Most physicians will go through numerous transitions in their careers. We all deal with the transition from med school to residency and from residency to attendinghood, perhaps with a fellowship transition in between.
It’s a rarity for your first job to also be your last, so most of us can expect further career transitions, and they often come when we least expect them. The pandemic has no doubt put many physicians’ careers in a state of flux.
Today’s guest post on the topic of transitions comes from financial advisor, Donovan J. Sanchez, CFP®, ChFC®, CSLP®, CLU®. [I’d like to buy a vowel, please.] He started out with a fee-based firm (earning commissions) and later worked for a fee-only practice (charging based on assets under management), but that too left a bad taste in his mouth.
Donovan now owns and operates a flat fee-only financial planning company at SkyviewPlanning.com. You may recall his last guest post here, the popular and revealing Confessions of an Ex-AUM Financial Advisor.
Physician in Transition: A Fast Track Guide to Financial Security
Transitions and turning points
All of us experience transitions in life. Many of these transitions are exciting and represent positive (though sometimes scary) changes. Perhaps in the near future you will be completing medical school and moving on to residency.
Or maybe your residency or fellowship training will soon be over and you’ll be moving on to your first job as an attending. You could also be approaching your wedding date, or birth of your first (or fifth) child.
Not all of life’s transitions are positive ones, however. Perhaps you’ve recently experienced the loss of a loved one, or received notice of a challenging illness. Maybe your relationship with your children is strained, or you’re going through a divorce.
Whether the transition you’re experiencing is a positive or negative one, it’s likely to carry with it significant stress. That notwithstanding, my experience has been that transitions and “turning points” in our lives often provide an opportunity to take stock of where we are and then make plans for where we want to be.
Establish healthy life patterns
Before we begin a discussion of financial steps to take, it’s worth reflecting on what will make life feel rich (even if you aren’t immediately wealthy). Having a lot of money will mean very little if you don’t have deep and meaningful relationships with your family and friends. Unhealthy life patterns can lead to anxiety, depression, dissatisfaction, and burnout.
Remember to feed your body and soul. Read good books, eat delicious and nutritious food, and get enough sleep (if at all possible). Exercise, give, and serve others, but remember to do all of these things within your limits.
Create a vision for what you want your life to be like. Do this with your spouse, if you’re married, and take little steps towards realizing your dream. Over time it will become a reality. Writing your vision down and referring to it regularly can help as you track progress towards your goals.
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There’s no “one-size-fits-all” plan
What follows are some guidelines for how to start on the path towards financial success. It’s possible that not every step applies to you, or that the path forward requires additional steps, or a different order than the one laid out below.
Personal finance is . . . personal, after all, and you’ll want to modify the information below to your unique situation.
If you’re a physician in transition, I hope this guide will help reduce complexity, provide direction, and make your path forward just a little bit easier.
The “offense” and “defense” analogy for financial planning is a little worn, but it is effective in describing how you should approach financial planning. Establishing mechanisms to protect yourself and your loved ones is vital.
Approach your cash flow from a defensive standpoint
Few things will impact the “future you” like establishing a savings strategy from the very beginning.
For you soon-to-be attendings, think of how much easier it will be to start saving 20% of your gross income from paycheck #1, rather than having to cut back in 10 years because you’re not on track to meet your financial independence goals. Ask your older colleagues—I suspect very few, if any, will say that they saved “too much” early in their career.
Many have found it useful to track all of their income and spending through a detailed budget. Others prefer to save 20% immediately and then simply live off what is left over. Your personality and preferences will help you determine the best path forward.
If you decide a detailed budget is right for you, you may find that you need a little push to make sure you keep it up. Early on in our budgeting journey, my wife and I would go on “budgeting dates” at a restaurant we enjoyed. We had the dual satisfaction of getting our budgeting done, while also enjoying a delicious meal together.
Additionally, consider establishing a “future money policy” so that a certain percentage of any future increase in compensation goes towards your goals. For example, you might decide that 50% of all future raises, bonuses, and windfalls go towards your retirement savings or paying down debt. This allows you the benefit of enjoying a portion of the additional income, while also getting ahead on your financial priorities.
If you’re living paycheck to paycheck, more drastic measures may be necessary in order to help you get back on the path to financial prosperity.
Protect yourself, and protect those you love
Because none of us know when illness, accident, and death might strike, it is vital that appropriate safeguards are put in place to protect you and your loved ones. This certainly includes having an adequate emergency fund, appropriate own-occupation disability insurance, as well as suitable term life insurance (whole life insurance often isn’t the optimal insurance vehicle for physicians, particularly young ones—if you were sold a policy, I highly recommend that you have it reviewed by an independent professional whose compensation isn’t derived from product sales).
Sadly, some of us will become disabled or die prematurely. So long as you and your family rely on income from your job, you need disability and life insurance. Though not very exciting to many physicians, these products can help you and your family avoid financial ruin if disaster or illness strikes.
Provide direction for those you love in life’s most difficult circumstances
If your family suffers the tragedy of your incapacitation or death, your decision to have established proper estate planning documentation will go a long way to helping alleviate their stress in a very difficult hour.
Engage the services of a competent estate planning attorney in order to establish a will, and other relevant estate planning documents (such as powers of attorney, medical directives, trusts, etc.).
