Those that don’t work in medicine often think that physicians earn so much money each year that they never have to worry about their finances. As a physician, you know that simply isn’t true.
With a higher salary comes more opportunity to build greater wealth, achieve financial stability, and fully enjoy retirement when you finally decide to hang up your white coat. But to do so you’ll have to make lots of important financial decisions, and they can be tricky ones to make.
From creating a budget to planning for retirement to making smart investments, here are seven strategies for physician money management that will help you maximize your income.
Establish a Budget
No matter how much or how little you earn each year, everyone can benefit from having a budget.
Many professionals follow the 50/30/20 rule, where you spend 50% of your income on things you need, spend 30% of your income on things you want, and save 20%. However, if student loans or med school credit card debts are looming large, it’s sometimes better to pay down that debt first and save a little less in the beginning of your career.
Start Saving for Retirement Now
Start contributing to a retirement savings account as soon as your employer says you are eligible. 401k and similar retirement plans do more than just help you put money aside for your golden years. They also lower your taxable income and reduce your tax burden at the end of the year.
Self-employed physicians that don’t have access to a 401k should start contributing to an IRA as soon as possible.
Create an Emergency Fund
All physicians should establish an emergency fund to cover at least six months of living expenses. Calculate exactly what it would take you to fund your current lifestyle for six months and save that aside, separately from your 20% savings account.
Always keep this cushion in the bank in case you lose your job or face some other type of unexpected emergency situation. It can be the difference between sustaining your lifestyle or having to sell existing assets or go into debt.
Make Tax-Advantaged Investments
In addition to contributing to a 401k or similar plan, consider putting some of your income into a backdoor Roth IRA. With a Roth IRA you pay taxes on the contributions you make today, but when you withdraw the funds in retirement, they are tax-free.
The contributions you make to health savings accounts are also tax advantaged. If your health insurance provider allows you to save in an HSA, this is yet another way to reduce your taxable income.
Diversify Your Investment Portfolio
Don’t invest all of your money in one place. Most experts recommend diversifying your portfolio with a combination of stocks, bonds, and index funds, which invest in the stock market as a whole rather than in specific sectors or companies.
Your investment portfolio should include real estate investments as well.
Physicians just beginning their careers can get a jump on real estate investing by purchasing a home with a physician mortgage. Physician mortgages allow you to make a zero or low down payment without having to pay PMI. For young doctors that still have a large amount of student loan debt, they are often the best way to qualify with a lender.
Read this article to learn more about the physician mortgage and discover the top loan lenders.
Keep Track of Your Debt
Always keep track of all of your debt. From mortgages to credit cards to student loans, it’s important to have an overall picture of your total debt amount.
This can help you keep your debt in perspective, help you identify which debts to eliminate first, and help you make more informed decisions as to how much money you can afford to invest.
Protect Yourself with Disability Insurance
Disability insurance is income replacement insurance, and every physician needs a long-term, individual, customizable policy.
If an injury or illness renders you unable to work you could lose your income altogether. But with disability insurance you can continue to collect a portion of your salary, even if you cannot work for months, years, or even decades.
When purchasing disability insurance be sure to select the own-occupation definition of disability. This is key for physicians, as this is the only definition that will pay benefits if your injury or illness prevents you from doing your current job. (Other definitions of disability require that your condition renders you unable to perform any job at all).
If you’re feeling overwhelmed by all of the various ways to budget, save, invest, and spend your money, hire a professional to help you figure it all out. A financial advisor can help you make wise decisions and put you on a path to financial health and lifelong financial security.