6 Financial Planning Mistakes Physicians Make

Physicians often have complex income structures that may include a combination of salary, bonuses, and income from private practice, as well as the hospitals they work for. In addition, they may earn varying amounts of money at different stages of their careers, starting from an intern to a resident and finally as a certified specialist. An established physician with ample experience and expertise can earn a high salary. Managing and optimizing this income can be complex. It can require a deep understanding of personal finance, investment strategies, tax implications, and more.

A financial advisor can help you understand the intricacies of financial planning for physicians. Additionally, you can read this article to get an idea about financial mistakes most physicians make, ways to adopt a foolproof personal financial strategy for your specific financial needs, and measures to enhance your financial preparedness.

Below are 6 common financial planning mistakes physicians make:

Even though financially well-off, physicians tend to make several financial mistakes. This can be due to several factors, such as busy schedules, lack of interest, etc. Medical professionals may also earn bountiful packages, which can offer them a high standard of living, eliminating the need to be more mindful of their money, save more, or prioritize their future financial security. The high-income structures can be misleading and make one think they need not be diligent with their savings and investments. However, like any other professional, physicians are prone to the same types of financial risks. Hence, it becomes essential to follow a rational financial plan that focuses on your short and long-term financial goals and ensures financial security not just in the present but also in the future.

Some mistakes that physicians must avoid:

1. Not creating a comprehensive financial plan

Financial planning for physicians and healthcare professionals is essential. Medical professionals often focus heavily on their medical careers and may neglect the importance of creating a comprehensive financial plan. This can lead to poor financial wealth in the long term, inadequate savings, and insufficient investments. Creating a budget can help physicians overcome these issues.

A budget can offer you a clear understanding of your income, expenses, and spending habits. It can help you identify areas where you spend the most. Track the frequency of such expenses and understand their impact on your overall financial wellbeing. A budget is like a snapshot of your financial health. It enables you to make informed decisions and be in control of your finances.

Many physicians do not have a budget to help them plan their finances for every month. This often leads to overspending, having false illusions of financial security, and a lackadaisical attitude toward personal finance. Keeping a budget can help you streamline and set your financial goals. You can plan for various goals like buying a house, retirement, and saving for a child’s higher education. With a budget, you can also identify opportunities to save and invest. This way, you can invest in different assets, build wealth over time, and work towards ensuring your financial independence for life.

2. Overspending and lifestyle inflation

Physicians may overspend and be affected by lifestyle inflation. When people fall into a high-income bracket, their needs and desires gradually increase. More often than not, people are drawn toward luxury items, expensive electronics, cars, lavish vacations, and other extravagant indulgences. This is normal and feels justified to quite an extent. Medical professionals spend a lot of money and time on their education and training. It is natural to want to enjoy the fruits of their labor. While all of this may seem harmless at first, it can come in the way of your long-term financial security. The more you spend, the less you save. You have little to rely on without adequate savings in your hour of need. The temporary relief or happiness of purchasing something expensive eventually wears off, and all you are left with is mounting debt, low savings, and financial stress.

It is essential to resist the urge to compare your lifestyle with your peers. Focus on your unique financial goals and make decisions based on your circumstances. While you may want to upgrade to a larger house or drive a better car to work, being sensible about spending your money is important. Try to take it slow. Instead of spending all your money on meaningless purchases, try to focus on building your assets. For every luxury item you purchase, invest a similar amount in an inflation-beating instrument and divert a portion of your income to your future needs. You can also set up automatic transfers to investments or separate bank accounts to ensure you save and invest first and spend later.

3. Not prioritizing debt management

Debt management is another reason why financial planning for physicians is necessary. Medical schools can be costly. In most cases, healthcare professionals have a lot of unpaid debt. This high-interest debt can have far-reaching consequences on a professional’s financial well-being. Postponing loan payments allows the interest to compound, resulting in a substantially larger overall debt burden at a later stage. This also means that you will likely be burdened with debt payments for a longer duration as your repayment amount will increase with more interest accumulation. This can make it harder to achieve financial milestones such as homeownership, starting a family, or saving for retirement. The higher debt you carry, the lower can be your credit score. This can impact your ability to qualify for other loans in the future. You may also be stuck with higher credit card interest rates, making budgeting and saving all the more difficult.

Therefore, it is important to make your student loan payments a priority. This will help you avoid delinquency or loan default. It will also ensure that you repay a relatively smaller amount and do not have to bear the burden of high-interest debt accumulation. You can set up automatic payments, however big or small, to ensure your payments are made on time consistently and you do not miss due dates. Additionally, you can look for other ways to simplify the process of debt settlement. For instance, if you have a good credit score and have reached the point in your career where you are earning a stable income, you can consider refinancing your student loans. This can help you get a lower interest rate and reduce your monthly payments or the repayment period. If you have more than one loan, you can create a list of all the loans, including details such as interest rates, repayment terms, and loan providers. You can prioritize loans with the highest interest rates first and then move to the ones with relatively lower interest. You can also explore federal programs like the Public Service Loan Forgiveness (PSLF). According to the PSLF, you must make a total of 120 loan repayments for at least ten years while working for the government or a non-profit organization to qualify for forgiveness for the remaining balance on your direct loans.

