Nobody’s perfect, especially when it comes to managing money. I have yet to meet someone who’s never made a financial mistake.
I’ve made my share of mistakes, but fortunately I learned from them and recovered early on. I’m not the first or last physician to make a financial blunder.
In fact, given how much time and effort doctors put into their medical education, it’s equally surprising and sad how little effort often goes into understanding basic personal finance and money management matters.
Dr. Jim Dahle has studied the financial mistakes of doctors and narrowed them down to seven categories. This post was originally published on The White Coat Investor.
7 Financial Mistakes Doctors Make (And How to Avoid Them)
The more I learn about doctors and their finances and the more I talk to other docs, the more I see several recurring themes that cause them to have difficulty reaching financial success. This post explores these themes.
1. Poor Debt Management
This one begins early for most medical students as they get into the habit of living beyond their means. Student loans, car loans, credit card loans, vacation loans, and poorly designed mortgages.
It isn’t just that the doc lives beyond her means (although we’ll get to that next), but she is simply paying too much interest causing a major drag on her finances.
2. Inadequate Savings Rate
Living within your means is very important. But to be truly successful, you need to live sufficiently far below your means that you can carve out money to invest, pay down debt, and build net worth.
Saving 10% is the general rule for most people (although even that might be a little low given our current low-expected-return investing environment), but most people also have 40 years to save for retirement.
Doctors only get 30 years, so they really need to be saving 15% if they plan to retire at 65. If you want to retire early, better bump that up to 20-25%. Remember that isn’t counting saving for your next car, that boat, a house downpayment, or your kid’s college fund.
That’s JUST retirement. A 5% savings rate just isn’t going to cut it. So on a $200K salary, that’s $40K a year. Just putting $17K into your 401K each year isn’t going to be enough.
What keeps doctors from saving more? Debt is a big factor, as is a sense of entitlement after years in training and many long hours at work.
But a major factor is the expectation in your own mind (and the mind of family and neighbors) that you need to live like a doctor. In short, you spend too much. Quit it. Like quitting smoking, it’s simple, but not easy.
3. Inappropriate Tax Management
Doctors are well-known to make all kinds of stupid investments just to lower their tax bill. Yet far too many don’t take advantage of the simple tax shelters available to them. Why some doctors have investments outside their 401Ks and IRAs when they’re not maxing those out is beyond me.
I’m always surprised how few doctors have heard about Backdoor Roth IRAs or Stealth IRAs. For most doctors, every dollar they put into a retirement plan saves them ~40 cents in taxes. Some self-employed physicians don’t even open the right kind of retirement plan, severely limiting their contribution amounts.
Those doctors investing outside retirement accounts don’t realize the impact of using tax-efficient investments, minimizing churn (and the capital gains taxes it produces), tax-loss harvesting, and using investments with low tax basis for charitable gifts and inheritances.
Most doctors are smart enough to either learn about the tax code and do their taxes themselves or hire a good accountant to do the job. But finding a few bucks here and there at tax time is missing the forest for the trees. The big gains are found in changing your tax behavior throughout the year.
4. Personal and Professional Divorce
Starting over is expensive. There is nothing a doctor can do that will impact his finances as much as a divorce. It isn’t unusual for a doctor to lose his home, a large chunk of his savings, and his future income stream (to alimony and child support). It is hard to recover from that. The old adage, “One House, One Spouse” is still applicable.
You can protect yourself from this in several ways. You can avoid marriage altogether, you can have a prenup or postnup agreement (especially if on a second marriage or if marrying after acquiring significant assets or after becoming well-established in your career), and you can live your life to make your marriage relationship a priority.
You can also marry a doctor. Physicians as a whole have a 24% divorce rate (higher among female physicians) but dual physician couples have only an 11% divorce rate.
Professional divorce is also expensive. Breaking up with your partners, closing a practice, moving to another town, etc… are all expensive.
You may have moving expenses, buy-out fees, employee costs, malpractice tails, and a temporarily lower income. Go into any business relationship with your eyes wide open, and have your contracts reviewed by an experienced health care contract attorney.
5. The Wrong Insurance
Not only do most people (doctors included) not have enough of the types of insurance they really need (primarily life, disability, and liability -professional and personal), they have too much of the types they don’t need. A quick reminder:
Insurance you probably need (circumstances do vary):
- $1-$3 Million of 20-30 year level term life insurance
- $7500-15000/month of good quality, personal, own-occupation disability insurance
- $1-3 Million of umbrella insurance (with accompanying high liability limits on your property insurance)
- $1-3 Million of Malpractice Insurance
Insurance you probably don’t need:
- Cash Value life insurance (whole life, universal life, variable life, variable universal life, etc)
- Group disability insurance
- Consumer insurance (home warranties, appliance warranties, electronics warranties, etc)
- Low deductibles on your auto and homeowner’s insurance
- Fantasy football insurance
- Marijuana grower’s insurance
6. Expensive Investments
In investing, you get what you don’t pay for. Many doctors pay 1-2% a year or more for investing advice, mutual fund fees or loads, commissions, or other costs. The difference 2% a year can make in an investor’s final net worth is astounding.
Consider two physicians, both of whom invest $50,000 a year in similar investments. The first, however, minimizes her investment costs while the second accrues an additional 2% a year in costs.
