While successfully managing your finances is about more than just avoiding the big mistakes, if you can at least start there you’ll have a good foundation and will be moving in the right direction. In this episode, we discuss seven of the biggest mistakes that can trip up physicians when it comes to their finances. We explain each mistake, why it’s important, how it happens, and what can be done to avoid it. Hopefully, this episode will help you avoid some of the common pitfalls.
Outline of this episode
- Mistake #1: Not having a financial plan [2:22]
- Mistake #2: Waiting too long to start investing [5:09]
- Mistake #3: Not saving enough to meet your various goals [7:58]
- Mistake #4: Being afraid to invest in the stock market [11:14]
- Mistake #5: Attempting to time the market [14:37]
- Mistake #6: Taking on too much debt [17:59]
- Mistake #7: Not having proper insurance coverage or an estate plan [20:27]
A financial road trip
Having a plan is similar to going on a long road trip. You could just start driving and you’ll eventually get somewhere, but where you end up and when you will get there are unknown. However, if you know where you want to go and use a navigation system you’ll know roughly when you’ll get to your destination and what adjustments may be needed over time. In the context of having a financial plan, if you know— at least roughly— where you want to be in the future then you have something tangible to check your progress against. Your goals and preferences may change slightly. There will be things outside of your control, like college inflation, investment returns, or what interest rates might do. That means you’ll have to make some changes over time, but having a plan and checking in on your progress regularly acts as a navigation system.
Putting your money to work as early as possible
As a physician, you face delays in saving due to the combination of med school, training, and for most, student loans. This makes it far more difficult to start saving and investing as early as your peers who are in other professions. However, it’s important to start investing as early as possible because of the power of compound interest. This is something we discussed in detail in episode #10, so if you haven’t listened to that one, be sure to check it out.
Compound interest has the biggest impact on growing your investments and the longer you let it work for you, the more impact it will have. Let’s say you’re earning $200k maxing out your 403b and receiving a 10% employer match. You’re saving about $40k a year toward retirement. Now let’s imagine you earn an average annual investment return of 7%. If we looked at how your investment portfolio would grow over time, you would reach one million dollars in about 15 years. Then 8 years later your portfolio would grow to around $2 million. The second million took you almost half that time as the first. Fast forward another five years and you see it grow to $3 million. As you can see, the time it takes to add each additional million to your portfolio continues to shrink. That’s compound interest in action.
Debt trap: just because you can buy it, doesn’t mean you can afford it.
We’re not talking about med school debt here— though the average physician starts their career with around $200k in student loans— we’re talking about consumer debt accumulated from lifestyle purchases. Things such as mortgages, vehicle loans, personal loans, and credit card spending. Debt is essentially borrowing from your financial future. You want to have something but you don’t have the money to pay for it in full right now. Instead of saving up over time, you’re pulling that purchase forward to right now by borrowing the money to buy it. When you do this you have to make good on that debt and not only do you have to pay back the amount you borrowed, but you also have to pay interest on that money. This puts pressure on your cash flow and there’s less money left over each month to save for other goals that are important like retirement or college for the kids. When it comes to debt, it can be easy to take on more than you should, because there are so many people willing to lend you money, especially as a physician. Keep in mind that just because you can pay for something doesn’t mean you can afford it.
Resources & People Mentioned
- Toolkit for Optimizing Your Finances as an Employed Physician
- Podcast Episode #5 – The 80:20 Rule of Investing