What DOs need to know about personal finance
This is the last in a series of three articles on money management. The first article, Students: How to safely wade the waters of 6-figure debt, focused on students. The second article, How interns and residents can stay afloat while anchored to debt, focused on residents.
When Natalie A. Nevins, DO, was celebrating her 15th wedding anniversary with her husband, the couple had a heated dispute over a Rolex watch. Dr. Nevins’ husband gave her one as a gift.
“What are you doing?” she asked.
“I wanted to get you something nice,” he said.
Dr. Nevins kept the watch, but she’s never worn it. She thought the money would have been better spent on more practical things. Flashy jewelry is not her style—she drives a Hyundai, lives in a modest home and says her focus has never been money. As the CEO of humanitarian aid nonprofit AD World Health Corp., and the director of medical education at Downey (Calif.) Regional Medical Center, providing medical care to those who need it most is what brings her the most joy, she says.
“One of the things I wish I wouldn’t have done is keep raising the standard of my living every time I got pay raises, because more stuff does not equal more happiness.” Dr. McClanahan, financial planner
She may not care about money, but Dr. Nevins earns enough that she’s had to make financial decisions about how much to save, where to invest, whether to buy a home and how to pay down her debt.
These are the choices nearly all physicians face. And like Dr. Nevins, many physicians didn’t choose their field for the money. Their passion lies in practicing medicine, not following the stock market and interest rate trends. And medical school, residency and the early years of practicing all require a great deal of focus and time, leaving little room for picking up a solid financial education. Yet the mean annual physician compensation, $166,400 in 2010, according to the U.S. Bureau of Labor Statistics, is a sum that requires some degree of financial prowess to manage.
More money, more problems?
Suddenly earning $150,000-plus with no money-management skills can be a recipe for financial peril.
“The more money you have, the easier it is to get into trouble,” says Mark Kantrowitz, a student loan expert and the publisher of Edvisors Network, which operates education websites.
Physicians are very smart, but they sometimes make the mistake of assuming that their academic success naturally translates into other fields such as money, says financial planner Carolyn McClanahan, MD, a former emergency physician.
“What I say to physicians is, ‘Would you do your own colonoscopy on yourself?’ ” she says. Dr. McClanahan recommends that new physicians seek help from a financial planner.
Considering their average salary, newly established physicians will want to choose a financial planner who charges an hourly rate, Dr. McClanahan says. She also suggests physicians employ a fee-only financial planner, who earns money solely from providing a service, not from selling products. The planner should also be a fiduciary, meaning he or she must make recommendations that are in the client’s best interest. The National Association of Personal Financial Advisors’ website is a good place to search for a legitimate planner, she says.
Physicians can also get recommendations from friends. This is how Darren Sommer, DO, MPH, found his financial adviser.
“When you’re giving money to somebody else, it’s good to know that they come recommended,” Dr. Sommer says.
Kristin I. Thom, DO, waited several years after residency before investing in a financial planner, a decision she says she now regrets.
“There are plenty of things I would have done differently if I had gotten some advice earlier on,” says Dr. Thom, who is a faculty physician for Eastern Maine Medical Center’s family medicine residency program in Bangor.
Student loans: Two options
Whether physicians choose a financial planner or elect to tackle their finances solo, they’ll have to consider retirement, housing and insurance, all under the shadow of sizable education debt. Some experts recommend paying off student debt as quickly as possible, while others suggest a more tactical approach that involves examining the interest rates on all loans, savings and investments.
“The happiest day I ever see any doctor have is the day they pay their loans off—because they’re a burden.” Casserly, financial planner
“Look at your finances and all your debts and all your savings opportunities. Line them up from the lowest interest rate to the highest interest rate,” Kantrowitz says. “If you have extra money, you apply it to the highest interest rate.”
For instance, say your student loan interest rate is 3.0%, you have a savings account that earns 0.5% interest and your mortgage has an interest rate of 7.0%. You’d want to devote more money to paying off your mortgage because it has a higher interest rate, and you’ll save by paying less interest over time.
