Written by Ben Kirchner, AAMS© / Financial Advisor
Going into practice is a busy time in the career of a young physician or dentist. We get lots of questions about what they can do during this time to start off on the right track. One key to success is reviewing the data behind the decisions we make. In medicine, this could mean recognizing that your blood pressure is too high, therefore you change your\habits or medications to improve your overall health. Similarly, doing a “financial check-up” can ensure long-term success with money. The most pivotal time for a checkup is during the transitionary period of going into practice. We’ve broken the financial check-up into six key categories:
1. Cash Flow
The residency years can be tough on the budget. Many residents that we work with come out of their training feeling stressed, not only from their jobs, but also from dealing with balancing the expenses of their budget. Now add in the new attending salary which can seem like a fantasy and be hard to comprehend. All of this makes now the best time to review your budget and cash flow.
The key item to discover here is the margin or unallocated monthly funds provided to meet your short and long-term goals. Right now, it probably feels like there isn’t any. Especially if you are in an expensive location (which most training programs seem to be), everything from daily cost of living and housing to family expenses chip away at your take-home pay. With your new income, you should see a lot more margin. How do you properly allocate that new margin to set yourself up for success?
Once you start your new job, it’s vital to build up a proper emergency fund in your savings account. A good rule of thumb is to have three to six months of fixed expenses set aside in a savings account. This is “boring money” that won’t be doing much except providing a safety blanket. It should keep you out of consumer debt and help cover unexpected bills like a car or home repair. The lack of a proper emergency fund can drain your income and have you paying thousands of dollars in interest.
2. Debt
Many of our doctors tell us they put debt on the backburner during their residency. Debt can induce a great sense of fear and even provoke habitual procrastination. Neither is good for your financial future, so it’s essential to address it now that your income is increasing.
Eliminating debt must be a priority in order to redirect your new income to your advantage. This starts with getting rid of any outstanding credit card balance, consumer debt, or unsecured loans. These forms of debt are an absolute killer in the wealth building process as they can charge high amounts of interest (in some cases over 30%!). Good luck finding an investment that can consistently provide those returns.
Additionally, this transitionary period is a great time to review a plan for your student loans. If the loans are public, review your repayment plan and options. If you’re pursuing Public Service Loan Forgiveness (PSLF), now is a great time to make sure your payment counts are up-to-date from your previous employers, and you know when you need to recertify your income. If your loans are privately held, review a sustainable payoff plan and investigate whether to refinance the loans to a lower interest rate. This will help you save money over time.
3. Insurance
It’s always important to protect against what could derail your financial plan. The two largest threats to that plan during this time of life are disability and death. Most of our doctors aren’t sure where to begin with disability or life insurance. Do they really need it? How much insurance should they get? What does all that jargon mean?
Regardless of your family situation, protecting against loss of income due to a disability is a must considering the specialized skillset doctors possess. Many companies provide discounts on the premiums if you place a policy during your residency. These discounts will follow you the rest of your career. Disability policies are built to fluctuate with your income and other coverage. Once you begin an attending role, be sure to review and verify that you are completely covered. Ideally, you’re covering your monthly take-home pay. We also recommend that your coverage is classified as “true own occupation”. This allows you to work in another area of the medical field like teaching or research and still be paid your disability benefit in whole if you are unable to work in your own specialty.
Another main area to review is supporting the ones that financially rely on you, even if you’re gone. If you were to die today how would your kids, spouse, parents, etc. continue to be financially supported? This part of your plan can be affordably covered with the purchase of term life insurance. As you move into your attending role, it’s a great time to review current or new coverage and see if any additional coverage is needed. This type of insurance is used to replace lost income, pay off debts, and pay for other goals like college. It’s not uncommon to need 10-20x your income to cover this need, and the benefit would pay out tax-free to anybody you designate.
4. Savings
After years of working insane hours and having little income to show for it, you’ve finally made it! You’ll now be making a fantastic income; more than you’ve ever made before. With this change comes a mindset shift from simply affording bills to stewarding the new resources well. So, what does that look like?
One of the easiest ways to go about this, is to automate the process of moving your money into wealth building accounts. The first few months in your attending position is a great time to set up a plan for your “tax-advantaged” savings. These savings are simply investment plans that give you a form of a tax benefit. This means making sure your 401k or 403b is on autopilot to be maximized by year end ($23k limit in 2024) and that you’re contributing the maximum to your Roth IRA via the backdoor Roth conversion strategy ($7k limit in 2024).
The next step beyond those accounts is to figure out your retirement or “financial independence” number. This involves looking more at a formalized projection and figuring out how to automate savings in brokerages or other accounts. Reach out to your financial advisor to learn more about your projections.
5. Roth Opportunities
The transition year is also a great opportunity to look at maximizing Roth opportunities. This is likely the last year that you can fund a Roth IRA directly without having to fund via the Backdoor Roth Conversion Strategy. It is also likely the last year you’ll be in a lower tax bracket, making Roth contributions more attractive. The after-tax dollars being contributed are taxed less this year than they will be when you’re practicing and in a higher income bracket.
Now is a great time to look at doing Roth conversions of former retirement plans. These are plans from previous employers like 401ks or 403bs that you put money into during your residency and received a pre-tax deduction on the contributions. This money has yet to be taxed. Left untouched, the funds will continue to grow and defer taxation until you withdraw the funds in retirement. A Roth conversion transforms the funds from their pre-tax state to an after-tax state that will grow tax-free and not require taxation upon withdrawal in retirement. The catch here is that you pay the taxes on the conversion today. As an example, if you had a 403b worth $10k, a Roth conversion would treat that $10k as additional income for that year. From there, it grows tax-free. It’s best to do these conversions in a year that you’re in a lower income bracket, which makes the transitionary year a golden opportunity.
6. Spending
Last but certainly not least, be sure to spend some money! It’s important that your spending aligns with your goals and that you are spending on items that bring you joy. After you’ve “adulted” your way through the other categories, it’s good to indulge a little. After all, you’ve earned it for all the years you’ve put into learning medicine.
Just like with saving, it’s important to have the right mindset for spending. For example, if you’re spending a lot of money on Uber Eats or DoorDash but really enjoy traveling, maybe do a “spending audit” and redirect some of that money to travel. Living like a resident in terms of the fixed expenses after residency can make an enormous difference in financial success long-term. If your monthly “demands” are low on items like housing, car insurance, cell phone, utilities, etc., you will have more freedom and flexibility to increase the variable areas of your spending on items like travel or entertainment.
Much like how small health changes at a young age exponentially reward you later in life, building a solid financial foundation now is a springboard for future financial success. These small changes can add up to millions of dollars over time, so don’t delay addressing the key areas today!
If you have any questions about your personal finances or would like a professional opinion on your financial check-up, feel free to reach out to us.
Ben Kirchner, AAMS© / Financial Advisor
After starting his career at two Fortune 100 companies, Ben joined MD Financial in May of 2018. Ben advises over a hundred doctor households, helping them achieve their financial goals. He is passionate about serving. Ben enjoys making sure all of our doctors thrive financially and have a great experience every step of the way. He can be reached at Ben@mdfinancialadvisors.com.