency fund. I do not insure my phone, laptop, etc… when I know that I could cover the expense myself if something was damaged.
That said, do what helps you sleep at night.
8. Estate Planning
This part should be short. In essence, you likely don’t have a lot of assets to protect when you start as a new attending. So, getting an attorney to build a trust for you likely isn’t high on the list of priorities.
That said, if you are married and/or have children you need to make sure things are taken care of if the worst-case scenario happens. We talked about term life insurance above, but here are some additional items to keep in mind:
- Get a will so that your spouse has less of a hassle and your kids don’t get stuck in probate if you both die at the same time (sorry to be morbid, but it is the topic at hand).
- Names beneficiaries on all documents (investment vehicles like your 401K/403B/etc, life insurance policy, life insurance policy at work, etc)
- Keep a document that has all of your passwords and locations of the document in a secure location.
9. Learn about Taxes
A friend of mine at work (who just came back after leaving his first private practice job) told me a crazy tax story. He had a colleague at his previous place of employment that not only inflated his lifestyle to the point where he was living paycheck to paycheck. He also didn’t know what quarterly estimated taxes were!
This mistake led my friend’s partner to owe $100,000 in taxes back to the IRS after his first year in practice. He is now on a payment plan to pay it back.
Moral of the story: spend some time figuring out the tax structure of the group you join.
If you earn an income as a partner in a group, side 1099 income, or some other non-W2 wages….then you likely owe quarterly estimated taxes.
At least there is a silver lining here, since you are finishing training now (instead of in 2017) you likely won’t have to pay the Alternative Minimum Tax anymore.
10. Say “No” to Steak Dinners
It won’t take long for you to get an email from someone in the financial industry. Or maybe you’ve already been tapped on the shoulder by a friend. They will invite you to free dinner, coffee, lunch, or something else. The meal will be provided by an insurance or financial company.
Of course, life has taught us all that very few things come free. This situation is no different. They are likely selling you conflicted financial advice.
These dinners are like playing poker. If you’ve been at the table for a while and cannot figure out who the sucker is, it’s probably you.
Realize that you are about to be pitched a whole life insurance policy or a chance to build a relationship with a fee-based financial advisor who plans to sell you one.
If you must go, eat the free steak. Just don’t take your advice from that dinner or buy any products. Otherwise, you’re likely the one buying the dinner for everyone there. You just don’t know it.
A Bonus Tip: Know Where to Find Help
If you have read The Physician Philosopher’s Guide to Personal Finance, frequent this site, and still need some financial advice, I have a suggestion for where to get it.
- a fiduciary
- paid under a flat-fee model
- experienced working with physicians
If you don’t know where to find this, check out my recommended financial advisor list on The Physician Philosopher. You might notice that the list isn’t very long. That’s because no one makes it on there if they don’t meet the strict criteria mentioned above.
Take-Home: Financial Tips for New Attending Physicians
This is one epic post, but it should help you set out on a pretty good journey if you follow the steps outlined above.
If you have other questions, feel free to reach out to me. Or read the book. It’s good, and perfect for medical students, residents, and new attending physicians.
What do you think of the list? Is it missing any financial tips for new attending physicians? Leave a comment below.