4 common personal finance mistakes physicians make

By Alistair Gardiner
Published March 12, 2021

Key Takeaways

Physicians are taking a beating amid the pandemic, and that leaves many weighing early retirement. According to a survey conducted by Medscape last year, a quarter of US doctors are hoping to retire early, as a result of the pandemic. That survey also found that COVID-19 has hit physicians’ finances hard. In 2020, a majority of doctors experienced a decrease in income of 11%-50%.

1. Failing to plan for retirement

Financial planning and management are expensive undertakings, with fees adding up to thousands of dollars a year. But hiring a financial planner can potentially improve your immediate financial outlook and help fund your retirement. 

According to an American Medical Association survey conducted in 2018, physicians younger than 60 are often confused as to which investments they should make. This tends to result in them making no investments at all. If you’re too busy to compound your ongoing medical education with a financial one, a financial advisor can solve this problem.

The survey also found that only 12% of physicians considered themselves “ahead of schedule” for retirement. If you consider the fact that almost three-quarters of retired physicians use a financial advisor, you can understand why it might make sense to hire one yourself. 

Advisors can help you budget, save, invest, identify potential tax savings, create debt-management strategies, and help you create and reach financial goals, such as owning a home or supporting a family. And, they can help debunk any physician retirement myths you might have heard.  

Also, it’s quite possible that COVID-19, and subsequent revenue declines, temporarily derailed your retirement strategy. A financial planner can help you sort through that and reassess your retirement priorities.

2. Investing in depreciating assets 

Many slip into this trap. Taking out loans for vehicles is a good example. Almost any kind of vehicle, whether it’s a car, RV, or a boat, will depreciate in value as you use it—and if you’ve taken out a loan, you’ll pay more than the cost of the vehicle through interest. It’s usually best to wait until you can afford to buy a depreciating asset outright.

Another example is buying a house (which can be a depreciating or appreciating asset) with the intention of renovating it and selling it for profit. This may seem like a better idea than renting, but that’s not always the case. When weighing renting vs. buying, people often look at the price of the house and the cost of their mortgage payments, and compare it with monthly rent. But they sometimes don’t consider the cost of repairs, maintenance, tax, and other unanticipated expenses. 

One trick is to look at the price-to-rent ratio, which is the purchase price compared with annual rent. If the ratio is high (ie, the price is more than 25 times the rent) you may end up saving more money by renting and investing your savings elsewhere. If the ratio is low (ie, under 10 times), buying could be a good investment. Of course, you should also pay attention to the direction of the housing market in the area you’re considering buying. 

3. Not investing at all 

Due to inflation, if you don’t invest your money in some way that gets you a return, it will lose value. In addition, many physicians can only start saving for retirement in earnest by their 40s, and that means they are playing a game of catch-up

You should start by putting some of your earnings into your employer’s sponsored retirement plan, either a 401(k) or a 403(b), particularly if they offer matching funds. You can also open an IRA account, which is a personal retirement fund with tax advantages. 

Investing in mutual funds has historically offered better returns, though it can be risky due to market fluctuations.

Passively managed funds, like index funds, can be a safer bet. There is substantial evidence that shows passive investing can bring a better return than active, over the long run. 

4. Not monitoring expenses closely enough

While this often feels like scolding rather than advice, it’s a key part of keeping your personal finances in check. For physicians, it’s critical to stick to this rule, especially following residency, when it may feel like you have more spending money, with your earnings increasing from five figures to six. 

One piece of advice is to make sure that your spending doesn’t increase by more than 20% in the first 3-5 years after residency. 

While you can use some of that extra cash to improve your lifestyle, you could focus on putting the bulk of it toward paying off student debts, saving money to purchase a house, and investing in retirement accounts. Make sure you start by paying off consumer debt, like credit cards, which can have high interest rates.

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