6 minute read
Financial Literacy for Physicians
As a physician, you have spent years mastering the art and science of medicine. If you are like most, however, your education likely lacked any financial literacy training. Being financially literate is essential for your financial health, gives you options, and may help prevent burnout.
I have no formal financial training, but as a financially successful, late-career emergency physician, I can offer you some advice. I subscribe to the philosophy of the White Coat Investor and highly recommend their website, blog, and podcast. On the website, you can sign up for a 12-week boot camp, where you will be sent one email each week to get yourself a basic understanding of finance.
Why many physicians struggle with money:
The median medical school debt is over $200,000. Many owe much more. This enormous debt, combined with a late start saving for retirement, puts many physicians behind the eight ball in terms of building wealth. In addition, delayed gratification and a large increase in salary after residency can lead one to get on the hedonic treadmill and fall into the high-earner, high-spender trap. There are societal pressures regarding the type of homes and cars physicians should own and where they should send their children to school. To make matters worse, those with “MD” or “DO” after their names often become targets of salespersons masquerading as financial advisors. The good news is that there are simple steps that you can take to get your finances on track.
Ten tips to achieve financial success:
1. Become financially literate and understand the concept of compound interest. The earlier you start saving, the larger your nest egg will grow. And remember “time in the market is more important than timing the market”.
2. Live like a resident for the first few years as an attending to avoid lifestyle creep. This means living on a fraction of your new income until you have paid down debt and started to save for retirement and perhaps a downpayment for a house.
3. Have a plan for student loans and other debt repayment. Each person’s plan will be different depending on the amount owed, salary, marital status, and whether or not one is planning on going for Public Student Loan Forgiveness (PSLF). If you are uncertain how best to proceed, StudentLoanAdvice.com can get you a personalized plan.
4. Build an emergency fund of 3-6 months of living expenses and keep this in a high-yield savings account as a buffer against unexpected expenses or job loss. Having a credit card balance is a financial emergency.
5. Get your own occupation disability insurance. You are more likely to become disabled than to die during your working years. As a result, this insurance will be more expensive than life insurance.
6. Get term life insurance if you have anyone who depends upon your salary. It is very unusual for a physician to need whole life insurance. Be very skeptical if someone tries to sell you anything but a term life insurance policy. Do not mix insurance and investing. Agents will make a large commission off of these policies, and off of you.
7. Have an investing plan and stick with it. You can get a feeonly financial advisor to get you started or confirm that you are on the right track. The White Coat Investor website has a list of recommended financial advisors. There are hundreds of reasonable plans that will achieve the goal of financial success: pick one. You should invest in broadly diversified mutual funds or Exchange-Traded Funds (ETFs). This means that you own a piece of hundreds (S&P500) or thousands (US Broad Market Index Fund) of the largest publicly traded companies in the US. Owning individual stocks puts you at increased risk. Remember Enron? If you are young, it is reasonable to invest 100% in stocks. Just realize that when there is a bear market, the value of your investments will drop. It is important not to panic sell (selling low). When the market is down, think of it as everything being on sale and consider buying more shares instead. Your investment plan can also include bonds, which are less volatile than stocks. Typically, as one gets closer to retirement age, a larger proportion of their retirement portfolio will be in bonds. If you want a simple plan, you can invest in a target-date retirement fund that will automatically adjust the percentage of stocks and bonds as you age and get closer to retirement. Finally, look for passive index funds rather than actively managed funds. Passive funds will have the lowest expenses, which translates to you keeping more of your money.
8. Max out tax-advantaged retirement accounts. Physicians often have access to several retirement options such as 401(k)s, 403(b)s, 457(b)s, and IRAs (Individual Retirement Account/Arrangement). By contributing to a traditional, tax-deferred account, you can save on taxes during your high-earning years. Roth IRA contributions are made with money that has already been taxed and have the benefit of never being taxed again.
9. Consider using a Health Savings Account (HSA) if available and appropriate for you. HSAs offer a triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals are tax-free when used for qualified medical expenses.
10. Live below your means and, if married, invest in your relationship, as divorce is expensive and can derail your financial goals.
Personal Finance is Personal:
There is no one right way to build wealth. The most important thing is that you start now and stay the course. Develop good habits: slow, steady progress will get you to the goal of financial freedom, which will in turn give you options, such as the ability to cut back on hours, take a sabbatical, negotiate for what you want, or retire early. Finally, determine where you fall on the “You Only Live Once (YOLO)/ Financial Independence Retire Early (FIRE)” continuum and strive for balance. You can enjoy the present without being destined to work into your seventies or eating Alpo in your retirement.
Gayle Galletta, MDProfessor of Emergency Medicine, UMass Chan Medical School
