Top 5 Financial Mistakes New Physicians Make – And How to Avoid Them

As a new physician, how you manage your income is crucial in order to have a solid financial plan that is working for you. Decades ago, being a physician was much simpler; today, new physicians have to take on the rising costs of operating a practice plus the decreasing amounts of reimbursements from health insurance companies. So, how can you make the most of the income you are earning and avoid financial mistakes? Financial security starts by avoiding these five common financial pitfalls. Let us take a closer look at each one and the solution to circumvent it.

5 Common Financial Pitfalls to Avoid

1. Poor savings strategies – To have a successful financial plan and savings strategy, you ultimately must live below your means. First determine several goals of what you are saving for (retirement, new house, etc.) – without a plan, it will be impossible to reach these goals. Next, how much should you save? A general savings rule is ten percent of income, however, physicians should be saving more than this and here is why. First, many physicians do not enter into their true income earning years until their mid-thirties, giving them less time to accumulate and compound savings. Second, because physicians are higher earners than most, their living standards are usually higher, meaning they spend more. In order to maintain this level of living in later years, larger nest eggs must be gathered.
   
   To give you an illustration of savings, let’s use an example of today’s average M.D. or D.O. with a subspecialty or specialty. The typical income for this individual is $350,000. If 25 percent of income is saved each year ($87,500), say until the age of 65, approximately $3 million will have been saved for retirement. This figure is strictly based on saving the 25 percent of income, although proper investing could increase the final value at retirement substantially.
   

2. Living without a budget or financial plan – Individuals or families who do not live by a written budget or financial plan will find it difficult to meet their financial goals and put themselves at risk for financial mistakes. The solution is to have a clearly written budget and review it on a regular basis, as it may need updating. Articulate financial goals and future milestones with your family, factoring in outward cash flow. Determine your spending allowance accordingly once this budget is in place. Determine time period intervals when you will monitor your progress against the goals you have set, and update your plan as necessary.
   

3. Poor debt management – Physicians deal with large amounts of debt, starting early on with medical school and student loans. Next come purchases and leases once a physician starts his or her own practice. In addition, physicians tend to carry high balance mortgages on their primary residences. When you factor all of these areas together, a lot of interest in paid out over time. This is where a knowledgeable advisor comes in. Find an advisor who can help you acquire the right type of loan, better manage your cash flow, and find products or loans with low interest rates.
   

4. Being improperly insured – While not being properly insured is an issue that can affect everyone, it is a crucial area of one’s long-term financial plan. For physicians, insurance is an area of special importance, considering the higher income and assets that come along with this profession. Physicians should speak with an advisor skilled in professional liability, disability, business overhead, life and even umbrella insurances. Secure proper plans depending on your income, area of specialty, assets, and life stage.
   

5. Raising financially ill-prepared children – When the time is right, educating your heirs about preserving the wealth you have earned is vital to protecting it. Consider this - according to The Family Business Institute, seventy percent of family wealth is destroyed in two generations, and ninety percent of it is gone within three generations. Here is a startling example of this: It is estimated that William Vanderbilt left his family almost $5 billion (in today’s value), yet not one of his heirs ranks among the leading affluent individuals on Forbes’ “America’s Richest” list. (Note: most of this fortune was lost/spent in the third generation).
   
   The solution here is to begin educating your family about wealth, taxes, money management and how to be financially responsible from an early age. Explain the intricacies of saving, investing, budgeting and the various strategies that come along with each area. The best lessons your children can learn in financial management and financial mistakes will come from you.

Your initial financial steps out of residency can have a huge impact down the road — so it pays to be careful. If you are a new physician, consider crafting a budget and financial plan, and securing the proper insurance for you and your family. Your hard work now can provide smooth sailing in the future.