Unique aspects of physician finance: 5 ways in which being a doctor impacts how you should approach personal finance

Jul 13, 2020

The main principles of personal finance are the same whether you earn $30,000 per year or $300,000 per year and whether you’re an hourly retail worker or salaried corporate executive. So, in many ways, physician finance is no different than personal finance for anyone else. However, there are several unique features of personal finance for physicians that are worth being aware of.

Is physician finance different than for other high-income professionals?

Some of the characteristic aspects of physician personal finance are similar to those encountered by any high-earning professionals. Generally speaking, having a high income makes managing your personal finances more complex. High income tends to be accompanied with a broader array of investments and more complicated tax decisions, for example.

Even compared to other highly-compensated professions, though, medicine puts its professionals in a distinctive position when it comes to personal finance.

This article focuses on five features of personal finance that are somewhat specific to physicians. These can make personal finance for doctors challenging, risky, or frustrating, depending on the situation. I’ve included some general thoughts on how you can avoid letting these issues negatively affect your financial situation.

1. Physicians experience a massive leap in income

The transition from residency to an attending-level job is accompanied by a substantial salary increase for most doctors.

Here’s a chart of my own income leaps over time. I spent years earning close to nothing while in school. I then had a solid, yet modest, income during post-graduate training. Then – very suddenly – my income shot up when I took my first “real” job after residency.

The magnitude and quick timing of the physician income leap means that some doctors are not adequately prepared.

Many physicians don’t make wise choices as to how to spend their attending-level salaries. Some drastically upgrade their lifestyle to “match” their salaries. Some simply don’t know where to begin as they face decisions about loan repayment, investments, and spending habits. This challenge can be compounded by a complete lack of financial education throughout our training.

How to avoid letting your income leap get the best of you

The best ways to avoid damage to your financial situation following your income leap are these:

  • Continue to live like at resident – at least in some aspects of your spending.
  • Be intentional and goal-oriented when you upgrade your lifestyle.
  • Educate yourself on personal finance and basic investing.
  • If you’re confused by personal finance or are having difficulty finding the necessary level of comfort with it, hire a fee-only financial advisor to assist.

2. Doctors’ high income / high debt combination can pose a challenge

In addition to the income leap described above, a physician’s combination of a high income and a high debt can be challenging when it comes to making personal finance decisions.

Many physicians can pay off educational loans quickly after graduating because of their high salaries. Whether this is the best financial decision is questionable. Some people are proponents of making minimum payments for as long as possible in order to be able to invest and reap returns at a higher interest than the loan interest rate. Others will tell you to pay off the debt to get it off your shoulders.

The balance you strike between paying off student loans and investing is a personal balance. While there’s no right or wrong, it’s a question that deserves attention. Unfortunately, some doctors don’t give it the attention that it deserves and don’t end up making the best decision for their personal financial situation and long-term goals.

How to mentally balance your income and your debt

Check out our post on how to approach being a HENRY (high earner, not rich yet).

3. People selling things will try to convince you that you’re more special than you actually are

As doctors, we’re sometimes led to believe that we’re pretty special. This message comes at us from various angles, with the most notable financial message coming from salesmen and businesses trying to sell us things.

If it hasn’t happened to you already in your medical career, you will – at some point – be contacted by insurance salesmen, mortgage lenders, financial advisors, and representatives from other professional services sectors who are hoping for a big sale.

Let’s look specifically at mortgages and life insurance for a moment.

Doctor’s mortgages allow physicians to take out big loans on home with far less than a 20% down payment. Lenders offer this because they’re confident that physicians will be able to pay back the loan.

This type of loan isn’t necessarily a bad idea, since a mortgage can be considered “good” debt. However, if you’re debt-averse, you might not appreciate the situation that this type of mortgage puts you in. Similarly, if you’re not sure that you’ll earn the salary needed to make the minimum payments for the next 30 years, you could end up in a regretful situation.

