We’ve worked with hundreds of new attending physicians over the past several years and gained insights into some of the unique characteristics of their financial situations. For the most part, early-career doctors’ financial goals are very similar to those of other early-career professionals. All our clients would like to find a job that’s fulfilling, spend less than they make, live in a house they love, support a comfortable lifestyle, pay for their kids’ education, set aside money for future contingencies, obtain appropriate insurance, pay down debt and save money for retirement. The key tenants of financial wellness are universal.
That being said, early-career doctors typically face some unique financial circumstances. New attending physicians are typically going to have a big, one-time jump in income while also being saddled with a mountain of student loan debt. Their negative net worth makes it hard to hire financial advisors that charge a percent of assets. Their high income makes them targets for less reputable advisors, often selling complex, opaque and expensive permanent life insurance policies. Beware. Those free steak dinners from the Northwestern Mutual salesperson could come with massive strings attached.
We would offer a few simple pieces of advice to new attending physicians:
1) NO ADVICE IS BETTER THAN BAD ADVICE.
At the end of the day, your money is finite. Your money can work for you or it can work for an advisor. It can't work for both. In most cases, financial advisors have inherent conflicts that make it hard for them to provide truly unbiased advice. The advisor might sell insurance and, thus, be biased toward recommending whole life policies. The advisor might earn commissions from selling stocks and therefore push clients into individual stock selections. More commonly, though, advisors simply charge a percentage of assets under management (AUM) and so are predisposed to recommend that clients deposit funds into those managed accounts versus paying down debt or contributing to employee-sponsored retirement plans.
2) FIND A GOOD FLAT-FEE FINANCIAL PLANNER.
I know that sounds self serving, but it doesn't have to be Aptus. There are many good flat-fee financial planners and advisors out there, and the White Coat Investor list is a great place to start your search. If you believe your can manage your investments in your own accounts at Vanguard, Fidelity or Schwab, then you might look for a flat-fee "advice-only" planner that caters to DIY investors. If you would prefer someone to manage your money for you, you should consider a flat-fee planner who also provides investment management services. Regardless, the flat fees helps mitigate most significant conflicts of interest.
3) GET THE RIGHT INSURANCE AND AVOID THE WRONG INSURANCE.
Buy disability insurance that covers own occupation or “own occ,” meaning that if you can't work in your own occupation the benefit is paid. We’d also avoid policies that exclude or limit mental health and substance abuse claims. Buy appropriate term life insurance. Consider an umbrella policy, typically as part of your auto coverage. Avoid any permanent life insurance, including whole life and variable universal life, as the high, opaque fees almost always outweigh the benefits of these financial products.
4) HAVE A PLAN FOR STUDENT LOAN REPAYMENT.
We’ve worked with married doctors with $1 mil. in student loan debt and we know it seems overwhelming. It will get better. There are essentially two viable routes for debt reduction. Option 1 is to enter the Public Student Loan Forgiveness (PSLF) program, take a job with the government or a non-profit, set up an income-based repayment program, keep up with your employment certifications, make 120 qualifying payments and—viola`--your debt will be forgiven. The drawback to Option 1 is that you can feel trapped in the public-sector job; there’s also the chance the PSLF program could be altered and your loans won’t be forgiven. Option 2 is to take a private sector job, refinance your loans into a lower rate if possible (perhaps a variable rate) and pay down the debt quickly. Either option is fine, as long as you make a specific commitment to paying down the debt in a finite time horizon.
5) DON’T BUY A HOUSE IN THE FIRST YEAR OF THE NEW JOB.
We often talk to doctors who want to buy houses either in residency or right away after they start their first job as an attending. Don’t do it. Take some time to make sure the new job and new location are good long-term fits. The math on buying versus renting can be somewhat complex, but the shorter the time you will be in a location, the better renting looks. We recommend getting settled into a new community for at least a year before buying a house and, depending on your financial situation and location, we think renting can be a great intermediate-term option.
6) RESIST THE URGE TO SPLURGE.
Young doctors have typically spent the last decade-plus living like students. With their first contract, suddenly their incomes increase several-fold. It’s time to live it up a little right? Maybe get a cool car? A really nice watch? Try to resist. You may not want to live exactly like you did as a resident, but the longer you can maintain a simple lifestyle, the faster you can pay down debt, build wealth and have financial flexibility.
7) FOLLOW THE 4 BASIC RULES OF CASH FLOW MANAGEMENT.
At Aptus, we believe that financial success, happiness and freedom hinge on spending less money than you make. Successful cash flow systems always include 4 main elements: 1) pay yourself first by saving into 401ks, 403bs, 457s, IRAs, HSAs and other retirement savings accounts, 2) set aside money for future expenses by squirreling away money each month for infrequent and/or difficult-to-predict big ticket items like vacations, cars, home down payments, home repairs, health emergencies, college funds and anything else that makes sense to you, 3) pay monthly bills, and 4) spend the rest. If you do steps 1 and 2 well, steps 3 and 4 will take care of themselves. This is easier said than done, of course. We recommend working with a financial planner to design and implement a cash flow system that works for you.
8) INVEST SIMPLY.
With investing, simpler is almost always better. We recommend following a waterfall of tax efficient investing, filling one bucket/account-type before moving to the next. For instance, you might start by making sure your get any match available in your employer retirement plan, then pay down high interest rate debt, save into an HSA if available, max out your contributions to your employer retirement plan, contribute to Roth IRAs either directly or via “backdoor” conversions, buy tax-efficient index mutual funds or exchange-traded funds in a taxable brokerage account and, finally, pay off low interest debt. In terms of specific investments, we’d go with either age-appropriate, index fund-based target retirement date funds or simple portfolios of 3-5 index funds mirroring the allocations of target date funds (e.g., 60% U.S. stocks, 30% international stocks and 10% bonds for young doctors in their late 20s or early 30s).
9) PASSIVE INCOME USUALLY AIN’T.
Almost all of our financial planning clients ask us about developing a passive income source, which generally means they are considering buying and renting houses. Our view is that there’s really no such thing as passive income. If you aren’t actively involved in a business, then you are unlikely to earn a better risk-adjusted return than investing in broad portfolio of index funds. If, on the other hand, you like fixing things and don’t mind unscheduled calls on nights and weekends, then rental property could make sense for you. Most doctors are better off sticking to their day jobs and getting paid for their considerable expertise.
10) DON’T FORGET TO FOCUS ON YOUR RELATIONSHIPS.
Perhaps most importantly, the first year out of residency is a stressful time and can put a strain on relationships with your spouse, kids, friends and family. Prioritize these relationships over all else for they will sustain you over the long run.