Financial planning tends to change when life changes. For physicians, few life transitions bring as much change as starting your first post-training position. The shift in career visibility and the accompanying jump in income tend to bring on a new wave of questions and opportunities. Making the right decisions at this point in your career goes a long way in setting the course for your future financial life. As you face the transition, consider focusing on the following eight areas.
1. Finalize Your Student Loan Game Plan
Hopefully, at this point you have at least a rough idea of your plan for student loans, whether that’s going for forgiveness or paying off your loans. Now is the time to finalize your game plan. If you are going for forgiveness, that means having a system that ensures you continue to meet all the requirements to actually qualify for forgiveness. If you’re planning to pay off your loans, that means evaluating refinancing options (to confirm you are paying the lowest interest rate possible) and putting enough money toward your loans each month to pay them off within a reasonable amount of time after finishing residency or fellowship (ideally 5 years or so).
2. Make a Plan for Managing Your Cash Flow
Develop a plan for how to allocate your cash flow between saving, spending, paying down debt, and investing. Find a system that works for you, whether it’s following a specific budget or simply hitting your savings targets and spending the rest. It’s easy to experience “lifestyle creep” as your income grows, so before getting used to your new income, determine how much of it you need to save for your different financial goals, and automate that saving, if possible. It’s important to remember that just because you can pay for something, doesn’t mean you can afford it.
3. Build an Emergency Fund
It’s a good idea to have at least 3-6 months of living expenses on hand in the form of cash or some other type of easily accessible asset. This helps protect against the risk of unexpected expenses, such as large repairs to your home or car, or the period you’ll have to wait before receiving disability insurance benefits should something happen to you. If you haven’t had the chance to do this during training, now is a good time to build your emergency fund since you have a much higher income but haven’t yet had the chance to grow into it.
4. Consider Increasing Your Disability Insurance Coverage
Insurance companies limit the amount of disability insurance you can purchase relative to your income, so during training the amount you are able to purchase is often less than your need. If this was the case for you, now is a good time to revisit your disability insurance coverage since the amount you can purchase has increased along with your income.
5. Make the Rent Versus Buy Decision
For many physicians, training is a temporary situation in terms of who they work for and where they live, which means renting a house often makes more sense than owning one. After finishing training, however, most doctors have much better career visibility (and a higher income), which strengthens the case for owning a home. For physicians who have been renting up to this point, now is a good opportunity to revisit whether it makes more sense to rent or buy your home.
6. Revisit Roth-Versus-Traditional Retirement Contributions
When it comes to retirement savings contributions, Roth contributions are made with after-tax dollars (but future withdrawals are tax-free) while traditional contributions are made with pre-tax dollars, but taxes are paid when the money is withdrawn in the future. If your tax rate is going to be higher when you take out the money during retirement, it generally makes sense to make Roth contributions now, whereas if your tax rate is going to be lower in the future, it generally is better to make traditional contributions now. For most physicians, training is the time when their income (and tax bracket) is the lowest it will ever be, so Roth contributions often make sense. However, the higher income that comes with the completion of training is often a tipping point when it comes to a doctor’s tax situation and the Roth-versus-traditional decision, so now is a good time to revisit it.
7. Consider Purchasing a Personal Liability Umbrella Insurance Policy
Unfortunately, physicians face higher risk of a personal liability lawsuit than the average person. Personal liability umbrella insurance helps protect you against this risk by providing an additional layer of liability insurance, beyond that provided in your other insurance policies (home, auto, etc.). If you don’t already have a personal liability umbrella policy, now is a good time to consider one.
8. Figure out What to Do with Old Retirement Accounts
When changing employers, most people leave behind old retirement accounts, like a 403b or a 401k, and they must decide how to handle them. There are several options, including rolling the old accounts into your new employer’s plan, rolling them into an IRA (traditional or Roth), leaving them where they are, or even converting traditional contributions into a Roth IRA. Each option has pros and cons, so decide which one is best based on your situation. If you do choose to roll old retirement accounts into a traditional IRA, be sure to understand how that will impact your ability to make “back door” Roth IRA contributions in the future.
The transition from training to your first post-training position brings about significant changes to your financial life, and with that, new questions to address. With the accompanying increase in income, you have the opportunity to continue building your financial foundation and developing the habits and behaviors that will guide your financial decision-making over the coming years. By considering the areas discussed in this post, and making intentional decisions about them, you’ll improve your chances of starting your financial life on a strong note.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.