Financial Planning for Doctors

A spending plan is a guide of how to best allocate the money you earn as a physician. It is similar to a budget, but the word “budget” carries negative connotations and is associated with anxiety, arguments, and acrimony. A spending plan is a positive tool. It is your plan. You set it and adjust it as needed.

Think of your spending plan as a financial map. You wouldn’t start a cross-country road trip without knowing your destination, what routes you’ll take, and some idea of how much fuel you’ll need. Your budget serves the same purpose. Your destination is your financial vision for the future. What you save for, such as a college education, a vacation home, or early retirement are similar to the stops along your route. Estimating your fuel consumption is similar to estimating how much of your income you’ll need to allocate to living expenses, savings and retirement.

Creating a spending plan doesn’t have to be complicated. Here’s a quick and simple four-step process.

Now that you have a clear understanding of your current expenses, income and vision for your financial future, it’s time to create a plan to reach your goals. You may have to reallocate how much you spend and on what. But these are your choices to make. Make the commitment yourself (and your partner) to strengthen your financial willpower and make the necessary spending changes.

As a physician, your income is significant. It’s important to make the most of the career and specialty you’ve worked so hard to develop and to deploy your resources wisely.

Unplanned expenses can wreak havoc with the best financial planning. Avoid extra money stress by establishing a short-term savings plan or emergency fund. Then, when an unexpected auto repair, home repair or medical emergency comes up, you’ll be ready. Think of your emergency fund as a financial cushion for unexpected expenses.

Strive to save an emergency fund equal to three to six months of monthly expenses. Of course this won’t happen overnight, but if you allocate funds in your spending plan, you can achieve this goal over time.

For example, let’s say your monthly expenses are $6,000. Your emergency fund should be $18,000 to $36,000. It may take four to five years of faithfully earmarking a portion of every paycheck to the emergency fund before you reach your ultimate goal.

While you build your emergency fund, also work to pay down any credit card debt. Start by selecting the credit card with the highest interest rate. Do your best to pay something more than the minimum monthly payment for that card and avoid additional charges on that card. If you have to use credit, choose the card with the lowest interest rate.

Some credit card companies offer a lower interest rate on balance transfers. Investigate transferring the balance from a high interest rate card to a card offering better terms. You may not want to close that credit card, but definitely avoid new charges.

For doctors, getting to a secure financial position can be a journey, especially if you are paying down medical school debt. Chink away at it one step at a time.

Long-term savings are essential for retirement planning and other goals such as saving for a home, a college fund or even a dream vacation. A sound spending plan includes an ample contribution to long-term savings.

Saving for long-range goals typically takes many years. Let’s say you have seventeen years to save for the projected tuition at a four-year public university of $281,000. Using simple math, you would need to save about $16,000 annually ($1,400 monthly). That’s a staggering number for sure. Thankfully, you have the magic of compounding interest on your side to help reach your goal.

Compounding Interest

Assume your savings will earn 10% compounded annually (10% is a much higher interest rate than currently offered but it makes the calculations easier to illustrate.) At the end of the first year, you saved $16,000 and earn $1,600 interest. ($16,000 x 10% = $1,600). By the end of the second year, your total contributions are $32,000. At the end of the second year your account value is $36,960. Over time, compounding interest increases the value of this account $3,450 compared to simple interest.

Factoring in the value of compounding interest over 17 years, you only need to save $6,925 annually to reach the goal of $281,000. That is much more manageable than $16,000!

Saving For Retirement

At some point, you’ll be ready to retire from your career as a doctor. Preparing for retirement is your most important long-term savings. Many retirees can expect to live 30 years or more in retirement. Even with Social Security benefits, you will need additional retirement savings. It’s never too soon to save for retirement.

To maximize your retirement savings, you will want to take advantage of a tax-favored retirement plans. Some plans, like a 401(k) or 403(b) are offered by your employer. If you are fortunate and have a retirement plan at work, participate in the plan as soon as you become eligible. You designate how much of your paycheck should be directed to your account. Some employers will contribute to your account as well.

In general, retirement accounts are tax-favored. Accounts such as 401(k)s and 403(b)s allow pre-tax contributions, up to an annual maximum. That means when calculating your federal income tax withholding the amount of taxable income is reduced by the amount you contribute to your retirement account. Traditional IRAs allow a tax deduction for annual contributions up to a maximum. Another tax benefit of most retirement plans is that income tax on the account is deferred until you begin withdrawals. You must begin minimum withdrawals by age 70 ½.

Talk to a financial professional about which retirement account works best for your situation.

There’s security in knowing you have a financial plan. You are accumulating assets, a home, short-term and long-term savings and managing your spending. However, even the best plans can hit a snag. Protect the results of your hard work with insurance products that help protect against the financial risk of something unforeseeable happening.

Insurance products share the financial risk of losing something valuable. It is essential to have a combination of the following four insurance products to properly cover your assets.

As unsettling as it might be to consider a premature death, life insurance is the capstone to a sound financial plan. Life insurance eases the financial strain of maintaining what you planned for the people you leave behind.

You and your spouse may have planned to send your children to college for instance. Even if your spouse earns a similar income, it may not be enough to raise the children in the family home and continue to contribute to a college fund. Once the kids are out of school, many couples step up contributions to retirement savings. The retirement you planned as a couple may not become a reality for your spouse if contributions to the retirement account are constrained by one income.

Some financial needs are temporary, while others are lifelong. For this reason, temporary (term) and permanent insurance both have their place.

There are several kinds of life insurance products, each designed to address a specific need and type of protection.