Understanding Personal Finance for Physicians
Quality Verified
Updated: May 2, 2023
Quality Verified
Updated: May 2, 2023
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Contrary to popular belief, not all physicians experience financial security. From costly professional expenses and a high amount of debt to managing large sums of money, those in health care face financial challenges just like anyone else despite their high income bracket. On top of the daily stressors that come with the profession, this can take a toll on their mental health.
That is why it’s important to understand the common financial challenges physicians encounter throughout their careers, insurance needs such as life insurance and disability insurance and the best ways to manage student loans and other debt. With the right tools and resources, physicians can develop ways to overcome these challenges.
Common Financial Challenges
Physicians face several financial challenges, from incurring debt in college and residency to facing a massive leap in income after getting a proper job. And these challenges aren’t just faced by those new to the field. Even after being in the business for a few years, some physicians still struggle to manage their spending, investment choices and retirement planning. Throughout a physician’s career, the long hours and rigorous training can make it difficult to focus on their financial well-being, which can compound and cause stress and mental health issues.
Financial Stress and Mental Health
Many studies have proven that poor financial health can affect one’s mental well-being — and physicians are no exception. This can be due to a number of reasons: lack of financial literacy, educational debt, lifestyle creep, or practice ownership. Regardless of the reason, this can take a toll on a physician’s mental health.
Transition Challenges
Unlike the average worker, physicians experience a giant leap in income between medical school and the first job after residency. This can be difficult to manage since making expensive lifestyle changes to match a high salary can be tempting. As you learn to manage your finances throughout your residency and as a new attending physician, there are a few common challenges you may face.
Residency Years
During post-graduate training, physicians often make a moderate income. Deciding how to properly allocate your funds and tackle your debt while still affording a social life is always a delicate balancing act. A demanding job — and the stress that comes with it — make it even more challenging. But while it’s easier to binge on what brings you comfort to “balance” those stressors, know that this can only cause you more problems in the long run.
New Attending Physician
New attending physicians often experience a massive leap in income — and while this can come with benefits, it also comes with its own unique set of challenges.
Managing Your Student Loan Debt
A physician’s student loan debt is often six times higher than that of the average student. Beyond learning how to manage debt responsibly, physicians can also look for ways to minimize their debt through medical school financial aid or Public Service Loan Forgiveness (PSLF).
After graduating from medical school, it can be tough to prioritize debt over getting a new car or buying a house, but tackling it sooner rather than later can help free up a lot of income that can be used towards savings, investments or retirement. Below is a step-by-step list to help physicians get started with their student loan debt.
Figure out how much debt you have
Make a list of all the student loans you have, along with their providers, interest rates and due dates, then calculate the total amount.
Determine your payment schedule
There are two key income-driven repayment plans to tackle debt: Revised Pay As You Earn (REPAYE) and Income-Based Repayment (IBR). Both plans calculate monthly payments based on your income and increase proportionally as your salary grows.
Apply for debt forgiveness
Debt forgiveness plans, like the PSLF or the NIH Loan Repayment program, can help decrease the total amount of debt you owe significantly after a period of time. Applying for this straight out of medical school can also help keep monthly payments low.
Reevaluate your budget
Take a look at your monthly budget and reevaluate accordingly to prioritize your debt and your savings.
Consider consolidating your debt
Through debt consolidation, private loans can reduce your interest and help keep monthly payments to a minimum.
Make extra payments towards your student loans
Where possible and when you can afford to do it regularly, pay more than the minimum towards your student loans. This can reduce your repayment term and even lower the amount of interest you pay.
Personal Finance Checklist and Understanding HENRY
Physicians fall under the “HENRY” category, which means “High Earners, Not Rich Yet.” There’s a common misconception that just because physicians earn a lot, it means they’re rich — which is not the case. Wealth is measured by net worth, which is the calculation of everything owned minus everything owed. So a new attending physician who suddenly experiences an income leap is not suddenly wealthy, especially if they still have student loans to pay.
Unfortunately, the mindset that physicians are “rich” because they have a high income is infectious — and some physicians themselves believe it. But this mindset can lead to bad financial decisions that may affect their quality and way of living in the long run, which is why financial literacy, planning and good habits are important to cultivate as early as possible.
Ways to Become Financially Literate
Improving financial literacy is the key to ensuring that physicians make wise financial choices and maintain good habits. Fortunately, from listening to personal finance podcasts to reading helpful books, there are many ways to become and remain financially literate.
Building Good Financial Habits
Accumulating wealth and achieving financial freedom requires discipline and good financial habits. By being intentional with spending rather than acting out of impulse, physicians can keep themselves on track to achieve short- and long-term goals and avoid living from paycheck to paycheck despite having a high income.
Below are a few ways physicians can start working their way towards building good financial habits.
Create a budget
It’s easy for physicians to spend on things without regard for the future — especially if they’re earning a high income. However, this can make achieving long-term goals such as buying a house difficult. By establishing a budget or a spending plan, you can start living within your means.
Automate bills
The phrase “out of sight, out of mind” also applies to finances. Automating your bills helps you avoid any instances of late or unpaid bills. And it means your checking account balance will be a more accurate reflection of what you have to work on after your expenses have been taken care of.
Track your spending
In line with creating a budget and automating bills, tracking your expenses can help give you an overview of your spending habits. For instance, if you notice that you’re spending too much on eating out, you can opt to eat at home instead and allocate those extra funds to savings or debt.
