By Scott Tschappat
Physicians face extra challenges when it comes to handling their money. They spend a lot of time learning their skill, leaving them with huge debts even before they start working. On top of this, they aren’t usually taught about money, they have a high amount of responsibility, and they often experience burnout.
Just like many physicians have the same problems, they also tend to make similar financial mistakes during their careers. Here are the five common money missteps I often see physicians make—and how you can avoid them.
1. Failing to Address Their Student Debt
Most physicians finish residency with a mountain of student debt; the average medical school graduate owes $241,600 in total student loan debt. Fortunately, doctors’ salaries can accommodate student loan payments, but paying more than the minimum may not be a top priority. After all, young physicians 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 physicians 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 increase their wealth over time. For example, many physicians 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 The income will not be taxed in the year it is received, and earnings on the money grow tax-deferred until withdrawn in retirement.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 physician 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 shielded financially?
Physicians are often the primary breadwinners for their families. Failing to safeguard 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 physicians 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. Investing in Private Placements
Most physicians are accredited investors and are therefore eligible to invest in private placements that are not available to the general public. While some of these investments may be profitable in the long run, caution is advised. Since private placement shares are not traded on a public stock exchange, there is no mechanism for selling your shares unless the company eventually goes public or is bought by another company. It may also be difficult to achieve adequate diversification with private placements. Most investors would be better served by building their investment portfolios with broadly diversified low-cost mutual funds or exchange-traded funds.
5. Not Running the Numbers Before Buying Into a Private Practice
As a physician, 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 an experienced financial professional before diving into this decision.
Set Yourself Up for Success
I find it surprising that many physicians only get a bit of financial education during a casual meeting or from an insurance agent during a dinner. No wonder they have a tough time handling their money. But by addressing these four typical mistakes, doctors can make their money situation better, lower their financial risks, and feel more confident about their finances.
At Acute WealthCare, we know that disciplined investing and a solid financial plan are the keys to a successful financial future, and we are dedicated to helping our clients navigate the financial world and avoid common money mistakes.
By taking the long-term approach, we can help you work toward your financial goals and build a bright future for yourself and your family. If you don’t already have an advisor helping you do that, reach out to us and schedule a 15-minute introductory phone call to get started!
Scott Tschappat is a wealth advisor at Acute WealthCare, an independent, fee-based comprehensive financial services firm with over 20 years of experience. Scott is committed to helping his physician and healthcare worker clients create a financial plan that brings them comfort and dignity. Scott learned the importance of proper financial management and making a plan for the unexpected at a young age when his father passed away suddenly and he watched his mother use the life insurance money wisely to take care of their needs, both present and future. He strives to steward his clients’ money well, as if it were his own mother’s, and help them every step on the journey to their financial future.
Scott lives in Highlands Ranch, CO, with his wife, Bridget, a school counselor at All Souls Catholic School, and their two daughters, Sarah and Emily. He loves sports and has been lucky enough to coach both of his daughters’ basketball teams. In the spring and summer, you can find Scott getting his hands dirty gardening and enjoying live music at Red Rocks or another local venue. To learn more about Scott, connect with him on LinkedIn. You can also register for his latest webinar on What We Do & How We Help.