Congratulations! You’ve made it to the far end of a very long pipeline. You’ve hit the light at the end of the tunnel, and discovered it wasn’t a train there waiting for you. This is an exciting time, medically speaking, as you begin practice with no supervision. It is also a very exciting time financially, but a very critical time at which almost every doctor makes significant financial errors and often sets themselves up for a lifetime of financial failure. If you follow the following 8 steps, you’re much more likely to be financially successful.
1) Review your insurance plan.
Hopefully you bought disability insurance as a resident. If you have others depending on your income, you should have bought term life insurance as well. A resident often doesn’t quality for, nor can afford, as much insurance as he needs. When you become a new attending, it’s time to get that stuff in place. This may involve exercising the future purchase option on your disability contract, or simply adding on another policy. But you should take this step within a few months of residency graduation. Don’t let the agent talk you into any cash-value life insurance, but do make sure you have $1-3 Million in term insurance if someone is depending on your income. It’s also time to increase the liability limits on your homeowners/renters policy and your auto policy. Get a $1-3 Million umbrella policy as well. Make sure your malpractice policy is adequate, and be sure you understand who pays for your tail coverage if/when you leave the job.
2) Don’t grow into your income.
Your attending salary dwarfs your resident salary, but it isn’t nearly as big as you think, and there’s a good chance it will go down in the future. Salaries for orthopedists, general surgeons, radiologists, and emergency physicians all dropped 8-12% this last year. This can happen to your specialty too. If you’re only saving 10% of your income, and your income drops 12%, guess what? You’re now running a deficit. It is far harder to cut back on your lifestyle, than to never increase it in the first place. You can double your residency lifestyle and still have plenty of money to pay down student loans, save up a house downpayment, and start saving for retirement. But you can’t quadruple your lifestyle and still do those things. Don’t rush out to buy the huge house and the nice cars. Save up a 20% downpayment for the house, and pay cash for the cars.
3) Avoid the bad contract.
If you’re an employee, you have an employment contract. I hope you had it reviewed by an attorney before you signed it, and understand what will happen if you quit or are fired, and what you can be fired for. More than anything else, the people you work with will determine your later job satisfaction. If you go into business with narcissists and thieves, you’ll be looking for a new job soon, and probably leaving on terms unfavorable to you. Even if you’re running your own practice, you’ll have contracts with insurance companies, partners, and hospitals. Signing a bad contract can cause you a lot of frustration and money.
4) Determine your corporate structure.
If you’re going to be an W-2 employee, go through your benefits package, especially health insurance and retirement plans, and make sure to maximize those opportunities. If you’re going into business for yourself, or are working as a 1099 independent contractor, it’s time for you to learn about running a business. Visit an attorney specializing in corporate law to review the merits of a sole proprietorship vs an LLC vs an S-corp vs a professional corporation. You’ll also get to choose (and pay for) your own benefits package. There are lots of available tax breaks here, and not understanding them can cost you thousands of dollars a year in extra taxes.
5) Develop a debt management plan.
Most docs get out of residency with an uncomfortable amount of debt. Just making the minimum payments is often the wrong thing to do. But there is a big difference between 2% student loans, 8% student loans, and 15% credit cards. The picture gets even more complicated when you take into account the possibility of student loan forgiveness under IBR and PSLF. It’s difficult to strike a balance between spending, saving for retirement, and paying down debt. An understanding of your various debts and a plan to tackle them will remove a lot of the stress of being hundreds of thousands of dollars in debt.
6) Develop an investing plan.
If you didn’t have time to learn about investing as a resident, now is the time. Hopefully you’re working a little less, and now with extra money in each paycheck, probably looking for a way to secure your financial future. It’s time to read some books, set some goals, develop an asset allocation, and learn the difference between a backdoor Roth IRA, a money market fund, a municipal bond, a 457, and an emerging markets ETF.
7) Learn about taxes.
Too many docs jump into dumb investments or expensive arrangements due to a fear of taxes. It’s time you learned a little bit about the tax code. If you are self-employed, don’t forget to start making estimated tax payments every quarter now that no one is withholding anything for you. Your corporate structure and your use of available retirement accounts can also have a huge impact on the taxes you owe. There is no better way to lower your taxes than to max out your retirement accounts. When you add in the benefits of asset protection and a secure retirement, I suggest you promise yourself to max them out every year, even if you have to hold off a couple of years on buying that BMW because of it.
8) Begin implementing an asset protection plan and an estate plan.
This doesn’t mean you need to run out in July or August and pay an attorney $5K you don’t have to form a bunch of trusts. If you have children, you need to get at least a will. You should also make sure your life insurance and retirement account beneficiaries are set up as you’d like them. But as the years go on and you begin acquiring stuff, you’re eventually going to want a revocable trust instead of just a will, and you’ll probably need to form an LLC or two in order to protect yourself from your toxic assets such as side businesses and rental properties.