Poor diet. Lack of exercise. Too much stress.
These are just a few of the common poor health characteristics you see in your patients on a daily basis. And no matter how hard they wish to change, old habits die hard.
The same goes for your financial health. Sure, you enjoy a larger income than most. But more money means more choices when it comes to how you allocate it. And more potential for problems.
That's why we asked our network of financial advisors to identify:
- Unhealthy financial habits mistakes that keep doctors in debt.
- Major money traps doctors fall victim to.
Here's what they said.
Neglecting student loan debt
You've spent the past decade of your life preparing for professional practice. Now that you're finally here, the last thing you want to do is grapple with student debt.
But turning a blind eye to your repayment options is one of the worst things you can do for your financial well-being. Fortunately, there are a variety of options to help pay down debt.
Among the most common is student loan refinancing. This may allow you to:
- Extend your loan term.
- Lower your monthly payment.
- Reduce the interest rate you pay.
But doing so means you need to take the time to review your best available options. There are various private lenders that provide tailored options, allowing you to compare interest rates.
In addition, there are multiple government programs that offer repayment assistance for doctors and other health care professionals.
Buying the wrong insurance
Insurance is a tricky industry to navigate — especially for those on the outside looking in. Unlike other professions, doctors typically require more coverage than others.
In addition to term life insurance, doctors also need:
- Physician disability insurance to protect their income from injury or illness.
- Medical malpractice insurance to protect their income from legal liability.
Finding the right balance between cost and coverage is tricky. Many doctors don’t take the time to sort it out on their own. This can lead to the types of situations Adam Glassberg of D3 Financial Counselors sees regularly:
“Sometimes I see practicing physicians with very large whole life insurance policies. Those are often riddled with hidden fees… and more oftentimes than that we end up unwinding those mistakes."
Insurance agents are typically commission-based. This means they may be incentivized to sell you the highest commissioned policy, despite your needs.
For this reason, you should consult your financial planner and ask them to recommend insurance specialists. You can also use LeverageRx to compare quotes from the:
- Best disability insurance companies for doctors.
- Best malpractice insurance companies for doctors.
- Best life insurance companies for doctors.
Needless to say, performing your due diligence is the best way to fully hedge all risks while also keeping costs as low as possible.
Avoiding retirement planning
You're finally a practicing physician. Why bother with retirement planning now when you're just getting started?
Well, chances are you have a handful of employer programs at your disposal. But how do you know which ones are working as hard as possible to grow your wealth?
John Stephens of TCI Wealth explains:
“If their retirement plan at work is just a basic 401(k) that they could get through their payroll provider, ADP or paychecks, plain vanilla, they’re not maximizing out the ability to do tax deferrals. So, they really need to spend the effort and potentially the money to go find the consultant who can help them define a much better, safe harbor 401(k) with profit sharing and then, on top of that, cash balance to find a definitive plan."
Add a retirement planning consultant to your financial advisory team who is willing to work with you to personalize your retirement portfolio. It will allow you to grow your wealth much faster than just relying on your 401(k) to get you to your retirement goals.
Ignoring your credit score
Surely you've had a patient whose ailment could have been treated more effectively (or even prevented altogether) if they had come in sooner.
The same goes for your financial health. Checking your credit score is one way you can see where you stand.
Your credit score informs lenders and other interested parties of your credit risk. It is based on a number of factors, such as your debt-to-income (DTI) ratio.
Unfortunately, a low credit score comes with major financial consequences. That's why it’s important take steps to fix poor credit rather than just hoping everything will work itself out.
To illustrate, let's take a look at a (hypothetical) new doctor entering practice.
- She has $150,000 in student loan debt she wants to extend to a 20-year repayment term.
- She wants to obtain a $325,000 mortgage on a home with a 30-year fixed loan.
- She is looking to borrow $45,000 over 60 months for a new car.
Now, say she has fairly good credit. Her loan rates are:
- 5 percent for the student loan.
- 4.5 percent for the mortgage.
- 5 percent for the auto loan.
But what if she has a lower credit score and will therefore be charged a higher rate of interest because they are considered a higher credit risk. The rates in this case would be:
- 6 percent for the student loan.
- 5 percent for the mortgage.
- 7 percent for the auto loan.
Here is a comparison of the monthly payments between the lower and higher interest rates:
- The student loan repayment amount would be $989 a month with the lower rate and $1,074 a month with the higher rate. Over the life of the loan, the physician would pay total interest of $87,584 under the lower rate and $107,915 under the higher one.
