Learn the steps and strategies of financial planning for physicians that will set you up for financial success as you land larger paychecks and tackle lingering loans

If you’ve taken out loans for medical school and lived frugally during residency, that attending paycheck may look like the answer to your financial woes. But the truth is that many physicians end up strapped for cash because they didn’t have a strategy for their newfound funds.

“We have a lot of physicians who are in so much debt because they over-leveraged themselves with their purchases,” says Los Angeles-based urologist Milan Shah, M.D., author of the book “Law of Increasing Returns: Advice I Wish I Had on My Medical Journey.” “If you don’t learn how to operate in residency, you’re probably not going to learn 30 years into practice. I think personal finance is no different.”

Whether you’re still in residency, completing a fellowship or already working as an attending, now is the time to build your financial acumen. Though money alone can’t set you up for financial security, a game plan can—allowing you to save, spend and pay down debt with confidence. The sooner you develop that plan, the sooner you’ll experience financial freedom.

Identify your goals—and your accounts

“The most important piece of financial advice is just to start understanding what your own goals and objectives are,” says certified financial planner Brian Burgess, lead advisor and partner at wealth management company Brighton Jones.

Start your financial planning by asking yourself, what are those goals? Do you want to buy a house, become a partner in your practice, retire early, travel the world or put your kids through school? Your goals will likely be a mixture of short- and long-term aspirations, and they should be.

With these goals driving you, take the practical next step of getting your account information in order. Create a spreadsheet with information about all your accounts— and your partner’s, if you share finances: checking, credit, savings, investments, retirement accounts, loans.

“Your accounts, with time, just multiply,” says Shah, who worked at Google as a data analyst before attending medical school. “So have a spreadsheet, triple- [or] double-password protected, not on the cloud. …Really organize these things.”

The mental clarity provided by identifying your goals and getting your account information in one place will help as you take your next financial planning steps.

Know the plans within the plan

With your accounts in order, it’s time to create your financial plan. This plan is really a series of plans: a spending plan, a debt plan, a housing plan, a savings and investment plan and a wealth protection plan. These work together to ensure you’re getting the most out of your money, now and in the future.

Develop your spending plan

If you’re wrapping residency and anticipating a larger paycheck, make a plan for the new funds before you start spending them.

“Come up with a spending plan: How are you going to handle this increase in income?” says Lisha Taylor, M.D., MPH, a family medicine/sports medicine physician practicing in Atlanta and an advisor for the physician finance platform Attend. “If your post-tax income is going to increase by $5,000 or $10,000 [per month], figure out exactly what you’re going to do with that increase before it happens. Because once it’s happened, you can easily find ways to spend money, and then it’s harder to cut back.”

This means calculating how much money you need to set aside for debt, bills, savings and investments before you determine how much is left to spend.

“It doesn’t have to be as strict as tracking every dollar,” says Taylor, who also co-hosts the Money Meets Medicine podcast and founded the Career Money Moves blog. “It’s mainly just giving yourself general parameters.”

Though it’s tempting to increase your spending right away, the best long-term approach is to graduate slowly into your new income.

“Continue to live like a resident for a couple more years,” says Brett Mollard, M.D., who practices teleradiology from Tacoma, Washington, and has been leading personal finance lectures for nearby residents and newly hired physicians for the past several years. “You still have student loans. …You can treat yourself to something nice once in a while, but…grow into your salary rather than accumulating a bunch of debt and making some decisions you may regret later on.”

Develop your debt plan

To avoid accumulating more debt, you need to make sure you have solid plans for any existing debt, including student loans and credit card debt.

Of course, the plan for your student loans will look different depending on whether you’re seeking loan forgiveness or repayment or intending to pay the loans yourself.

If you hope to take advantage of programs like Public Service Loan Forgiveness, having a plan means doing the work necessary to enroll. “[Make] sure that you areenrolled in that program, that you’ve signed up for the appropriate plans, that you’ve met the requirements,” says Taylor.

Alternatively, you may decide to pay off the loans yourself. “If you’re planning to pay it off yourself, [figure] out exactly when you’re going to pay it off by. Having target goals in mind, having a set amount of money per month that you’re going to allocate toward that goal, is really important,” says Taylor.

Even more pressing than student loan debt may be any credit card or other high-interest consumer debt you are carrying. If you’re staring down numerous loans, start with the highest interest rate, rather than the largest loan.

“Traditionally, you look at the highest interest rates first and prioritize pay-down of those high- interest-rate loans,” says Burgess “But what you don’t want to do is jeopardize any of the required principal payments that you need to make.”

If you’re trying to decide between eliminating debt faster or investing earlier, Shah advises physicians to consider the mental freedom of being debt-free.

“There’s always that debate…should I pay down debt or invest?” he says. “The one thing that isn’t discussed in that is mental interest—to know that you have a looming debt to begin with. That takes a toll on you. …Even though there might be one percentage difference in terms of what you could return in the stock market or in a high-yield savings account…that doesn’t really matter, that small percentage. Because [if you pay off your debt], it’s not a weight in your mind.”

