By Dr. James M. Dahle, WCI Founder
The first year out of training is the most important financial year of your life. Get it right, and you are likely to build massive sums of wealth that will provide you with financial security, the ability to help others, and career opportunities you can now only dream of. Get it wrong, and it will feel as though you are spinning your wheels as you slowly burn out on your career. Today, we will consider the top 10 ways that doctors get it wrong.
#1 No Plan
If you fail to plan, you plan to fail. The default option for most physicians is not pretty. Without any sort of check on it, most people will spend all of their income and then some, leaving nothing to use for building wealth. Ideally, every graduating resident would already have a written financial plan for their first 12 paychecks. They will have already decided how much to save for retirement, how much to put toward their student loans, and how much to put toward a house or other short-term goal.
#2 Inadequate Savings Rate
The typical attending physician should be saving 20% of gross income for retirement, with any amounts for other goals—such as paying off a mortgage, saving for college, or buying that new shiny Tesla—in addition to that. However, the new attending is in a unique position that they will never be in again. This doctor is used to living on an income of $50,000-$60,000 per year but are now making $200,000, $300,000, or even $400,000 per year. The difference between those two figures can be used to jumpstart any wealth-building plan.
Consider how quickly new doctors could pay off debts and build wealth if they were willing to live the same lifestyle they had as a resident for just a few more years. Even after paying the additional tax burden, a doctor making $300,000 and only spending $50,000 a year would have something in the neighborhood of $175,000 per year to use to build wealth. Even $400,000 in student loans won’t last long against that onslaught. Live like a resident for 2-4 years after residency, and you will solve almost every future financial problem you could ever have.
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#3 Wrong Student Loan Plan
While this is arguably more important for residents to get right than attendings, it can still result in the waste of tens of thousands of dollars of income. If you are employed full-time by a 501(c)3 (nonprofit), enroll your federal student loans in the Public Service Loan Forgiveness plan by making payments under an Income Driven Repayment program. The earlier in your training that you do this, the sooner you will reach the 120 monthly payments required to qualify for tax-free forgiveness of the remainder of those loans. If you are not working for a nonprofit, refinance your student loans. It is not unusual for a doctor with 7% federal student loans to refinance to 3%. On a $300,000 loan, that is an extra $12,000 per year that can go toward principal instead of interest.
Student loans and the many programs and options are challenging to navigate. If you need help, check out StudentLoanAdvice.com, a WCI company.
#4 Inadequate Insurance
There are some risks that you cannot self-insure against no matter how well you save—at least for a few more years. Buy insurance for these risks including disability, death, loss of valuable property, health, and both personal (umbrella) and professional (malpractice) liability. If your malpractice policy is claims-made instead of occurrence, know what the plan is for paying the tail when you break up with your employer. Insure well against financial catastrophes. That usually means a five-figure benefit for disability insurance and seven figures worth of term life and liability insurance.
#5 Failed to Invest
Some people save just fine but fail to actually put the money into any sort of investment. They may find they have half a million dollars or more just sitting in their checking account. Meanwhile, they have missed out on thousands of dollars in tax savings and compound interest that could have been theirs if not for their paralysis due to fear of loss or their unwillingness to put time into developing an investing plan.
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#6 Missed the Forest for the Trees
Occasionally, I run into a physician with a bizarre collection of investments with no underlying plan. One-fourth of your money in your favorite stock, 1/4 in Bitcoin, 1/4 in gold, and 1/4 in your brother-in-law’s failed restaurant is not a reasonable investing plan. If you will build your plan from the top down instead of the bottom up, you can avoid this error.
#7 Didn’t Understand Contract
Too many physicians sign contracts they do not understand and would have never signed if they had. Don’t assume that others, including other physicians, have your best interests at heart. Have employment and partnership contracts reviewed by a competent healthcare attorney or a contract review service. Don’t be penny wise and pound foolish; the few hundred dollars you spend is likely to pay for itself.
#8 Bought Whole Life Insurance
If ever there were a product designed to be sold and not bought, it would be whole life insurance. Selling it to a new doctor with hundreds of thousands in student loans is the equivalent of financial malpractice. While there are a few niche uses of this product, almost no new attending has a need for any of them. Buy term life insurance if anyone else depends on your income and avoid the hard-sell, high-commission, whole life insurance agent no matter how convincing they may be.
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#9 Hired a Bad Advisor
There are a plethora of financial professionals who call themselves financial advisors. The vast majority are sales agents paid on commission masquerading as financial planners. It’s fine to buy things from salespeople, but don’t rely on them to tell you if you need their product in the first place. The answer to that will always be yes. When it comes to financial advice, you want a minimally biased, fee-only, fiduciary, experienced financial planner +/- an asset manager. You want good advice at a fair price. Get second and third opinions until you are sure that you are getting it.
#10 Bad Housing Decisions
A house is often the most expensive purchase of your life, although education may rank a close second. Doctors make all kinds of housing-related errors, including buying a house before they are ready to do so, spending too much on a house, or getting an above-market rate mortgage. Try to keep your mortgage to less than 2X your gross income. You might have to stretch a little in a high cost of living area (stretching is 3-4X, not 10X), but realize this will have consequences on the rest of your financial life. To come out ahead on a purchase decision, expect to need to stay in the house for five or more years so that appreciation can overcome the substantial transaction costs. Do not buy a house until you are sure you like your job and that your job likes you.
Doctors are well-known for making lots of financial mistakes. Avoid these big ones, and your nest egg will thank you for it later.
What other big financial mistakes do early-career physicians make? Did you make any when you were a young attending? What else can you do to start building wealth early? Comment below!
[This article originally appeared in the American Academy of Emergency Medicine's Common Sense magazine.]