- The monthly mortgage principal and interest payment would be just over $1,598 with the lower 4.25 rate. (This doesn’t include property taxes, insurance, and other costs.) The higher rate would increase your monthly principal and interest payment by $145 to $1,744. The monthly auto loan payment would be $849 with the lower rate and $891 with the higher rate. Over the life of the loan, the total interest paid would be $5,952 with the lower rate and $8,463 with the higher rate.
In total, this physician’s debt payments would be $272 more per month due and cost $75,353 more in interest than if he or she had a better credit score.
Pursuing risky investments
Consider the following investment opportunities:
- Real estate.
- Medical equipment.
- Angel investing.
All are perfectly within the realm of possibility given a doctor's salary. However, before making any major financial decision you need to make sure it's not a money trap that could drain your savings. (Or even worse, whittle away years of retirement planning.)
With such high salaries, doctors need smart investments to effectively grow their net worth over time. Bob Reed of Personal Financial Advisors sums this up well:
“Sometimes physicians attempt to take risks that they’re not knowledgeable enough about to take. They make money, and they want to make more money and so they will speculate sometimes in things that they hear about but might not be well versed enough in to effectively run. It’s very complicated to come up with a good portfolio and to manage it and apply it to your goals."
So how can you avoid this? The first step is to set a smart goal you can stick to. If you plan to retire at 60, don’t pursue a risky endeavor at 57. Reed says following a plan gives you grounded logic to stay away from certain investments.
If you want to make large real estate investments, stick to what you know. Ben Utley of Physician Family recommends buying a medical office building for your practice. Investments become riskier when, as Ben puts it, “they don’t focus on the business of being a doctor and doing the business of a doctor."
The life of a medical professional breeds stress.
- Long hours.
- Delivering bad news to patients and their families.
- Sometimes your best efforts fall short.
- You have to deal with patients who don’t adhere to their treatment plan, then blame you when their health worsens.
- There are the never-ending regulatory changes, continuing education requirements, and conflicts with insurance companies.
How you cope with the stresses of the job can cost you money and keep you in debt. Many indulge in high-dollar items or experiences on impulse.
Of course, all doctors need a way to unwind and escape the rigors of their profession. But don’t let your outlet of choice add to your stress by causing financial burdens.
Exercise, socialize with friends and family, and take advantage of inexpensive activities within your community. Budgeting for other stress relievers like meals out, vacations, and hobbies can help, too. But only if you stick to that budget.
Intentionally overspending to "keep up with the Joneses"
Not only are doctors high-earners, but they are surrounded by high-earners. However, as Lauren Lindsay of My Personal Advisors points out:
“The problem is that between specialties, you have a huge discrepancy in salary. You can have doctors making $600,000 a year alongside doctors that make $200,000 a year."
This discrepancy can lead to many doctors to live beyond their means instead of paying down debt. Lindsay says this problem has one of the "easiest said but hardest executed" solutions – to set aside money and live within your means.
Be realistic about the amount of money you are actually take home. If you are a $300,000 salary doctor, don’t live like a colleague making $500,000. In fact, you should try to continue living like a resident for as long as possible.
- Troubleshoot insurance issues with a reputable specialist.
- Create a realistic financial plan to gradually build your wealth over time rather than gambling on risky investments.
- Maximize your 401(k) with the help of a financial advisor – one that you can trust to help you through these traps and set you up for a safe retirement.
Doing so won't just steer your away from these four common money traps. It will give you the financial freedom you deserve.
Unintentionally overspending by "flying on autopilot"
The combination of a busy career and a significant income causes many medical professionals to spend money whenever and however the mood strikes. This includes:
- Failing to make and stick to a budget.
- Buying items on impulse with an "I deserve this" attitude.
- Trying to keep up with others by buying the latest technology, the fanciest cars and homes, and going on the most exotic vacations.
- Neglecting to comparison shop for the best rates on insurance, loans and other major financial commitments.
- Using a credit card for rewards and cash back but only paying back the minimum balance and thus racking up large interest charges
Just like your patient’s one cheeseburger for lunch doesn’t seem like a big deal to him, your expenditures and debt accumulation may not seem like much at the time and in relation to your overall income.
But just like a cheeseburger everyday combined with a sedentary lifestyle could eventually cause problems for your patient, so too will overspending add up to a financial mess for you in the long run.
If you've made it this far, you probably noticed a consistent theme in each of the mistakes: a lack of balance.
- Neglecting student loan debt.
- Buying the wrong insurance.
- Avoiding retirement planning.
- Ignoring your credit score.
- Pursuing risky investments.
Not because you don't know or don't care. But because managing your personal finances requires a lot of time – something doctors have very little of to spare.
While these traps are easy to fall into, there are relatively simple solutions available. By proactively surrounding yourself with reputable financial professionals you can trust, you will be able to achieve the long-term balance you need to succeed.