By laying out your wishes in writing through the formal legal mechanisms of estate planning, your family will benefit from peace of mind in knowing that your wishes are being carried out in the way that you wanted.
Establish a shield for when accidents or lawsuits strike
This goes beyond malpractice insurance. Make sure that you have the right amount of home and auto coverage, as well as an adequate umbrella policy.
Incorporating the items above will help you protect yourself from what can go wrong, while providing the psychological benefit of knowing that you and your family will be okay if accident or illness strikes.
This allows you to enjoy, to a greater extent, when things go right.
Release yourself from bondage
This necessarily starts with eliminating any high interest debt. If you have credit card debt, establish a plan to pay this off before investing or making additional payments to other lower-interest debt.
If you don’t already have an emergency fund, set up a “starter” emergency fund (Dave Ramsey’s “Baby Step 1”), and hold off on building the full emergency fund until the credit card debt is paid off completely.
Credit card interest rates are too high to be ignored and should be tackled first as you build your net worth.
Crush your student loans
For many of you, this is the most exciting part yet. Student loans have been stressing you out and keeping you up at night for years. Carefully determine whether or not it makes sense to privately refinance or remain on an income-driven repayment plan that allows you to benefit from Public Service Loan Forgiveness.
This is a surprisingly complicated area of planning and professionals are available to help guide you, if needed.
Current rates & cash-back bonuses for those of you not in interest-free forbearance or pursuing PSLF:
Get YOKED (from a savings perspective)
Build up that savings muscle so that it’s ripped, shredded, buff, and swol! You might have abs of flab and non-existant traps, but you are going to be a financial Hulk.
As a first step, make sure that you obtain any matching contributions to your retirement plan offered by your employer—you don’t want to be leaving money on the table.
Next, establish a timeframe for financial independence (when your money works harder than you do so that financial reliance on your job is no longer necessary). How much do you need to save per month in order to achieve this goal?
If you’re early in your career and expect to retire at a traditional retirement age, saving 20% of your gross income may be enough. If you’re further on in your career, or have ambitions to retire (completely or partially) from medicine at an earlier age, then you may need to save much more than 20%.
In brief, you’re seeking to save enough so that someday you work because you choose to, not because you have to.
Filling the buckets and the benefits of diversity
Enjoy the benefits of diversity (from a tax perspective).
There are a number of buckets that you’ll want to fill up if they’re available to you.
As already mentioned, take advantage of any matching contributions your employer offers.
Next, if you’re enrolled in a High Deductible Health Plan, contribute to a Health Savings Account and invest those funds once you reach the required threshold. The Health Savings Account is exciting because it has a triple tax benefit—pre-tax contribution, tax-free growth, and no tax on distributions so long as you use them for qualifying health expenses. Pretty cool, right?
If you’re in a high tax bracket, it’s likely that you’ll want to then maximize pre-tax contributions to your employer-sponsored plan through work—like a 401(k) or 403(b). This allows you to benefit from making pre-tax contributions during peak earning years (high tax bracket years) that may then be withdrawn when you are in a lower tax bracket.
If you’re not yet in a high tax bracket, or if you’ve already maxed out pre-tax contributions to your employer-sponsored plans, consider making (and maximizing) Roth contributions. For those above the income limit for directly contributing to Roth IRAs, the “Back Door” Roth IRA may be appropriate—but this will depend on other factors unique to your situation.
Because Roth contributions are made on an after-tax basis, you don’t get an up-front deduction. However, any growth in the account is not taxed, and qualified distributions are taken tax free!
Because we don’t know what the future holds in terms of tax rates, having assets that are, and are not, subject to taxation during retirement years makes good sense.
Save for Important life goals
Other life goals that you might want to focus on include saving for a 20% down payment on a home or saving for your child’s education.
Regarding education planning, looking into your state’s 529 plan is a good place to start, though plans vary by state and some plans have better investment options than others. You’ll want to weigh the state tax deduction your state offers for using its 529 plan with the quality of its investment options.
Depending on your goals, look into saving additional money into taxable accounts (not restricted by age-requirements for penalty-free distributions), or alternative investments like real estate. You might also consider increasing your mortgage payments to get that baby paid off as soon as possible.
Unleash your (and other’s) potential by giving
One of the great benefits of putting your financial house in order is that it puts you in a position to give in meaningful ways. And if you’re working your plan and know that you’re heading in the right direction, even if you haven’t yet “made it,” you’ll still feel empowered to help your neighbor on this difficult path called life.
Make sure that you enjoy each moment that life has to offer and give meaningfully, remembering there are other ways to give than just with money.
Even if the transition you’re going through is a challenging one, there’s probably something you can learn from it, and a way that you can use it to bless someone else’s life.
For the physician in transition, I hope this brief guide helps reduce complexity and demystify some of the important steps you can take to put yourself on the path to financial stability and peace.
The content provided is for informational purposes only and represents my personal opinions based on my experience, study, and practice. Yes, I’m a financial advisor, but this article isn’t intended as advice for you specifically. Your unique situation needs to be taken into account, and the ideas presented here may not apply.
Please make sure you do your due diligence before implementing anything. Due diligence includes hiring a qualified professional who understands your situation completely and can offer you personalized advice.
Did we leave anything out? What transition in your career proved to be the most difficult for you?