Understanding Personal Finance for Physicians
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.
To help physicians manage the effects of financial stress on their mental health, here are a few tips to tackle a financial crisis:
- Avoid lifestyle creep. It’s easy to start living an expensive lifestyle once you see your income skyrocket. Avoid this by being goal-oriented when you upgrade your lifestyle and hold yourself accountable with your money.
- Balance your debt and investments. How you balance your debt and investments will depend entirely on your current financial situation. But make it a point to set aside money for both each month.
- Plan for retirement. It may be tempting to simply enjoy having a high level of income for what is likely the first time in your career, but remember to plan for retirement as well. Have an adequate savings and investment strategy that keeps your retirement in mind.
- Create a long-term financial plan. Financial needs evolve as you grow older. It’s essential to keep this in mind and adjust your financial habits accordingly based on your long-term goals.
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.
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.
During residency, choosing the appropriate terms and payment plans is essential to ensure that repayment is manageable down the line. Opting for government loan programs over private ones can help minimize the monthly debt expense. Some institutions even offer loans geared towards physicians. For instance, Laurel Road currently offers a 0.25% rate discount to new student loan refinancing applications, which can be better than traditional bank offers.
Lacking a budget
Establishing a budget is essential to build discipline and ensure that your finances are in control. Start by identifying your income and listing out all the necessary expenses. Don’t forget to include a section for your savings and debt. From there, allocate a budget for each and try to live within those means.
No emergency funds
An emergency fund may not be at the top of a physician’s mind — especially considering the high salary they’re expecting to make after they finish their residency. Even so, it’s important to set money aside for a rainy day. This doesn’t have to be a huge chunk of your income and can be a minimal and manageable amount until it reaches three to six months of your living expenses.
Not managing insurance needs
The risky nature of a physician’s career requires ample insurance coverage, which some residents may not consider. However, employers may not offer robust enough insurance in case of an accident. Purchasing disability, medical malpractice and life insurance are all necessary policies to protect physicians from the risks that come with their jobs.
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.
Living beyond one’s means
Physicians are often placed on a high financial pedestal, leading some to live a lifestyle outside their current financial capacity. But you can overcome this by making decisions with financial goals in mind and coming up with a stringent budget. It can also help to continue living like a resident to avoid the lifestyle creep that plagues many physicians.
Difficulty balancing investments and debt
The ideal balance between investing and paying off debt depends on one’s income and financial goals. However, consider putting extra cash towards investments that help you earn more interest than your debts. For instance, if you have a loan with an interest rate of 3.75% and an investment that yields 4.5% in annual returns, it may be better to invest extra in the latter.
Not thinking of investments or savings
For some physicians, investing or saving is not part of their plan at all as they end up suffering from a lifestyle creep. However, it’s important to keep investments and savings in perspective to help you achieve financial goals and even early retirement. In other cases, it can even grant you the flexibility to take a break, as the world of health care can lead to burnout after a few years.
Not planning for retirement
Not thinking about retirement is a crucial mistake since physicians often have fewer years to save and accumulate a comparable income to let them live comfortably during retirement. Make a long-term plan and figure out how much you need to save for retirement — this can be done in combination with investments to generate more passive income.
Not purchasing disability insurance
Physicians often carry a significant level of risk while on the field, and an untimely injury or illness can result in a temporary or sustained loss of income. Purchasing disability insurance can protect your income if you cannot perform your medical specialty’s duties.
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.
- Read or listen to personal finance books/audiobooks. There are plenty of popular personal finance books designed to help you change your mindset when it comes to money. Some may educate you on how to save better in small ways, while some talk about investments. Start with what interests you the most or what you want to prioritize.
- Listen to personal finance podcasts. If you have no time to read books, personal finance podcasts are a great alternative as you can listen to them passively while getting other things done.
- Use financial management tools. Given physicians’ busy schedules, leveraging technology and using one of the many personal finance tools and applications available is one way to increase financial literacy. Beyond giving an overview of your finances and simplifying money tasks, these tools also provide lessons on financial literacy in small and easy-to-understand ways.
- Enroll in a financial literacy course. If you really want to get serious about increasing your financial knowledge, consider enrolling in a financial literacy course. These give you a structured setting to learn all about money management where you can learn and ask questions.
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.
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.
- Invest early. Starting as early as possible is crucial as physicians often delay saving in earnest due to the years it takes to become a practicing physician. Given the late, and usually heavily indebted, start that most physicians have to their professional careers, taking advantage of investment opportunities is a must to catch up with peers and achieve financial success.
- Choose wisely — avoid enticing offers. Given that physicians often have a high income, they have access to complex investments not usually offered to the general public, such as hedge funds. Choosing investments wisely and conducting ample research is vital to protect your hard-earned money.
- Strategically title assets. This involves also putting the title of your assets in a trusted person’s name, which is usually your loved ones. Such a strategy can help protect assets from creditors, but note that it requires trustees and a separate tax return.
- Create a will. While a will is usually something made later in life, an untimely death can happen to anyone. Planning early can ensure that your assets go to those you intend them to.
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.
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.
The most popular and easy-to-access form of financing for any business is a loan. For physicians specifically, there are a number of financing options through major banks such as Wells Fargo’s Practice Finance and Bank of America’s Business Advantage. These financing options consider a physician’s financial circumstances and the unique start-up costs that may be incurred when opening or buying a practice.
Small Business Administration Loans
The SBA offers two types of loans that may be ideal for physicians starting up a practice: the 7(a) Guaranteed Loan and the 504 Local Development Company Program. The 7(a) Guaranteed Loan has large loan amounts, better repayment terms and fewer restrictions on how the funds are used. On the other hand, the 504 Local Development Company Program is best to finance computers on medical equipment.
If you need to buy supplies or cover certain expenses, a credit card can help in a pinch. However, this is not wise for a long-term financing strategy.
Contrary to popular belief, government and private grants are not just for educational or nonprofit purposes. Some organizations and state governments may offer a grant in your area to stimulate local economic development or support minority- or woman-owned private practices.
Family or Friend Loans
If you know of a trusted family or friend who may be willing to lend you money, it’s worth a shot. Make sure, however, to get everything down in writing to ensure that both parties avoid any legal repercussions.
Expert Insight on Personal Finance for Physicians
Handling finances is a challenge for anyone — but most especially for physicians. After years of long hours during residency and toughing it out with a low income, adjusting to the significant jump in salary can be difficult. To help physicians understand how they can manage their finances better, MoneyGeek gathered insights from a few experts in the field.
- What are the best ways for those graduating from residency to adapt to their rapid change in income?
- How can physicians cope with the debt that comes with the profession?
Family Practice Physician and Expert Contributor for Test Prep Insight
Chief Investment Officer at Integrity Advisory, LLC
CFP® Fee-Only Financial Planner and Founder of Harrison Financial Planning
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
- 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.