By Dr. James M. Dahle, WCI Founder
Whenever possible, it is best to learn from the financial mistakes of others rather than your own. For example, I've made the mistake of using a commissioned financial advisor who sold me crappy, expensive, loaded mutual funds; I've bought whole life insurance; and I've incurred unnecessary taxes in a taxable account due to not fully understanding the kiddie tax laws.
Luckily, these mistakes pale in comparison to financial errors made by some of our colleagues. A 2011 thread on Sermo, a physician-only forum, revealed 175 of the biggest financial mistakes other physicians have made before you, and I've detailed them below.
Consider this a financial “Morbidity and Mortality Conference.” Painful to listen to sometimes, but better than having to make each mistake on your own. Add your experiences as a comment at the end of this post.
Doctors' Biggest Financial Mistakes
#1 Getting Ripped Off
- Working with a “financial planner” who specializes in working with physicians and almost got me into whole life insurance. (Skip this mistake and use a WCI vetted financial advisor)
- Overpaying for legal advice ($3,500 to review an employment contract).
- Buying a universal variable life insurance policy as an “estate plan.”
- Investing with Bernie Madoff.
- Listening to brokers/financial planners/coin dealers.
- Not realizing that the goal of brokers is to take your money and make it theirs.
- Giving OTHERS control of substantial sums of MY money.
- Hiring an expert to manage my money. This guy charged 1% per year on the balance. Got a call from the fraud division of the FBI and they seized all my money. After about two years sweating, got it back without interest. Taught me to learn about investing. I decided I may not be a pro, but I won't steal my own money.
- Investing (before I learned about personal finance) through a professional who gave “free” advice steering me to load mutual funds and life insurance with high fees.
- Listening to an attending during med school for stock pick advice.
- Paying a lawyer to do my tax returns for 10 years. . . He charged $10,000 for a return that a national tax preparation company does for $1,500 or less.
- Allowing myself to get talked into a variable annuity when I was a chief resident. Bought it at roughly market peak; it sank with the market in 2001-2002; paid lots of charges and surrender charges when I got rid of it three years later to buy my first house, and due to the nature of variable annuity, I didn't even get to write the losses off on my taxes. . . Stay away from those RIPOFF variable annuities; get a tax-deferred or even taxable account like everyone else.
- Relying on money managers for too great a percentage of my net worth. . . It's best to learn enough to oversee a lot of your assets on your own.
- Bought front-loaded mutual funds.
- Getting ripped off to the tune of $11,000 for a real estate closing by my lawyer who charged by the hour. Took his fees right out of the mortgage check before I ever saw it.
- Buying a timeshare, buying a variable annuity, buying whole life insurance, and depending on brokers to make financial decisions.
- Stock tips from friends, relatives, or cab drivers should be avoided at all costs. Those free financial newsletters are just scams. What they touted are probably their own holding which they will sell when your rush to buy them pushes up the stock price transiently before they fall off the cliff.
There is a common theme here and it is one I tackle frequently on this blog. You need to be very aware of how, and how much your advisors are paid. This includes financial planners, stockbrokers, insurance agents, realtors, attorneys, accountants, and investment managers.
As a general rule, people don't go into these fields for the same reason firemen and kindergarten teachers choose their jobs. There is no Hippocratic Oath among financial professionals. It is your job to understand how much you're paying and whether that is a fair price. Understanding how the person advising you makes their money also helps you understand their conflicts of interest.
#2 Insurance Issues
- Not buying disability insurance.
- Divorce-related situational depression issues resolved in the past impacting a disability insurance application. [Mentioned multiple times]
- Not getting OWN-OCCUPATION disability insurance on the first day of residency.
- Bought too much useless, expensive insurance.
Well, no one said they wished they'd bought more life insurance. Of course, there's a real survivorship bias there. All those dead guys who should have bought more aren't here to tell us. Buy plenty of the insurance you need and avoid the insurance you don't.
#3 Personal Finance Issues
- Using credit cards.
- Buying too big of a house.
- Should have listened to Dave Ramsey and completed his course about eight years earlier.
- Spent too much on a wedding.
- Credit card debt in med school.
- Marrying a fiscally irresponsible spouse.
- Spending $600 to replace the clutch on a $1,000 car then donating it to charity two months later.
- Sending my kids to a private college in the future ($50K a year, what a waste!).
- Quitting one job before I had another. (Thankfully savings helped me through that transition.)
- Buying a used jeep and not noting it was burning out its engine from an oil leak.
- Not being aware of recurring automatic charges. I signed up for AOL when it first came out. Had automatic recurring credit card charges of $24.95 a month for over 14 years (wife paid the bills) for essentially nothing that you cannot get for free now. Just stopped it when our credit card had to be changed.
