Top 10 Biggest Financial Mistakes Doctors Make
I previously published a post that garnered some attention called Top 5 Financial Mistakes New Attendings Make. I realized, since posting that article, that I was not thinking big enough! There are more common and serious money mistakes that I still see all too frequently. Physicians, in all their intelligence and perseverance, still commonly make poor financial decisions. Be it our delayed gratification, or our expectation that ‘we deserve it all;’ doctors and physicians habitually make personal finance so much more difficult than it needs to be. Here are the top 10 biggest financial mistakes doctors make, and how you can best avoid them!
Table of Contents
1. Not adhering to a budget
OK, we will start with the most common and simple mistakes that I see, and work our way down this list. First and foremost, overwhelmingly the most common financial mistake I see doctors and physicians making is not having an adequate budget. Now, I used the term ‘adequate’ strategically here. I have met plenty of physicians who have a ‘budget’ but it is far from adequate.
What a budget isn’t
A budget is meant to be the foundation with which you build your financial prosperity. Without a true understanding of your income, or total expenses, recurring payments, etc. how is an individual or family ever able to plan? Looking through your bank or credit card statements a few times a year and saying ‘I budget,’ is a recipe for disaster.
What a budget is
A budget needs to be honest and transparent. For anyone building a budget from scratch, I recommend a few things. Take a weekend, sit down with every single bank statement, all your credit card statements, and document every purchase. Have specific categorizations for your expenses. Make sure you include sections like: student loans, insurance premiums, eating out, coffee, childcare, entertainment… and so on. I have found this to be so crucial in a physician’s future financial success that I have created a FREE Excel spreadsheet that is yours simply by subscribing to our newsletter. You can find the signup form at the bottom of this post!
Also, there are a lot of great budgeting apps out there to kick-start your budgeting needs. Check out an article I wrote called 5 Best Budgeting Apps for Doctors! Create a comprehensive, honest, and transparent budget. Finalize it with your significant other. Stick with it.
2. Not creating a financial plan
The second most common financial mistake on our list of the top 10 biggest financial mistakes doctors make is regarding financial plans…or lack thereof. A financial plan, much like a budget, is an absolute necessity. Financial plans are financial roadmaps for your future. How will you spend your money, what will you prioritize, when should I tackle my debt, etc. There are a handful of financial decisions you will make early in your career that will have massive repercussions on your money later in life. Financial plans can help you intelligently navigate these decisions and set you up for financial prosperity.
Write your financial plan ASAP
There are multiple times throughout medical education where financial plans are helpful. However, I advocate for the creation of one sooner rather than later. Residency, fellowship, or during your first year out of training are excellent times to formulate a financial plan. If you are uncomfortable doing this yourself, this can be a time when hiring a financial advisor (who is fee-for-service) may prove useful. Having a professional review your budget, your expected income, your savings rate, and your retirement plan can help you better streamline your financial journey.
If you would like to know more, I have a great post called How to Write a Financial Plan. Here I venture into more detail on financial plans and even showcase my personal financial plan! So, make sure after you create a budget, that you create a financial plan that best supports your short and long-term goals.
3. Not appropriately managing debt
Discussing debt always strikes a nerve with me but it absolutely makes the list of the top 10 biggest financial mistakes doctors make. I am always flabbergasted at the absurd ways physicians convince themselves debt elimination is not a priority. Your debt is keeping you poor. I don’t care how big your house is, how nice your car is. If you are carrying hundreds of thousands of dollars in medical education debt, then you have hamstrung yourself from reaching financial freedom in the future.
Debt is personal
What is difficult is that debt elimination strategies are individualized. What a family, or individual, can accomplish is contingent on many factors, including: cost of living, children, amount of debt, income, candidacy for Public Service Loan Forgiveness (PSLF), employer loan reimbursement options, etc. As you can see, there are a multitude of factors that affect one’s ability to eliminate their debt…but the point is there are still options! Please do not become someone who carries their debt with them, paying the minimum, without a clear debt repayment plan.
PSLF v. refinancing
If you are pursuing PSLF, great! Please make sure you are making certified, qualifying payments monthly and keeping track of them. If you find that your interest rate is keeping you from making headway and refinancing is a better option, then refinance consistently to achieve the lowest rate possible. However, just make sure you have a plan, period. Your goal should be to either facilitate a PSLF plan, or eliminate your debt within 5 years of training completion. Do not let your debt languish.
I have a prior article on how my wife and I are tackling our combined $670,000 medical education debt!
4. Spending too much money
I honestly should just leave this sub-title as is and move on, it is somewhat self-explanatory…but alas, it needs some explaining. Why? Because it still happens so commonly. Most doctors, for whatever reason, feel they ‘deserve the world’ immediately after they complete their training.