Develop your housing plan

Your housing expenses are likely to be one of your largest expenses moving forward, so housing deserves its own plan.

Many physicians see purchasing a house once they finish residency as a rite of passage, but don’t make this decision simply by default.

“[Home ownership] is like that sign of adulting that you just cannot wait to check off of your list,” says Taylor. “I really want people to make an informed decision on whether they should buy first or rent first. …You can’t just compare the mortgage price to the rent price. … You have to consider all of the other factors.” These include not just the additional costs of home ownership, but whether your personal and professional life are likely to stay settled for the next few years.

Mollard echoes this sentiment, specifically recommending renting to physicians who are moving to a new area. “Sometimes I see people buy houses before they even start,” he says. “But I always tell people [that] you should really make sure you like the group that you’re working with. [Make sure] it’s a job that you want to stay with, that you like the area and your family likes the area. …It’s just better to rent for the first year or two. …Don’t overcommit to it.”

Develop your savings and investment plan

Another pivotal component of financial planning is setting aside enough money for your short and long-term goals — and then ensuring that money makes money through strategic investments.

“We’re delayed in our ability to invest because we spend so much time in school,” says Taylor. “So start investing. It could be as simple as picking a target date retirement fund… and investing in that through your work retirement account, whether that’s a 401(k) or a 403(b), or doing a Roth IRA or a backdoor Roth IRA.”

Tax-advantaged accounts like IRAS, 401(k)s and 403(b)s and HSAs may sound like alphabet soup to new investors, but these popular accounts are tried and true ways to start saving and investing for the long term. Each type has its own stipulations, like maximum contribution amounts, qualified withdrawal ages and income limits, but here’s the high-level view:

Traditional and Roth 401(k)s and 403(b)s. These are employee retirement savings plans. A 401(k) is typically offered by for-profit companies, and 403(b)s by non- profits. You can fund traditional 401(k)s and 403(b)s with pre-tax paycheck deductions, let the money grow tax-free, and then pay taxes when you start deducting funds at the appropriate age. You can fund Roth 401(k)s and 403(b)s with post-tax paycheck deductions, let the money grow tax-free and then withdraw it tax-free at the appropriate age. Many employers offer matching or non- matching contributions as part of their 401(k) and 403(b) programs.

Individual Retirement Accounts (IRAS). These are personal retirement savings plans that you can open independently of your employer. Just as with 401(k)s and 403(b)s, you fund traditional iras with pre-tax money and Roth IRAS with post-tax money. Traditional IRA funds are taxed when you withdraw them, and Roth IRA funds can be withdrawn tax-free at the appropriate age. If your income is too high for you to qualify for a Roth IRA, you can create a backdoor Roth IRA by opening a traditional IRA and converting it into a Roth IRA — just make sure to do your homework. You’ll have to fill out the appropriate paperwork and pay the resultant taxes.

Health Savings Accounts (HSAS). HSAS allow you to contribute pre-tax money, let it grow in investments tax-free and then use it to pay for qualified health care expenses tax- free. They’re only available to those enrolled in high-deductible health plans, and you can roll over unspent funds indefinitely. [Not technically an investment account, Flexible Spending Accounts or FSAS also allow you to contribute pre-tax money and use it for health care expenses, but the funds typically remain in cash (rather than growing in investments like HSA funds) and generally do not roll over from year to year.]

Ideally, you will be working toward fully funding your 401(k)s or equivalent, IRAS and potentially your HSAS by contributing the maximum amounts each year. This will let you maximize any employer matching (free money!) and get the most tax benefit in retirement. If you’re debating between traditional and Roth accounts, consider whether you’re in your peak or non-peak earning years. In non-peak years like residency, Roth accounts take advantage of your lower tax bracket. In peak years, traditional tax-deferred accounts reduce your taxable income.

You may wonder how much to save, especially if maxing out your accounts is not an option—or if you’ve maxed them out and wonder how much else to save in other age or contribution restrictions offer the benefit of liquidity, allowing you to invest money that you’ll need to access in the nearer future.

“While you’ll want to participate in longer-term retirement plan options — at least to the amount of the employer match if that’s something that’s offered by the group of clinicians that you’re working with — you want to always make sure that you’re…not jeopardizing your short-term goals or financial priorities,” says Burgess.

These may include building a cash-account emergency fund large enough to cover three to six months’ worth of expenses, saving for a down payment on a house or saving to buy into your practice.

While retirement savings can be invested with more risk and diversified for the long term, these shorter-term savings should be invested more conservatively.

Speaking of diversification, don’t make the mistake of trying to choose individual stocks that you anticipate will perform well. “Oftentimes, when people start investing, they [say],

‘I’ve heard of Netflix; I’m going to buy stock in them. I’ve heard of Apple; I’m going to buy stock in them,’” says Taylor. “I would encourage physicians who are starting off…to instead purchase index funds. Index funds are large groups of stocks and large groups of bonds. So instead of having to pick individual companies or individual bonds, you have one index mutual fund, and you’ve got all of them.”

