Going to medical school doesn’t guarantee that you how to handle your finances. Newly minted physicians earn high incomes but have large amounts of student debt, and generally require specialized insurance. This can get people into trouble if they aren’t aware of best practices for building and holding onto wealth.
Below you’ll find 12 of the most common personal finance mistakes that doctors make. Knowing what can go wrong is the best way to make better decisions.
Ramping Up Spending Too Quickly
Physicians enjoy a large bump in salary when they emerge from their residencies. Many are quick to enjoy the lifestyle this increase affords them. But this ignores the biggest drag on their savings — student debt.
Instead of upgrading your house, car, and lifestyle when you become an attending, you should channel your extra income into paying off your debt, thus establishing a stable financial base. Only then you should start enjoying the spoils of your work.
Not Saving Enough
Even when doctors recognize the value of paying down their debts, they may not save enough for retirement. They often don’t realize the importance of compounding interest and underestimate how much they need to save annually to continue their normal lifestyle into retirement. On average, doctors should be saving at least 20% of their income.
Allocating Assets Inappropriately
Early on in their career, doctors should favor growth investments, like stock funds, REITs, and similar assets. However, safer investments, like government bonds and money market accounts, need to be included as a hedge against loss. High net worth individuals often focus on growth without a safety hedge, which can get them into trouble.
A good rule of thumb is to use your age to set your safe investment percentage. A 30-year-old should have 30% of their portfolio in safe investments. As they age, that percentage goes up, ensuring that a larger share of their assets are protected from loss as they get close to retirement.
Buying Too Much House
Buying a big, expensive house, even if you can afford it, isn’t always the smartest financial move.
That’s because homeownership creates a host of hidden expenses that eat away at a physician’s ability to save. The more expensive the home, the higher these costs climb. Taxes, interest, furnishings, climate control, repairs, and other expenses add up quickly. Be sure that you still have enough income after taking care of these costs to save the recommended 20%.
Not Purchasing Adequate Insurance
Life insurance exists to replace your earning power should you pass away. Doctors can earn quite a bit over their lifetimes. Therefore they need life insurance policies that match. $500,000 worth of coverage seems like a lot, but when you make $200,000 a year, your policy payout won’t last very long.
Doctor’s need at least a million dollars of coverage. Two to three million is better. They also need adequate disability, umbrella, and malpractice insurance. Skimping on any of these could get you into trouble. Similarly having a good dental malpractice insurance policy is important.
Purchasing Insurance They Don’t Need
As important as insurance is, sometimes you don’t need it. Life insurance is the most salient example. It’s intended to support your dependents in the case of your untimely demise, replacing your lifetime earning power.
If you don’t have any dependents, you don’t need life insurance. It’s really that simple.
Playing the Stock Market
The proper way to invest in stocks is to purchase shares in mutual funds. This spreads your risk among hundreds of different companies. However, doctors and other high net worth earners frequently play the market, buying stock in individual companies.
This is a mistake. You’re a doctor, not an investment professional. Even seasoned investors find timing stock picks challenging. The chances that you will pick winners more often than losers are slim. Buying individual stocks is a poor way to build wealth.
Leasing a Car
Doctors don’t drive Hondas, right? They drive expensive status cars. And they want the newest model with all of the bells and whistles. Leases guarantee a new car every few years.
But this is the worst way to buy a car. Leasees are essentially renting their cars on a long term basis. New cars depreciate rapidly within the first few years, causing you to lose significant value on your investment. However, with a lease, you don’t own the car, so you’re not building any value at all.
The better move is to buy a pre-owned luxury car. A vehicle that’s three years old has already depreciated significantly, which means you’ll be getting a discount for an automobile that’s still in excellent condition.
Loaning Money Instead of Giving it Away
It’s nice to have the resources available to help family and friends in need. However, if you want to help, the smart move is to make it a gift instead of a loan. Why?
Because if the person defaults on their loan, it can ruin the relationship. This isn’t a risk when the money is gifted. More importantly, you’re less likely to give away money you can’t afford to live without. You might give someone $1,000, but loan them $10,000 because you’re assuming you’ll be paid back. But what if you aren’t?
Listening to Unqualified Investment Advisors
So you know this guy who knows a woman that’s putting together the “deal of a century.” It’s a “home run,” you’re told. You’ll double your money, guaranteed! You just can’t lose!
When something sounds too good to be true, it usually is. There are no guarantees in investing unless you’re talking about savings accounts and CDs. Make sure you get investment advice only from people qualified to give it.
Not Having a Proper Will
This is a mistake that many people make, but it can be particularly damaging for doctors and other high earners, particularly if you have children. You’re going to accumulate a sizable net worth, and you don’t want to leave its dispersal to chance.
Managing Taxes Inappropriately
There are significant tax shelters available to individuals with high earning power. However, many physicians are unaware of them or are too busy to educate themselves fully. Doctors that don’t manage their tax liabilities properly lose more money to the government than they need to, reducing their overall savings.
It’s best to consult with a trustworthy tax professional to be sure you’re managing your money wisely. And in general, you should find a financial advisor you can trust to look at your entire financial picture.