Perform an annual audit
Because many people put bills on autopay, they sometimes end up paying for products or services they no longer use. Save a statement of your insurance policies and keep a record of your bills on autopay. Then do a review once a year.
Avoid incurring more debt — pay in cash instead
Not all debt is bad, but it’s best to keep it to a minimum. The best way to avoid incurring more debt is to pay in cash instead. That way, you’re only buying what you can at the moment, instead of saddling your future self with something more to pay for.
Keep an emergency fund
Emergencies can hit you at any moment. Whether it’s your car breaking down or a sudden hospital visit, it’s important for physicians to have some money set aside. Try to save anywhere from three to six months of your living expenses and then some.
Explore physician-specific loans and offers
Financial institutions understand that physicians are in a unique financial position. Should you need a loan, there are numerous financing options available for physicians. For instance, physician mortgage loans may enable you to qualify for a mortgage with higher limits and up to 100% financing even though you may have a higher debt-to-income ratio.
Choosing Investment and Securing Assets
To accumulate wealth and establish security, physicians need to look for and choose the right investment opportunities. There are plenty of investments for different risk profiles, along with a plethora of mentors and resources available to help physicians build the ideal investment portfolio for their needs. Besides investing, securing your assets is equally important. After all, a physician’s job comes with a significant amount of risk and is considered a litigation-prone career.
Starting Up a Private Practice
Owning a private practice is not an uncommon dream amongst physicians. Not only does it guarantee control, but owning your job means you get to make more money throughout your career. However, processes like business planning, budgeting and creating balance sheets are just a few of the many things physicians need to take care of before setting up a private practice. Doing so requires proper financial knowledge and can be a challenge — especially considering how business subjects are rarely taught in a physician’s curriculum.
Structuring the Budget
The budget is one of the most important factors to consider when putting up a private practice. It’s the very foundation of the business and dictates whether or not you’re ready to open your own private practice, as it includes things like your office setup, equipment, insurance, professional fees and more.
Below is a quick step-by-step that can help you create a budget for your private practice.
Estimate your fixed and variable costs
Take a look at the fixed and variable costs your practice may have. Fixed costs include rent, insurance and utilities, while variable costs include the professional fees you’ll charge patients. Other fees to consider are your medical license and certification fees. And if you join a physician organization like the American Medical Association, you may have to pay membership fees or association dues, which can change depending on your years of practice.
Estimate your revenue
Determine your monthly revenue based on the number of new and repeat patients you expect to see each month. This is easier if you already have a steady stream of regular patients, but otherwise, you can review your financial records over a certain period and use those as a guide. If you experience any rejected claims from your insurance, consider outsourcing your coding of insurance claims to avoid an interruption in cash flow.
Determine your profit
By finding the difference between your fixed and variable costs and your revenue, you can determine your projected profit. Of course, you want this to be positive.
Minimize expenses
As you’re just starting out, you want to make sure that you keep your overhead costs at a minimum. Consider going paperless to save on supplies or rethinking your marketing strategy to make it more efficient.
Predict one-time costs
As your practice grows, you will start to need more equipment. Consider creating a timeline based on your projected income to determine when you will get or need new equipment. Perform a cash flow analysis on your new equipment. The analysis will help you understand how much you are spending, where your money is going, how much revenue you can generate and how quickly you will see a return on your investment.
Remember to track your cash flow
Your cash flow is all the money that goes in and out of your practice — and a positive cash flow is what you should aim for. Once your practice is up and running, remember to monitor this on a weekly or monthly basis. The easiest way to get this number is by finding the difference between the amount of money you have at the beginning of a set period of time and how much you have at the end.
Adjust as needed
Establishing a budget is not a one-time thing. Revisit it every month for a few months to adjust your budget as needed — especially if you notice any costs haphazardly going up or if you can cut down on anything unnecessary.
Finding Financing Options
Starting a private practice is no easy feat financially. Establishing a private practice requires enough capital to fund things like rent, utilities, equipment, technology and software and more. Fortunately, there are several financing options available for physicians.
Resources to Help Improve Physicians’ Personal Finance
There are a number of further resources available to help physicians get on the path to financial freedom. Reading more can help physicians build good spending habits, reduce expenses and reach financial goals.
- American Medical Association: The AMA lists out a few physician-specific loans and financial services from Laurel Road, which can help physicians in the country find better deals and options to help them improve their finances. AMA also provides several financial articles to help physicians navigate insurance, planning for retirement and ways to save during residency.
- American Society of Anesthesiologists: For physicians who want to hire a financial advisor, this resource from the ASA Community talks about what to look out for.
- InCharge: InCharge offers financial literacy resources for anyone interested in learning about budgeting and saving. They also offer a host of personal finance workshops and workbooks.
- PubMed: This article provided by a private wealth advisor outlines the three pillars of financial planning for physicians: protecting themselves, their families and their assets, reducing their taxes and growing their wealth.
- The American College of Obstetricians and Gynecologists: This resource from the ACOG explores financial support options for physicians and practices during the pandemic.
About Nathan Paulus
sources
- Association of American Medical Colleges (AAMC). "Physician Education Debt and the Cost to Attend Medical School: 2020 Update." Accessed October 21, 2021.
- Education Data. "Average Medical School Debt." Accessed October 19, 2021.
- International Journal of Medical Education. "An assessment of residents’ and fellows’ personal finance literacy: an unmet medical education need." Accessed October 21, 2021.