Develop your wealth protection plan

Though financial planning is all about creating the future you envision, there will, of course, be things in the future that you can’t control. For this reason, it’s important to have a solid income and wealth protection plan in the form of insurance. Everyone knows the importance of health, home and auto insurance. For physicians, disability, life, malpractice and even umbrella insurance are just as important.

“Long-term, specialty-specific, individual disability insurance [is] vital for physicians, especially physicians who are starting out in their career,” says Taylor.

Try to work with an independent insurance agent who is not incentivized to sell you a specific policy but, rather, who can help you find the policy that’s best for you. “If they have an incentive to sell you a certain disability policy… it’s worth seeking CliffsNotes on that,” says Shah.

The same goes for life insurance. A commission-based advisor may be incentivized to sell you a “whole life” policy, which will cover you for a lifetime. A term policy, which covers you for a specific period of time, is often a better choice.

“I tend to favor term life insurance because it’s cheaper, and it…allows you to give money to your family if you were to die unexpectedly before you have the chance to build wealth,” says Taylor, who adds that this is a high priority for those who have others depending on their income. “[For] anybody who’s married or has children or other dependents that they take care of, life insurance is really important.”

Malpractice insurance is also crucial. It’s likely offered through your employer, but look at the policy closely to determine whether you’re adequately covered for the past and the future. “Make sure … that [your policy] will cover you not only while you’re working at that employer but even after you leave,” says Taylor.

If your policy does not provide this “occurrence” coverage after you leave, you need either to purchase your own additional “tail” coverage or to ensure the prior acts are covered in the malpractice policy offered by your next employer in the form of “nose” coverage.
While you’re busy covering your nose and tail, cover your head too with solid umbrella insurance.

“Umbrella policies are super helpful,” says Mollard. “Let’s say somebody falls on my property. They could sue me [and] go for my coffers. An umbrella policy is almost like a person’s limited liability company, LLC. …It essentially umbrellas all of what you own into this one policy and then gives you coverage, so if something happens, there’s a limit. They can’t go for your personal stuff.”

Working with an advisor

As you review all that goes into creating a financial plan, you may decide you want some expert guidance from a financial advisor. To find an advisor you can trust, consider their credentials, experience, fee structure and any conflicts of interest.

Burgess recommends looking for a certified financial planner, designated by a “CFP” after the advisor’s name. This certification not only speaks to the advisor’s education level but also indicates that they’re held to the fiduciary standard of legally working in their clients’ best interest.

“You 100% want to make sure they are fiduciary,” says Mollard. “Essentially, a lot of financial advisors are not fiduciaries.”

Burgess also recommends seeking an advisor who’s part of a registered investment advisory firm. “A registered investment advisor does give independent advice and isn’t beholden to a certain group,” says Burgess. This allows you to avoid the conflicts of interest that may arise with advisors who make commissions based on certain purchases.

Don’t hesitate to ask in detail about how an advisor is paid. “A lot of financial advisors will say, ‘Oh, my advice is free,’” says Taylor. “But what they don’t tell you is that every product that they purchased on your behalf…they’re making commissions on. So you want to be crystal clear about what fees you are paying that financial advisor and what potential conflicts of interest they could have.”

In his lectures for residents and new physicians, Mollard recommends avoiding commission-based advisors entirely and treading with caution when it comes to working with advisors whose fees are based on a percentage of the assets under management. He recommends advisors who charge a flat hourly or yearly fee for service.

In addition to vetting their education, certification and fee structure, Taylor recommends specifically seeking out an advisor who has experience working with the unique financial situation of physicians and shows interest in your specific goals.

“You want to make sure that they have some experience with doctors like you…and have been able to give them some concrete advice,” she says. “You want an advisor who is going to ask you about your financial goals and give you a plan to achieve them and then explain to you why [that plan is best].”

As you look for an advisor, avoid the temptation to outsource your finances entirely. Your advisor should be just that, an advisor. It’s still up to you to stay on top of your accounts and investments and regularly monitor their overall performance.

You may also want to consider hiring an accountant not only to manage your taxes but also to advise you on financial decisions with tax implications. This is particularly important as your taxes grow more complex—for instance, if you practice in multiple states, become a partner or start purchasing investment properties.

Finding flexibility in your life and finances

Financial planning isn’t just an opportunity to learn about investments and insurance and interest rates. It’s also an opportunity to build the life you envision. Keep this in mind as you create your financial plans — it will help bring meaning to any decisions you make to cut back spending, tackle loans quickly or save aggressively.

“Look forward to the growth that comes from learning,” says Shah of the financial planning journey. “It’ll open up new doors in your life. …It’ll create balance in leaps and bounds, flexibility in your life, fulfillment in your career. …That’s the payoff. It’s more than just saving correctly. It’s creating flexibility in your life to enjoy it.” •