It’s always good to learn from those who have trod the path ahead of you.
From learning from the mistakes of others to avoiding pitfalls that might be harder to see along the way, staying out of trouble can pay dividends now and later.
In this post, take a look at nine common mistakes physicians make with their money, and some tips on how to avoid them and stay on the right track.
This guest post was submitted by site sponsor Forme Financial.
As a physician, you’re faced with a highly unique set of financial opportunities and challenges that most people on the planet never face.
Following years of a lengthy and costly education and the rigors of residency, you’ve entered the world with massive earning power, and things get exciting very quickly. Still, you’ve been waiting for this moment for so long, and your list of goals and objectives is lengthy.
No matter where you are in your career journey now, you’re faced with pivotal financial decisions that can either lead to you reaching your financial goals or sometimes wishing you had made different and more informed choices.
To help you stay on course, here are nine financial mistakes that doctors can avoid and how to make needed adjustments to get back on course:
#1 – Not Having a Plan or a Clear Destination
John Wooden, one of the most beloved college basketball coaches of all time, was known for telling his players, “Failing to prepare is preparing to fail.”
His entire coaching philosophy was centered on the concept of preparation, as he knew that no matter how talented or smart a person may be, there must be a framework of thought and action in place for true and lasting success.
This is also true in the world of personal and business finance. There isn’t a one-size-fits-all formula for financial planning for physicians — and the world in which we live is inherently uncertain — which is why we suggest you take a dynamic approach rather than a static approach to building your financial framework.
Peace of mind for your future is possible when you know that you’ve evaluated all of your options, reflected carefully on the information you’ve uncovered, and then customized your strategy to be in keeping with the way you want to live.
It is also important for you to be very clear about your destination and “why” it’s meaningful to you. After all, it’s a journey of decades, and knowing your “why” will keep you motivated to see it all the way through. It’s all about where you want to go with your professional and personal lives.
Especially when working with a financial advisor, be clear about the vision you have for your life and communicate where you want to end up in the future. In fact, make sure your advisors are aligned with where your “True North” is as you work together.
#2 – Not Coordinating Your Decisions
One of the reasons we love working with physicians is that you tend to be amazing problem solvers. Over time, you collect a huge wealth of knowledge, but it’s quite easy to create “silos” for the problems that arise and not consider how all the moving parts of your life work in concert.
At Forme, we focus on the seven elements of physician wealth. They should be your focus as a physician, no matter what career stage you’re currently in. The elements are:
- Cash management
- Debt management
- Proactive tax planning
- Risk management and insurance
- Estate planning
We believe greater financial stability comes when you evaluate the many moving parts of your business and personal life and how they work together and impact one another.
For example, if you’re considering investing in real estate to generate additional income, this decision likely will impact your taxes, debt considerations, insurance needs, and estate planning documentation. It’s easy to overlook these types of synergistic effects of your financial decisions. However, without a thorough understanding and coordination of these elements, a financial decision made in isolation could lead to less than desirable results for your overall financial picture.
Take our Fingerprint Assessment now to see how everything works together.
#3 – Not Managing Delayed Gratification
As a physician, a lengthy training period, accumulated debt, and a lack of forward progress on many of your other goals can contribute to a very understandable feeling that you are behind both personally and financially.
Then, “suddenly,” as if we can discount the years invested in training as spontaneous, your income begins to rise – rapidly. It would be tempting, and in many ways justifiably so, to take all of that pent-up demand and delayed gratification and begin living the life you’ve always wanted, but here’s the truth. Financially successful physicians often don’t do that.
These doctors take the same discipline that made them successful in med school and throughout residency, and apply the same thoughtful good habits to their life and financial goals. They continue to prioritize the things that matter most, which are often a combination of paying down debt and beginning to accumulate assets for important goals such as a home purchase, educating children, or saving for financial independence. Then, and only then, they begin to expand their lifestyle with what’s left over – guilt-free because they know they prioritized what truly matters.
#4 – Not Evaluating the Potential Advantages of PSLF
As you may already be aware, the Public Service Loan Forgiveness (PSLF) program is a United States government program created under the College Cost Reduction and Access Act of 2007 (CCRAA) to provide indebted professionals a way out of their federal student loan debt burden by working full-time in public service.
The program permits Direct Loan borrowers who make 120 qualifying monthly payments under a qualifying repayment plan, while working full-time for a qualifying employer, to have the remainder of their balance forgiven.
Numerous success stories have come from doctors taking advantage of PSLF, including gaining loan forgiveness for $400,000+ and life-changing experiences for physicians who have given their time and expertise to highly impactful nonprofits.
