For all the new attendings just starting practice, or for those residents and fellows in their final year of practice, it's time to start really thinking about financial planning.
Completing your training program is a huge accomplishment. And happily, once you're an attending you finally start getting paychecks that are commensurate with your education. But before you go out and spend your entire first paycheck after residency, really start thinking about your financial goals. What do you do with all of that extra income?
Build your financial plan
While it might be tempting to spend it, that won’t grow your wealth over the long term. In order to make the most of your money and secure your financial future, you should put together a financial plan (including a budget) and make your money work for you.
The first thing to do when making a financial plan is to identify your short-, mid-, and long-term goals.
The first thing to do when making a financial plan is to identify your short-, mid-, and long-term goals. Whether it’s financing a new car or vacation, paying off student loans, or saving for your children’s university fees, it can be hard to do the hard work of planning for and monitoring your financial situation without knowing what you’re working toward.
After identifying your goals, it’s time to make a plan to reach them. In order to build an accurate “roadmap” to your goals, you must know where you are financially. It’s hard to draw a map if you don’t know your starting point. Put together a summary of your investments, insurance policies, and assets, along with any debts or other liabilities.
Once you know where you are and where you want to be, you will be able to put together a financial plan to move you from one point to the next.
Your financial plan should include two prongs: the strategies that build your wealth, and the protections that shield you from unforeseen life events.
Your financial plan is a reflection of your priorities.
Your financial plan is a reflection of your priorities—as you think about your financial goals, think about the most important things that you want to accomplish.
Is it saving for your children’s college funds? Is it being financially independent by 55? Is it buying a vacation home and spending a month there every year?
As you think about your goals, consider where you want to be in 5, 10, and 20 years and how these shorter-term goals contribute to your long-term destination.
Don’t forget about short-term savings
One of the most important places to put your money right away is in starting a short-term savings or emergency fund. This is hugely important, and the money should not be used for anything except bona fide emergencies.
Insufficient savings can force you to turn to debt, which is why you shouldn't immediately grow into your income.
The goal is to have six months worth of living expenses, and to do it as soon as possible. Insufficient savings can force you to turn to debt, which is why you shouldn't immediately grow into your income.
It’s much harder to cut back than to never increase your lifestyle in the first place. Before you start making big purchases, you should have a cushion in a savings account.
Really go after those debt repayments
You will also have debt payments to consider in your financial plan. After housing expenses, this will likely be your largest monthly expense. Most new doctors have an uncomfortable amount of debt after training. It can be difficult to strike a good balance between spending, saving, and debt payments.
A good plan to tackle debt repayment will remove a lot of the stress that arises from being in student loan debt. To see our guide to loan repayment strategies, click here.
Build financial protections
After working out a financial and debt repayment plan, it’s time to protect yourself from unforeseen events.
It’s especially important during this time after training that you obtain both disability and life insurance in order to protect you and your family if an unforeseen illness or injury causes you to be unable to work and thus lose your income.
Disability insurance is the most important coverage all physicians can get, as your financial well-being depends significantly on your ability to earn an income. It can even be argued that it is more important than life insurance, as it is statistically more likely that you will become disabled during your working years than that you will die prematurely.
By providing you with replacement income if you’re unable to practice medicine as a result of accident or illness, disability insurance allows you to have confidence that you could maintain your lifestyle and pay back student and other loans even if you aren’t able to work.
Life insurance provides your beneficiaries with a tax-free payment, or death benefit, that they could use to pay immediate and long-term expenses. Death benefit proceeds can be used to maintain or supplement your family’s lifestyle by generating income that can cover any long-term expenses you may have in place or replace your future income
When deciding how much to get, add up your total debts and any expenses that would arise from your death, plus your long-term needs and any future financial goals. Purchase coverage that is enough to clear your debts and provide sufficient resources to meet your dependents’ needs.
While hopefully this insurance will not be necessary, it is important to consider protecting your family as you craft your financial plan to meet your desired monetary and lifestyle goals.
Building financial opportunities
Finally, it’s time to start building financial opportunities. While the first 90 days after you begin as an attending may seem really fast, it’s important to get as quick of a start on this as possible.
As a physician, you’re most likely starting later than many of your age cohort when it comes to saving for retirement.
As a physician, you're most likely starting later than many of your age cohort when it comes to saving for retirement. And honestly, your balance sheet is probably pretty unbalanced right now.
You may have a lot of liabilities and few assets (except for your future earnings). You may not have a lot of liquid assets, and probably little invested for retirement. As part of your financial plan, you should make sure that account for savings is an integral part of it.
Get into the habit of paying your future self first. Insufficient savings can force you to turn to debt, which is why you shouldn’t grow into your income. It’s much harder to cut back than to never increase your lifestyle in the first place. Before you start making big purchases, you should have a cushion in a savings account.
