Financial Planning for the Early Career Doctors

Financial Planning for the Early Career Doctors

Getting to that point in your career where you’re finally making real money is a reason for celebration. Whether landing the job you studied in school for all those years, working your way up to gaining more responsibility, or getting a significant bonus- having more income is a great feeling.

What you’ve accomplished is finally putting yourself firmly on the first stage of a financial journey that could result in long-term wealth. Retiring early, taking time out from a career, accomplishing goals like buying a house, buying into a practice, or starting your own business, all of these are now within reach. How you handle the first stage of higher income significantly affects how soon your goals become a reality.

It’s a lot to take, but some easy steps are keeping more of your income, relieving your debt burden quickly, and getting your new assets working for you.

We write guides for many employer benefits such as the Piedmont Healthcare benefits open enrollment guide.

Maximize Your Employee Benefits

Your salary isn’t the only source of income from your work. Your employee benefits are worth real money if you deploy them thoughtfully. They can include employer-paid health insurance, additional insurance coverage, pre-tax contributions to flexible spending accounts, paid time off, and more. Time spent reviewing your employee handbook and signing up for benefits can keep more money in your pocket and lower your taxable income.

The most valuable benefit is usually an employer-sponsored retirement plan, either a 401(k), 403(b), or 457. Contributions to traditional retirement plans are tax-deductible, so it’s generally recommended to contribute as much as possible (up to the annual contribution limits) to maximize tax savings. 

However, if your employer matches your contribution, make sure you contribute enough to get the employer matching funds. Not taking advantage of this benefit is leaving money on the table. Instead of getting a raise, it’s like volunteering to take a pay cut.

Insure Your Income & Protect Your Family

Many early career dentists & physicians need to obtain proper disability and life insurance policies. The insurance policies ultimately protect you and your family from losing your income. 

Disability Insurance 

Disability insurance protects you and your family if you become disabled or unable to work. You’re significantly more likely to make a disability claim early in your career than you are to claim on a life insurance policy. You can design the best financial plan, but it may fail without properly structured long-term disability insurance. 

One of the critical features of long-term disability for early career doctors to consider is an Own-Occupation definition within your policy. Many disability policies will stop paying after some time when you can work in any capacity. Specific forms of Own-Occupation require your policy to continue paying when you can’t continue your clinical work. 

Working with a financial planner who specializes in working with doctors who genuinely understand your unique financial needs is crucial. 

Life Insurance 

Many early career doctors are pitched whole life insurance, indexed universal life, or other permanent life insurance products by life insurance salesmen posing as financial advisors. These policies are not a good fit for more than 99% of early-career doctors. 

The life insurance salesmen pitch these products because they earn a very high commission plus payments every year you keep the policy alive. These salesmen may mean well when pitching you these products. However, they’re not in your best interest. Here’s what you should do instead. 

Term life insurance is a substantially more efficient way to insure your income. The costs are much lower because the policy lasts for a term of years. The difference between the premiums you’d pay for a permanent policy and a term policy could go towards your investments or a home purchase rather than paying commissions to your life insurance agent. 

Early career doctors must obtain more than ten times their income in term life insurance. If you’re earning $300,000 per year, you should get more than $3,000,000 in insurance. $3,000,000 is just a starting point. You may need even more if you have children, a mortgage, and a spouse that doesn’t work.

It’s Called “Cash Flow Planning” Because You’re Meant to Do it in Advance

The ability to make purchases and know you can cover them at the end of the month is a great feeling, but it can quickly get out of control and sabotage your long-term goals. If you’re using credit cards and then covering expenses with the next paycheck, you’re still living paycheck to paycheck; it’s just that the salaries got bigger.

With increasing income often comes “lifestyle inflation.” The temptation to increase your expenses with a rising income is understandable, and you should reward yourself, but excess spending can leave you in a tough spot.

You can avoid it by having a cash flow plan. Your cash flow is the money coming in and going out each month, but don’t confuse it with your budget. Budgets are about regulating spending. Cash flow planning is about tying your income to goals to see where you need to make changes. These can include limiting spending but also minimizing debt costs or increasing investment risk. Cash flow planning helps with big-picture planning across your financial picture.

Start With Your Income

After taxes, this means monthly net income across all sources, including salary and bonus, side gigs, and everything. 

