How doctors can make 2022 their best financial year yet
Key Takeaways
In medicine as in money, it pays to have a plan. Treatment plans lead to better health. Financial plans lead to more wealth. With the New Year almost upon us, it’s time to give your financial plan a checkup (or create one, if you don’t have one already).
Plans are, at best, educated guesses as to what the future might bring. Anyone purporting to know what the markets will do in the next hour, let alone the next month or year, is probably the equivalent of a financial snake oil salesman. However, we can lean into a few time-tested financial principles to ensure that no matter what 2022 throws at us, we have sound footing.
Cash is king, (but not too much)
As we close the book on 2021, inflation is looking like the financial story of the year. We’ll have fresh consumer price index (CPI) data on Friday, but economists are projecting a month-over-month gain in November of about .7%, which would be the 18th consecutive month of increases. If the projections prove true, that means your dollar in November was worth less than your dollar in October.
While this is less-than-desirable in the short term (higher prices on consumer goods), it’s even more problematic in the long term. The dollar has a long history of inflation. For example, a dollar in 1800 was worth about $22 of today’s dollars. That works out to about a 1.4% annual inflation rate, and a cumulative price increase of about 2,100%!
While cash may lose value over time, it has one colossal advantage: liquidity. If you have cash on hand, you can address pressing problems—such as an emergency car repair, medical bill, or home repair—without incurring debt. During COVID-19, doctors who saw patient volumes plummet and procedures canceled may have felt this pain acutely if they didn’t have an emergency fund.
As we look ahead to 2022, inflation may be here to stay for a while, and so will the mutating coronavirus. You still need an emergency fund. However, be precise with the dollar amount. What do you need to get by for 6-12 months? If you don’t know, you don’t have a budget (and you probably should have one). You may want to set that aside in a savings account–but not a penny more. While that cash is earning whatever pitiful interest rate your bank is offering, it’s also slowly withering away, due to inflation. And, your money could be making money elsewhere, such as in your retirement accounts. Speaking of retirement accounts ...
Staying the course
Omicron has sent the markets on a bit of a roller-coaster ride recently. Are we due for another correction? For context, we see a market correction about every 2 years. During the onset of COVID-19, the S&P 500 declined by 34%, bottoming out on March 23. In less than 5 months, the S&P rallied and hit an all-time high.
We can also look to 2008 for some lessons. Let’s say you pulled all of your money out of the stock market during the financial crisis. At the time, it might have seemed like a good idea. From peak to trough, the bear market caused the Dow Jones Industrial Average to decline by about 54%. However, over the next decade, the markets went on one of the best runs since the 1800s. In other words, while you may have dodged some comparatively short-term volatility by exiting the market in 2008, you would have missed out on some of the market’s best returns of all time.
If you’re an early-career physician, decades away from retirement, you can probably stomach some market volatility. Know that over the long term, the market has returned about 10% over the past century. And if you’re getting closer to retirement, and you’ve done everything right, your asset allocation has drifted into less risky investments, such as bonds, as you’ve neared retirement. Which brings us to …
Asset allocation
When was the last time you checked the asset allocation of your employer-sponsored savings plan, or your other investment accounts? The principle is that the younger you are, the more risk you can tolerate. Therefore, more of your assets can be in stocks. As you age and near retirement, you can afford less financial risk. Therefore, more of your assets can be in bonds. Historically, stocks offer more earnings potential, at a higher risk. For example, a pandemic could frighten investors and wipe out your gains. Bonds, on the other hand, are an I.O.U. paid with interest, typically from a corporation or government, and consequently are less risky.
The good news is that if you’re invested in target-date funds, this rebalancing is automatic and based on your anticipated retirement date. If you aren’t invested in target-date funds, then you may need to have a conversation with whomever manages your portfolio, or roll up your sleeves and rebalance things yourself.
Personal finance advisor Ramit Sethi recommends the following allocations, based on Vanguard’s target date funds:
35 years old: 90% stocks, 10% bonds
45 years old: 90% stocks, 10% bonds
55 years old: 69% stocks, 31% bonds
65 years old: 53% stocks, 47% bonds
Student loans
It’s an unfortunate truth, but many physicians are needlessly repaying (or overpaying) their student loans. The federal government recently revised the regulations for public service loan forgiveness (PSLF). Doctors are eligible if they are enrolled in a qualifying repayment plan and work for a qualifying non-profit employer. Under the new regulations, doctors who were in the wrong repayment plan or who had the wrong type of loans can correct either or both, and work toward PSLF. You can read about the details in this post.
You might be thinking, I work for a for-profit entity, so I’m out. Maybe you’re out of the PSLF game, but it’s possible that refinancing your student loan debt could save thousands.