Beyond saving cash, safe investing can have a hugely positive impact on your financial future. Investing today, thanks to the power of compound interest, will have a huge impact on your financial health later.
In 30 years, a $15,000 investment today at a conservative average return of seven percent return will give you $114,184. A $30,000 investment will return you $228,368! Choosing the right investments is critical, so if you aren’t sure or don’t want to spend a lot of time on tracking the health of your investments, working with a financial advisor can maximize your returns.
Investing is a great way to make sure your money is getting you the best return possible. If you didn’t have time to learn about investing as a resident, now is the time to learn or to assemble a good financial advising team.
Between learning the difference between a backdoor Roth IRA or a 457 plan and finding the best ways to maximize your post-tax income, it’s time for a crash course in financial literacy!
If you don’t feel comfortable setting up a financial plan by yourself or don’t have the time to do so, finding a good financial advisor who will help you develop the best plan to achieve your financial dreams can be a good idea.
Should you or should you not buy…
So now that you know more about the power of financial planning, let's move on to the good stuff: what should you buy (and what should you wait on)?
Maybe, or maybe not. Sorry to be so non-committal, but there are so many variables to consider when thinking about home ownership that it’s hard to give a blanket recommendation. But there are some things to really ponder when you’re looking to buy a home as a new attending.
If you’re moving to a new area, you may want to consider renting first so that you get a good idea of whether you like your new job and its location, and to get to know the area better.
A huge percentage of doctors quite their first post-residency position within three years.
After all, a huge percentage of doctors quit their first post-residency position within three years, and even realtors say it’s hard to break even on a home unless you’re in it for at least three years.
Plus, closing costs can add up. You have to spend between two to five percent of the value of a home when you buy it and another two to five percent when you sell it. So that gain in your home’s value that you might have hoped to see may not pan out.
The calculations are a little different if you grew up or already know the area well. You probably know which neighborhood you want to live in and have a good idea about things like your commute and area schools.
But even if you’re sure about the city and the neighborhood you want to live in, don’t buy on impulse! No matter how great the opportunity, there will always be more.
If you are ready to buy a house, remember that it’s recommended to spend no more than 30 percent of your gross monthly income on housing. And don’t forget to include insurance and property taxes in your monthly payment calculations!
When you’re looking at mortgages, think about whether you want a 15- or a 30-year mortgage. 15-year mortgages usually have a lower interest rate than 30-year mortgages.
15-year loans have a higher monthly payment, but you pay less interest. 30-year loans have lower monthly payments, but you pay more for the house in the long run due to the increase in interest.
An example to illustrate the difference is by using this amortization calculator. Assuming a 15-year fixed mortgage interest rate of 3.5%, and a 30-year fixed mortgage interest rate of 4.25%, let’s run the numbers!
With a loan of $500,000 and a 15-year mortgage, you’ll end up paying $643,320 over the life of your mortgage.
With the same loan amount and a 30-year mortgage, you’ll pay $885,240 for that loan. That’s a difference of $241,920!
Also, save up as much of a down payment as you can. There are “doctor loans” that require little to no down payment, but just because someone is willing to lend you money without a down payment doesn’t mean that the loan is actually a good deal for you.
If you want to use a “doctor loan,” you may have only one or two lenders to choose from. Whereas a 20 percent down payment gives you more options and lets you avoid private mortgage insurance that would be added on top of your monthly payment.
It basically boils down to this: buy a house because you need a place to live and want to put down roots.
It basically boils down to this: buy a house because you need a place to live and want to put down roots. Don’t buy a house because you are hoping for (or worried about) future price appreciation. You can’t control it, and you can’t predict it.
Do it! If you’re going to spend some hard-earned money, let lifetime memories be the return. Plus, it’s a great time to recharge.
(This is of course assuming that you have an emergency fund, a budget, and a retirement investment plan).
The best car to buy as a new attending is the one you already own. Only buy one if you can’t avoid it. If you’re without a car or the old one is dying, then go ahead, but don’t take money out of your emergency fund to do so.
The best car to buy as a new attending is the one you already own.
And if your car dies and you’re a new attending, really consider buying something inexpensive. A car is a depreciating asset and not a good place to put your money immediately. Reliable transportation doesn’t have to be expensive, and attending physicians don’t have to drive fancy cars.
As a new attending physician, really focus on building assets as opposed to liabilities like a car that produce expenses. After all, if instead of spending $5,000 for the next 45 years you invest that money into a Roth IRA with an eight percent return, you’ll have over $2 million just from that money by the time you retire!
Seriously, don’t buy a boat until you’re debt free. Boats depreciate even faster than cars do, and they require a lot of maintenance.
If you’re debt free and you still want to buy one, then try out owning a boat by renting one. Figure out how many days a year you would need to use the boat before owning is cheaper than renting (and don’t forget to add in maintenance costs of ownership).
Boat ownership is far more expensive than it seems at first, and young attending physicians usually have other non-retirement financial needs and goals to save for.