This is what Dr. Nevins is doing. She has been paying the minimum on her student loan, which has an interest rate of roughly 4%, since 1997 because she wants to pay off debts with higher interest rates, such as her mortgage, first.
“With the interest rate on my loan as low as it is, it didn’t pay for me to try to pay it off sooner. It isn’t considered a liability for my credit rating or anything else, and I’m not looking to buy a bunch of stuff,” she says. So far, she’s cut her education debt from about $165,000 to $116,000.
Dr. Sommer took a similar approach. Although he has outstanding student loan debt in excess of $200,000, Dr. Sommer, who is the chief medical officer for the Optimized Care Network in Dayton, Ohio, says the interest rate on his loans is less than the return he anticipates earning though investing in the stock market and in retirement accounts.
“I tried to invest in other areas that had higher yields rather than put the money into student loans,” Dr. Sommer says.
However, following Dr. Sommer’s or Dr. Nevins’ approach to student loans requires a lot of discipline. Some physicians may pay the minimum on their loans with intentions to funnel the extra money into their mortgage or the stock market, but end up spending it on lifestyle instead.
And physicians shouldn’t discount the effect carrying a heavy debt load can have on the psyche, says financial planner Julie Murphy Casserly, author of The Emotion Behind Money. She recommends paying the debt down sooner rather than later.
“The happiest day I ever see any doctor have is the day they pay their loans off—because they’re a burden,” she says. “Forget the interest rate you’re paying on it. What kind of burden does it feel like as you pay that payment every month? It sucks the life out of people, emotionally.”
Insuring your wealth
As they do with loans, physicians have several options when it comes to their insurance needs. Physicians’ insurance portfolios tend to be more complicated than those of other professionals.
Physicians typically get life and disability insurance to make sure their spouses and children won’t be stuck with hefty bills and scant income if tragedy were to strike.
Employers usually offer these products to physicians on staff. DOs should take advantage of free employer-provided insurance, says financial planner Tom Orecchio, but he advises physicians to acquire supplementary insurance independently. Life and disability insurance acquired through an employer is usually not portable, which means physicians may have to provide proof of health again when they switch jobs and get reinsured. If they’ve had a serious illness in the interim, they may find themselves uninsurable. Employer-provided insurance is also frequently capped, and healthy physicians may be able to find more coverage for less by looking outside.
Money tips for physicians in private practice
Physicians who run their own practices will have financial concerns beyond those described in this article. Dr. Hollen says the following tips can help physicians run a fiscally healthy practice.
- Make sure there are checks and balances in place on the practice’s finances. For instance, have a supervisor look over all the bills, even if someone else is in charge of paying them.
- Conduct regular audits of the finances to catch errors or signs of embezzlement early on.
- Invest in professional CPT and ICD-10 coding courses. “It’s really the language of reimbursement in a practice. It’s the road map of how you get paid,” Dr. Hollen says. It can also be financially beneficial to use a professional billing and coding company, he says.
- Have a lawyer go over your contracts.
- Make a habit of paying all the practice bills on time, and maintain excellent credit.
“I prefer a mix of employer-provided insurance and personally owned insurance,” Orecchio says.
Dr. Nevins found her insurance independently of her employer. She joined a risk pool, from which she obtained disability and professional liability insurance. In the plan, she shares risk with more than 10,000 other physicians.
“It’s a much better deal,” she says. “It costs me much less money because my practice is very low risk, and when we all do well, we get a rebate. I got money back last year.”
Orecchio also recommends umbrella insurance, which would protect a physician in car accidents or a “slip and fall” scenario on his or her property. Physicians’ high earnings mean they’re more vulnerable to lawsuits. And for this reason, physicians should also start saving early for retirement, Dr. McClanahan says, as retirement savings vehicles such as 401(k) accounts are protected assets that can’t easily be seized.
“Physicians are deemed to be high net worth,” she says. “They are easy targets for lawsuits.”
