Written by: Corey Janoff
In over a decade of working with doctors and dentists, I have observed my fair share of the good, the bad, and the ugly when it comes to money moves. The physicians who are on track to reach their financial goals tend to make smart financial decisions when it matters (surprise, surprise). Others can’t seem to get out of their own way.
For this week’s blog, I decided to put together a list of ten money moves financially savvy doctors make so you can try to emulate their acts. By no means is this list complete, nor are these things listed in ranked order. They are all important. There are definitely more than ten things money savvy doctors do on their quest for financial independence. This should give you a good starting point, though, for some things you can do to get your finances on the right track.
1. Purchase a Home Less Than Two Times Income
I have written numerous blog posts about home buying and mentioned rules of thumb for home ownership in plenty of other posts. The amount you spend on a house might be the number one predictor of your ability to accumulate wealth. Money savvy doctors rarely finance more than two times their gross annual income when purchasing a home.
When I say “finance,” that means the original mortgage balance is less than two times income. So a financially savvy physician who earns $300,000 per year will have an original mortgage balance that is less than $600,000. This doesn’t necessarily mean that $600,000 is the maximum home price they can afford. It just means if they buy a $700,000 house, they are likely putting $100,000 for a down payment and taking out a mortgage for the remaining $600,000.
Aside from taxes, housing will likely be your single largest expense during your lifetime. Therefore, the less you spend on housing, the more you can spend elsewhere in life. This is a prime example of opportunity costs. A dollar spent here is a dollar that cannot be spent elsewhere.
I understand that in major cities, sometimes it is hard to find a house that checks all the boxes for less than two times a typical doctor income. Just because you live in an expensive city doesn’t mean the laws of math don’t apply to you. You’ll either have to settle for a smaller house or make some sacrifices elsewhere in your life. But if you want to achieve financial independence before your early-to-mid-60’s, you will find a way to keep your mortgage balance under two times your annual income.
2. Save At Least 20% of Income for Retirement
It takes a lot of time to complete the education and training requirements to become a doctor. Most doctors are starting their retirement savings a good decade after many of their peers in their college graduation class. Due to the late start, doctors have a lot of catch-up to do.
It is like you are running a marathon, but all the non-doctors got to start an hour earlier than you. If you want to finish around the same time as everyone else, you have to run a lot faster.
Someone who finishes college at age 22, gets a job and starts saving for retirement might be able to retire by age 60 if they save 10-15% of their income. A physician who wants to retire by age 60 will likely need to save at least 20% of their income starting in their early 30’s.
Fortunately, most doctors have sufficient incomes to play catch-up and still live an enjoyable life along the way. It is important to get started on the right track and get the retirement savings in order before increasing lifestyle and living the stereotypical doctor life.
3. Max Out Tax-Advantaged Investment Accounts
Financially smart doctors make a point to max out their available investment accounts that offer them tax benefits. Depending on your circumstances, the types of accounts available to you may vary.
Most doctors will have access to either a 401k or 403b account through work. For government employees, a TSP is essentially the same thing. In addition, there may be a 457b account if employed by a hospital.
Beyond that, maxing out Backdoor Roth IRA’s each year for those without any other pre-tax IRA’s is a no-brainer.
Self-employed physicians have a lot of flexibility with how to approach retirement savings and can potentially sock a lot of money away in tax-favorable accounts.
If your health insurance plan allows for a health savings account, that are also a great tax-advantaged vehicle to invest into.
Saving on taxes is a big goal for many physicians. In total, this is a lot of money that can be deposited pre-tax or Roth to help reduce taxes while working or during retirement years, or both!
4. Financially Savvy Doctors Diversify
The physicians who are most pleased with their investments usually take a rather boring approach. They spread the risk around multiple types of investments and hold on for the long-haul. They may only check their investments once or twice a year to make sure things are in line with their investment objectives and only make minor adjustments along the way to keep things in line.
Maybe it is an understanding that you don’t need the best returning portfolio to ultimately reach your goals. The financially wise doctor takes a diversified approach to minimize the impact of one particular sector performing poorly.
5. Don’t Chase Returns
It is easy to get caught up in the hype of the hot new investment and want to move a bunch of money into that. While that is fine, the savvy doctor never invests more than he can afford to lose in those speculative investments.
Usually the investment that performed the best lately won’t continue to perform the best forever. Just ask people who invested in internet companies in the 1990’s, real estate in the mid-2000’s, or tulip bulbs in the 1630’s.
These were the hottest things to own at one point
Using the same logic, the investment that performed the worst recently likely won’t continue to be the worst performer forever.
The doctor who is often disappointed with his investments is one who sells out of the investment that has performed poorly as of late and moves money into the one that has done well as of late. This effect of repeatedly selling low and buying high can have a negative impact on long-term results.
Fidelity did a study a handful of years ago on which accounts performed the best. The accounts with the best results were owned by people who had completely forgotten about the account or were dead! People who didn’t touch their money, or even look at, it had the best results over the timespan that was studied.
Some food for thought.
6. Earmark Retirement Savings for Retirement
When doctors who ultimately achieve financial independence set money aside for retirement, they only touch it in retirement! If money supposedly invested for retirement is used for a home renovation, then it is no longer retirement money.
