The world seems to think that doctors have nothing to worry about when it comes to their finances.
It may be common knowledge that an established doctor or dentist has the opportunity to make a salary that is much higher than the national average, but the years of low-paid residency and extremely high student loan debt are often missing from the conversation.
Even once these initial hurdles are overcome, medical professionals can struggle with managing money and making financial decisions just like anyone else.
As a financial planning firm dedicated to the support of medical professionals, the advisors at InvestRx have seen success stories — and common financial pitfalls — of new doctors.
To help you stay ahead of the curve, here are five top mistakes new doctors make with their money — as well as best practices to avoid them.
1. Going into forbearance on student loans
With an average student loan balance sitting at just over $196,000¹ for MDs and $285,000² for DDSs, the student loan burden on new doctors can be overwhelming — especially considering that the average resident salary is under $60,000.
It’s tempting for a new doc to enter forbearance and put off medical school loan payments until they are out of residency and making more money.
Forbearance is a stipulation offered by many loan providers that allows the holder to put off student loan payments for up to 12 months at a time. A loan holder may apply multiple times, which could potentially allow a new doctor to defer loan payments until after residency.
On the surface, forbearance may seem like a great option for a new doctor who is not ready to start making loan payments. However, what is not readily understood is that interest on the loan principal continues to accrue throughout the forbearance period. This means that while you are enjoying your first years of employment without making loan payments, the balance of your debt continues to climb.
Let’s say you graduate dental school with $200,000 in debt at a 6% interest rate. If you decide to enter forbearance and put off paying your loans through a 3-year residency, by the time you started making payments your loan would be sitting at a balance of over $238,000.
That’s an additional $38k in debt accrued by waiting three years.
As you can see, going into forbearance can have a huge impact on your amount of long-term debt.
Though it may seem like a good option at the time, we almost never recommend that someone applies for forbearance. Instead, look into other options for student loan payments during residency and your early years in the medical field:
- Federal loans offer income-based repayment and pay as you earn plans to lower the burden on new doctors.
- You may be a candidate for refinancing, if you have high-interest private loans.
- Making consistent payments as soon as possible – even if they are small – will pay dividends down the road.
2. Buying your dream home/car right away
After working hard through medical school and residency on a tight budget, getting that first “real” paycheck can feel like you’ve hit the lottery. Many new doctors will celebrate by splurging on a nice new car, a bigger house, or some other luxury item.
There is nothing wrong with treating yourself and celebrating your hard work, but be sure not to over-leverage yourself (or your new cash flow) too early.
Though you may have the cash to buy nicer things, the medical professionals who are most financially successful in the long run will take this time to create a firm foundation.
How can you build a firm foundation?
- Create an emergency fund and set aside cash reserves for major upcoming expenses
- Set up a retirement plan with funding goals
- Ensure your insurance needs are covered
- Begin to make large payments toward your student loans
This may seem like an incredibly boring plan, but waiting a few years before making those big purchases can set you up for a successful and financially stable career — especially if you use the same momentum to make positive changes for your financial future.
3. Not creating a budget and spending plan
Once you start making good money, it may seem like you have no need for a monthly budget or spending plan. You are making more money than you ever have, so you feel like there is no way that you could spend it all.
However, the advisors at InvestRx can tell you from experience that it is more than possible to overspend. If you don’t create a plan for your money, there is a high chance that you will be left wondering “where did it all go?”
Once you finish residency, it is easy to lose track of your money and start a spending snowball. A spending snowball happens when you buy a nicer house, so then you need nicer things to fill your house, and a nicer car to put in the garage, and nicer clothes to wear (you get it), and somehow your lifestyle has become quite expensive.
Sure, it may be completely feasible for you to maintain this lifestyle — and that is completely fine if you’re cash-positive — but as an advisor, I recommend keeping your saving and debt payment goals in mind as well..
If you still have student loans, building up an expensive lifestyle will reduce the size of your payments and lengthen the time you have to make them. Also, unless you plan to work forever, you will want to set up a saving and investing plan with clear goals for retirement that you contribute to on a regular basis.
At InvestRx, we encourage new doctors to “live like a resident” for the first year or two of their career in order to set this firm foundation. This doesn’t mean that you have to eat Ramen dinners, but it is an opportunity to be mindful of how to spend (or save) your newly increased income.
4. Not buying insurance
Insurance is never an exciting topic to discuss, but it is extremely important for medical professionals to be well covered. Between medical malpractice, life and disability policies, it may seem like far too much of your paycheck is being taken to protect you from seemingly unlikely events. However, this is a small price to pay for peace of mind — knowing you and your family are protected in a worst case scenario.
Medical malpractice insurance is the most common type of coverage in the medical profession and is even required for doctors in certain states. The importance of medical malpractice insurance cannot be overstated, as it protects you from paying out of pocket if a patient were to sue you. The cost of malpractice insurance can be very high, but it is looked at as a necessary expense throughout most of the industry.
Life insurance is consistently recommended to every working professional, and with good reason. If you are the main breadwinner in your household, you need a plan in place so your family is provided for were something to happen to you. Life insurance makes this very easy. You can select a simple term insurance policy and pay a monthly premium, so that your chosen beneficiary will receive payment at your death.
Disability insurance, though equally — if not more — important than life insurance, is often overlooked. Depending on your policy, disability insurance will pay a portion of your current salary for a designated period of time in the event that an injury or disability keeps you from working.
Many residents and new doctors will forego disability insurance because it has a higher cost than life insurance. However, you are much more likely to become disabled over your lifetime than to die prematurely³. As a medical professional who relies heavily on your physical and mental capability, a disability policy is a must. There are many options and variables in these policies, so make sure you completely understand what you are buying before signing up. ds.
5. Holding large cash savings instead of smart investing
Once you go from residency to attending and begin to receive a higher salary, you are presented with a whole new world of money management decisions. If you make the wise decision to “live like a resident” and don’t make the mistakes listed above, you will likely see your savings account start to grow substantially.
Many medical professionals initially visit with a financial advisor at this point. They have accrued a large cash savings balance and know they should do something more effective with their money than leave it in the bank at a low interest rate. This is when a qualified financial advisor, like the ones at InvestRx, can assist you with creating a strategic plan for your money.
A good advisor will not only help you invest your hard-earned money, but they will help you come up with a plan for your saving, spending and retirement plans down the road.
The InvestRx Difference
Stop making the same money mistakes your fellow doctors are making. Designed specifically for the busy lives and unique needs of medical professionals, InvestRx integrates an online investment platform with white-glove service with the goal of growing clients’ wealth simply and effectively.
We offer investment accounts and financial roadmapping services, all guided by our team of financial experts, with your goals in mind. If you have experienced any of the issues above, or have questions on how to make the best financial decisions at any point in your career, contact an advisor to talk through your options.
- Association of American Medical Colleges – 2018
- American Dental Education Association (ADEA) – 2018
- Social Security Administration – 2019