4 Common Financial Mistakes Doctors May Make (And How to Avoid Them)
Doctors and physicians may have the cure to the common cold, broken bones and other ailments. But when it comes to finances, they’re in the same boat as most of their patients: they need to establish financial security and save for retirement.
Even with higher perceived earning potential, many physicians face the unique challenge of a shorter savings horizon and a larger debt burden. Forty-five percent of doctors and physicians accrue more than $200,000 of debt from medical student education according to the Association of American Medical Colleges (AAMC), complicating their ability to sufficiently save for retirement.
Whether a physician is new to practicing medicine or ready to retire in a few short years, there’s little room for financial error. Read on for four common financial mistakes physicians make and how to potentially avoid them.
1. Poorly Managed Debt
Student loans from undergraduate and medical school tuition can add up to a substantial amount of debt. In fact, the median amount of premedical student debt is $24,000 according to AAMC, and the average medical school debt is $183,000.
And, student loans aren’t the only debt to manage. The average American, ages 18 to 65, carries $4,717 of credit card debt. While it’s reported only 35% of credit card users don’t carry a balance, the Fed highlights a strong incentive: “Paying off credit card debt has a riskless return that averages 14%, which no other asset class can match.”
In terms of student loans, physicians should consider accelerating loan repayment with a payment plan, paying biweekly or by making larger payments to reduce the principal.
2. Not Saving Enough
When physicians finish their residencies, they’re focused on putting their education to work, not rationing their paychecks. Even if they live within their means, they often fail to save enough to make up for the extended time spent in medical school and residency.
According to The White Coat Investor, “Saving 10% is the general rule for most people (although even that might be a little low given our current low-expected-return investing environment), but most people also have 40 years to save for retirement. Doctors only get 30 years, so they really need to be saving 15% if they plan to retire at 65.”
Dr. Dahle at KevinMD.com recommends even more aggressive rates, “Many of your colleagues are using 20%, 40% or even 60% of their gross income to pay down debt, purchase income-producing assets, and save for retirement and college. Even if all you want to do is retire at regular retirement age, it will require you to save 15% or 20% of your income throughout your career.
However, according to a 2015 Fidelity report, 48% of doctors and physicians do not meet Fidelity’s recommended savings goal, and 42% worry about having enough money to make it through retirement.
3. Not Conducting Due Diligence
When doctors and physicians do find potential investment opportunities, they often fail to perform adequate due diligence on them. To perform better due diligence on an investment, doctors should initially consider the following questions:
It’s all too easy to take advice from family or friends without asking your own tough questions about an investment. It could also be hazardous to your future financial health.
- What is my investment horizon? Can you afford to keep capital tied up for a lengthy period of time? Or do you require an investment that can be liquidated quickly? The answer will help determine if a particular investment is right for you.
- What is the investment approach? What investment approach are you, or a third party, taking towards your capital? You may be more interested in potentially less risky investments with lower yield or be comfortable taking on more risk for potentially higher returns. An operator of an investment opportunity like a real estate property may also have different risk appetites that affect outcomes.
- What is the operator or investment quality? Is an investment of sound quality backed by tangible assets? Does the operator of an investment know what they’re doing to maximize returns on that investment?
4. Investing in the Wrong Assets
Thirty-eight percent of physicians and doctors are often nervous about the financial decisions they make. But because they don’t have time to keep a watchful eye on their investments and make necessary adjustments, asset allocation may not always be front-of-mind.
According to Vanguard, an investment management company, “Allocation should be built upon reasonable expectations for risk and returns, and should use diversified investments to avoid exposure to unnecessary risks. Both asset allocation and diversification are rooted in the idea of balance. Because all investments involve risk, investors must manage the balance between risk and potential reward through the choice of portfolio holdings.”
A home-run mentality—the desire to make up for lost time with high-risk financial activities—can lead to overly aggressive asset allocation. According to a study done by Fidelity, 48% of physicians and doctors ages 70+ invest too aggressively.
Instead, they should resist temptations to allocate their portfolio into mostly high-risk assets and consider the benefits of a diverse portfolio. One potential asset class that can add diversification in a portfolio is Real estate. Real Estate may produce consistent cash flows backed by assets with intrinsic value and act as a hedge against inflation and a downturn. Although there are risks in Real Estate, it can potentially work well as an addition to a diversified portfolio.
Like the human body, personal finances need to stay healthy to last a lifetime. Doctors and physicians should consider tackling four key areas to potentially build wealth:
- Pay down debt
- Increase savings rates
- Conduct due diligence
- Make sound investments
Avoiding common mistakes in these areas can help physicians and doctors proactively address their financial health and prevent portfolio problems before they start.
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