Delayed gratification
Look, I get it. I may preach fiscal responsibility, but I am also human. When I completed my fellowship, I was 33 years old. My wife and I were a dual-income physician household, and here we were still unable to make the aesthetic upgrades to our current home we wanted. We could not understand how two physicians could feel like the poorest couple in town?! It was hard to be in my mid-thirties and admit that the next few years of our life would look much like they did while we were still in training.
A harsh reality
This is the harsh reality of securing financial prosperity later in life. We must practice what we preach now, to reap the reward later. This is not a new concept to physicians. However, it is a ‘tough pill to swallow’ when we have spent the past decade of our lives utilizing the very same approach with our education.
Lifestyle creep
I think the need to expand our lifestyle to match our income is a byproduct of delayed gratification and societal expectation. For those who are able to avoid lifestyle creep in the first few years of their attending careers, they can rapidly pay down debt, save, invest, and allow their future selves the ability to spend more. Doctors and physicians will be able spend more later in life, but that is only after they have made strategic and intelligent early-career decisions. Please, don’t spend it all away just because you feel you ‘deserve’ it. You do deserve it, but in stride. Expand your lifestyle slowly over years, not immediately after your first attending paycheck hits your bank account.
5. Not saving enough money
In lock-step with spending too much, is saving too little. Not saving enough money is mistake #5 on our list of the top 10 biggest financial mistakes doctors make. Obviously, if you are spending too much money, there will be little leftover to save. This is a problem. Again, simple math, but somehow hard for many doctors. There are multiple articles arguing the best savings rate. I frequently see 20% recommended and I agree, it is a good starting point. Saving 20% of your income is critical to building a reasonably sized nest egg by retirement age (i.e., 65 or later).
Savings rate
Now, keep in mind that your savings rate is dependent on multiple factors. One factor to consider is your retirement age. If you are planning to work to an average retirement age, like your mid-to-late 60s, then a 20% savings rate is reasonable. However, if you are pursuing financial independence, retire early (FIRE), then you may be looking at a 40-50% savings rate (or more) depending on when you wish to retire.
Lifestyle in retirement
Another factor to consider when determining your savings rate is your future expected lifestyle. Yes, currently you may be budgeting for your mortgage expenses, childcare, and student loans, but these will likely be gone by retirement age. This ties back to the importance of a budget. With an all-inclusive budget, you can see what your monthly expenses would be once these payments are gone. Our household currently spends $4,000 in childcare, $8,592 in student loans, and approximately $3,000 for our mortgage monthly. Once our children are older, our debt eliminated, and the home paid, we will spend $15,000 less a month… that is $180,000 less annually! As you can see, if you remove these expenses, we likely need far less to sustain ourselves in retirement comparatively.
Inflation
Lastly, you need to factor in inflation. At the publication of this article, inflation is substantially higher than 2-3% annually. However, your savings should factor in annual inflation and plan accordingly. Physicians make great incomes, but they commonly fail to understand the importance of utilizing this income to build towards a better future. Live below your means and save. If you are pursuing FIRE… then save more!
6. Not getting appropriate insurance coverage in training
If I have said it once, I have said it a thousand times. You need to guard against financial disaster. One way is to have an emergency fund. However, another common mistake physicians make is not acquiring appropriate insurance early in their careers.
Term life insurance
Let us start with life insurance. More specifically, term life insurance. The best time to get term-life insurance is while you are still in training. You will never be as young and likely never as healthy as you are then. Do not dilly-dally and get term-life insurance while in training. Also, avoid whole-life insurance. Honestly, avoid anything that couples your investments with life insurance. P.S., the second best time to get life insurance is right now (if you haven’t already)!
Long-term ‘own-occupation’ disability insurance
The second form of insurance is long-term disability insurance. I personally will not spend time talking about short term disability insurance as commonly there is redundancy built in if you keep a 3-to-6-month emergency fund. However long-term ‘own-occupation’ disability insurance is a must! If you need to know more information on this, check out these articles:
Umbrella insurance
Last, but not least, is umbrella insurance. Umbrella insurance acts as a ‘catch all’ for everything else that can happen to you. Yes, malpractice insurance is important, but this is often provided by your employer if you are not in private practice. Make sure to get umbrella insurance to guard against pretty much everything else.
