After advising and educating physicians on personal finance for a few years, I thought “I would never encourage my kids go to med school.” The nurses seemed to be able to accumulate wealth at a faster rate than the doctors.
But I changed my view after working with some young physicians right out of residency. When they started by setting and implementing goals right after they started as an attending physician, they were on track to be physicians on FIRE (Financially Independent, Retiring Early). In some cases, these young physicians had stronger net worth statements than physicians in their 50’s who did not have a solid financial plan.
It’s essential to be aware of, and overcome, these unique hurdles to create a strong financial path. Timing is the key: you need a good start right out of med school and residency. Here are six of the main hurdles that physicians face:
- Lost decade: 20’s. Medical school and residency steal the most critical decade for compounding interest: Age 22-32. The average college graduate enters the “real world” at 22. Physicians’ “real world” doesn’t start until around age 32. This costs them a decade of savings and growth. In the investing game, time is your best asset. A career for a non-physician usually spans from age 22 to 65 (=43 years). Losing a quarter of the working years available for wealth accumulation means doctors must have a laser-focused dedication to make up for that time. The way to do that is to start diligently saving their very first year as an attending. (Even better- start the habit of investing in residency!)
- Student loan debt. The average medical school student loan debt is projected to exceed $300,000 by 2024 at current rates. Medical school graduates owe more than 6 times as much educational debt than the average college graduate. Student debt burden is the main culprit for not saving.
- Difficult Relationship with Money. Physicians often have a difficult relationship with money. They are most likely to have the “money avoidance” money script which is an unconscious belief about money. This script is defined by disdain, anxiety, or fear about dealing with finances. They may feel incompetent or overwhelmed so they avoid the subject altogether. Alternately, they might have an aristocratic attitude about money, believing that dealing with the minutia of money management is below them. All of these hinder the process of creating a plan.
- Status Markers & Lifestyle Creep. Young physicians yearn to acquire some of the trappings of the good life after working so hard through residency. Society expects them to have a certain level of status markers: the impressive car, house, and country club membership. But making these purchases too soon can derail a financial future. It’s ok to want a BMW and a nice house. But it’s critical to have a game plan in place. It may be wise to delay these purchases a couple years to get loans paid down, and save a down payment for the dream house.
Lifestyle creep is real. Once the full salary kicks in, it’s easy to get stuck on the hedonistic treadmill. As discretionary income rises, things that were formerly luxuries become new necessities. Instead of occasionally splurging on a nice bottle of wine when dining out, it becomes expected all the time, and therefore not as special. We consume more and more than before, thinking that we work hard and deserve the nice things. Then spending creeps up. We counter this by being aware of the creep, and creating a spending plan.
- High Income Taxes. Physician salaries typically fall into in the 32-37% marginal tax brackets. It’s important to understand which plans to prioritize first to minimize income taxes. Understanding benefits of different pre-tax plans will help to accumulate wealth.
- Insufficient financial education. Physicians have to juggle significantly more debt and significantly more income than the average person. This combination creates a desperate need for financial education. A study by the USDA and National Endowment for Financial Education showed studying financial concepts for as little as 10 hours not only significantly increased high school student’s understanding of money management, but also improved their financial behavior in the following months. Just 10 hours of financial education can change the course of your financial future. Learning the basics of compounding interest, diversification, how to approach insurance, and how to deal with financial advisors can set young doctors on the right track.
Physicians have unique hurdles to overcome in the realm of personal finance. Understanding the hurdles and having a plan to overcome them will help young physicians to build a strong financial foundation.
By Jennifer Frahm