A Physician’s Guide to Personal Finance and Investing

It’s not unusual for parents to want their children to grow up to become doctors. It’s one of most noble professions in the world and it pays well–or at least that’s the general perception. People see a young doctor and think of a Grey’s Anatomy character driving home in their Porsche to relax in their luxurious condo after a long day of performing emergency brain surgeries.

In reality, many physicians start their careers at a financial disadvantage due in large part to the extensive financial investment and time that goes into becoming a doctor. Here are some of the unique financial challenges that new physicians face when trying to build personal wealth:

• As a result of years of medical school, physicians enter the workforce much later than the average person. Starting work later in life means fewer productive income-earning years.
• Debt from medical school can average close to $100,000. As such, physicians must commit a higher portion of their income from the early stages of their career (their least productive years) to pay off this debt.
• The ongoing cost of continuing education and practice development further puts the financial squeeze on physicians’ earnings.

Physicians, especially those that are just beginning their careers, are highly focused on their patients and keeping on top of their profession by consuming constant medical knowledge. There’s little time to also think about things such as investments, retirement planning, and personal wealth. As such, our Physician’s Financial Guide was designed to help medical practitioners overcome the financial hurdles that will be evident throughout their careers and set them up for success throughout their professional life cycle. 

Personal Finance & Your Professional Life Cycle

In order to avoid being consumed by debt at the start of your career or engulfed by the “lifestyle trap” at the mid- point of your career, it is important for new physicians to envision their professional life cycle in stages:

Early Stage

The challenge for new physicians is to pay off debt and save for the future while working with marginal cash flow. Some physicians might also be in the early stages of starting a family or purchasing property – which could further delay the start of financial planning for the future, resulting in a potential loss of hundreds of thousands of dollars.

Mid-Stage

Like any profession, the young physician will have likely evolved in their role, is comfortable in their work environment, and has refined their skills over 5 to 10 years. These prime years of professional stability and growth also coincides with income growth.

During this time, some physicians might even be celebrating the end of their student debt from medical school. However, with increased wealth comes increased financial responsibilities as new personal expenses emerge, such as mortgages or increased rent and car payments. Although many physicians are well-compensated, the old financial planning adage remains true: It’s not what you earn, it’s what you keep. In this regard, a physician’s rising income could be offset by rising expenses and increased debt if they do not plan carefully and keep an eye on cash flow.

At this stage in their careers, there should still be enough income to make maximum contributions to retirement plans. What may surprise many physicians is that this still may not be enough to fund a timely and comfortable retirement. Time is precious for physicians. Even if they somehow find the time to think about retirement planning after a long day of helping patients, it is difficult to find the energy. If they do find the time and energy, they still need the financial expertise to think about strategies on how to add to their retirement contributions so that they are not constantly playing catch-up against time.

Late Stage

The late-stage of a physician’s career is equivalent to a fine wine: It gets better with age. At this point, the physician is at their professional peak and at their maximum earning powers. Expenses and debts are also under control since “End of Student Debt” celebrations have been replaced by “End of Mortgage” and “Empty Nest” celebrations. And with the right planning and steady contributions to their retirement plan, they have built up more than enough assets for a comfortable and fulfilling retirement.

Planning for the Different Stages of Your Career

Early Stage (First 10 Years): The Time is Now to Manage Your Personal Finances

You’re finally out of medical school and you have all the student debt that comes with it. The first instinct is to quickly pay down that debt, but you also want to enjoy the fruits of your labour as a well-compensated young physician. There will be time for savings, investments, and financial planning a little bit down the road when your debts are finally paid off, right?

To make the most of your hard-earned income, the time to save and invest is now. The earlier you start, the more time and opportunities you have to grow your wealth. On the other hand, the “Cost of Delay” can result in a significant loss of money in the long run.Due to extensive schooling, physicians tend to enter the workforce later in life, so there is even less time to waste. It’s important to save early, even while in residency, in order to be financially healthy in the long run.

Mid Stage (Years 10-20 of Practice): The Time of Your Life

After a few years, you’ve hit your stride; you’ve gone from an in-debt resident to becoming a successful specialist or even starting your own practice. You are at the top of your profession and near the peak of your earning power.

This is the time of your life. However, even at this stage of your career, there are financial pitfalls to avoid. As their earnings increase, some physicians fall in the trap of going beyond indulging a bit in the good life and overspend to maintain a certain lifestyle. On the other hand, a financial plan would ensure that an increase in earnings coincides with an increase in savings. With financial planning, it is possible to live the good life today, while developing a strategy to make sure you have an even better life tomorrow.

 Late Stage: Retirement

At this stage, physicians are spending more time with their families and enjoying their grandchildren. With an increasing awareness of their own mortality, the retired physician starts to consider his or legacy to family and society at large.

For most physicians, their peak earning years are those just prior to retirement. This significant cash flow, combined with lower debt obligations and family expenses, means they can retire comfortably. The real question becomes whether that retirement comes earlier or later than anticipated.

It’s understandable to try to pay off expenses (rent/mortgage, debts, insurance, etc.) as soon as possible. It seems like the financially responsible and prudent thing to do. After essential expenses such as food, transportation and utilities are taken care of, some people then turn their attention to non-essential expenses such as entertainment, clothing, and travel. Anything left over after these expenses is typically applied to retirement savings.

There’s nothing wrong at all with spending money. Physicians worked hard to get where they are and no one wants to live the life of a miser. But a savings plan should be set in place for financial emergencies. A general rule of thumb is to have enough saved for at least 6 months worth of living expenses – in the case of any unforeseen events. A financial plan can help physicians prioritize their savings, either for an emergency fund or a long term goal such as a house or car.

Create spending guidelines for your cash flow needs. Use those guidelines to build a financial roadmap to help you navigate and prepare for any situation.

The Next Steps Towards Financial Independence

Creating a financial plan for your entire career and professional/life cycle may seem daunting, but you have to start somewhere. Start by developing a plan over a 12-month period that takes into account carrying your monetary surpluses forward. This will allow you to discover how much progress you can make towards increasing your savings or decreasing debt.

Want to make sure you get started the right way? The IP Private Wealth team has helped many physicians develop comprehensive plans. By thinking about spending, expenses, and financial management early in your career, you’ll be able to withstand emergencies, maximize your earnings, and make the most of your peak earnings years as you plan for the future. Contact us to learn more.