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: 

1. 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!) 

2. 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.   

3. 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. 

4. 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. 

5. 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.

6. 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

The post 6 Hurdles: The Reasons Physicians Have Difficulty Accumulating Wealth appeared first on Intentional Investment.

Money is simple.  

Spend less than you earn. Save 10% of your income.  Invest. 

But money is also complicated.

Both the math and the emotion wrapped around it. 

Have you ever felt like you were stuck in a destructive pattern that keeps you from achieving your money goals? How can you explain knowing what you should do, but not actually doing it?  

The culprit:  emotions about money. 

Our emotions often get in the way of making good decisions.  In fact, money decisions are based 90% in emotion, and only 10% in logical reasoning, as shown by Nobel Prize winning economist Daniel Kahneman.  

Knowing your “money script” can help you to understand how you think about money.  Dr Brad Klontz is a financial psychologist who coined the term money scripts as being core beliefs about money that come from our families, our experiences, and our temperament.  These money scripts are often developed in childhood, and can impact your level of income, your net worth, financial behaviors and even your credit card debt. 

The four money scripts are:

People usually have a primary and secondary money script that directs their money behaviors. 

The first step towards making good financial decisions is to identify your money script. Once you’ve identified your tendencies, the next step is to make a game plan with positive steps toward building your financial future.  

In the Intentional Investment seminar and workshop, we start with identifying your money script.  In our experience, about 55% of physicians tend to have the “money avoidance” as their primary money script. This seminar empowers young physicians with the education and confidence they need to create a plan.  (A longer description of the money scripts used in the seminar is attached below.) 

Sources: Journal of Financial Therapy (Volume 2. Issue 1 2011). “Money Beliefs and Financial Behaviors: Development of the Klontz Money Script Inventory” by Brad Klontz, Psy.D., Sonya L Britt, PhD, Jennifer Mentzer, BS, Ted Klontz PhD.

KNOW YOUR BACKSTORY:  MONEY SCRIPTS

Concepts adapted from Mind Over Money: Overcoming the Money Disorders that Threaten our Financial Health by Brad and Ted Klontz

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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: 

1. Consolidating loans and pursuing forgiveness through federal programs such as PSLF, Pay As You Earn, and Income Base Repayment plans, or
2. 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

The post A Burnout Reduction and Wellness Strategy: Personal Financial Health for the Medical Trainee appeared first on Intentional Investment.

Physicians face more financial challenges than ever, including increasing student loan debt, delay to investing due to school and residency, all-consuming careers, and wealth management becoming more complex and intimidating.

No Systematic Solution

There have been no systematic solutions to the challenge of equipping young physicians with financial literacy education.  Physicians have been left on their own to read books, listen to mentors, participate in blogs, attend seminars.  The problem with these half-solutions is that there is not sufficient opportunity for follow up or for physicians to ask questions. Hospitals and private practices often allow financial advisors or insurance agents to deliver so-called education seminars on the premises.  In reality, these typically turn out to be thinly-veiled marketing sessions. In many ways this is an example of letting the fox into the henhouse.  There is considerable downside for attendees- they may be taken advantage of under the guise of implied endorsement by the hospital.  It’s not enough for administrators to mentally check off the box that financial literacy education has taken place.  

Elements of a comprehensive personal financial literacy framework for physicians: 

1. Deliver three courses on personal finance:  At the end of medical school, late in residency, and near the end of fellowship.  A personal finance course should extend 8-10 hours and cover investing, insurance, asset protection, home purchase, college savings and more.
2. Use an objective and expert instructor who does not have conflicting agenda of selling financial products or asset management services. An MBA degree does not automatically qualify someone- most MBA programs focus on corporate skills, not personal finance.  
3. Deliver the course in a classroom setting, with all the seriousness of a medical subject. 
4. Offer subsequent training, providing ongoing access to experts. 
5. Make attendance mandatory, to ensure that students take the course seriously.

Teaching is most effective when students have an opportunity to implement what they have learned.  This real-world, hands on dimension drives the message home and converts class discussion into life-long wisdom.

