For all the new attendings just starting practice—congratulations! Completing your training program is a huge accomplishment. And happily, you’ll now be receiving paychecks that are commensurate with your education. The first paycheck after residency will be a big change, but don’t spend it all without having a financial plan in place. So what do you do with all of that extra income?
While it might be tempting to spend it, that won’t grow your wealth over the long term. In order to make the most of your money and secure your financial future, you should put together a financial plan (including a budget) and make your money work for you.
The first thing to do when making a financial plan is to identify your short-, mid-, and long-term goals.
Whether it’s financing a new car or vacation, paying off student loans, or saving for your children’s university fees, it can be hard to do the hard work of planning for and monitoring your financial situation without knowing what you’re working toward.
After identifying your goals, it’s time to make a plan to reach them. In order to build an accurate “roadmap” to your goals, you must know where you are financially. It’s hard to draw a map if you don’t know your starting point. Put together a summary of your investments, insurance policies, and assets, along with any debts or other liabilities.
Once you know where you are and where you want to be, you will be able to put together a financial plan to move you from one point to the next.
Your financial plan should include two prongs: the strategies that build your wealth, and the protections that shield you from unforeseen life events.
Your financial plan is a reflection of your priorities—as you think about your financial goals, think about the most important things that you want to accomplish.
Is it saving for your children’s college funds? Is it being financially independent by 55? Is it buying a vacation home and spending a month there every year?
As you think about your goals, consider where you want to be in 5, 10, and 20 years and how these shorter-term goals contribute to your long-term destination.
One of the most important places to put your money right away is in starting a short-term savings or emergency fund. This is hugely important, and the money should not be used for anything except bona fide emergencies.
The goal is to have six months worth of living expenses, and to do it as soon as possible.
Insufficient savings can force you to turn to debt, which is why you shouldn’t grow into your income.
It’s much harder to cut back than to never increase your lifestyle in the first place. Before you start making big purchases, you should have a cushion in a savings account.
You will also have debt payments to consider in your financial plan. After housing expenses, this will likely be your largest monthly expense. Most new doctors have an uncomfortable amount of debt after training. It can be difficult to strike a good balance between spending, saving, and debt payments.
A good plan to tackle debt repayment will remove a lot of the stress that arises from being in student loan debt. To see our guide to loan repayment strategies, click here.
After working out a financial and debt repayment plan, it’s time to protect yourself from unforeseen events.
It’s especially important during this time after training that you obtain both disability and life insurance in order to protect you and your family if an unforeseen illness or injury causes you to be unable to work and thus lose your income.
Disability insurance is the most important coverage all physicians can get, as your financial well-being depends significantly on your ability to earn an income. It can even be argued that it is more important than life insurance, as it is statistically more likely that you will become disabled during your working years than that you will die prematurely.
By providing you with replacement income if you’re unable to practice medicine as a result of accident or illness, disability insurance allows you to have confidence that you could maintain your lifestyle and pay back student and other loans even if you aren’t able to work.
Life insurance provides your beneficiaries with a tax-free payment, or death benefit, that they could use to pay immediate and long-term expenses. Death benefit proceeds can be used to maintain or supplement your family’s lifestyle by generating income that can cover any long-term expenses you may have in place or replace your future income
When deciding how much to get, add up your total debts and any expenses that would arise from your death, plus your long-term needs and any future financial goals. Purchase coverage that is enough to clear your debts and provide sufficient resources to meet your dependents’ needs.
While hopefully this insurance will not be necessary, it is important to consider protecting your family as you craft your financial plan to meet your desired monetary and lifestyle goals.
Finally, it’s time to start building financial opportunities. While the first 90 days after you begin as an attending may seem really fast, it’s important to get as quick of a start on this as possible.
As a physician, you’re most likely starting later than many of your age cohort when it comes to saving for retirement.
And honestly, your balance sheet is probably pretty unbalanced right now. You may have a lot of liabilities and few assets (except for your future earnings). You may not have a lot of liquid assets, and probably little invested for retirement. As part of your financial plan, you should make sure that account for savings is an integral part of it.
Get into the habit of paying your future self first. Insufficient savings can force you to turn to debt, which is why you shouldn’t grow into your income. It’s much harder to cut back than to never increase your lifestyle in the first place. Before you start making big purchases, you should have a cushion in a savings account.
Beyond saving cash, safe investing can have a hugely positive impact on your financial future. Investing today, thanks to the power of compound interest, will have a huge impact on your financial health later.
In 30 years, a $15,000 investment today at a conservative average return of seven percent return will give you $114,184. A $30,000 investment will return you $228,368! Choosing the right investments is critical, so if you aren’t sure or don’t want to spend a lot of time on tracking the health of your investments, working with a financial advisor can maximize your returns.
Investing is a great way to make sure your money is getting you the best return possible. If you didn’t have time to learn about investing as a resident, now is the time to learn or to assemble a good financial advising team.
Between learning the difference between a backdoor Roth IRA or a 457 plan and finding the best ways to maximize your post-tax income, it’s time for a crash course in financial literacy!
If you don’t feel comfortable setting up a financial plan by yourself or don’t have the time to do so, finding a good financial advisor who will help you develop the best plan to achieve your financial dreams is an excellent idea.
Tags: Financial Planning