If they both make 5% after-inflation, but before costs, how much more does the first doctor have after 30 years? Nearly $1 million more ($3.32 Million to $2.38 Million).
For a million bucks, I think you can spend a little time learning about investing, hiring an advisor who offers good advice at a reasonable price, and analyzing the true costs of your investments. If you add on another 30 years in retirement, the numbers get even worse.
I’m not talking about buying treasuries or getting involved in Peer-2-Peer Lending. I’m talking about family and friends. If you’ve read through the Stupid Doctor Tricks post, you can see dozens of examples of people who loaned tens of thousands of dollars to parents, siblings, kids, and friends. You’re “the rich doctor” so they come to you.
7. Loaning Money
Well, I’ve got news for you. You’re not rich. You can afford to help others out, but in general, make the money you hand to friends and family a gift, with no strings attached.
This will do two things for you. First, it will preserve the relationship. A lender-debtor relationship is different than a family relationship, especially when the debtor goes into default.
Second, it will preserve your money. Most of us are willing to lend much more money than we’re willing to give. It’s far better to give away $10K than to lose $100K in loans.
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What was your biggest financial mistake?
16 thoughts on “7 Financial Mistakes Doctors Make (And How to Avoid Them)”
Ugh I see number 2 ALL THE TIME in the aviation profession. How can pilots on $300K+ not be saving anything! This is ridic haha. My cost of living is the same now earning $160K as it was when I was a student earning $40K! Its just the saving rate sky rocketed everytime I got a pay rise
Buffet challenged professional managers to simply beat the S&P 500 over a 10 year period, only one guy took him up on the offer, he payed Warren’s charity $500K. If you have minimum interest in taking care of your own finances, in general your better off parking your money in an S&P 500 fund +/- international fund and let it run, you will pay less than 0.1% in fees and outperform most managers and yourself.
Thinking “tax deductible = free”.
If you are going to use a financial advisor, you better at least know good advice from bad advice. And you also should understand that actively managed accounts routinely underperform 80% of passively managed funds. And it’s impossible to predict the 20% that will outperform. This has been shown in study after study. Knowing this, i think most people like myself come to the conclusion that you don’t need to pay someone to do this. But if you are going to pay, make sure they’re doing a good job because no one will look after your money like you will.
If you use money managers simply diversify them as well. It’s more expensive because the rates go down as the amount goes up, but you do limit the risk from fraud. Also, publicly held companies have deeper pockets if something goes awry. Finally lockbox scenarios wherein your money is controlled by the expert but can’t be withdrawn can be set up.
I had a friend who had 10 million stolen from his account; fortunately he was able to recover only because the small outfit he used had been purchased by a national brand a year earlier, and the 10 year fraud hadn’t been detected.
Bernie Madov had solid reputation until he got caught
I realize that most commenters here say that you should read, study and learn how to manage your investments and while agree that you need to watch your money closely, I have a dissenting opinion regarding the use of financial professionals. In a nutshell, the greatest financial gains I have experienced have been when someone else I trust was managing my money. During the recent plunge in the stock market when the Dow dropped by roughly 30% my portfolio dropped by roughly 16% due to the careful planning by the wealth managers I use. I tried to diversify my portfolio years ago and while I made some gains, it wasn’t until I placed It in the hands of a money manager did I make substantially greater gains. I have other examples in my life where turning over the reigns to of my finances netted me excellent gains. I felt that since I was smart enough to become a doctor I must be smart enough to determine my financial future. I spent all the time in medical school and residency to learn to do what I do. Why should you think of money managers any differently. It appears that the 1% fee is a major sticking point and I agree that while 1% of a large number is a lot of money, spending 1% to make that number bigger than I can do myself while protecting my assets seems like a good idea. I stress that you want someone who has a solid reputation. Avoid the Bernie Madovs out there.
Money managers don’t spend nearly as much time during their education as we did to become doctors. Spend time on your own financial education and you will probably exceed the hours they did to start their career
Your financial advisor likely de-risked your profile into Conservative bonds. If the Dow drops 30 and you only drop 16%, on the way back up you’re only going to appreciate half as much as The riskier portfolio. It’s really not rocket science. Equating medical education to portfolio management is not fair. You must first accept that nobody can predict the future. It’s about managing risk/reward, diversification and fees. Simple.
I would argue that there is one more mistake that is perhaps the biggest and the root of all other financial problems for doctors: not starting a financial education!
I was scared to start my financial education because I didn’t want to have to face my mistakes. But finally doing so gave me the power to take control of my situation and work to make it better. Still a long way to go but heading in the right direction!
Completely agree with this. And I think a lot of the other mistakes are a corollary of this one point. If a doctor knows the difference between term life and whole insurance, they wouldn’t fall for sales pitch on the latter. If a doctor knew that they needed to do the math and reverse-engineer their annual savings rate, many of them wouldn’t spring for that car or boat or house.
Thanks PFB! Keep spreading the word!
Any recommendations on where to start?
This blog is a great place to start. So are many of the great blogs you see featured on PoF.
For books, check out the white coat investor book, millionaire next door, bogleheads guide to investing, or the coffeehouse investor. Each are $20 or less, the best investment towards your finances that you will ever make!
The Prudent Plastic Surgeon