7 Financial Planning Tips for New Physicians

Now that medical school and residency are behind you, you’re finally practicing as a licensed physician and making the salary you deserve. And with decades of high earning potential ahead of you, it’s important to put some plans in place now to protect that income and make it grow.

Ready to start making some smart money decisions?

Here are seven financial planning tips for new physicians that want financial stability and security for life.

1. Create a Budget

The first step in creating any sound financial plan is to create a budget based on how much money you earn each month. Most experts recommend using the50/30/20 rule, which means spending 50% of your income on the things you need, 30% on the things you want, and putting 20% aside in savings.

To create a budget that you can stick to you need to know how much money you take home each month after taxes. For physicians, that means having a clear understanding of your compensation model.

Some physicians are paid a straight salary. Some earn a straight salary plus productivity bonuses. Others work under an RVU compensation model where your salary depends entirely on how many patients you see and/or how many procedures you perform.

Understanding your compensation is the only way you’ll be able to figure out your take home pay and be able to create an appropriate budget. 

2. Establish an Emergency Fund

Everyone needs an emergency fund to cover a minimum of six months’ worth of living expenses. Keep in mind that your emergency fund is separate from your savings — once you have a healthy emergency fund set aside you’ll want to continue to save at least 20% of each paycheck.

3. Live Within Your Means

Despite the fact that physicians earn more each year than most other professionals, many find it difficult to stick to a budget and save for the future, and that’s often because they live above their means.

Yes, you work hard, so it’s understandable that you want to drive a luxury car, buy the biggest house on the block, and take a lavish vacation each year. It’s absolutely fine to spend your money on such things, as long as you’re meeting all of your financial obligations and saving and investing as you should be.

4. Create a Student Loan Repayment Plan

If you still carry medical school student loan debt, paying it off (and paying it off on time) should be a top priority. Fail to make payments on time and your credit score will drop, which can make it difficult to get a mortgage or a low-interest credit card in the future.

Consider enrolling in an income-driven repayment plan where your loan payments are based on a percentage of your income. That way, you can build that monthly debt into your budget and make sure you never fall behind on payments.

5. Maximize Retirement Contributions

It’s never too soon to start planning for retirement. If your employer allows you to contribute to a 401k or similar retirement savings plan, do so. Do it now and contribute the maximum allowable amount each year.

If your employer doesn’t offer a retirement savings plan, open an individual IRA and start contributing to it on your own with after-tax dollars. IRA contributions are tax-deductible, so this will also help to reduce your tax obligation at the end of the year. 

6. Buy Disability Insurance

Disability insurance isn’t health insurance, it’s income insurance to protect the future unearned income you could lose if you become too ill or injured to work.

Every physician in every medical specialty should protect themselves with an individual, long-term disability insurance policy. Even if your employer offers disability through a group policy, you’ll want to get a policy of your own.

Why?

Because you can customize it with various options, including the option to choose a benefit period that lasts from the day the policy begins all the way up until you reach retirement age.  

7. Buy, Don’t Rent

As a new physician, purchasing a home might not be your top priority, especially if you’re considering working for a different employer in a different state when your current contract ends. Yet no matter how much you may love the apartment you’re renting, buying a home of your own is always a better investment.

Renting will not help you build wealth, but purchasing a home is a wise investment that will. Every mortgage payment you make will help build your equity in the home. With inflation rates rising each year, the equity you earn today will be worth even more in the future when you do decide to sell.

Conclusion

Financial planning doesn’t have to be complicated, but it can be helpful to seek the advice of a financial advisor to help you create a budget and determine where and how to invest your income.

With the right financial plan in place, the physician salary you earn today can help you achieve financial independence and build generational wealth.

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