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Tips for New Doctors - Personal Finance

July 6, 2008 – 6:00 am

If you’re entering your last year of residency, you are probably eagerly awaiting your first “real job” and the substantially higher income that comes with it.  Unfortunately, many new physicians don’t make the effort to create a comprehensive financial plan before they graduate.  I’d recommend that you find a reliable, trustworthy financial planner before you leave residency and have him or her help you make a plan.

Leave residency with a conservative attitude toward money.

Don’t think of yourself as being suddenly independently wealthy.  You’re not!  Sure, your income may triple or quadruple, and you won’t be wanting for any of life’s basic necessities, but you can’t just spend blindly.

Consider renting for the first year or two.

Most physicians stay at their first job for about two years and then move on to a more desirable job or a job that is a better fit.  Each time you buy and sell a house, especially after just living in it for a couple of years, you will likely lose a significant amount of money (10 to 40 thousand dollars depending on how much your house costs, the market conditions, e.t.c.).  Keep your options open and don’t buy a house too early.

Disability Insurance - Don’t Leave Home Without It!

Like it or not, you’re in the service industry.  If you don’t provide your services, you don’t generate income.  Your ability to generate income is your most valuable asset, so why not insure it as well as you can?  A seasoned CPA or financial planner should be able to help you navigate the confusing lists of disability insurance policy riders (extras) that you will likely need in order to create the best coverage possible.  I would recommend against using an insurance agent as your financial planner.

Umbrella Insurance

You’re going to be a doctor, and people will think you have an endless supply of money.  Read about it, learn about it, buy it - lots of it.  It’s dirt cheap, and it’ll protect you from greedy people.

Health Insurance

If you’re young and relatively healthy, strongly consider a high deductible health plan and a health savings account.  The money that is put into a health savings account is not taxed and grows tax free.  It’s a great way to supplement retirement savings.

Life Insurance

Don’t skimp on this.  Don’t buy anything but term life insurance.  It’s dirt cheap, and if you are smart, by the time a 20 year term life insurance policy ends, you should have built up enough wealth to self-insure your life.  Conventional advice is to buy a policy that pays out ten times your annual income to your family members.

One word of advice on insurances - if you can, get private policies, not policies through your employer.  Private policies are generally portable if you leave your job for another.

Don’t buy a new car.

Motor vehicles depreciate at an incredible rate.  If you really need a replacement car, buy a cheap used car.  If your current vehicle is still in decent shape, keep driving it.  New cars are not an investment, they’re a luxury.  Try not to buy a car during the first two to three year period after residency.

Save up an emergency fund.

Work quickly to save up 3 to 6 months of your net income and place it in a money market account.  You can open money market accounts at most major financial institutions - i.e. Fidelity.com, Charles Schwab, e.t.c.  You’ll earn 3 to 5 % interest on the money and it can be withdrawn easily if needed.  Try to have 3 months of your income saved up by the end of your first year.

Credit Cards

Personally, I hate ‘em.  I’ve never had one and don’t plan on getting one.  If you think you need one, then make sure you pay the balance off each month.  If you are not able to pay off your consumer debt each month, then ditch the card(s).  It makes no sense to keep punishing yourself with more and more high interest debt.

Student Debt

You need to make a plan for debt elimination.  Make sure you allow yourself to save up your emergency fund before you start making accelerated payments on your debts.

Retirement Savings

Start saving for retirement right away.  Don’t delay by even a year.  Some companies won’t let you contribute to a 401k plan for at least a year.  This doesn’t stop you from opening a traditional IRA and putting in 4k, or maxing out your health savings account, or putting money into taxable accounts.

Learn as much as you can about personal finance (and taxes).  Your financial adviser should be able to function as an adviser, not as a replacement for your brain.  There are a lot of good sources for information on the net… I learned a lot from www.fool.com and www.irs.gov.