You can talk to a financial advisor to learn more about debt management and financial planning for resident physicians, nurses, surgeons, etc., and to know which of these strategies can help you and your unique financial considerations.

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4. Not planning for retirement optimally

Physicians may have a considerable disadvantage than other professionals as medical schools and training may take up most of their 20s and, in some cases, even their 30s. As a result, they often start their careers later than others. This brings a delay in saving for retirement, too, ultimately affecting their financial security in the future years. To top this, physicians have additional financial burdens to prioritize, such as student loans. This alone can consume a significant portion of their income, leaving little room for other goals like retirement.

It is essential to understand that delayed retirement savings can significantly diminish the time available for your money to grow from compounding benefits. The longer your investment horizon, the more time your money gets in the market. In the absence of time, you will have limited possibilities and will likely end up with a smaller retirement fund than necessary to sustain your desired lifestyle in retirement.

Remember to start planning for your retirement immediately, regardless of the age you start earning. You can start with the employer-sponsored 401(k) retirement plan, which is likely the first thing you will get as soon as you start working. Physicians may also get a 403b or 457b plan. All of these accounts can help you save consistently and enjoy tax advantages along the way. Remember to aim to contribute as much as you can and meet the permitted contribution limit for the year to receive the maximum employer match, as it is essentially free money towards your retirement. In addition, keep a well-diversified portfolio of stocks, bonds, real estate or REITs (Real Estate Investment Trusts), gold, commodities, currencies, etc., depending on your financial goals and risk appetite. Lastly, learn to balance debt repayment with retirement savings and focus on both goals to ensure complete financial independence for life.

5. Not learning more about personal finance

The more you know about financial planning for physicians, the easier it can be to manage your money. Irrespective of your professional field or level of education, it is vital to go the extra mile and learn about personal finance. This can help you make informed decisions, make use of income-generating opportunities, follow the right investment strategies, and plan for diverse financial goals. As a medical professional, you may have your hands full with busy work schedules, inflexible work hours, and erratic routines. It may be hard to take out the time to pursue something else, but you must think of this as an investment in your future. Understanding the basics of personal finance and employing general strategies like savings, budgeting, diversification, portfolio rebalancing, etc., can be helpful to streamline your finances and ensure better financial adequacy all through life.

Learning about personal finance is not as time-consuming or complex as it may seem. You can start by reading online journals, subscribing to newsletters from financial experts, purchasing books on budgeting, saving, and investing, listening to podcasts, interacting with peers with an interest in finance, and reaching out to a professional financial advisor to learn more.

6. Not seeking the help of a financial advisor

As discussed above, physicians can often have demanding schedules, leaving little to no time for in-depth financial planning. As a result, they end up missing out on potential opportunities to appreciate their wealth. A financial advisor can help remove the burden by providing professional financial management. A financial advisor can offer physicians the chance to focus on their medical practice while still making informed financial decisions that benefit them for life.

Physicians without proper financial understanding and knowledge may overlook crucial aspects of risk management, such as portfolio diversification, insurance, etc. A financial advisor can help identify potential risks and implement appropriate risk mitigation strategies to protect your financial interests. Financial advisors can also help physicians simplify their complex tax situations. Since physicians fall into a high-income bracket, they require different strategies to minimize their tax load. Financial advisors can recommend valuable tax-saving opportunities and help physicians save more.

Another benefit of hiring a financial advisor is getting an objective perspective on financial matters. These professionals can offer you unbiased advice, helping you see beyond emotional biases and make rational financial choices that align with your long-term goals. Financial advisors also provide a holistic approach to financial planning where they assess various aspects of your financial lives, including budgeting, debt management, tax planning, retirement planning, insurance coverage, estate planning, and investment strategies to recommend a comprehensive approach that ensures that all areas of your financial well-being are addressed effectively.

[See: Financial Advisors for Doctors & Physicians ]

To conclude

Financial planning for physicians and healthcare professionals is not as complicated as it may seem. While it can take time for medical professionals to finally get to a point where they have a stable income compared to other career paths, physicians also earn a lot more in comparison. This can offer them an edge and help them save and invest more, and take on more risks. However, it is essential for physicians to take advantage of their high incomes and stable careers to prioritize their future financial health. This can be done by keeping a proactive approach to financial planning and adopting the right measures from the very start.

Physicians can use WiserAdvisor’s free advisor match service to find suitable financial advisors in their area for efficient and hassle-free guidance and assistance on financial planning. All you have to do is answer a few simple questions based on your financial needs, and the match tool will help connect you with 1-3 advisors best suited to meet your financial requirements.