An early career physician has a lot going on and doesn't need to get everything just right, but there are a few financial priorities that should be recognized.
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You did it! It was a long 8, 10, or 12 years to get through med school, residency, and maybe fellowship, but here you are, you early career physician.
A full-fledged attending who has attained an incredible depth of knowledge in your field and learned almost nothing about money. Don’t worry; that’s normal. I’ll be happy to help you get started.
You’ve got time to figure out the finer details of personal finance over the next few years, but there are a handful of concepts you’re going to want to get correct right off the bat.
Making a major mistake in any of the following areas can cost you big-time down the road. Don’t look back in anger at your younger self and wish you had gotten these things right the first time around.
Most people think that doctors have it made. A career that garners respect, an excellent salary, and the knowledge and skills to diagnose and heal the sick and wounded.
Medicine can be a fulfilling and lucrative career, but many physicians fail to make sound financial decisions and it comes back to bite them when they are mid-career and they realize that the job they once loved never loved them back.
“Looks like we made it.” – Barry Manilow
Just because you’ve made it through training and have landed a good doctor job doesn’t necessarily mean that you’ve made it. Looks can be deceiving. You’ve got a lot of work to do before you’ll truly have it made.
“You better get your priorities straight. And watch out with that other crowd you’re running with. Don’t think I haven’t noticed.” -Coach Conrad to Randy “Pink” Floyd, Dazed & Confused
As you settle into your first job and likely a new city or neighborhood, you’re bound to make new friends. That new crowd you start running with can go a long way towards determining how you spend your time and money.
Understand the implications of your peer group on your finances. There is a bit of a paradox in that those who appear to be doing really well financially may not be, and those who appear to be less fortunate may simply be banking a much higher percentage of their income as opposed to spending it. If their incomes are comparable, those who practice stealth wealth may not look the part, but they’re the ones you’ll want to emulate.
Now let’s help you get your financial priorities straight.
#1 Make a Plan for Your Debt
Young doctors are not rich. Most have a significantly negative net worth, thanks to student loan balances that usually increase throughout training.
There are plenty of other potential debts to consider, as well. credit card debt, car loans, and maybe mortgage debt, too.
Start by taking inventory of how much you owe, to whom, and for what. There are different approaches to debt pay down that equate debt to snow-related objects for some reason, and I prefer the “debt avalanche.”
Pay down the highest interest-debt first. There’s almost no reason at attending physician earning $200,000 or more a year should have credit card debt. Pay it off ASAP or transfer it to a 0% APR card and plan to eliminate the balance before that introductory rate expires in 12 or 15 months.
I’d caution against taking on an automobile loan, also. Yes, the interest rates can be super-low or zero, but switching from making a lump sum purchase in the tens of thousands of dollars to making a payment in the hundreds of dollars per month can cause you to buy more car than you want or need.
In the first couple of years in a new job or town, it’s generally ill-advised to buy a home, and I recommend renting because many doctors don’t stay in their first post-training job. I’ve heard the attrition rate can be as high as 50%.
If you do choose to buy a home, lock in a low mortgage rate and only consider a physician mortgage loan if a 20% down payment is unattainable in your location and timeframe.
Student Loan management
is hugely important, and getting this wrong can be incredibly costly.
Ensure that you are on the optimal repayment plan, take advantage of any government gifts like public service loan forgiveness (PSLF) if working for a non-profit or loan payment suspension (as exists in 2020 for certain federal loans).
If you’re not certain that you’re on the right track with student loans, I can recommend two resources.
First is a book by Dr. Ben White, Medical Student Loans: A Comprehensive Guide. It’s not a tantalizing subject, but the book is quite educational and thorough. The only caveat I’d give is that programs change frequently, and legislative acts can and will make some of the information obsolete.
The second resource that can be highly valuable is a student loan consult from someone who eats, sleeps, and breathes this stuff. I can recommend two.
Student Loan Advice
, a WCI Company, offers comprehensive student loan consults. Andrew Paulson holds a Certified Student Loan Professional (CSLP) designation, and he is the lead consultant.
Travis Hornsby, a physician’s husband and former Vanguard bond trader, and the team he’s assembled at Student Loan Planner, has been doing this for years. If you’d like someone to fully analyze your financial picture to come up with the best student loan strategy for you, look them up.
#2 Avoid Massive Lifestyle Inflation
You know what will make paying your debts down much more difficult? Spending lots of money on other stuff. Weird, I know.
I get that you’ve been dreaming of this day for a long time and you’ve told yourself for years that you were going to do this or have that as soon as you could afford it.
You know what? Splurge on something. Treat yourself. But don’t make it a habit; you want to keep it a treat, right?
One vacation, set of golf clubs, handbag, or power tool isn’t going to make or break you. It’s the instantaneous upgrade of absolutely everything that can push back financial independence indefinitely.
There are four categories of spending (not including debt service) that account for most of our spending: housing, transportation, food, and travel.