- Not saving as much as possible early in my career to take advantage of compound interest.
- Allowing lifestyle to creep upwards with increasing financial success.
- Keeping the house in the divorce—I had to spend $76K repairing it to then short-sell at a >$200K loss. I'll be paying on the loan I had to take for the repairs for the next 15 years.
- Giving my daughter a credit card (for “emergencies”) when she entered college in Boston.
- Not starting 529 plans for kids early enough, not investing aggressively enough.
There you have it. A lot of accumulated experience that may save you thousands.
These are mistakes made every day by millions of people. They aren't particularly specific to doctors, but doctors certainly make them as much or more than other people. Spend less than you earn, be wise with your cash, and if, heaven forbid you get divorced, take the 401(k), not the house.
#4 Investing in the Financial Markets
- Trading Options.
- “Greed” and it cost me $2 million. [Would love to hear the details on that one!]
- Buying and selling individual stocks (in this case selling Apple and buying Bank of America).
- Falling in love with a single stock lost me $40K.
- Buying on margin.
- Not spending enough time tracking investments.
- Panicking and selling when the market goes down.
- Only putting $10K into some start-up called AOL.
- Bought and lost a bundle on companies that I had no idea what they did (I don't even want to think about the dot.coms).
- Not getting out of the market in 2000. Lost a lot of money that took years to make up.
- Thinking I could time the market.
- Bought Lehman bonds in 2007.
- Holding Lehman Brothers stock, hoping for rebound and Fed to rescue and eventually lost all (quite a substantial amount).
- With just a few stocks my dad and I lost about $400K.
- Getting cold feet and bailing out of the market when it had bottomed out in November 2008.
These are common mistakes among all investors. It is important to be widely diversified, to avoid trying to time the market, and to develop an investing plan you can stick with. An index fund investor owns all the Apples and AOLs in the market, so if you don't want to miss the next one, buy a total market index fund.
#5 A Bit of Cynicism
- Getting divorced. [Mentioned multiple times]
- Having children. [Mentioned multiple times]
- Falling in love with the wrong woman. . .
- Not listening to my wife.
- Going to law school (an MD/JD who never used the JD).
- Going to medical school/becoming a physician. [Mentioned multiple times]
- Going into primary care. [Mentioned multiple times]
- Staying in academic practice.
- Marrying my second wife after a whirlwind courtship. Twelve years later, she had an affair with a rich lawyer and took half and left. Just after I educated her ungrateful children.
- Went into internal medicine.
- Letting my first wife have access to the checkbook for too long before splitting.
- First marriage ($800K down).
Cynicism aside, if the first rule of physician personal finance is “Spend Less Than You Earn,” then surely the second is “One House, One Spouse.” Divorce is not only emotionally devastating, but financially devastating. Most docs that get divorced never really fully recover. Stock market losses pale in comparison. This section also illustrates the importance of choosing your specialty wisely. If you like pediatrics and ophthalmology about the same, shouldn't you consider that one will allow you to have a much better lifestyle later on?
#6 Lifestyle Choices
- Buying a timeshare.
- Not saving for retirement when I had the chance.
- Chasing women.
- Spending too much remodeling and landscaping homes I thought I would stay in long term.
- Moving to a town where we did not fit.
- Buying the toys that I love to play with.
- Built our dream home. We did it smart, and cost-conscious, and came in under budget, thank goodness, and we love it, but I wish I hadn't done it now as I could retire sooner if I hadn't done it
- Not saving more (but I like my toys).
- Making $200K playing online poker during med school and blowing half of it on clubbing, girls, and watches instead of investing it.
- Working at a low-paying academic job for several years between college and medical school.
- Practiced in a small community.
- Dumping $75K into a pool/backyard in my first house out of residency then leaving a year later. Recouped $0.
- Purchased a small sailboat. There is credibility to the saying, ” The happiest days as a boat owner are the day you buy it and the day you sell it.”
- Accumulating more things than I need (having too much stuff is a burden).
- Vacation home (fun but money pit), boat (not fun and money pit), and health club investments.
- Bought into the idea that we “deserved our dream house,” so built an absolutely ginormous copper roof-Corian-granite-marble-cherry-Viking-Subzero-custom everything post and beam ego stroke and promptly realized that we did not want to work 60 hours a week forever to pay for it.
- Realize now that every time you buy something expensive, you are affecting how long and how hard you will work prior to retiring. That's fine if you love spending 60 hours a week at work and see yourself doing it until you're 70. But if not, think twice before getting the big house, the nice car, the boat, the pool, or sending the kids to an expensive private liberal arts college. It's also very expensive to change jobs. Choose your job and the community it is in wisely.
#7 Practice Management Issues
- Going into practice with a narcissist.