If you haven’t considered PSLF, we strongly recommend looking into it, as it may free you in more ways than one. Click here & see if you may be eligible.
#5 – Failing to Strategically Negotiate Salary and Contract Renewals
If you’ve found yourself kicking yourself after signing a contract and have been certain you could have negotiated better terms, you’re not alone. An error in judgment can be costly and easy to make because there are so many moving pieces to your career.
Sometimes the end of a contract sneaks up quickly, and before you know it you’re forced to make quick decisions that ignore your wants and needs for the future. This is why it’s essential that you take a step back at least one to two months before your contract ends to begin the conversation and evaluate your options.
Additionally, make time to carefully document the value you’ve brought to the practice and share it in the most compelling way possible. Then, bring an attorney into the process to review the contract draft to assure that terms are in your favor.
Speak to an advisor about contract negotiations.
#6 – Underestimating the Drag on Returns that Come from Taxes and Product Fees
Another common mistake made by physicians is overlooking the tax costs of their investment decisions until it’s time to file their returns. Unfortunately, by that point, it’s often too late to lower their tax bill by implementing tax-smart investment strategies.
Investors should keep in mind that with investing it’s not just how much you make that matters—it’s how much you keep after taxes and fees. The amount lost to taxes and expensive investment products can significantly affect your returns. Even seemingly small amounts can incrementally cost investors a lot of money—in some cases, over time, this could represent millions of dollars in opportunity loss.
The good news is that you may hold on to more of your returns by managing your investments tax efficiently through strategies including tax loss harvesting, avoiding short-term capital gains, and tax-smart asset location. Moreover, you can limit the impact of high product fees on your investment returns by investing in lower-cost products such as ETFs and direct indexes.
#7 – Being Unprepared for the Unexpected
It’s easy to underappreciate the risks that you’re constantly exposed to as a physician. As mentioned previously in this article, the future is unknowable and can reap horrible consequences if you’re not prepared.
Just as a pilot has checklists every step of a journey to keep their passengers safe, it’s important for you to put together an emergency manual that applies to your unique situation. This probably includes having the right malpractice, disability, and life insurance plans in place and having a plan if the economy crashes and the stock market goes down when you least expect it.
With so many moving parts and the consequences related to the unexpected, we highly recommend working with an advisory team to help you run through the many scenarios you can face and how to best prepare for them.
#8 – Taking Directions from Bad Navigators
Physicians are known for sticking together and sharing advice with one another. There are many benefits to having such close associates and being able to bounce ideas off of each other, but it also comes with its pitfalls.
For example, we often hear of doctors making risky investments in commercial real estate and buying high-risk stocks after hearing suggestions from their friends and colleagues.
The last thing you deserve after your hard work and saving efforts is to be a part of an investment gone wrong and have to work harder to make up for it.
In fact, make sure all of your advisors know where your “true north” is or you won’t be confident their directions will get you there.
#9 – Not Taking Care of Yourself While Caring for Everyone Else
Just as you care for others, it’s vital that you care for and protect yourself. This includes making sure you spend enough time with your friends and family, making the right eating and exercise decisions, managing stress, avoiding burnout, and employing adequate disability insurance.
Your ability to maximize your high earning potential and reach your financial goals is often predicated on your ability to stay healthy. Each of your decisions has a ripple effect – if your health suffers, you will be faced with paying more for insurance (or maybe not even qualify). Your ability to stay healthy may also impact your estate planning – or could even lead to early retirement, which obviously will negatively impact your savings and plans for the future.
As you move through your days, it’s important to ask yourself the following question: “What’s the point of all of this planning and hard work if you’re not enjoying it and/or taking care of yourself?”
As you move forward with your future, we dare you to simplify your life as much as possible.
This can only come with clarity surrounding your financial plan and all the elements that have the power to either help you reach your goals or drag you off course.
Need some perspective? Forme is here to help. Schedule a meeting with our advisory team today.
The information provided herein was prepared for educational purposes only and is not a solicitation to buy or sell any security or insurance product, nor an offer to provide investment advice. All examples are hypothetical and for illustrative purposes only. Nothing contained herein should be construed as legal or tax advice and is not intended to replace the advice of a qualified tax advisor or legal professional. The information contained herein may have been compiled from third-party sources we believe to be reliable but cannot guarantee its accuracy or completeness.
Forme Financial is an SEC-registered investment adviser. Additional information about Forme Financial, including its services and fees, is available online at http://adviserinfo.sec.gov/.