If you recently finished residency and you’re starting your first job, your income probably just increased dramatically. That’s a great payoff after many years of hard work and sacrifice.
Your first instinct may be to go out and buy a new car or put down money to buy a new home to celebrate. There’s nothing wrong with that. But your initial financial steps out of residency can have a huge impact down the road — so it pays to be careful. Here are a few things you can do to start out right:
Consult financial and insurance advisors
As a new physician, your financial situation is unique. Student loan debt and liability issues, along with high earning potential make financial planning complicated. Financial and insurance advisors have the expertise to help you make important financial and insurance decisions. Be sure you find advisors who have a history of offering advice to physicians and are sensitive to your individual needs.
Get long-term disability insurance. The sooner the better.
Since you’re earning more, you need to protect your income. Plus, you may have high student loan debt that will still need to be paid off even if you’re disabled. It’s difficult to get loans cancelled due to a disability, and if you allow your loan to go into forbearance for a period of time, you’ll rack up a lot of interest. A long-term disability policy can help you continue to pay your loans, and other monthly expenses, until you can get back to work. Getting a policy in place now also helps you lock in lower rates.
Consider life insurance
Life insurance can be very affordable when you’re young and healthy. A $500,000 term life insurance policy can be as affordable as $30 per month.1 A life-insurance policy will protect your loved ones from having to take on the burden of your debts if you die — and will give you peace of mind that they will be cared for after you’re gone.
Ask what you want out of life, and start planning
After you’ve talked to a financial advisor and have your important insurance policies in place to protect your assets, there are other smart financial moves you can make.
Kimberly Palmer, a columnist and blogger with U.S. News & World Report, writes in her book, Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back, “Being smart about money begins with being smart about what you want out of life. What would you do if you weren’t limited by time or money? Do you want to start a nonprofit, travel around the world, or take a year-long work break to pursue a passion project? …. Once you have those big goals in mind, it’s time to figure out a way to get there.”
Here’s what Palmer suggests for young physicians2:
- Start with a budget. New responsibilities and temptations can quickly make your new salary disappear. Don’t wait to start a budget; free online tools such as Mint.com make it easy.
- Pay off high-interest student loan debts early. Student loans that carry a 5 or 6 percent interest rate (or higher) are costing you much more than your savings can earn in this current low-interest rate environment. Paying off a chunk of your student loans will immediately start saving you more money than making those slow and steady monthly payments.
- Save ambitiously for retirement and other goals. Saving at least one-quarter of your pre-tax income for retirement and other goals might sound like a lot, but it will help you feel financially secure.
- Don’t wait to start investing. The power of compounding is on your side now, so don’t wait to open up a 401(k) account until you feel like you have “extra” money, because that might never happen.
- Think about when you can afford to start a family. Being as financially prepared as possible can go a long way toward easing the stress of a new bundle of joy.
- Give back, but be choosy. Instead of giving $50 sporadically throughout the year, consider choosing a cause that you really care about and making a bigger difference — by giving your time as well as your money.
1Insurance information Institute, “Term Life Insurance Rates Expected to Drop in 2008,” by Dr. Steven Weisbart, CLU, September 21, 2007.
2“Money Tips for Young Doctors,” by Kimberly Palmer, money.usnews.com, posted February 7, 2011. Accessed March 18, 2011.