My first year after residency, I worked as an independent contractor in urgent care. The money was decent, but I didn’t have much financial sense, as the business side of medicine wasn’t covered during any of my training.
I was an independent contractor, meaning taxes were not automatically deducted from my income. So, when tax season came around, I submitted a 1099, wrote the IRS a fairly large check, and continued about my business.
Learn the ropes or consult a professional
To my dismay, the following tax season I found I owed the IRS a significant amount of unpaid taxes, along with interest and late fees—all in addition to what I owed for the current tax year. I was dumbfounded and angry. Although I had enough in my bank account to write these checks, it depleted my savings.
I immediately consulted a tax professional; he took a look at my situation and responded, “You need to become incorporated.”
He told me that it would take me a couple of years to recover my losses, but I would eventually reap the financial benefits of having a corporation. At no time during my decades of education did I learn about taxes or investments—let alone establishing a corporation as a sole proprietor.
I had limited free time in residency to learn about the importance of finances as a doctor, and our program did not offer any financial or business courses or seminars. This was my first mistake.
"I should have taken it upon myself to learn about my finances during residency."
— Kristen Fuller, MD
My second mistake was not consulting a tax guy as soon as I landed my first post-residency job. My third mistake was not contributing to a retirement fund.
Although we are pressed for time and living on a shoestring budget during residency, we should not be deterred from becoming financially literate.
Live below your means to prevent going broke
Money makes the world go ‘round—whether you want to admit it or not. We need money to live; it provides us with education, housing, food, healthcare, and the flexibility to enjoy our hobbies, but money can also be the root of our downfall as doctors.
"As doctors, we have a high earning potential, and after coming out of residency, it feels good to finally have some."
— Kristen Fuller, MD
It feels good to purchase a home, go on lavish vacations, and buy frivolous items. This hedonistic approach is easy to get sucked into, but when we make more, we spend more. Certainly, indulging yourself every once in a while is fine, but perpetual overindulgence can have dire consequences.
When we spend too much on things we don’t necessarily need, we have little left over to save. But we can’t just assume income will flow forever. That’s why, today, I try to live below my means.
Create a budget
Speak to a financial advisor to help you calculate a budget—there are also many free programs and apps for this. The first step is to calculate your take-home pay (after taxes) and list all your fixed and variable monthly expenses. Fixed expenses are bills such as housing, food, car payment, gas, student loans, and utilities. Variable expenses are more flexible—your gym membership, online subscriptions, and entertainment expenses. In general, you want to keep your monthly expenses at 50% of your take-home pay.
This may seem harsh initially, but you can take actionable measures to reduce your monthly spending.
Can you reduce utilities by running the AC less and turning off the lights when you leave? Can you save grocery shopping at the gourmet market for special occasions, and vow to do most shopping at the supermarket chain where items are cheaper? Cutting down costs in these ways is necessary to live below your means.
Regularly save and invest
Generally, you want to save and invest at least 20% of your take-home income. Residency is a great time to start, even if you’re only able to contribute 5% of your income. The sooner you start saving and investing, the sooner your money starts to work for you. Whether it is an IRA (there are many kinds), a 401(k) (ideally with an employer-match plan), a stock portfolio, high-interest savings account, or a mix, investing for your future is a major part of being successful.Related: What to do if you’ve saved nothing for retirement
I didn’t start investing until after residency, when a financial advisor helped me set up an IRA and a couple of index funds. It wasn’t until nearly a decade after residency that I opened my first high-interest savings account. These types of savings accounts can earn you up to 10 times more interest than a typical account with a bank, and most are federally insured up to $250,000.
Hire a tax professional
"I cannot stress enough the importance of hiring a tax professional you trust."
— Kristen Fuller, MD
Make sure it’s someone who is easy to reach on the phone who fosters open communication. Whether you are self-employed or employed by a hospital or private practice, the more money you make, the more complicated your taxes can become. This will be especially true when you begin to invest, own property, and have other passive streams of income.
If you are self-employed, you should be incorporated either through an LLC, S Corp, or C Corp (your tax professional should advise which one is best for you, and help with set up). Tax professionals don’t offer services for free, but I consider it an investment, as they will help save you more money in the long run.
"I firmly believe that every medical school should counsel their students on managing personal finances."
— Kristen Fuller, MD
This is not currently part of curricula, so we must be in charge of our own financial education. Whether this means attending business conferences for physicians, speaking with financial advisors, or reading books about finances and medicine (The White Coat Investor is a great resource), it is our responsibility to become financially literate. This is the first step in experiencing true financial freedom.
Each week in our "Real Talk" series, mental health advocate Kristen Fuller, MD, shares straight talk about situations that affect the mental and emotional health of today's healthcare providers. Each column offers key insights to help you navigate these challenging experiences. We invite you to submit a topic you'd like to see covered.