- Starting a primary care practice on my own.
- Merger that sounded too good to be true (it was)—cost was $150K to a pediatrician.
- Going into solo practice (general surgeon).
- Paying more than the going rate for an employee.
- Hiring someone with more training than I needed (RN vs. LPN, etc.).
- Devoting myself to seeing patients and trusting the office staff to do the clerical work. They either didn't perform well or stole from me.
- Seeing patients who need help but do not believe that they need to pay their bills. [Good luck with this emergency docs!]
- Starting a practice in a neighborhood going downhill.
- Joining practices out of residency where the senior partners were excellent physicians but couldn't manage a lemonade stand.
- Not watching over my billing company.
- Not managing the assets receivable when I closed my practice.
- Lost over $250,000 when Medical Manager billing system went belly up, bought out by Web MD, and did not take care of smaller practices. . . billing went into cyberspace for six months. . .we were able to paper-bill for most of it, lost my practice, gained a new understanding of the business of medicine.
- Bringing in partners. . . I would do it alone the next time.
- Getting a laser for my office. Cost a fortune—still paying it off, fortune in advertising, increased malpractice about 15%. Most months it is in the red.
- Staying in group practice when I should have gone solo years earlier.
- Starting a single practice. Between the employee problems and expense probably was never financially worth it.
- Joining a practice management group.
- Staying in one of those 90s “Group Without Walls” deals that cost me a years income for two years participation.
- Allowing settlement of a malpractice claim that should have been defended. Made getting affordable PLI very difficult for several years.
This was one of the most enlightening parts of writing this post. It's relatively easy to read a few good personal finance and investing books to avoid most of the problems listed previously. But practice management is something that doctors generally just learn as they go, making all the same mistakes over and over again. If you're going to run your own practice, you must realize that you need to spend a certain part of your working time, and education time, on running a profitable practice.
#8 Contract Issues
- Joined the wrong practice.
- Accepting a position in a group of dishonest, deceitful physicians that most likely carry a DSM IV diagnosis.
- Not having my contract reviewed by an appropriate attorney.
- Not reviewing employment contract.
- Signing a non-compete agreement with 100-mile barrier.
- Not getting a partnership promise in writing.
- I trusted doctors and started my practice without income guarantee based on promises by PCPs in the area (an endocrinologist).
- Signing a contract with United Healthcare.
- Trusting that employed physicians will show up for work and do their job on a salary.
- Building a new office with four partners and not making sure everyone was individually liable for their part of the upfit and loans. After one split, two divorced, and we closed the practice, I got us all out for $100K of “stupid tax” each.
Read your contracts and have them reviewed by an appropriate attorney. Don't make the mistake of thinking they are set in stone. They aren't. Make sure all verbal promises are in the contract.
#9 Real Estate Issues
- Buying two houses at the market high with plans to renovate them, flipping one and living in the other.
- Buying a house right out of residency.
- Owning two houses at once.
- Buying and selling houses at the wrong time.
- Bought first house with first job (rather than renting).
- Not taking the first offer on a house.
- Falling in love with a house cost me $200K.
- Bought high, sold low on a house.
- Used builder's appliances instead of getting my own.
- Underestimating repair costs on rental properties.
- Not doing due diligence on real estate purchases.
- Buying into a hot real estate market.
- Built a house in residency.
- Buying a house too late.
- Buying a house too soon.
- Buying the biggest house I could afford.
- Buying too much house at the peak of the bubble.
- Refinancing house in 2008 just as market took nose dive.
- Not listening to my wife when we could have bought two acres of land on Nantucket in the late 90's for $250K.
- Remortgaging my house at the age of 59 to pay for renovations that cost more than I ever dreamed of.
I was surprised how many errors were listed that were related to real estate. Some are simply a matter of having to live through the real estate crash as a homeowner. But many are a matter of buying a home at the wrong time in your personal or professional life. I have found quite a bit of ignorance among physicians on topics related to real estate. Since your home is the biggest purchase you'll ever make, it pays to spend some time learning how to get a good deal on the home and the mortgage to pay for it. If you get into real estate investing, realize that you're playing in an inefficient market against some real professionals. If you're not sure who the sucker at the table is, it's you.
- Taking out too many student loans.
- Taking too long to pay off student loans.
- Lending money to in-laws who just declared bankruptcy.
- Lending money to friends. [$4K from one poster, $100K from another]
- Getting too big of a mortgage.
- Taking out enormous student loans.
- Loaning $10K to my younger brother for investment. It tanked.
- Medical school debt.
- Borrowing money on paid-for house to play stock market with full service commission trades just before the “dot.com” crash, and to buy other single family dwellings with nonpaying renters a year or two before the subprime real estate induced recession.