Decide which is most important to you, and go well above-average in that category, but be reasonable with the rest. With a multiple six-figure income, you can have nice things, but not all the nice things.
If financial freedom is important to you, I recommend attempting to meet the “live on half challenge.” Use half of your take home pay to pay down debt and invest, living on the other half. Do that, and paid work will be optional in about 15 years from the day your net worth is zero.
#3 Save for Big Ticket Items
This really ties together the first two priorities of managing debt and keeping your lifestyle in check.
Most physicians can afford to max out all available retirement accounts, make student loan payments, and still set aside tens of thousands of dollars annually.
Like I said, you can have nice things. But please don’t take on a bunch of new debt to have them.
Want a Tesla? Don’t go crazy on your home, travel or fine dining, and save up for it.
Dreaming of a month-long African safari? Save up for a nice camera, get the appropriate vaccinations and medications, and start a safari savings fund.
The same goes for a boat, motorhome, kitchen remodel, or anything else that could be financed, but can also be purchased with a five-figure pile of cash.
A down payment on a home also belongs here, but if we’re preaching what we practice, I have to admit that twice I used a physician loan (< 20% down payment with no PMI) early in my career.
Later on in my career, though, I transitioned to paying cash for homes and avoiding mortgages and their closing fees altogether.
Paying cash for a truck, trip, tritoon, or townhome not only keeps you from taking on additional debt, but it might also restrict your budget a bit. People tend to spend less when they’re not spending other people’s money, and that’s a good thing.
#4 Protect Future Income
It’s great to start making good money when you’re fresh out of residency or fellowship, and it’s vital to continue making good money for years to come.
You’re very likely “in the hole” in terms of net worth and you’re lagging by up to a decade or so in terms of career earnings behind your age-matched peers who took different career paths.
How can you protect your future income?
Yes, there is insurance that will help, and we’ll get to that, but there are some simple things you can do to help safeguard and perhaps increase your income in the first few years.
One, be a good coworker. Treat your employees well. Be kind to the nursed and ancillary staff that you cross paths with. Be gracious with the physicians that consult you and to those to whom you refer patients.
Being well-liked and having good working relationships with your fellow medical staff members can go a long way towards helping you not only keep your job but also increase your pay.
Also, be a good doctor in the eyes of your patients. I have no doubt that you will give excellent medical care, but realize that patients often judge the quality of their doctor by the doctor’s bedside manner, non-verbal cues, and perceived attentiveness to their needs.
I’m not saying you should bend over backward for top patient satisfaction scores, but if your income depends upon you growing your practice or referral base, you want to be known as a good doctor. Understand that your patient population is going to use a different set of criteria for quality than you would uses when judging other physicians.
On the insurance front, you need true own-occupation disability insurance from one of the “big six” companies that offer it. Don’t make the mistake of thinking a group policy Is adequate or that going without is a risk worth taking.
When you’re well on your way to financial independence, you can cut back on your coverage or drop your coverage completely, but when your net worth is in the five or six figures, long-term disability insurance is vital. Buy from an independent agent that will shop around on your behalf.
Also, if anyone besides you depends on your income, it’s smart to purchase term life insurance. You’re much more likely to become temporarily disabled than die young, but if the unthinkable happens, at least your loved ones will be taken care of financially.
A young, healthy person should be able to get a policy that will pay out $2 Million for under $100 a month. There are a number of variables that go into that calculation, but you can get a quote specific to you in just a few minutes.
#5 Understand Available Investment Accounts
The first four financial priorities haven’t really touched on investing. Personal finance is a broad topic, but investing is a big part of it, particularly for the high-income professional.
The important part, especially early on, isn’t to do everything exactly right, but to avoid big blunders. Investing can be made inexplicably complex, but it can also be pretty simple.
Early in your career, the most important thing to understand is what types of accounts you have available to you and how much you can invest in them each year.
If you are a W-2 employee, that list probably includes a 401(k) or 403(b) and maybe a 457(b). Depending on your health insurance options, you may also be able to invest in an HSA.
As an independent contractor earning 1099 income or a partner receiving a K-1, you might have different retirement accounts available to you.
There’s the individual 401(k), SEP IRA, SIMPLE IRA, and defined benefit plans. You can’t have all of these at the same time, but you may have one or two of them.
Regardless of your employment status, the backdoor Roth IRA and taxable account are additional accounts in which you should be able to save and invest for retirement.
For a more complete rundown of these and other accounts, please see my two-part series:
You’ll also have to decide what to invest in within each of these accounts. You may have been automatically invested in a default fund like a target-date fund, which is not a bad way to start.
If you’re asked to choose your own funds, look for funds with low expense ratios, ideally index funds with an annual expense ratio of 0.10% or less. One to three funds is a great starting point and can be all you’ll ever need.
Once you know what retirement accounts you have available, do your best to max them out each year. It may feel like a hardship at first, but I promise you’ll be thanking yourself later.