7. Investing poorly
Another way that doctors can hurt themselves financially is through risky, volatile, or fad investments. Thinking you can be a successful day trader as a physician is mistake #7 on our list of the top 10 biggest financial mistakes doctors make. I will keep this topic brief, but physicians are already busy enough. I have yet to meet a physician who has the time in their schedule to be a successful day-trader. If you are a practicing clinical physician, it would be highly uncommon for you to have the availability to research single stocks or cryptocurrencies enough to reasonably avoid loss consistently.
Keep it simple
Face it, as busy professionals, we lack the time needed to understand and ‘safely’ invest in very risky fads. Keep it simple. Invest your money in low-cost index funds. If you wish to keep it overly simplistic, then utilize the three-fund portfolio approach popularized by the Bogleheads. If not, then invest in funds that index the market. Appropriately diversify through domestic and international stocks and bonds, and incorporate some real estate if you choose. It honestly does not need to be more complex than that.
8. Not prioritizing personal financial education
I may be biased here, but I think doctors are wholly unprepared to manage the incomes they receive after they complete training. We just never obtain a formal education on personal finance. This is the reason so many physicians ruin themselves financially. They allow substantial lifestyle creep, they make inappropriate and unnecessary purchases, and do not think long-term with their income.
Continuing financial education
Unfortunately, no one will ever work to protect your assets more than you. As such, continuing financial education should walk in tandem with your continuing medical education. Make sure you are taking the time to educate yourself on personal finance during your training, and with each subsequent year thereafter. For my wife and I, we work to read a handful of personal finance books a year, while simultaneously subscribing to some great personal finance websites.
Luckily for us there are several great financial websites catering to doctors and other high-income earners. If you wish to know more, check out the lists I have already curated for you:
9. Not prioritizing relationships
The final two mistakes on our list of the Top 10 Biggest Financial Mistakes Doctors Make are less financial and more existential. Do not get me wrong, mismanagement of your relationships can absolutely ruin you financially, but it is bigger than that.
Work-life balance
One of the most heartbreaking financial mistakes I see colleagues make is not prioritizing their relationships. More directly, I mean their marriages. Balancing your work-life and your home-life is hard. Honestly, I am incredibly thankful my wife is a physician also. This is not because I love having a dual-income household (which I do), but because I am married to someone who understands my demanding career. Though it can be difficult to manage each of our complex schedules, I am able to approach our agenda from a sense of professional understanding.
Divorce is expensive
Whether your significant other is in the healthcare profession or not, it does not matter. What matters is that you make a conscious effort to work on your relationship, constantly. That is easier said than done in such a demanding career, but don’t make your chosen partner feel second to your job, because divorce is exponentially more expensive than making steady investments in your spouse daily. Go out on financial dinner dates. Incorporate ‘date night’ in the budget. Make it a priority… your future selves will thank you.
10. Not addressing their own mortality
Not to end on a morbid note, but I think this final mistake is important. In the hustle and bustle of day-to-day life, doctors, like anyone else, can lose track of what is important. I would like to say we are the exception, being surrounded by the terminally ill with such regularity, but we are also human. Like everyone else, we often fail to reflect on our finite time here on Earth. Taking a moment to realize that time, much like money, is a finite resource, can help you better plan for the future.
What brings you joy?
Now, I do not mean to say ‘plan ahead’ in a morbid sense. I mean plan ahead for what really matters to you. What brings you joy? If spending time with your significant other, your children, your family is where you derive the most happiness, then make sure you are using your money to facilitate these experiences. As I have heard it said before, ‘don’t be the richest person in the graveyard.’ Make sure you use your high-incomes as a vehicle to afford you the opportunity to maximize time. If I leave you with one message, it is this: All the money in the world is meaningless if it is not utilized to cultivate joy in your life and in the lives of others. Don’t fall prey to your own greed.
Take home points
Financial mistakes are common. You will make them, just as I have. However, as you venture through your financial journey, there are common pitfalls to avoid. Live below your means. Save. Invest intelligently. Insure against disaster. Prioritize your relationships. Protect what brings you joy. Do these things and you will utilize your doctor income to secure financial prosperity. As always…
Stay motivated!
The Motivated M.D.
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What money mistakes do you see doctors make? Is it just our profession? Let us know in the comments below regarding our Top 10 Biggest Financial Mistakes Doctors Make! We love to hear from you.
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dude awesome article man! I’m not sure of the term life insurance during residency unless you really have somebody dependent on your income. i understand that you might be the healthiest at that time and cost of term would be the lowest, but you might got for years after residency before you might get married and have kids, all the while paying for term insurance you didn’t need. Otherwise solid advice, especially on whole life which screwed me and I lost $50,000!
Oh no I am sorry to hear about your whole life insurance issue. That’s terrible! Thank you for taking the time to visit the site and provide a comment! I always appreciate interacting with the readership!