If you’re a new graduate, there are a few steps you can take now to put your finances on a strong footing
First, congratulations on your upcoming graduation. I’m sure you are excited (and a little nervous) to finally be an attending and make your own medical decisions without someone else watching over your shoulder. You’re probably also itching to get your first five figure monthly paycheck and spend it. But before you buy that shiny new Bimmer, let’s go through the steps to get your finances on track:
Take July off
Delaying gratification on that first big purchase, at least until August, might actually save you a ton of money in the future. Take the time to sit down and plan your next few years. How does giving up $20,000 of spending to gain $100,000 in the future sound to you? Or, don’t start your first job until August and really take July off to recuperate and take a much-needed break.
Figure out your (true) expenses
This means everything: food, clothing, utilities, taxes, student loans, rent/mortgage and anything else you can think of. Once you know your monthly income and your monthly expenses you are in a much better position to understand which expenses are truly necessary and which ones are excessive. This exercise also allows you to estimate how much you can save every year and start an investment plan. So while everyone else is living paycheck to paycheck, you’ll be saving paycheck to paycheck.
Build up an emergency fund
EPs are supposed to know what to do with every emergent patient. Doesn’t it make sense to prepare for a financial disaster? Whether it’s a disability, a large home repair or any other unexpected financial event, you need to have an emergency fund for quick access to large amounts of cash. Here are some quick rules of thumb for your new emergency fund:
1. Multiply your monthly expenses by 6. That is the amount of your emergency fund.
2. Invest in a money market account or CDs
3. Don’t touch it unless you have to.
Buy disability insurance
You might think you’re invincible, but there is a much higher chance of becoming disabled than dying at your age. Disability insurance protects your future income stream. Even though you have student loans to pay and a seemingly endless number of expenses, this is not an area where you should be cheap. Buy as much disability insurance as you can because it gets ever more expensive as you age. When I was a resident (how many times has that phrase haunted you?), disability insurance for physicians started getting restrictive, but recently insurance companies have loosened their underwriting for physicians. You can purchase more insurance now than you could just a few years ago. The two most important features you need to have in a disability insurance policy are own occupation coverage and inflation protection. Own occupation coverage simply means that if you become disabled as a physician, you can still have income from another career and still receive disability benefits. With inflation protection, your disability benefits will increase every year as the cost of living rises. Finally purchase an individual policy before you join a group as an employee in order to maximize your benefits.
Buy life insurance
If you’re married or have kids, you need to purchase life insurance. Imagine what would happen to your family if you die and still have significant student loans to pay and a mortgage. Life insurance provides instant liquidity for your family to cover your obligations. At your young age you can purchase a large amount of life insurance for dirt cheap prices. Stick with term insurance for now: it provides a fixed amount of insurance over a specified period of time. Consider at least a $1 million term policy for 20 to 30 years, and you’ll pay only a few hundred dollars per year. Your insurance agent will try to sell you permanent or whole life insurance, but most of you should probably hold off on making this purchase since it’s far more expensive and does not provide nearly as much bang for your buck.
Save as much as you can
Your colleagues will be trying to hit grand slams by picking the next Microsoft – after all, if you can intubate someone at 2 a.m., that means you’re an expert financial analyst also, right? – but you should focus on the amount you save. This is far more important in building wealth in your early career than investment returns. Imagine you work for a group and can max out your retirement contribution of $49,000 this year. By the end of the second year, you’ll have almost a six figure investment portfolio and a 100% increase in the value of your portfolio from your first year. Unless you are guaranteed to get a 100% return with your stock picks, focus on savings first.
I know numerous physicians who haven’t become serious about saving until nearly 10 years into their career. Think it’s not a big deal? Think again. Take a look at what happens if you wait 10 years to start saving (see sidebar at right). You’ll end up with half as much by saving 10 years later than by starting now and maximizing your contributions. You might think you’ll be just fine with $3.6 million. But what if you have kids? What if you get burned out? What if “Obamacare” reduces your pay and you can’t save enough? What if you become disabled? What if you have poor investment returns? What if…
insert problem here.
Just say no
Disclosure: I am an investment advisor and financial planner as well as an emergency physician. But I am telling you to avoid financial advisors in the beginning of your career. Financial advisors know that you are uninformed, and lots of them prey upon you like vultures. They know that you have high future income potential and are only eager to sell you something that you probably don’t need. Be particularly cautious of insurance agents who can “do investments too.” If you feel like you really need an advisor, take your time and find someone who acts in your best interest and who resonates with your personality.
Setu Mazumdar, MD practices EM and he is the president of Lotus Wealth Solutions in Atlanta, GA www.lotuswealthsolutions.com