Top 5 Financial Mistakes Doctors Make and How to Avoid Them
Doctors are some of the most intelligent people in the world yet, everyday financial principals elude many. The reason for this is simple: Physicians are healthcare professionals, not financial specialists! Your time and training are spent largely on managing your patients/practice and your family which does not leave a lot of time for other things. Here are some of the most notable things that cause financial difficulty….
#1 Debt Management
This often begins early for most medical students as they get into the habit of living beyond their means. Student loans, auto loans, credit cards and perhaps a mortgage they shouldn’t be in. Overpaying on interest can cause a major drag on your finances so prioritizing is key.
#2 Saving Too Little
Living within your means is incredibly important no matter who you are. But to be truly successful, you need to live sufficiently below your means so that you can have money to invest, pay down debt, and build net worth. Saving 10%-12% of your gross pay is the general rule for most people, more if you plan on retiring early. Remember that isn't counting saving for your next car, a boat, or your kid's college fund. That's JUST retirement. What keeps doctors from saving more? Debt is a big factor, and so is a sense of entitlement after years in training and many long hours at work.
#3 Divorce
Both personally and professionally, divorce is expensive and emotionally taxing. This is likely the largest financially impactful thing that can happen to a doctor. It isn't unusual for a doctor to lose a home, a large chunk of savings, and future income (to alimony and child support). It is hard to recover from that. Interestingly, Physicians as a whole have a 24% divorce rate (greater among female physicians) but dual physician couples have only an 11% divorce rate.
Professional divorce is also expensive. Breaking up with your partners, closing a practice, moving away and so forth are all expensive. You may have moving expenses, buy-out fees, employee costs, malpractice tails, and a temporarily lower income. Go into any business relationship fully informed and have your contracts reviewed by an experienced health care contract attorney.
#4 Poorly Chosen Insurances
Most people (doctors included) do not have enough of the types of insurance they really need (primarily life, disability, and liability -professional and personal), they have too much of the types they don't need. Individual circumstances vary but here are some guidelines:
Insurances you likely need
- Level term life insurance of ~$2M in coverage. Many employers offer some coverage at low cost
- Malpractice Insurance
- Around $2M of umbrella insurance
- Disability Insurance Coverage
Insurance you likely Do Not Need
- Cash value life insurance policies such as whole or universal
- Group disability insurance
- Low-likelihood coverages such as home warranties or for electronics and appliances
- Carrying low deductibles on home and auto policies
#5 Lending Others Money
Lending money to family and friends almost never goes well. You are a kind and compassionate person of some means who wants to help so people will come to you. But often times emotions get in the way of good decision making and you have to exercise caution here. If you do decide to go down this road, resolve to make the money you hand to friends and family a gift, with no strings attached.
This will do two things for you. First, it will preserve the relationship. A creditor relationship is different than a family relationship, especially if/when the debtor goes into default. Second, it will preserve your money. Most of us are willing to lend much more money than we're willing to give. It's far better to give away $10K than to lose $100K in loans.