Whether you’re a family physician in a rural Midwest town or a cardiac surgeon in a major east coast city, physicians across the board often share a similar issue: They’re not great with money. Physicians don’t learn financial planning in med school, and despite their salaries, many suffer the same financial hardships as people that earn much less. But if you put the right practices in place early on in your career, you can enjoy financial stability throughout your career and turn your income into long-lasting wealth. Ready to learn how? Here are the seven financial planning tips that every physician needs to know.
Create a Financial Plan
Financial planning requires you to create a strategy. That includes budgeting, creating an emergency fund, allocating funds for insurance and business expenses, and determining how much to invest. A solid financial plan can help you reach your financial goals and build generational wealth to create financial stability for your family. Most physicians rely on the advice and guidance of a financial planner to help them define and meet those goals. Estate planning involves preparing for the transfer of a person’s assets and responsibilities after their death, ensuring their wishes are honored and their loved ones are taken care of.
Protect Yourself With Malpractice Insurance
All physicians should protect themselves with malpractice insurance, even if their state doesn’t require it. Why? Because malpractice insurance doesn’t just cover damages for patients — it also pays for legal defense costs. Depending on your attorney and how complex the case is, the cost to defend yourself in a malpractice suit can be tens of thousands of dollars or more. Without malpractice insurance, you’ll have to pay for that out of pocket. How much you’ll pay for malpractice insurance varies based on your specialty, location, claims history, and other factors. Checkout this guide from Physicians Thrive to learn more about the cost of a malpractice insurance policy.
Save For Retirement
It’s never too early (or too late) to start saving for retirement. From 401k plans offered through your employer to individual IRAs and Roth IRAs, putting a portion of your income into a retirement plan is a must. The first step in creating a strong retirement savings plan is to determine how much you’ll need to save each year. This article delves into what percentage of your income you should save, based on your age and when you start contributing to a retirement plan.
Buy Disability Insurance
Disability insurance is a must for all physicians. If you become too ill or injured to work, disability insurance will pay benefits up to 60% of your current income, allowing you to sustain your lifestyle and continue to save, invest, and plan for retirement. Most physicians devote 1%-3% of their income to disability insurance, and the protection it offers is worth every penny. Just be sure to select a policy with the own-occupation definition of disability. With an own-occupation policy, any injury or illness that prevents you from doing your current job will make you eligible to start collecting benefits.
Diversify Your Investments
Diversification is the key to a sound investment portfolio. From stocks and bonds to CDs and real estate, it’s best to invest in different vehicles for growth. Since most physicians aren’t experts on asset allocation and diversification, consulting with a financial advisor is usually the best move. Your age and how close you are to retirement play a significant role in where and how you should invest your money, and a great financial advisor can steer you into and out of the investments that make the most sense at different points in your career.
Minimize Your Tax Liability
The less you pay in taxes, the more money you’ll have to save, spend, and invest. Create a tax planning strategy that helps you to reduce your taxable income. From contributing the maximum amount allowed to retirement accounts to donating securities to hiring your children to work for you, there are multiple legal ways you can reduce your tax liability and keep more of your hard-earned income in your own pocket.
Live Within Your Means
Physicians earning high annual incomes are often tempted to spend more because they make more. If you want to be smart about your finances, don’t fall into this trap. Experts recommend spending 50% of your income on things you need, designating 30% of your income for things you want, and saving the other 20%. If your needs, such as your mortgage, monthly household expenses, and children’s education total 60% of your income, then you should only use 20% of your earnings on the things you want. Don’t rack up credit card debt on things that you don’t need. Instead, curtail your spending and make it a point to live within your means.
In Conclusion
Income is not the same as wealth, so no matter how much you earn, it’s important to spend, save, and invest it wisely. With a smart budget, solid investments, insurance protections, and a strong retirement plan in place, you can turn your higher-than-average physician salary into significant wealth over time.