What do you do in an emergency?
When it comes to a crisis, there are three major problems a doctor can face:
Disability: You are too sick or injured to work. Fortunately you can get disability insurance to mitigate this risk.
Premature death of the primary breadwinner: Your untimely death could leave your loved ones without the proper source of income. This risk can also be insured away with very inexpensive term life insurance. How much do you need? We recommend 20x annual income, depending on your individual situation. The good news is that it is very inexpensive for healthy, young doctors.
Job loss: The key is to have enough funds to last during the transition. MD Financial usually recommends every doctor have easily accessed funds that are 3-5 months fixed living expenses for an emergency/rainy day fund:
Enough to pay mortgages, student loans, food and other fixed expenses. “Bare bone budget” is key, not for vacations and clothes.
The exact amount is variable and depends on how much you need to be at peace.
If your ideal amount of liquid emergency money is large, we recommend a backup emergency fund that is invested in an account that will do better than the bank, usually 25% stocks / 75% bonds.
A 5 step approach to protect you and your family from potential loss:
The emergency fund. This is an account at a bank. It is easily accessed and the money will be there when needed, 3-5 months fixed expenses.
The intermediate account (also known as the “put and take” account). These are funds in a taxable “non-qualified” brokerage account that are saved for a big purchase in the next few years. The purchase can be things such as a down payment for a new house, a new car, college for the kids, etc. The goal is to do better than the bank, with no penalties to pull it out. The idea is to have it for things you will be buying before retirement.
Another brokerage account. The Wealth Accumulation Account (also known as the “put and keep” account). These funds are also invested in a taxable, “non-qualified” brokerage account and are saved for retirement. They are generally mostly stocks and some bonds, depending on the risk level of the doctor.
The 401-k/403-b, retirement accounts. Most of our doctors can borrow up to 50% of their 401-k or 403-b accounts that they have with their current employer.
Roth Accounts or IRAs. We only use these if it is absolutely necessary as there is a 10% penalty and ordinary income tax on the gain, if funds are withdrawn before age 59 ½ in most cases. This is the source of last resort due to the tax penalties.
You can also check out the posting here, featured on Brown Emergency Medicine, or on iTunes.