This is a synopsis of the white paper published in the journal Practical Radiation Oncology, full article linked below.
When financial knowledge is used by physicians to build a strong financial foundation, it can expand life choices, reduce burnout, and increase mental well-being. Burnout is reported in more than half of all practicing physicians. It is related to career dissatisfaction, substance abuse and depression. Burnout severity may be associated with increasing levels of student loan debt and feeling hopeless about finances.
Financial Independence is the goal when discussing the financial part of life. Financial Independence is a specific term used in the investment industry that describes the point in time when the assets a person has saved generates enough interest & returns each year to cover their annual expenses, regardless of employment income.
Unfortunately, financial literacy is poor among physicians and financial education is not taught at most medical schools. This lack of knowledge puts them at a disadvantage when juggling student loans, physician incomes, and societal expectations.
This paper focuses on four basic tenants of personal financial fluency: debt strategies, behavioral strategies, investment strategies, and asset protection strategies.
Debt Strategy
The primary methods of eliminating debt for physicians with sizeable student loan debts at the end of residency includes either:
- Consolidating loans and pursuing forgiveness through federal programs such as PSLF, Pay As You Earn, and Income Base Repayment plans, or
- Refinancing and eliminating the highest interest debts as soon as possible.
If a physician is using one of the forgiveness options if they work for a nonprofit entity, they would still be wise to save in an account that could be used to pay off student loans, just in case the forgiveness plan does not pay off.
Behavioral Strategy
Setting personal financial goals is key to keeping a young physician on track for financial success. Focusing on growing wealth (measured by net worth) is done by delaying gratification and living frugally in the first few years after residency. It takes a great deal of personal discipline to track spending, live on a budget and have a laser focus on saving and pay down student loans. This is especially difficult for new physicians, since they want to enjoy their new larger incomes after many years of living frugally during school and residency.
Physicians have already shown they have the capacity to work hard and have great self-discipline to get through training. That same self-discipline, along with intellectual curiosity, saving in a low-cost investment program, and learning a bit about investments is crucial to success.
Investment Strategy
Future value of money depends on four factors: income, percent of income saved, time invested, and rate of return on the assets. Physicians need a working understanding of the concepts of risk vs return, how asset classes (stocks, bonds, cash, real estate) work, and asset allocation (how much to put in each type of investment at different ages and stages.)
Understanding tax implications of financial choices is a fundamental principle of good financial health. Physicians need a basic understanding of different type of investing vehicles such as 401(k)s, 403(b)s, 457(b)s, HSAs, 529 college savings accounts, and IRAs. Knowing the best time in life to maximize a Roth vs pre-tax option is essential too.
Asset Protection Strategy
It is important to create a way to protect against the impact of unexpected life events and emergencies. The basics include an emergency fund of 3-6 months of living expenses, setting up a will and trust to dictate where children and assets go in the event of death.
Buying disability and life insurance while young and healthy is easier and less expensive than waiting a few years. Disability insurance can be relatively expensive, but essential because the ability to practice medicine is typically a physician’s best asset. Life insurance offers an array of options that can get complicated. Term life insurance does not have an investment component, is much less complex and less expensive. Whole life insurance is generally inappropriate for young, indebted physicians. The authors caution against combining insurance and investing through whole life insurance as a young physician.
The most valuable asset to protect is mental and physical health, and devoting necessary resources of time, energy and money to caring for self and relationships should be prioritized above all else.
Robust financial health can lead to financial independence and may grant broader professional and personal freedoms. This may help mitigate against burnout. Financial education is an overlooked but important curriculum component for physicians.
Summarized by Jennifer Frahm. The lead author of this paper is Dr James Dahle. He wrote the book White Coat Investor. Link to the full article can be found HERE