Physicians & Money: March 2020

7 Common Financial Mistakes Physicians Should Avoid

Naveed Saleh, M.D., M.S.

Jan. 29, 2020 (MDLinx) – According to some estimates, primary care physicians make an average annual salary of about $237,000 while specialists take home roughly $341,000 each year. These salaries should be enough to provide most physicians with a comfortable lifestyle. Nevertheless, some physicians find themselves financially strapped. Although certain external factors may play a role in determining financial status—such as high student loan debt or costly healthcare expenditures for chronic conditions—poor personal decision-making can also contribute to financial insecurity.

With this in mind, here are seven common financial mistakes that physicians make—and tips on how to fix them.

Failure to save

No matter what stage of your career you’re in, now is the time to start saving for retirement, if you haven’t done so already.

Financial experts recommend that the average person put away at least 10% of their income in savings vehicles, including IRAs (traditional or self-employed) and 401(k)s. (And high-earners like doctors should put away even more to achieve a retirement lifestyle they’re comfortable with.) Be sure to max out your contributions to such vehicles, and take advantage of any matching program that your employer offers. Moreover, if you have kids, making contributions to a 529 plan to help cover the expenses of higher education is vital.

For most busy physicians, finding a trusted financial advisor and good accountant are the keys to growing wealth. Fees for financial advisors vary and could include a flat-fee for setting up the initial account, fixed fees, hourly charges, commissions, performance-based fees, or a small percentage (1% or 2%) of assets managed.

If you’re being charged commission, try to keep an eye on what your broker is trading. One unethical and illegal practice is “churning,” where an advisor engages in excessive trades to generate commission without concern for investment goals.

Lastly, if you find the prospect of working with a private broker unsettling, consider investing with a bank. Chase, for instance, offers Chase Private Client and Chase Wealth Management services.

Neglecting to budget

Unless your parents paid your way through medical school, it’s likely that you carry a lot of student loan debt. When combined with paying your mortgage or a business loan for opening your private practice, you may find yourself staring down a ton of debt. To manage it, budgeting is integral.

Living beyond your means

You worked hard to become a doctor, and you deserve certain perks like a nice car and house.

But, instead of going for something like a tricked-out, high-priced Porsche Cayenne Turbo, consider something else that’s still nice but easier on your wallet, such as a Lexus GX. This SUV has plenty of bells and whistles, but it costs about half the price of the Porsche.

In terms of bigger purchases, it may be a good idea to pass up the 5,000-square foot McMansion in lieu of a nice house that’s half the size and half the mortgage.

Going underinsured

You can save money in many ways, but skimping on insurance should not be one of them. Every physician should carry malpractice, liability, disability, life, and umbrella policies.

Let’s consider, for instance, the following tragic scenario. Dr. Jane Doe worked hard to buy her dream house replete with a big backyard pool. She throws a party, where an intoxicated partygoer drowns in the deep end of the pool.

No amount of money will replace the loss of life, but in the event of a lawsuit, monetary compensation from homeowner insurance will most definitely fall short. The extra few hundred bucks spent each year on an umbrella policy that offers an extra $1 million in liability coverage could save Dr. Doe from financial ruin.

Financial protection against divorce

The last option any couple wants to consider is divorce, which can be devastating in terms of emotional damage. Sadly, about one in four doctors go through this traumatic life change.

No amount of money will result in “finding a new normal”—which takes time—but a prenuptial agreement could prevent a divorced doc from losing their house, savings, or future income due to alimony or child support payments.

Asking someone you love to sign a prenuptial agreement sounds incredibly unromantic, but it’s a really good idea—especially if one partner will earn substantially more income during the course of the marriage. Alternatively, you can ask for a postnuptial agreement (maybe after a romantic dinner).

Financial protection against professional divorce

Divorce need not be only from a lover. It can also take a professional form. Breaking from your partners can come at a steep price, including lease break fees, buy-out fees, malpractice tails, and employee costs. You can also expect to take an income hit following financial emancipation.

Always go into all professional agreements with eyes wide open, and have a healthcare lawyer review all documents, including buy-sell agreements, before you sign any paperwork.

Grabbing hands

Lyrics to the chorus of the Depeche Mode song “Everything Counts” begin with “the grabbing hands grab all they can.” Don’t let this trope become the refrain of your life. Some friends and family members, imagining that you are flush with cash, may be inclined to hit you up for money.

Remember that any gift of more than $14,000 per person per year is taxable by the IRS. If you do decide to lend a helping hand, consider drawing up a loan agreement with a lawyer first.

Bottom line

Just as exercising and eating right are the boring but necessary steps to staying healthy, saving and budgeting are the boring but necessary steps to good financial health. Make a financial plan, stick to it, and avoid the financial mistakes laid out above.

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