Retirement: Reasons to save
Having spent at least seven years in training, physicians have fewer earning years than the general population. Kantrowitz recommends that physicians save 15% to 20% of their income for retirement. “A good rule of thumb is, you want to save a fifth of your income for the last fifth of your life,” he says.
With higher incomes, physicians following this advice will easily max out their 401(k) accounts, as depositors can’t contribute more than $17,000 per year. Kantrowitz suggests they deposit remaining retirement savings in a taxable fund such as a brokerage account.
Physicians may be tempted to instead put their extra funds into relatives’ or co-workers’ entrepreneurial activities. Tread very carefully here, Kantrowitz says.
“If you’re going to be investing your money in ventures, stick to what you know,” he says. “If it’s a medical venture in your specialty, it may be worthwhile because you can tell whether it’s good.”
Ignoring the Joneses
Not all physicians will want to invest in venture capital, but most will want to purchase a home and a car. Experts recommend saving a sizable down payment for both, even paying in cash when possible.
“Delay your gratification for a few years,” Kantrowitz says. “At a six-figure salary, it won’t take that long to save the amount of money you need.”
Financial planner Joseph Hollen, MD, says it’s OK for a physician to take out a loan for purchasing his or her first car, but subsequent vehicles should be bought in full.
“Physicians should be saving enough money so that they can buy their next car and every car after that with cash,” he says.
Dr. Thom’s adviser counseled her to place a dummy “car payment” in her budget years before she needed a new car. Several years later, she had enough money saved to buy the car in full. And she earned interest on the money she saved over time rather than paying out interest on an auto loan.
Dr. Sommer bought his house in 2011. His professional status helped him land a great deal, he says. Physicians’ earning potential makes them strong candidates for a mortgage, so they can often land a lower interest rate or other perks such as a low or no down payment loan. Dr. Sommer suggests future homeowners shop around for these deals, and he says local banks and smaller banks are good places to look.
Dr. Nevins and her husband bought their house in 2005 upon the urging of friends and family, who said it was the perfect time for them to buy. Now, she says it’s the one financial decision she would change if she could.
“After you look at all the taxes and the expenses of being a homeowner,” she says, “I don’t know if it actually comes out being much different than if we had been renting.”
“A good rule of thumb is, you want to save a fifth of your income for the last fifth of your life.” Kantrowitz, student loan expert
When making large purchases, physicians should be wary of falling into the trap of keeping up with the Joneses, Kantrowitz says. Don’t let your six-figure income burn a hole in your pocket.
“I’ve seen many cases where doctors buy the expensive house and buy the expensive car,” he says. “And they’re having trouble managing their money, even though their incomes are in the top 1% of the population.”
In the same vein, when physicians receive salary increases the temptation is to boost spending to match new earnings, but it’s typically not a good idea, even with big raises. Dr. McClanahan says she learned this lesson from personal experience when she was practicing.
“One of the things I wish I wouldn’t have done is keep raising the standard of my living every time I got pay raises,” she says. “Because more stuff does not equal more happiness.”
If you don’t spend your entire raise, what should you do with that money? Divide it and address your past, present and future, says financial planner Casserly.
“If you get a 3% raise, you take a third of it, you it add it to your monthly student loan payment, take a third of it and put it into living today, and put a third of it into planning for your future,” she says.
A fine balance
Casserly’s fiscal recipe is all about balance, and other financial pros agree that finding an equilibrium in one’s life, work and money is the key to financial success.
“Relationships and family are critical,” Dr. Hollen says. “If physicians put all that on the back burner to work for more money and the relationships disintegrate, then that’s the worst financial planning you could ever have.” In particular, he notes the devastating financial impact of divorce, and he suggests keeping priorities in check to help prevent it.
Finding pleasure in one’s work rather than in consumption can also be a good financial move. This tactic has worked for Dr. Nevins. She says helping patients is more satisfying than acquiring things—such as that Rolex.
“How much happiness can you really get from a watch? Maybe that really does it for somebody, but it doesn’t do it for me,” she says. “Seeing patients get healthy and stopping their pain is far more gratifying to me.”