When you have a healthy six- or seven-figure income, it’s easy to feel like you have all of your money challenges figured out. But in many ways, more money means more problems. And if you don’t get the basics right, you will fail. Yes, even as a doctor.
Here are some simple yet powerful personal finance tips curated with you in mind:
1. Build an Emergency Fund
The very first step to financial stability is to establish an emergency fund. This emergency fund should include enough cash to survive without an income for roughly six months. In other words, if your monthly expenses are $10,000, you need at least $60,000 set aside in a cash savings account that’s separate from your spending account.
2. Go Hard After Existing Debt
Doctors and debt go together like peanut butter and jelly. It’s not uncommon for a new physician to leave medical school with $200,000 to $250,000 in student loan debt. And if you aren’t careful, this loan can follow you around for years.
As boring as it sounds, the best thing you can do over the first five years of your career is to aggressively pay down student loan debts with every spare penny you have. It’ll eat up most of your income – and you won’t be able to buy a bunch of flashy watches and cars – but it’ll set you up for long-term success.
3. Be Smart About New Debt
Not all debt is bad. There are some situations where debt can be a good thing. But even with good debt, you have to be smart.
Take buying a house as an example. Choosing the right home mortgage can mean a difference in tens of thousands of dollars over the life of the loan. Doctor loans, because they have relaxed debt-to-income ratios and no private mortgage insurance (PMI), can allow you to buy a house where a traditional loan would otherwise be inadequate. Every situation is unique. Just make sure you’re researching and comparing options!
4. Ensure Adequate Insurance
With the debt and expenses you have on your balance sheet, you can’t afford to find yourself in a situation where you’re unable to work. The results could be disastrous.
One way to insulate your family from risk is to ensure you have adequate insurance in place. At a bare minimum, you need disability insurance and term life insurance. There are other good products out there as well – like an umbrella policy – but this is a decent place to start.
5. Moderate Lifestyle Inflation
One of the great things about being a physician is that your income is going to increase over time. And in many cases, your salary will grow significantly from year to year. This is good news. But it’s imperative that you’re smart about how you use these pay raises. Otherwise, you’ll just increase your expenditures dollar for dollar.
The 10 Percent Rule is one of the smartest and most practical approaches.
“In a nutshell, take 10 percent of that increase in take home pay, and spend it on whatever your heart desires,” The Physician Philosopher writes. “In other words, if your take home pay goes up $10,000 – then take $1,000 and spend it on whatever your heart desires each month. This is your allowed lifestyle inflation after training.”
The other 90 percent – or $9,000 using the previous example – is used to pay down debt, save, and invest. And if you do this for five or ten years, you’ll eventually reach a point where you can increase your discretionary spending even more (because you won’t have debt payments and you’ll have more cash flowing, wealth building assets).
Take Control of Your Financial Picture
Doctors make way too much money to be broke. Yet if you take a sample of doctors at all stages of their careers, you’ll find that many are living paycheck to paycheck. That paycheck might represent a pretty hefty sum of money, but it’s all going to lifestyle expenses and debt. There’s no savings, investments, or protection in the form of insurance. And that’s problematic.
You don’t want to reach this point. The sooner you heed the advice outlined in the article, the faster you can begin building true wealth. Take it step by step and be intentional throughout the process.
