6 lessons physicians can benefit from on Financial Awareness Day

National Financial Awareness Day (August 14) is almost upon us. What better way to celebrate than to come up with a few financial strategies that could save you thousands in the long run?

Medical school taught you a great deal, but while you’ve been meticulously trained to manage any case that comes your way, you may not have received the same caliber of personal financial education. Newly minted physicians face the triple-threat challenge of high student loan debts, comparatively low wages, and a turbulent economy. Sound personal financial planning, however, will help you meet these challenges. “It is important to manage income more effectively through planning,” said New Brunswick, N.J.-based accountant Amro Badran of Badran Tax & Accounting, LLC. “Managing income helps you understand how much money you will need for tax payments, other monthly expenditures, and savings.”

Coming up with a personal financial plan isn’t always easy, but it’s crucial. Your plan will help track expenses, create a savings strategy, and build a cushion to absorb the cost of emergencies. Here’s a blueprint physicians can use to develop their own personal financial plans.

Improve your credit score

A good credit score is essential. Credit scores are a representation of your total debt load and your consistency of debt repayment. They have a major effect on credit card and loan interest rates, as well as a borrower’s access to credit. Lenders use credit scores to help determine how likely you are to pay them back on time. The higher your credit score, the more you can save through lower interest rates. Whether it’s financing a car or applying for a mortgage, a good credit score can save you thousands. 

“Having good credit may help you qualify to borrow—and borrow at lower interest rates,” Badran said. “And interest rates are important, because the higher your rate, the more you could end up paying over the life of the loan.”

Want a high credit score? Make punctual debt payments. 

“To improve your credit score or prevent it from lowering, pay bills on time, avoid making late payments, pay off credit card balances, and do not max out your credit cards,” Badran said.

You can view your credit scores on the federally approved website, annualcreditreport.com, to see specific areas where your score might be improved. Check out this post on how physicians can avoid common credit card blunders.

Build your emergency fund

Accidents can happen anywhere at any time. While emergencies are often impossible to predict, having a reserve fund to deal with emergencies in cash can provide some peace of mind.

What exactly constitutes an “emergency” can differ. At PhysicianSense we define financial emergencies as situations that require immediate attention emergent. For example: 

• Your furnace dies in the middle of winter.

• You suffer a debilitating injury resulting in financial hardship.

• Your car’s transmission explodes.

Most experts recommend that your emergency fund include 3-6 months of expenses. Let’s say you’re a family physician making $175,000 per year. Your monthly budget roughs out to about $6,000. That puts your target emergency fund goal at $36,000. Let’s say you set aside 20% of your monthly budget ($1,200) to build your emergency fund. You would reach your goal in 30 months.

Just remember: Every little bit you put aside adds up, and provides more financial stability and protection should an emergency occur.

Build a budget

Financial freedom begins with some discipline. In this case, it’s a budget. 

“Increase cash flows by carefully monitoring your spending patterns and expenses,” Badran said. “Tax planning, prudent spending and careful budgeting will help you keep more of your hard-earned cash. An increase in cash flow can lead to an increase in capital, allowing you to consider investments to improve your overall financial well-being.”

The first step is to come up with a list of your essential monthly expenses (utilities, mortgage payments, groceries, etc.). Then, add in your extra non-essential expenses, such as dining out, subscriptions for streaming services, and other online memberships. If you feel you’re spending too much, you can start saving by cutting down on the nonessential items. That extra cash can contribute to paying off other expenses or even find its way into your emergency fund.

“Most experts agree that 20% of your income should go toward savings, another 50% toward necessities, and 30% goes toward discretionary items,” Badran said.

Create your budget today using our physician budget guide.

Start saving for retirement

Who doesn’t want to retire early? However, with Social Security benefits eligibility continuing to rise (right now, many people can get full benefits at age 66), it’s not a bad idea to start setting aside some cash for your retirement fund as soon as possible. 

“Start saving for retirement as soon as you can,” Badran said. “Start in your twenties when you begin to earn a paycheck. The sooner you begin, the more time your money has to grow.”

Most experts recommend setting aside roughly 10-15% of your pre-tax annual income toward your retirement fund. However, most physicians won’t necessarily be able to contribute that large of an amount toward retirement initially, as they will likely still be paying off debt from medical schools. That’s why it’s crucial to make larger-than-average contributions as soon as you are able.

“Physicians typically get a late start to retirement planning,” said Badran. “This is because they typically do not start earning higher levels of income until their early thirties. Therefore, a doctor’s retirement goals typically require a higher contribution rate. Some physicians will contribute more than 20% to 30% of their pre-tax income toward retirement.”

Badran recommends considering specific retirement plans, including a traditional IRA, Simplified Employee Plan (SEP), or Saving Incentive Match Plan for Employees (SIMPLE) for physicians currently employed at a healthcare system, or a Solo 401(k) plan for physicians who operate their own practice.

“For any doctor, saving for the future is an important decision,” Badran said. “Finding the retirement plan that best serves your needs is critical. The best retirement plan for a medical doctor will offer attractive features, prudent investments, and overall cost-efficient administration. Most importantly it will help secure their financial future.”

Plan for family needs

Your family will need shelter, and it will benefit greatly from education. Both, however, come with high price tags.

Thinking about settling down and buying a house? Before making a down payment, see if your dream home adheres to the 20/10/1 Rule. Before buying, you should have the following in cash:

• 20% of the house’s fixed price as a down payment.

• 10% of the house’s price for moving expenses, furniture, and renovations.

• 1% of the price for any other potential expenses you may encounter.

Let’s say you’re buying a house that is listed for $500,000. According to the 20/10/1 Rule, that means the amount you need for a down payment will come out to $100,000 (20%). You’ll also need to set aside another 10% ($50,000) for moving expenses, and an extra 1% ($5,000) for additional expenses.

Alternatively, you may want to consider securing a physician loan. Unlike other loans, physician loans are specifically designed to help physicians, especially those who are just beginning their career, secure housing. Most newly minted physicians have a predominantly poor debt-to-income ratio because of student loan debt, and usually lack work history that lenders often look at when granting loans. Based on these circumstances, physician loans ignore past student loans, do not require physicians to make a down payment for new homes, and accept contracts for future employment rather than looking at a proof of earnings. The main downfall is that lenders do charge a slightly higher interest rate.

On the family front, your children’s college savings strategy may benefit from a 529 plan, a college savings account exempt from federal taxes. With a 529 plan, you can open an account, name your child as the plan’s beneficiary, and start contributing money immediately. By the time they’re ready to go off to college, you should have enough squirreled away to support them throughout their academic career.

Check out the physician’s guide to saving for college the smart way.

Keep updating your plan

Of course, you’ll want to follow your long-term financial plan once it’s in place. But just as the economy is always changing, so too are your personal finances. In order to keep your finances healthy, Badran highly recommends regularly updating your plan based on your current financial situation.

“To make the most of your plan and improve your chances of success, you will want to regularly check your plan at least once a month and aim to update any important information at least every three to six months,” said Badran. “Importantly, you should be updating your plan whenever significant life events take place—purchasing a new home, getting married, getting a new job or a salary increase, or having a baby, to name a few.”