Your first year in practice is busy. In fact, you may have overlooked a few financial moves that can save taxes, avoid problems and lead to success. While financial planning for doctors is not complicated, it does require time and energy that’s in short supply during the first year or two of practice. To start making progress, you can use the following steps as a checklist to get on track with your finances.
1. Choose your family’s financial leader.
Your finances will run more smoothly when you choose one family member to be responsible for your money. That doesn’t mean they make all the decisions alone. It means all financial communications and major decisions pass through their hands so that they can keep your family moving in the right direction. If you are not sure whether you or your spouse will be better at this, pick the person who is more organized, the person who checks the mail, or the one who is most plugged in to the online world.
2. Find a competent, caring financial advisor.
Your family CFO may need someone to act as their eyes and ears, to keep them informed, and give them guidance. When you select an advisor look for one who will listen to you, speak clearly, and make themselves available to help when needed. Be certain the advisor is a fiduciary who is compensated on a fee-only basis with at least ten years experience and the Certified Financial Planner™ mark.
3. Find a bank that will save you time.
Look for a bank that’s large enough to handle your needs, but small enough to offer responsive service. If a “relationship banker” is available to you, be certain to spend some time getting to know them and what they can do to make your financial life run more smoothly. If you are banking your medical practice, a community-based bank might be a good fit for you. If you have minimal banking needs, consider using a credit union instead. They tend to offer higher rates on deposits and lower rates on consumer loans and lines of credit. The best bank won’t make you money but it will save you time.
4. Find a responsive, knowledgeable tax preparer.
Medical specialists earn more than 95% of all other taxpayers. That’s the good news. The bad news is that you will give up about half your earnings to the taxman over the next 20-40 years of your practice but a solid tax person can help you pay no more than you absolutely must. To find the right tax preparer, get a name or two from your colleagues and ask your financial advisor for a third name. Interview all three candidates and choose the one who makes you feel most comfortable. Avoid tax advisors who sell insurance and investments. Schedule a November tax planning session for the current tax year.
5. Use a reasonable, approachable attorney.
The best way to use an attorney is early and often. To find the right one, ask your colleagues who they use, ask your tax preparer for a referral, and ask your financial advisor who they prefer, then select your attorney before you really need their help. The best choice is likely to be a business attorney who also handles trusts and estates. Ask them to prepare a simple will for you now, and plan to do more complex estate planning as your net worth grows.
6. Re-examine your disability insurance.
You may have purchased disability insurance as a resident, but you’re probably not “covered.” Why? Because your income has increased now that you’ve begun to practice. Disability coverage is one of the most complex forms of insurance and special provisions apply to physicians. Seek the help of a disability insurance specialist who has at least 10 years experience with disability insurance for doctors and ask them to explain the “definition of disability” for any policy you own or may be asked to purchase.
7. Form a general financial game plan.
Before you make any major financial decision, find out how much it will cost to achieve the goals that lead to financial security for your family. Ask your financial advisor to help you put together a plan to refinance your student loans, save for college, and build a fund for retirement. Try to answer the question, “How much do I need to save each month to make sure I’m on track?”
8. Purchase a reasonable home.
Note that we didn’t say, “Build the nicest home you can afford.” Many, many physicians jeopardize their ability to achieve financial security by buying an expensive home whose payments make it challenging (or impossible) to save for other goals like college and retirement. Think about what your family needs in a home, form a budget, and stick with it. Once you become accustomed to living in a larger home, there’s no going back to a smaller one.
9. Load up on life insurance… term life insurance, that is.
Ask your financial advisor to help you calculate how much money you may need in order to pay off your home, create a college savings fund, establish an income for your survivors, and cover the cost of their retirement. Remember to diversify your policies the same way you would diversify an investment portfolio. Plan to pare back your coverage over time as you make progress toward your goals. Avoid permanent or “cash value” life insurance, especially variable universal life (VUL).
10. Re-discover your employee benefits.
If you work for a hospital or clinic, ask your human resources person to provide a list of all the benefits available to you – retirement, insurance… even parking passes – and schedule a time to meet with them to review the list. Make sure you’re getting the benefits you earned. If you are self-employed, talk to your financial advisor about ways to save taxes while you save for retirement, including a solo 401(k), profit sharing plan and defined benefit plan or “cash balance” plan.
11. Get a PLUP.
No self-respecting physician would willingly go without malpractice insurance but many will drive cars, walk dogs and coach sports teams without the type of insurance that protects them from claims that arise from accidents in these activities: a Personal Lines Umbrella Policy (PLUP). Ask your property and casualty agent to integrate your PLUP’s coverage with your home and auto insurance.
12. Establish an emergency savings account.
If you and your spouse/partner both work, set aside at least three months worth of living expenses. If only one of you earns an income, set aside six months worth of living expenses. Put this money in a safe place like a bank certificate of deposit or money market fund. You may never need it, but if you do you’ll have it.
13. Get a handle on your student loans.
Refinancing a student loan means getting a new loan to pay off an old one. The key is to get better terms—a lower interest rate or a lower payment—on the new loan without sacrificing protections, pledging more collateral or adding a co-signer to the new loan. A sound refinancing decision requires physicians to know the costs and benefits of their current student loans and be able to compare them to the costs and benefits of options for new loans. Think twice before you refinance federal loans using a private loan.
14. Start saving for college.
Kids grow up in a hurry, and the cost of college education has historically grown at a rate more than twice the average rate of inflation (about 7% per year). After you’ve fully funded your retirement plan and your emergency savings account, this is probably the next best place to be saving and, for most physicians, a Section 529 college savings plan is the best vehicle. Check to see if your state’s 529 plan offers tax incentives.
At home, make a place for everything: bank statements, investment records, estate planning documents, insurance policies, tax documents, etc. Develop a system for keeping track of passwords so that you and your spouse/partner both know how to access your online accounts. Consider the installation of a safe for valuables and extra boxes of checks. (Most embezzlement situations we see begin when the nanny or housekeeper steals a spare set of checks.) If you use a cloud-based service to store everything, make sure your spouse has access in case something bad happens to you.
As a new physician, it may be challenging to find the time and energy to pull all of this together. Set aside some time this weekend, tackle one of these items, then come back to this list every now and then until you manage to get your family’s financial planning all done.