Identify Your Expenses

These usually break down as follows:

  • Debt, including credit cards, leases, and loans (personal, education, etc.)
  • Taxes except for salary taxes, which are covered in net income
  • Basic monthly expenses: Rent, food, gas, cable, phone, etc.
  • Discretionary expenses: Dinners, trips, purchases
  • Savings: Cash reserve, retirement, big purchase
  • Insurance costs: Homeowners, health, professional liability, auto
  • Extraordinary expenses: Vet bill, car repair, etc. To get a realistic annual figure, average the last three years

Knowing where you’re at can begin planning for what’s possible. This means identifying short-term and long-term goals.

  •         A vacation trip
  •         A new luxury car or other big consumer purchase
  •         Buying your first home
  •         Buying into practice or starting a business

Creating a timeline for when you want to accomplish your goals and then tying it to your cash flow planning can help you identify areas where you want to make changes to hit your goals.

Setting aside money creates flexibility so that even if your goals change, you can reallocate those dollars towards whatever the new plans are.

Knowing your goals and values allows you to begin making the right financial decisions for your situation and makes it easier to say no to things that distract from your primary purpose. As life unfolds, your goals will evolve, so you must revisit and evaluate your current cash flow plan to ensure it aligns with your current way of life.

Creating a Cash Reserve

Also known as an emergency fund, your cash reserve should consist of 3-6 months of your living expenses (or more if you have variable income). Having a cash reserve is an essential piece of your financial foundation. It could help you avoid high-interest credit card debt if unexpected expenses arise. Keep your emergency fund in a high-yield savings account so it can earn slightly higher interest than it would at a traditional bank.

Getting Out from Under Debt

Even with relatively low-interest rates, debt can get expensive. And the less debt you have, your credit score will be higher. This matters when you want to move forward with goals like buying a house, but even lease rates on cars or credit cards are sensitive to your credit rating.

How can you go about minimizing debt?

 The refinancing decision is first up. If your credit score is good and your debt-to-income ratio is below 50%, you should explore options, such as a lower interest rate or a shorter loan term. If you are eligible for federal student loan repayment programs, such as PSLF, you shouldn’t refinance.

Set up auto-pay. Auto-pay allows you to ensure that your payments are made on time each month and helps you avoid interest charges. 

Bump up your payments. Adding extra monthly money to your original payment schedule can help you pay down debt faster. You’ll need to contact your servicer to ensure they put extra money toward your balance, not your next monthly payment.

 If you have credit card debt, you’ll want to pay that off as quickly as possible, so prioritize that in your cash flow planning.

Student Loan Debt

Student loans are the biggest hurdles for early career doctors. They don’t act like other debts. You can’t compare interest rates on your current student loans and determine whether you should finance them. That’s why we’ve created guides such as the dentist’s guide to student loan repayment strategies.

Designing your student loan plan should start with income-driven repayment plans. These plans allow you to base your repayment on your income rather than the underlying balance. Beginning on an income-driven repayment plan early in your career will enable you to receive forgiveness through IDR forgiveness or Public Service Loan Forgiveness (PSLF). 

If you’re looking to start a practice or do something else that requires a temporary decrease in your income, then income-driven repayment is a viable option. It would be best if you only considered private refinancing your student loans after you’ve determined that any time of loan forgiveness isn’t likely to happen, you’re making real money, and you want to pay off your loans quickly. 

More than 99% of advisors and financial planners don’t understand the nuance of student loans. The only way to ensure you’re working with someone that genuinely understands student loans is to see if they hold the Certified Student Loan Professional® (CSLP®). That’s why we’ve decided to offer student loan advice through consultations.

Enjoy Your Money

What’s the point of a financial plan if you never get to enjoy your money? Building a solid foundation around the basics and creating good habits is essential, but it’s just as important to make flexibility and fun part of your plan. This portion of your money should be for things that bring you joy, whether travel, nice dinners, shopping, etc. Your overall situation will determine how much you can spend in this area, but remember to build it into your cash flow plan.

The Takeaway

The goal of financial planning is two-fold: to help you enjoy your money now and to ensure that you set yourself up to achieve your life goals in the future. By thinking through your financial goals and values, you can begin using tactics and strategies to align your money with those goals.

Money is nothing more than a tool to get you where you want to be, and a financial advisor can help you think through your options and ultimately help you make the best decisions for yourself, your family, and your money.

Related reading: Tax Advantages for Practice Owners – Arch Financial Planning


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