The Unique Challenges of Managing Finances as A Physician (And How to Overcome Them)
By: MD Wealth Management, LLC
Trent DeBruin, MBA, CFA, CFP®
Andrew Musbach, CFP®
Physicians are unique in many ways, including their personal finances. While they tend to be viewed as affluent members of society, the public often fails to appreciate the unique challenges that doctors face when managing their financial lives. Yes, the average physician does have a much higher income than the average American. However, physicians also face different obstacles when it comes to personal finance.
The earlier that you, as a physician, can identify and understand these obstacles, the easier it will be for you to plan around them and become intentional about leveraging your best asset: yourself.
In this article, we’ll explain some of the unique financial challenges faced by physicians and offer practical solutions for overcoming them. Understanding and incorporating these recommendations can allow you to avoid many common pitfalls and take purposeful actions towards the ultimate goal of achieving financial peace of mind.
The average medical student who borrows to pay for their education (75% of all students) now graduates with nearly $200,000 of student loans. While most Americans begin their working careers with a net worth close to $0, many physicians start in the hole, confronted with a large debt burden to alleviate before they can even begin the process of building wealth.
To overcome this situation, it is essential to be proactive in managing student loans. If you are seeking public service loan forgiveness, it’s vital to ensure that all the right boxes are checked, so forgiveness is ultimately granted. If planning to pay back student loans, refinancing options should be evaluated to minimize the interest rate being paid on the debt. Waiting a few extra years to make lifestyle upgrades, such as a new car or a bigger house, can be extremely beneficial, if it means being able to pay off student loans over a shorter period of time. It’s rare to find a physician who regrets paying off their loans sooner than was required.
Delayed Start to Saving and Investing
By the time most physicians finish their training, many of their peers in other professions have already been earning (and saving and investing) for nearly a decade. Since the traditional retirement age in the U.S. is 65, approximately one fourth of physicians' earning years have been forfeited, compared to the average American. This is a difficult obstacle to overcome, especially during the early part of a doctor’s career when they are trying to establish a financial foundation and begin building wealth.
The delayed start of saving and investing makes it even more important to make the correct financial decisions as soon as possible. It is crucial to save enough income each year (somewhere in the 15-20% range is recommended for physicians). An excellent way to sustain this savings habit is to automatically deduct a certain amount with each paycheck received. Once the right amount is being saved, the impact should be maximized by allocating it to the correct financial accounts. Contributions should be made to tax-advantaged accounts (IRAs and employer retirement plans) before being made to taxable accounts.
Unfortunately, lawsuits are an ever-present risk for physicians. And while the likelihood of getting sued varies depending on the specialty, this is an area where physicians are subject to much more risk than the average person. Therefore, they must take additional measures to protect themselves. The risk also extends beyond the professional realm into personal liability. Since there is a societal image of physicians being “rich,” doctors are often a target for personal liability lawsuits.
Fortunately, there are several things that can be done to mitigate this risk. On the professional side, physicians should have adequate malpractice insurance, as well as a plan for tail coverage, in the event of an employer change. On the personal side, assets should be properly titled to offer the maximal protection from lawsuits. This could involve titling assets in a non-physician spouse’s name or taking advantage of joint titling like “Tenancy by the Entirety” for one’s home. Physicians can also utilize legal structures, such as certain types of trusts, to provide additional protection. Personal liability umbrella insurance provides affordable protection, while avoiding liability-prone possessions – such as pools, trampolines, and dangerous pets – can also reduce the likelihood of a lawsuit materializing in the first place.
Busy Schedules and Physician Burnout
While finding adequate time to meet life’s many demands can be difficult for anyone, it is even more of a challenge for physicians. With a 60-hour average work week, the typical physician works 50% more than the average American. In addition to leaving little time for managing their finances, doctors’ long hours and stressful work contributes to an abnormally high burnout rate, compared to other professions. The result is that more physicians pursue early financial independence or retirement, which further compresses the timeline for accumulating wealth.
While everyone has the same number of hours in a day, it’s possible to buy more free time by delegating certain responsibilities to others. This applies to household tasks, such as mowing the lawn or cleaning the house, as well as to professional activities, such as hiring a CPA to prepare their taxes or a financial advisor to help them manage their financial life. When hiring a financial advisor, it is recommended that you work with a fiduciary, fee-only advisor. He or she a has a legal obligation to act in the client’s best interest and does not receive any financial incentives for selling products.
In order to pursue early financial independence as a way to combat physician burnout, the best solution is to accelerate the rate of wealth accumulation. This requires a combination of higher savings rates, as well as measures to increase earnings during working years. Financial management is about tradeoffs. Therefore, a physician who wants to pursue early financial independence will most likely have to live a more modest lifestyle than colleagues who are planning to work until the traditional retirement age.
Unique Insurance Needs
The combination of a high income and a late start to saving and investing mean that health-related issues can have a disproportionate impact on a physician’s overall financial well-being. This necessitates carrying higher amounts of insurance, especially life and disability, than the average person. The type of disability insurance required for physicians also tends to be nuanced. In many cases, employer-provided group coverage or general individual disability policies are inadequate for their needs. Therefore, it is important for physicians to also have an individual, own occupation, specialty-specific policy.
Above-average life insurance needs make it especially important to purchase cost-efficient coverage. For most physicians, this means buying “term” life insurance, which is relatively inexpensive and provides coverage for a fixed period of time. Unfortunately, other types of insurance, such as whole/variable life insurance, are much more profitable for the agents who sell them. As a result, physicians often feel pushed into buying unnecessary coverage. Insurance is for protection, not for investment. Permanent life insurance tends to provide expensive insurance coverage with mediocre investment returns.
The most cost-effective type of disability depends on several factors, including gender and occupation. It is, therefore, recommended to get price quotes from several different insurance companies. Using an independent agent who specializes in disability insurance for physicians increases the likelihood of being shown several options and ultimately paying the best price for a physician’s specific situation. By contrast, an agent who works for a specific insurance company naturally has an incentive to sell that company’s products, regardless of whether they are the best or cheapest in the market.
Physicians face many unique challenges in managing their personal finances. However, there are also several unique opportunities. The most powerful financial asset that physicians have working for them is a high income. It is critical to maximize how hard that income works, by making the right financial decisions throughout their career. This requires an understanding of the nuances of financial life as a physician and incorporating these lessons into regular financial management. With the proper knowledge and proactive planning, physicians can overcome financial challenges, while maximizing their opportunity to enjoy a life of financial security, that is free of worry.