As a physician, your sole focus in your twenties (and likely into your thirties) was learning your craft--undergrad, med school, internships, fellowships, post docs, etc. You’ve given up countless hours with your nose in books and days on end at the hospital to become a physician. Now that you’re an attending physician (or close to it), you’re hoping that the hard work will pay off for you financially. Unfortunately, though, many physicians fall prey to traps that will hinder them from flourishing financially once their income finally rises.
You’re Tired of Living Like a Peasant
I’ve noticed a pattern with many of the physicians I’ve worked with. After a decade or more working for modest income, your first attending position comes with a significant spike in pay. You’ve seen your friends that started their careers in their early twenties slow climb the income ladder and now have the means to purchase nice things (homes, cars, vacations, toys). Meanwhile, you were working overnights driving your parents old Honda Civic and living in an apartment near the hospital. When you finally get that first job as an attending, you decide to treat yourself for that decade of hard work with a new Porshe, a brand new $1M home or by taking exotic vacations.
I get it. You’ve worked hard to get where you are and earn the living that you do now. I’m not suggesting that you should continue living like a poor college student for the rest of your life, but if you get caught in the trap of lifestyle creep right away, it’s hard to go backwards. Could you imagine going back to a Motorola razor after having the power of an iphone for 10 years? Probably not. The same is true for our broader standard of living.
You might not be worried about spending all of your income in those first few high income years because you’ll be able to save later. Through my experience with many physicians, I’d caution you on this. Burnout in your world can be high with the pressures you face. If in 10 years from now, you’re burned out on work, but haven’t begun saving in earnest yet, you’ll leave yourself little flexibility. The longer you can delay ramping up your lifestyle to match your high income, the more options you’ll give yourself down the road.
The Income Compression Problem
I often compare the financial life of a physician to that of athletes. You might earn a really high income, but it won’t likely be for as many years as the rest of the working world. Because you won’t be saving until your mid thirties or even later (especially if you’re paying off student loans), you don’t have as much time to let compound interest work its magic.
Your income spike also presents a challenge in the form of taxes. It’s very possible that you could go from the 15% tax bracket to a 35% or even 39.6% bracket overnight. You might earn far more income than the average person, but you keep a smaller percentage of it after taxes.
Because of these issues, it’s important that you begin saving as SOON AS YOU START EARNING! Looking at your top line income number can lull you into a false sense of confidence that you’ll easily cruise into a care free retirement someday. That’s not necessarily the case unless you start planning early in your career.
You’re a Target for Financial Snake Charmers
Unfortunately, many ‘financial advisors’ or ‘financial consultants’ are really just glorified salespeople. Many see you as a target client because you are what people in the financial industry might refer to as a “Henry” or “High income, not rich yet”. With your high income, the life insurance, disability insurance and annuity salesman will be coming out of the woodwork to convince you that they have THE product to solve all your financial woes. They’ll tout tax deferral, interest free loans, guaranteed returns and all sorts of other great sounding features on the surface. In many cases these products will end up being good for the seller and not so good for you.
Here’s a lesson that will serve you well when it comes to financial products: the more complicated a product is to understand, the more likely you should run quickly the other direction.
Before you make a decision to purchase any product or work with any particular advisor, have a healthy level of skepticism and do your homework. Ideally you’ll find a fee-only advisor whose interests will be aligned with yours.
You’re Used to Being the Smartest Person in the Room
Hopefully I don’t offend you here, but you are accustomed to being the smartest person in the room. I’m not here to diminish your knowledge as a health care provider. But just because you are brilliant in your specialty, it doesn’t mean that you’re also a born money master. This line of thinking might lead you to the conclusion that you can or should be entitled to ‘beat the market’.
For several decades now, the academic finance community has known that the odds of you earning a higher rate of return (after fees and expenses) than the general market over any meaningful period (such as your timeframe for retiring) is very slim. Even Warren Buffett agrees that trying to outsmart the market is not wise.
As a physician, I know that you respect the power of using evidence based practices. Make sure you apply that same line of thinking to your investments by exercising a low cost, diversified portfolio to let the power of the markets work for you. Don’t waste your time searching for the next hot fund, a phenom hedge fund manager or stock tip you heard from your brother-in-law. Use data, evidence, and reason when it comes to investing -- just as you do in medicine.
We work to help young physicians get on track to reach financial independence. If you’re looking for an advisor who understands the unique financial challenges you face, let’s talk.