Be sure to allocate your money for your various goals. Retirement money should only be used in retirement. I have no problem if you want to put a new kitchen in your house, or pay for your kids to go to college. Save money for those goals. However, if you rob Peter to pay Paul, you are only setting yourself back in other areas.
Most physicians earn nice enough income to accomplish pretty much any goal they have. However, physicians don’t earn enough income to accomplish every goal they have. Prioritize accordingly.
Retirement is the one goal you cannot borrow money for. There are student loans for college. You can finance a home remodel with a home equity loan or line of credit. Auto loans. Mortgages. Heck, you can even make donations to charity with a credit card! Nobody will lend you money for retirement, unless they have zero intention of getting repaid (then it’s just a gift, not a loan). For doctors who want to achieve financial independence one day, make sure the money that is earmarked for retirement is only used in retirement.
7. Carry Umbrella Liability Insurance
Umbrella liability insurance is probably the most overlooked component to a solid financial strategy. In short, it provides additional protection above and beyond the liability limits of your home and auto insurance.
Most physicians are unaware that their home and auto insurance may only have a maximum liability limit of $500,000. Well, let’s say you live in Los Angeles and you are driving in traffic on the 405 one day and a motorcyclist is cruising up the freeway in between lanes. For anyone who has driven on a freeway in southern California, you know what I’m talking about. You decide to change lanes, but you don’t see the motorcycle flying up behind you, because everyone else is basically at a standstill. You see an opening and you quickly cut into the next lane. As you are merging over, the motorcycle slams into the side of your car and the driver (rider?) goes flying arse over teakettle.
The motorcyclist ends up with some spinal injuries that result in what is likely to be lifelong complications.
As a responsible human, you cooperate with authorities and exchange information. The motorcyclist googles your name and finds out you are a doctor. His eyes light up, because he sees an opportunity. He calls the personal injury attorney from the billboard he saw while lying on his back on the 405 and sues you for $2 million and wins in a jury trial.
Your first line of defense in this example will be your car insurance. But if your car insurance liability limit caps out at $500,000 and you don’t have any additional protection, you are on the hook for the remaining $1.5M. Good luck.
The financial ramifications of this could easily be mitigated with an inexpensive umbrella liability insurance policy, purchased through the same company you have your home/auto insurance with. It’s cheap too. Maybe a couple hundred dollars per year per million of coverage. If you don’t have it, get it. An umbrella liability policy is probably the least expensive form of asset protection a doctor can buy.
8. Have Sufficient Own-Occupation Disability Insurance
I could make a strong argument that disability insurance is the most important insurance a doctor should have. Physicians spend a minimum of 11 years after high school training to be a doctor. The average doctor graduates medical school with over $200,000 of student loan debt, which will grow to $250k or more by the time she completes residency.
You have a very unique skillset and are well compensated to exercise your abilities to their fullest extent. If you are unable to fully exercise those abilities, your income will likely take a hit and so will your financial dreams.
Protecting your income is of utmost importance and doing so with an own-occupation, specialty specific disability policy is a must.
Now, not everyone can qualify for disability insurance outside of work, because you have to be somewhat healthy to qualify. If you have any health issues or medical conditions, you may only be able to get policies provided through employers, which will limit your job search.
Because health is a factor, get a policy as soon as possible, if you don’t already have one. The younger and healthier you are, the less expensive and easier it is to qualify for. Health will likely deteriorate over time, so use your age and health to your advantage and lock it in now.
The financially savvy doctor understands the importance of being able to earn income and fully protects her income until income is no longer needed.
9. Have an Adequate Amount of Life Insurance
This one may not apply to everyone. If you don’t have a spouse, children, parents, or anyone else who depends on you, and have no desire to ever have any dependents, then you can ignore this one. For the rest of you who either have dependents or who plan to one day, life insurance is a must.
The financially savvy doctor understands this and purchase a significant amount of life insurance, to ensure his family can maintain their lifestyle if he is no longer there to provide for them financially.
How much is a significant amount? Probably more than you think. The amount differs for everyone, but unless you have a spouse who works and earns a sizeable income, most doctors should probably have at least $3 million in coverage.
Similar to disability insurance, the ability to qualify for life insurance is contingent on health and it is less expensive the younger and healthier you are. Physicians who don’t have a huge need for coverage now may still strongly consider getting a policy for future planning purposes.
10. Have an Estate Plan
Next to umbrella liability insurance, estate planning is another often overlooked or undervalued component to a well-rounded financial strategy. Nobody is immortal and doctors understand that as well as anyone. You never know what could get you.
Doctors who have children want to make sure that if they do die an untimely death, their kids will be taken care of according to their wishes. Savvy physicians understand that without an estate plan, a judge in a courtroom will decide the fate of their kids and surviving family members will likely fight over what they think is best.
The only way to mitigate these risks is to have a properly written estate plan from a qualified estate planning attorney.
At its most basic level, this will include a will, advanced directives, and powers of attorney should you be incapacitated but still alive. Some physicians will also set up a living trust, or some other type of trust, depending on what their goals and wishes are. A qualified attorney will be able to help determine the best means to achieve your goals.
Be a Money Savvy Doctor
Most doctors aren’t very money savvy. The fact that you are reading this puts you way ahead of your peer group in terms of financial competence. Not all of it is fun. It will take some discipline and dedication to adhere to these principles. However, it is all doable and you can do it!
This list is by no means complete, but it covers some of the big things to devote attention to on your quest for financial independence.