The general rules and requirements for home loans are in place for a reason. Simply being a doctor doesn’t necessarily mean the rules don’t apply to your financial situation.

Like a mortgage lender, a life insurance salesman may try to convince you that you’re special. Specifically, they’ll try to sell you way more life insurance than you actually need.

I was recently told by a life insurance agent that I should have at least a $2.5 million policy. I have a husband who is gainfully employed, no children, and less than $100,000 owed on my house. There is no reason why I’d need even close to $2.5 million in life insurance.

The purpose of life insurance is to ensure that your family isn’t left in a financial bind when you die. They should be able to pay off any debts and smoothly transition to a life that doesn’t depend on your income. Whether you want them to be able to continue their current lifestyle and spending habits forever is a personal decision, not a necessity.

How to avoid believing that you need special insurance and mortgages

When any lender or agent approaches you, be cautious. This applies to anyone trying to sell you life insurance, disability insurance, long-term care insurance, home loans, and financial advising, among other things.

Rather than take their information at face value, look up general information about the product or service. Don’t rely on the sales rep or on physician colleagues to provide you with accurate, personalized information. And don’t let them convince you that you need special insurance or a special loan simply because you’re a doctor.

Better yet, don’t let agents and salespeople take you by surprise. Decide what services and products you need, get some quotes, and identify the most appropriate plan for your personal situation.

4. You’re a target and people will try to take advantage of your personal financial situation

It’s common knowledge that physicians earn high salaries.

It’s also a common belief that physicians are clueless when it comes to finances.

The result of these two notions is that doctors get taken advantage of. Doctors are the targets of scams, frivolous lawsuits, and financial schemes. Some are further targeted by their families and social circles for personal loans (many of which are never repaid).

Lawsuits faced by medical professionals are not limited to medical malpractice cases. High net worth individuals of any type can be a target of personal lawsuits, especially if their wealth is apparent to others.

Physicians tend to participate in professional activities aside from patient care that can, regrettably, leave them exposed to suits. This includes serving on boards of directors, doing consulting work, and volunteering for non-profits.

How to avoid being a target of scams, schemes, and lawsuits

Always perform due diligence on any investment opportunities. Do your homework before sending money to anyone following an offer or demand. You’ve probably heard before that, if an opportunity sounds too good to be true, it probably is. Moreover, if it leaves you feeling uncomfortable, there’s probably a good reason why.

If you loan any amount of money to a friend or family member, mentally consider it to be a gift, rather than a loan.

To minimize your risk of malpractice lawsuits:

  • Develop good relationships with patients
  • Practice evidence-based medicine
  • Document thoroughly

Finally, to minimize your risk of financial destruction from other types of lawsuits, purchase umbrella insurance and make sure your activities are adequately covered by other appropriate insurance, such as directors and officers liability insurance.

5. Your professional expenses are substantial

The final way in which physician finance differs from most personal finance circumstances is that our professional expenses are hefty. We pay for:

  • State medical licenses, renewals, and associated fees
  • Initial board certification and maintenance of certification fees
  • CME
  • DEA and state-controlled substance fees
  • Professional association dues

These are all part of the “true cost” of being a licensed physician in the US. Depending on your work arrangement, expenses can also include insurance, equipment, and other costs.

These expenses really add up – especially for physicians with side gigs or who keep multiple licenses active for telemedicine or locums work. Most other professions don’t rival medicine when it comes to professional expenses.

How to limit the financial impact of your professional expenses

One way to limit your professional expenses is to work as a full-time, W-2 employee for a company that covers your expenses and not do any side gig work. But that’s not desirable for many doctors – especially those wanting autonomy or hoping to reach financial independence quickly.

If you do work as a consultant or earn income through side gigs, be sure you’re writing off eligible expenses at tax time. Having an LLC can formalize your situation and help you keep work expenses separate.

Physician finance has some atypical aspects, but there are ways to approach them wisely. Comment below with your own experience or recommendations for how to make the best of the financial situations we’re in.

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