Early career physicians need to consider fundamental financial factors
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Completing medical education and training is a monumental achievement that can launch a successful lifetime career.
During this busy and challenging time, financial considerations can often take a backseat, leading to potential pitfalls that may impact a physician’s future financial health. The early states of your career provide a critical window to build a solid financial foundation by addressing student loans, establishing emergency funds, and making informed decisions about insurance and retirement savings. Ignoring these fundamental financial factors when launching a medical career may lead to missed opportunities and increased financial stress down the road.
This article explores five practical strategies tailored for physicians who have recently completed their medical education and those in the early years of practice.
Choose job and employment contract review
When choosing a first job after completion of medical training, many physicians gravitate toward the highest paying career opportunity. Physicians should consider other factors, such as the location of the job (cost of living and city/state taxes) and the opportunity and potential cost of a future partnership buy-in.
Once you have determined your top job choice, it is essential to pursue a comprehensive legal review of the contract being offered by your prospective employer. Compensation structures, noncompete clauses and termination provisions are key factors for analysis by an attorney who specializes in health care employment law.
- Compensation structures: Physicians should understand the different components of a contract’s compensation structure, which may include a base salary, bonuses, and employee benefits, such as disability and malpractice insurance, paid time off and retirement plans.
- Noncompete clauses: Noncompete clauses can have a significant impact on a physician's future career opportunities. It's important to carefully review these clauses and negotiate reasonable terms with regard to geographic scope, duration and specialty restrictions.
- Termination provisions: A clear understanding of severance packages, nondisparagement agreements and other relevant termination provisions can help physicians protect their financial interests in the event of unexpected job changes.
A recent Residency to Retirement article covered the legal hurdles of an employment contract.
Pay off student loans
Addressing student loans early on is a key element in financial planning for physicians. Effective strategies for paying off student loans can include consolidation and refinancing, and physicians should understand the impact of interest rates and repayment plans to make informed decisions about their financial futures.
Consolidating or refinancing student loans can simplify repayment and potentially lower interest rates. However, it's important to weigh the benefits against potential drawbacks, such as losing certain loan forgiveness options or extending the repayment period.
Physicians can also explore different repayment plans, such as income-driven repayment or refinancing with a lower interest rate, to optimize their loan repayment strategy.
This recent Residency to Retirement article discusses the impact of the 2023 end of the federal student loan payment pause and outlines available repayment strategies for physicians.
Establish emergency fund, maximize retirement account benefits
Building a financial safety net starts with establishing and maintaining an emergency fund. Physicians should aim to save 3 to 6 months’ worth of living expenses in a high-yield savings account that allows easy access in times of need. Automatic monthly transfers into your emergency account can replenish the fund quickly after withdrawals.
Contributing to employer-sponsored retirement plans, such as a 401(k) or 403(b) plan, offers several advantages:
- Physicians can harness the power of compound growth by beginning these contributions early in their careers.
- Employers often provide matching contributions, which essentially combines “free money” with your contribution amounts to grow over time.
- Retirement plan contributions are tax-deferred, meaning physicians can lower their taxable income while saving for retirement.
When investing within retirement accounts, physicians should consider their risk tolerance and time horizon. An experienced financial advisor can help a young investor diversify investments across different asset classes to mitigate risk and regularly review and adjust investment allocations as financial goals and market conditions change.
Budget with your lifestyle in mind
Understanding cash flow and effective budgeting is fundamental to financial success.
Managing cash flow can be challenging for physicians, especially as they transition from the income earned in residency and fellowship to the higher salaries and bonuses often enjoyed by practicing physicians. By tracking income and both fixed and variable expenses, physicians can better manage their cash flow and ensure they have enough money to cover their financial obligations, enjoy personal lifestyle goals, and contribute to emergency funds and retirement accounts.
One popular budgeting strategy is the 50/30/20 rule, which suggests allocating 50% of income toward essential expenses like housing, utilities and groceries; 30% toward discretionary expenses like dining out and entertainment; and 20% toward savings and debt repayment. Of course, physicians may need to adjust this guideline based on their individual circumstances and financial goals.
Financial tools and apps, such as Mint, YNAB (You Need A Budget) and Personal Capital, can aid physicians in budgeting, tracking expenses and setting financial goals. These tools can provide a comprehensive overview of finances, help identify areas for improvement and automate savings contributions.
Secure disability and life insurance
Insurance provides essential financial protection as you build assets and take on more personal and professional obligations. Many physicians may not realize that one of their most significant assets to protect is the value of their future income. Disability and life insurance are key tools for physicians to protect this asset for themselves and their dependents.
Disability insurance should be secured early in a physician’s career to protect the value of their future income from the risk of a short- or long-term disability. Physicians who find that the group disability insurance provided by their employer does not fully meet their needs can choose to purchase individual disability insurance to ensure comprehensive protection against income loss due to illness or injury.
Life insurance is an important consideration for physicians as soon as they have a spouse, children or others dependent on their incomes. After determining the amount of life insurance they need, physicians can choose between term life insurance and a wide variety of permanent life insurance products, each with their own advantages and drawbacks.
The coverage amount of the life insurance policy should be sufficient to replace lost income and cover outstanding debts, such as student loans or a mortgage. It is important to review and update coverage regularly as personal and financial circumstances change, such as getting married, having children or purchasing a home.
This Residency to Retirement article provides additional insight on how to determine the amount of life insurance you need.
Conclusion
Financial planning is a critical aspect of a physician’s early career and one that can be easily underestimated. Diligently paying off student loans, budgeting, securing insurance and saving for retirement may require some sacrifices up front. Nonetheless, the financial decisions you make in the early stages of your medical career can set the trajectory for your long-term prosperity. A professional financial advisor who specializes in working with physicians can be a valuable resource to help you establish a financial plan and adjust it as circumstances change.
For more information:
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com, where Adam Braunscheidel is a wealth advisor. You should seek professional tax and legal advice before implementing any strategy discussed herein. Mr. Mandell and Mr. Braunscheidel can be reached at mandell@ojmgroup.com or 877-656-4362.
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