10 moves for money-savvy physicians
Key Takeaways
One leitmotif that underlies all sound investments is the “time value of money.” Thanks to factors like interest rates and opportunity, any amount of money in hand today is worth more than the same amount of money at some future point. Extended a bit, this principle helps explain why investing earlier during your financial trajectory is a good idea: The earlier investments are made, the greater the time value of money.
Here are 10 money moves to consider earlier rather than later.
Life insurance
Sure, your employer may provide life insurance, but it’s likely not enough should the unthinkable happen, and if you switch jobs, you’ll leave your policy behind. When purchasing a plan, experts have two recommendations. First, secure a plan as soon as possible to lock in lower premiums. Second, go for a term policy rather than whole life. Whole life proffers permanent coverage plus a savings/investment component. Term policies typically last from 10 to 30 years. In the long run, term saves you money because the returns on the typically expensive whole life plans are mediocre.
Disability insurance
“Own occupation” disability insurance pays out if a physician can no longer serve patients. Buy early and ensure that the insurance policy has a rider that permits the purchase of additional coverage as salary increases, to obviate a protracted underwriting process that goes with older age and increased risk of chronic illness.
Refinance student loans
If there’s been a financial silver lining to the pandemic, it’s the short-term reprieve that the US Department of Education issued on federal student loans—with payments and interest suspended through January 2021. Not all private lenders, however, have suspended loans, and these vehicles are ripe for refinancing in light of historically low interest rates.
Refinance the mortgage
With interest rates at historic lows, in addition to refinancing student loans, now is a great time to join 19 million other Americans and refinance your home. Granted, the paperwork is a pain, but with 30-year fixed rates coming in at 2.71%, and 15-year fixed rates a mind-blowing 2.26% (as of this writing), the payoff is worth the hassle.
Prepay the mortgage
Few returns are risk-free, which makes the prospect of prepaying the mortgage all the more attractive. Extra payments go straight to principal, cutting precious years on the term of the mortgage.
There are a few approaches to prepaying the mortgage:
Pay a little extra with each mortgage payment
Make an extra mortgage payment a year
Direct any windfall to the mortgage (eg, inheritance, bonus, tax returns)
If you want help figuring out the impact of making extra payments on your mortgage, check out Bankrate’s calculator.
Health Savings Account
A health savings account (HSA) allows you to set aside pre-tax money to cover qualified medical expenses, cutting health-care costs. The HSA can be used to pay deductibles, copayments, coinsurance, and more. Notably, HSA funds can’t be applied toward insurance premiums.
According to healthcare.gov, “While you can use the funds in an HSA at any time to pay for qualified medical expenses, you may contribute to an HSA only if you have a High Deductible Health Plan (HDHP) — generally a health plan (including a Marketplace plan) that only covers preventive services before the deductible. When you view plans in the Marketplace, you can see if they’re ‘HSA-eligible.’”
For more information on setting up an HSA, click here.
Estate planning
It’s never too early to get a jump on estate planning. At a minimum, designate a healthcare surrogate and a power of attorney. If you have children, a will designates guardians and provides guidance regarding the estate. An air-tight estate plan also reduces the likelihood of future family squabbling.
Additional savings
Once a 401(k) or 403(b) is maxed out, physicians can consider additional investment opportunities. Practice owners, for instance, may consider cash-balance plans, which are a form of qualified-retirement plan that permits savings in excess of 401k plans. Those doing locum tenens work can put income in a simplified employee pension IRA or 401(k).
Angel investing
Investing in start-ups is a high-risk/high-reward proposition. But for those who possess the fortitude for potential loss and money to burn, the payoff could be substantial.
Becoming an angel investor usually entails becoming an accredited investor first, or having a net worth of at least $1 million—excluding the value of the primary residence—and an annual income of at least $200,000 for the past two years for an individual, and $300,000 for a married couple. This requirement is set forth by the US Security and Exchange Commission to permit investing in vehicles not registered with a financial authority.
Financial advisor
Traditional financial advisors come in many forms, including certified stockbrokers, financial planners, financial consultants, registered investment advisors, and wealth managers.
Although traditional financial advisors cost more, exact higher minimums, and sometimes also require clients to make at least $250,000, they may be a good choice over their online counterparts for higher-earning clients with more complex needs and who prefer a personal touch.