- Loaning $30K to step-father in law to fix up his townhouse to sell for $500K or so (he thought). Market tanked and it couldn't be sold. Then he got demented and was robbed blind by drug-using “friends.” So far he's paid back on $3K, and likely that's all we'll see.
- Loaned “Alan's” business $10K—return = $0; loaned “Rose” $5K—return = pennies on the dollar; loaned a family member a house—return = less than zero (I pay the property tax); loaned another house to an in-law right before she had a massive attack of transverse myelitis—return = less than zero (but she has mostly recovered so I AM grateful).
- Taking out loans for medical school that I did not need. All paid off but money wasted.
Two commons themes here. First, don't loan money to family. Make it a gift. You're less likely to give as much as you'd loan, and in the end, you'll be out less money. Second, minimize your student loans. Last, don't treat your house like an ATM.
#11 Bad Investments
- Lost $60K in a franchise deal.
- Lost $16K investing in a surgical center.
- Investing in family member's ideas.
- Paying too much due to ignorance of its true value or lack of patience.
- Various dumb doctor deals.
- Investing in Nutrition Superstore.com back in the late 1990's. . . They stole $10K from me.
- Bought a truck repair business to get my son-in-law mechanic set for life. . . I found out that the reason he remains a mechanic is because he isn't a self starter but a wrench turner. It cost me $125K.
- Built a 50,000 square foot medical center in my underserved community when lots of docs were looking to move into the area. As construction was underway, the health care reform debate started. All docs that were interested in moving/expanding their practices pulled out, frightened by what the future would hold. Now on the hook for $11 million facility at 50% capacity. (Fortunately, I am a minority partner.)
- Going in with HCA on a surgery center a few years ago. Play with snakes and you will get bit.
- Being caught up in the Rare Coin and Gold investment mania of the 70s.
- Investing in savings certificates in a company dealing in sub-prime loans in 2002 before the bad publicity hit. It went under, I lost $250K.
- Investing in Mezzanine financing of condos before the crash. . .three projects paid well, last one a total loss.
- Private placement apartment real estate limited partnership with debt assumption—general partner went bust and after bankruptcy, the “forgiven debt” came back to limited partners as PHANTOM INCOME, with the IRS demanding $80K taxes due within 30 days.
- Investing in an office building—construction was very delayed, tenants dropped out, and I was left holding the bag.
- Buying 2009 season tickets to the St. Louis Rams. I live in Kenosha WI, so I'm hundreds of miles away. I ended up donating most of the $3,000 worth of tickets to the Rams' charity. It seemed like a good investment for reselling at the time.
- Investing in a limited partnership in the 80s.
- Investing in 3DFx and a hotel in Costa Rica.
- Bought an airplane as an investment (I don't even fly it).
- I sold all my stocks my grandmother gave me to invest in the Ambulance Service I worked for. When it went bankrupt I lost my job and my savings.
- I twice purchased small farms; big, big mistake. Lost mucho dinero.
- Investing in an oil well on the advice of a friend.
- Once only, I thought it was OK to take a flyer (gamble) on an oil well for $48,000.
- I got involved in a partnership diagnostic center. I lost a lot of money in it.
This is one of the most fascinating sections of this series. There are an unbelievable number of “dumb doctor deals” out there. Keep your investments simple. As a doc with a relatively high income, you've already won the retirement “game.” You can save 20% of your income, invest relatively conservatively, and retire well. You don't need to be investing in stupid stuff. Most investments presented to doctors don't treat the doctors fairly according to one financial adviser interviewed on this site.
- Having a relative do my taxes.
- Not taking my dad's business and building it into a local household name.
- Having ego.
- Believing the military HPSP “Scholarship” actually was a scholarship, and not just a particularly restrictive employment contract.
- Staying longer in the private sector then I should have.
- Getting a loan tied to mortgage for a start up distributorship business which I did so my hubby has something to manage—but apparently is not REALLY interested in.
- Not taking some business courses in college.
- Giving up my public safety pension to go to med school. Although the ex would probably have gotten half anyway, I am now working harder in my 50's while all my contemporaries at the time are retiring at 75% salary.
- Staying in the military when civilians were getting paid like real doctors and retiring and working in private practice now when we aren't.
- Taking 10 years to wise up regarding how aggressively to work to maximize the profitability of my labor.
There you have it. One hundred and seventy five different ways your colleagues have lost money. I'm sure there are 175 more ways to lose money. Share yours below.
Too many of us feel that talking about money is taboo, so we just keep making the same mistakes over and over again. Learn from the mistakes of others!
What are your biggest financial mistakes? Share your experiences (or better yet, those of a colleague!) and let others benefit from them, just as you've benefited from seeing others' mistakes.
[This updated post was originally published in 2011.]