Written by: Davis Barry
Doctors graduate from medical school with significant earning potential, but to maximize wealth-building, there are certain financial steps they would be wise to take. Of course, one of the financial issues many doctors need to address immediately is their medical school debt. At Agili, we take a holistic approach to helping our clients build wealth, so while we certainly recommend paying down medical school debt, we provide financial planning and investment management recommendations that can be accomplished concurrently, building a well-rounded financial plan together.
Factors to Consider in Financial Planning for Doctors
According to a recent Association of American Medical Colleges (AAMC) report, Physician Education Debt and the Cost to Attend Medical School: 2020 Update, 73% of medical school students graduate with debt. In 2019, the median debt was $200,000. The average four-year cost for public school students is $250,222 and for private school students, the cost is $330,180. As a result, student loan repayments can be more than $2,000 per month. And since the repayment terms for these loans can vary from 10-25 years, some doctors may still be paying off medical school debt at the age of 55.
In addition to the medical school debt they accrue, during their education and training years doctors can miss out on nearly a decade of compound interest on savings — one of the most powerful tools in building retirement savings.
A Financial Health Prescription for Doctors
For doctors, the road to financial independence can be long and winding, but it starts with setting goals. If you do not understand why you should make certain money decisions it will be difficult to maintain the discipline to achieve your goals. The foundation of financial literacy is budgeting and investing, always remembering to pay yourself first. Sounds simple enough. Yet for doctors, after years of education and training, it can be tempting to go out and buy that $1 million dream home, fancy boat and take lavish family vacations. It is important to remember that lifestyle inflation is a real threat to longer-term goals and financial independence.
So here are our recommendations for the financial health of doctors.
- The first thing a young doctor should do is build an emergency fund of at least 3-6 months of living expenses. Having the peace of mind that an immediate emergency fund provides is important to financial success.
- Set up automatic student loan, mortgage, and credit card payments. Target higher interest rate debt with extra payments to expedite overall debt reduction and interest savings.
- Save up for a house down payment or consider a low down payment physician mortgage. It makes sense to purchase a home in an area you plan to live in for at least 5 years. Find the right house that meets your family’s needs, but do not go overboard. A house is a big commitment and expense.
- Establish automatic retirement plan contributions and backdoor Roth IRA contributions.
- Consider funding a Health Savings Account if available. If your practice does not have a cash balance pension plan established, suggest they offer one.
- Additional savings should be invested in a taxable brokerage account.
- Obtain adequate insurance (professional & personal). For most young physicians, earnings potential is their biggest asset and should be insured via own occupation long-term disability insurance. An appropriate amount of term life insurance is also critical for young physicians who are married and/or have children. Also, umbrella liability insurance should not be overlooked.
- College savings for children will be necessary since very few doctors qualify for financial aid. It is never too early to set up a 529 account to start saving for your children’s future education. Even a couple hundred dollars a month will go a long way if you start when your children are young.
- Put estate planning documents in place (wills, power of attorneys, advance medical directives and likely a revocable trust). If you have children, make sure to name a guardian in your will.
- Make sure all retirement and brokerage accounts, as well as life insurance policies, name the appropriate beneficiaries. Keep a secure document that lists all financial accounts and login credentials.
- Understand your tax situation. Depending on how you earn income (partner, W-2, 1099, side 1099, or some combination thereof) you may need to make quarterly estimated tax payments. Pre-tax retirement contributions are the physician’s friend when it comes to saving money on taxes.
Importance of a Holistic Approach to Financial Planning
For doctors and other professionals just beginning their busy careers, taking a holistic approach to financial planning is more easily accomplished by partnering with a financial planner who focuses on your big picture goals and values. The focus should be on the “whole you.” With their advice and by properly managing financial resources, life goals are achievable.
For more information about financial planning and budgeting specifically, we invite you to view our Best Financial Advice Video: Why Budgets Matter.