Physicians should be properly equipped to make constructive financial decisions for themselves. The best time to gain critical knowledge for decision making is before such decisions become urgent.  Financial literacy gives physicians control over their finances, and helps them to make proactive decisions about their financial futures.  Proper financial literacy helps set up physicians for success.

Summary by Jennifer Frahm.  Full article can be found HERE

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Authors of this research article tested 1052 students at seven different medical schools using questions from the Vanguard Financial Literacy Test and FINRA Financial Literacy Quiz. The average score was 47% correct. From the questions most often answered incorrectly, researchers found that medical students would benefit from learning about the time value of money, student loans, asset classes, and asset allocation.

Financial literacy among U.S. medical students is low. This is concerning, because medical students occupy a unique niche with higher levels of educational debt. Medical schools and policy makers should consider and evaluate new methods to improve financial literacy among medical students.

Can you answer more than 47% of these questions correctly?

1. If interest rates rise, what will typically happen to bond prices?

A. Rise
B. Fall
C. Stay the same
D. No Relationship

2. Which of the following is true about a stock mutual fund vs. a single company’s stock?

A. Buying a stock mutual fund usually provides a safer return than a single company’s stock
B. Buying a single company’s stock usually provides a safer return than a stock mutual fund.
C. Don’t know

3. If a fund charges an expense ratio of 1%:

A. You will pay a one-time fee amounting to 1% of the number of shares held in the account.
B. Your fund investment’s returns will be reduced by 1% each year
C. Your fund investment is reduced by 1% at the time you buy the shares
D. You will pay a sales charge of 1% to a broker at the time you buy the shares

4. When you invest in a traditional 401(k), which is an employer’s retirement savings plan, your contributions are taxed:

A. When you withdraw them during retirement
B. Before you invest them
C. Once a year on or before April 15
D. When you reach age 65
E. Don’t know

5. Suppose you owe $1000 on your credit card and the interest rate you are charged is 20% per year, compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?

A. 2 years
B. Less than 5 years
C. 5 to 10 years
D. More than 10 years
E. Don’t know

6. If you invest in a 401(k) plan at work, are you eligible to contribute to an IRA?

1. Yes
2. No
3. Don’t know

7. From 1926 to 2013, the average total return per year for the US stock market was:

A. 4% per year
B. 12% per year
C. 22% per year
D. 33% per year
E. Don’t know

8. Generally, a portfolio that has 80% of its assets invested in stocks would be best suited for:

A. An 18 year old using assets to pay for college over the next 4 years
B. A 35 year old investing for retirement
C. A 75 year old investing for income and capital preservation
D. None of the above
E. Don’t know

9. You owe $3000 on your credit card. You a pay a minimum amount of $30 each month. At an annual percentage rate of 12% (or 1% each month), how manty years would it take to eliminate your credit card debt if you made no additional new charges?

A. Less than 5 years
B. Between 5 and 10 years
C. Between 10 and 15 years
D. Never, you will continue to be in debt
E. Don’t know

10. Imagine that the interest rate on your savings account is 1% a year and inflation is 2% a year. After 1 one year, would the money in the account buy more than it does today, exactly the same, or less than today?

A. More
B. Same
C. Less
D. Don’t know

11. Which of the following is true about the student loan interest deduction?

A. It is limited to the lesser of $2500 or the amount of interest you actually paid
B. You can claim the deduction as long as you are a dependent.
C. The amount of deduction is subtracted from your total tax to arrive at the amount owed.
D. Your eligibility to take the deduction is not limited by your income.
E. Don’t know

12. If you only own US stocks in your investment portfolio, can you reduce your overall risk by adding international stocks?

A. Yes
B. No
C. Don’t know

Answers: 1-B, 2-A, 3-B, 4-A, 5-B, 6-A, 7-B, 8-B (although D could also be correct if they thought a 35 year old should be investing at least 85% in stocks according to the rule of 120, so ‘none of the above’ could be acceptable too), 9-D, 10-C, 11-A, 12-B

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