Medical students and trainees commit to very lengthy and demanding educational paths. They learn very quickly that there just aren’t enough hours in a day. Not only do they face very rigorous academic challenges, they’re also painfully aware that if they don’t force themselves to make time for social activities and exercise, they may blink and find themselves twelve years older and without a life.
As students and doctors strive to balance hectic lives, they have little time for anything else. And that, of course, is why on the eve of completing residencies and fellowships, many doctors find themselves unprepared to make important financial decisions including how to prioritize repayment of student loans, whether and how to afford a new home and or car, how to take the first steps toward launching a private practice, etc.
The last thing doctors want to do is spend precious time on activities they find boring or frustrating. For many, this includes analysis of personal finances. But making some time for critical decisions can make life easier down the road, and most importantly—can save time in the long-term, by obviating the need to make hurried or panicked decisions, or spending time fixing mistakes. The best way to save time is to be proactive, organized and responsible.
When it comes to financial planning, being organized is primarily about record-keeping. Ideally, maintain a file or folder for each financial account or product. For example, keep a file for all property and casualty insurance products (homeowner’s or renter’s insurance, auto insurance, and umbrella insurance). Similarly, maintain folders for life insurance, disability insurance, your home mortgage, college saving plan(s), and one for each brokerage, investment, IRA, 401(k), 529, or 403(b) account. You don’t need to actively do anything with these folders: you don’t need to examine them on a daily basis—just make sure you put all relevant correspondence including the latest statements in each folder as they are received.
In addition, at the beginning of each tax year (January 1) set aside one folder or drawer in which you will collect all tax-relevant items for that year. This will include all receipts, W2s, 1099s, etc. If in doubt regarding the tax relevance of any item, place it in the file or drawer. Your accountant can sort through it and determine what’s relevant. As your knowledge grows you can gradually take greater ownership of these documents and pore over them yourself. You may also file your own taxes if you feel comfortable doing so.
Being organized will serve you well in future. One specific example is that if you are ever audited by the IRS, the receipts and records you keep are your first line of defense and they will save you and your accountant time, headaches, and money.
There are countless stories of physicians living beyond their means. One case that comes to mind involves two plastic surgeon partners. Both were consistently earning $800,000 annually yet had less than $700 in the bank. Inconceivably (at least for most of us), they’d spent all their money on trophy real estate properties and expensive automobiles (one of them owned seven cars).
While real estate can be an investment, the total cost of a home goes beyond obligations to pay a long stream of principal and interest payments over 15 to 30 years. You are responsible for property taxes each year—and trophy homes have very high taxes. And, you must also pay monthly for utilities and maintenance of each property. Ignoring these total costs of ownership can lead you to become financially overextended.
Take the advice many professional athletes are given: You are allowed one of everything: one home, one car, one spouse, etc.
Had the two surgeons described above lived more modestly, and meticulously saved their significant earnings, each of them could have realistically saved four to five million dollars over ten years. They could have retired very comfortably at the age of 45! Instead, they spent the next decade in indentured servitude to their lenders.
One of the first purchases some doctors make upon accepting their first full-time job after residency is to buy a nice car. There’s no doubt doctors deserve to enjoy the fruits of long and difficult labors, but an expensive car is generally not the most responsible move when carrying $200,000 of school debt. We’ll revisit this issue later.