Doctors are at a distinct disadvantage when it comes to personal financial management. They undertake years of education and training, which often puts them in six-figure debt before even starting their career. Their late start and large student debt is compounded by a lack of formal financial education, a high degree of professional liability, and a higher rate of burnout than most other occupations.
Just as many doctors are exposed to the same challenges, I also see many doctors make the same financial mistakes over the course of their careers. Here are the top 4 mistakes I see doctors make and how you can avoid these common pitfalls.
1. Failing to Address Their Student Debt
Most doctors finish residency with a mountain of student debt—the average medical school graduate owing $241,600 in total student loan debt. (1) Fortunately, doctors’ salaries can accommodate student loan payments but paying more than the minimum may not be a top priority. After all, young doctors have been studying hard and living on loans for so long that it can feel well-deserved to loosen the purse strings a bit.
While this may be fine in moderation, it is important to establish good financial habits early on and make plans to tackle student debt from the beginning. This is particularly important if you are paying high interest rates on your student loans. Remember that the quicker you pay down your loans, the less you pay in interest and the more you will have to contribute to other financial goals like buying a home or saving for retirement.
A good way to avoid this mistake is to develop a long-term financial strategy, track and control your expenses as your salary increases, and continue living like a resident until your student debt is repaid.
2. Missing Out on Tax-Deferred Retirement Accounts
I’ve found that doctors often miss out on opportunities to maximize their tax-efficient retirement savings, instead allowing cash to pile up in savings accounts or other assets that don’t maximize their wealth over time. For example, many doctors ignore the 457 deferred compensation plans offered by their hospitals.
These plans allow doctors to contribute pre-tax income to a retirement account. The income will not be taxed in the year it is received, and earnings on the money grow tax-deferred until withdrawn in retirement. A 457 plan is very similar to a 401(k), but it allows for special catch-up contributions and no penalty on withdrawals before age 59½ if you have already left your employer. These additional benefits make 457 plans a very appealing and tax-efficient method for saving for retirement.
If you’re a doctor with access to tax-advantaged retirement accounts like a 457 plan, be sure to make the most of the tax benefits by regularly contributing.
3. Inadequate Insurance Protection
If something were to happen to you, would your family be financially secure?
Doctors are often the primary breadwinners for their families. Failing to protect your income with life insurance and disability insurance can have drastic consequences in the event of unforeseen illness or injury.
Insurance needs vary depending on your unique circumstances, but most doctors should take steps to mitigate their financial risk. Low-cost term life insurance from a reputable company can be an effective option as it is less expensive and less complex than other life insurance policies like whole life or universal life. Disability insurance is typically offered by your employer, but supplementing this policy with “own occupation” coverage may be advisable for some doctors.
4. Not Running the Numbers Before Buying Into a Private Practice
As a doctor, you may think the ultimate sign of success in your field is finally buying into a private practice. While this is a commendable goal to have, many doctors do not fully understand the financial implications of this decision before signing on the dotted line. There are many factors to consider, including:
- What is the practice worth? Make sure an independent third party conducts a proper valuation of the practice rather than just relying on the word of the current partners/owners.
- How much of any ownership stake are you purchasing? Your rights will be different as a majority versus minority owner, and it’s important to know these differences up front.
- What are the terms of your financing? Make sure you shop around to find the best term length and interest rate before choosing a lender.
Buying into a private practice is a big decision that should not be made lightly. It has the potential to affect your financial future for years, if not decades, to come. Make sure you are doing your due diligence and working with a financial professional before diving into this decision.
Are You Making Some of These Mistakes?
It is astounding to me that the only financial education most doctors receive is the occasional “lunch and learn” through an affinity group or from a commissioned insurance broker over a steak dinner. It’s no wonder they face an uphill battle in managing their personal finances. By addressing these four common pitfalls, doctors can put themselves on a better path toward financial security, reduce their financial risk, and gain some much-needed financial confidence.