By Gary Eickhorst, ChFC®
Congrats! After years of hard work, little sleep and lots of determination, you have finished medical school and residency, and your paycheck finally reflects a physician’s salary. The jump from the average residency pay of $51,000 to a full-time physician salary is typically large. The change can be overwhelming to determine what do with the income surplus. See below for tips on how to lay a firm financial foundation and avoid potentially damaging mistakes.
Surprised we started with this piece of advice? You’ve worked hard to get to this phase in your life. You owe yourself a treat. However, before you go as far as a new sports car or an extravagant trip, read the below to ensure you have yourself appropriately set-up for financial success.
Eliminate Financial Risk
Healthcare costs are at an all time high. Although you may be able to self-treat many of your own health challenges, the unexpected can still wreak havoc on your finances. To financially mitigate medical surprises, secure adequate insurance coverage.
- Health Insurance: Evaluate high vs. low deductibles and the use of HSA plans. If you are an independent contractor, work with a broker that can help you choose a plan that eliminates unnecessary costs.
- Disability Insurance: Your income is your most valuable asset. Just over 1 in 4 of today’s 20 year-olds will become disabled before they retire*. Keep in mind accidents are not usually the culprit. According to the Council for Disability Awareness, back injuries, cancer, heart disease and other illness cause the majority of long-term absences. We could write an entire blog on what to look for in a disability policy (and we will in the near future). In the meantime, as you research coverage, be sure to include an “own occupation” rider.
- Life Insurance: You may want a plan to provide for loved ones if you aren’t there to provide for them. However, finding the right policy – or policies – to meet your exact needs can be difficult. Work with a broker to compare the advantages of term vs. permanent policies to keep your premiums as low as possible while maximizing any future benefits.
Address Student Loans
You may have some whopping loans to pay off. You can see one of our recent blogs to learn more about how you might address this monster: https://www.financialdesignsinc.com/blog/five-tips-to-managing-medical-school-student-loans/ Be sure to work with a trusted advisor to determine how you should balance paying-off debt with saving. Although some people choose to start saving only after the debt has been addressed, there may be a more financially efficient strategy that involves doing both at the same time.
Start Saving for Retirement Now
“I sure wish I hadn’t started saving for retirement so early” – said no one ever.
We get it – retirement seems like a long way off… but remember that little thing called Time Value of Money? At the bare minimum, try to find a way to contribute enough to at least receive any kind of institutional match available to you. Additionally, if you are an independent contractor, you can save up to $56,000** a year in a retirement account. This may seem aggressive, but the positive effect on your tax bill might surprise you (not to mention the jump start on saving for your Golden Years). Work with a financial advisor who can show you hypotheticals to help determine what the right saving strategy is for your specific situation. Your advisor should also be able to account for your current debt and incorporate that into your plan as well.
Plan for the Worst – But Also Plan for Fun
You may have heard the rule of thumb to have enough savings to cover 3-6 months salary should an emergency arise. We couldn’t agree more. As Joan Rivers reminds us, “In life the only thing you can expect is the unexpected”. This savings account could also be used to fund little surprises like your home air conditioner going kaput or an unexpected car repair.
What people don’t talk about as often is funding the fun too. You deserve to enjoy your hard-earned paychecks both pre and post retirement. Make monthly contributions to a “vacation” fund and/or a “3-5 year” fund that allows you to do the things you love without having buyer’s remorse. This could be anything from a new car to a trip to Bora Bora to a remodeled kitchen.
Don’t Underestimate Ways to Reduce What You Owe Uncle Sam
For w2 and 1099 physicians, your HSA and retirement contributions are tax deductible. Make sure you are maximizing this benefit.
If you are a 1099 physician, you can also deduct health insurance premiums, business expenses, and you may be eligible to utilize the new QBI deduction which is literally saving many physicians thousands more in taxes. Work with a tax professional to make sure you aren’t paying a dime more than you have to.
Lastly, don’t get overwhelmed. As Dave Ramsey says, “Nothing happens without focus. Don’t try to do everything at once. Take it one step at a time”. Have questions? Don’t hesitate to reach-out for a discussion on how to tackle your specific financial situation. We are here to educate and remove any financial anxiety.
** Individuals over the age of 50 can contribute up to $62,000 annually (this reflects 2019 limits)