[Editor's Note: This is a guest post from James D. Osborne, MBA, CFP®, of Bason Asset Management, a low-cost, fee-only ($4500 per year for financial planning and asset management) advisor in Colorado and one of my advertisers. This post is full of common-sense advice for a new attending.]
So you've spent the last decade or so getting educated, specializing, doing a residency and now you're out, as an attending or in private practice. You're getting a real paycheck – now what do you do? Your first five steps:
1) Do nothing.
No new house, no new car, no big lifestyle changes. Just wait a bit. Yes, you have a nice new paycheck but you also have nice big student loan payments and you are not used to how much money is in that paycheck. Before you make big lifestyle changes, take six months to get used to your new income. If you want to get ahead financially, the first step is not parting with every dollar that comes in. So maintain your resident-like lifestyle for a while and start tackling the rest of this list.
2) Build savings.
Let's face it, your balance sheet is ugly right now. Lots of debt, not a lot of cash, probably even less invested for retirement. If you don't have one already, you need to have a cushion in a savings account. There are endless rules-of-thumb about this (3 months livings expenses, 6 months, etc) but let's pick a target: $25,000. You're gainfully employed now in what should be a stable position, so unemployment is not the risk most of you face. But cars break down, refrigerators and furnaces quit, unexpected trips to see family and attend weddings and go to graduations will come up. Start right now putting money away into savings – real money. At least $500 a month.
3) Get disability insurance.
You have now invested hundreds of thousands of dollars in your future earning potential and you need to protect it. Get competitive quotes from multiple carriers and make sure you understand the differences between policies. PLEASE work with an independent agent who can show you multiple quotes and specializes in disability insurance. If you don't know anything about disability insurance, The White Coat Investor has already done an excellent job giving you a primer – go read it here. Most surgeons and specialists will want an “Own Occupation” rider that specifically covers your ability to practice in your specialty. You also want a Non-Cancelable/ Guaranteed Renewable policy. Again, discussed by WCI here, but the short end is you do not want to give the insurance company any opportunity to raise premiums, reduce benefits or cancel your policy once it is in place.
4) Make a plan of attack for your student loans
Getting to where you are now wasn't free and the interest tab on your student loans is running up. Stafford loan rates are now at 6.8%, not cheap by today's standards. Private loans can be higher. There are varying schools of thought on debt repayment – the snowball method (attack the smallest balance first) or the highest-rate-first strategy. The snowball method is very emotionally satisfying – actually seeing a debt close and go away. A highest-rate-first strategy will result in less interest paid over time. Whichever you choose, you need a plan of attack. A 6.8% guaranteed return is tough to beat and many doctors would do themselves well in making debt repayment a top priority. [Especially with the recent threats to the Public Service Loan Forgiveness program-ed]
Whether you are an employee, an independent contractor, self-employed or a partner in a private practice, research your retirement account options. Employees may have access to a workplace retirement plan such as a 401(k) or a SIMPLE-IRA [SIMPLEs are generally used by employers that hate you and don't want you to ever retire-ed]. Self-employed individuals or business owners may have these and other options (including an individual 401(k), a SEP-IRA or plain old IRA) to evaluate. While this need must be balanced with repaying student loans, the power of compounding is on your side while you are young. Even if you are aggressively paying down debt, consider putting away 5-10% of your pre-tax income into an available retirement plan (and of course only invest in index funds).
Above all else, understand this: the single largest determining factor for your future financial success is the relationship between your income and your lifestyle. I have worked with plenty of clients and seen school teachers who retired comfortable at 60 because they lived within their means and seen business owners bringing home $200,000 and unable to retire because their spending habits grew in lockstep with their incomes for decades. Everything else is important: insurance, getting out of debt, investment policy, investment costs and taxes, but these things combined pale in comparison to the simple truth that you must spend less than you bring in if you ever want to reach financial independence. If you start this habit early, it is easy to continue. If you get behind, it can be incredibly difficult to change.
What do you think? What other advice do you have for those reaching attendinghood this summer? Comment below!