Jon Appino with Contract Diagnostics interviews Ryan Inman with Physician Wealth Services
As one of the most major of life’s milestones comes to fruition, you will finally finish your decades of training, one of the most important aspects of your life tends to get ignored. That is your overall financial health.
Despite all the training, you haven’t been formally introduced to the complexities on obtaining great financial habits and a healthy relationship with money. This leads to some serious mistakes that physicians all too often find themselves in as they are starting to make the compensation that they deserve.
With that increased compensation likely follows several mistakes, avoidable mistakes, that we want you to be aware of. Some of these could cost you a decade or more of additional working years if left unchecked and not addressed. As you can imagine, we have many horror stories here at Contract Diagnostics we try to inform you on avoiding with your contracts – your personal finance mistakes are no different. Setbacks can be costly. Sure, there are blogs and articles on this, but to boil it down to four key points to focus on is our goal today.
Let’s break down the four most common mistakes we hear and see physicians make as they become a new attending.
Mistake 1 – No Clear Plan in Mind
As physicians, you have been so focused on becoming the best physician that you possibly could be that you potentially have lost touch with other main priorities that you want to do or achieve in life. Training was basically survival but there is no better time than now to start thinking about how you will thrive throughout your professional career and your personal life.
Physicians that stop and think about what is actually important for them to not just achieve in the workplace or their career but also in events or activities that truly make them happy are more likely to succeed in all of their lifelong goals. Unfortunately, most physicians do not take the time to reflect on what is important or what they want to accomplish. They receive their first paycheck and start spending it on all the items that they have been deprived of while in training. Spending with no clear plan or path in mind; that usually leads to trouble. Emotions are hard to fight here!
The foundation of a financial plan revolves around two distinct topics: cash flow and goals. Not having a firm understanding of both, no plan is ever complete or accurate. Ryan Inman, fee only financial planner for physicians at Physician Wealth Services says, “without having a true financial plan, one that takes into account your goals, your dreams, your opportunities and your challenges, it will be nearly impossible to gauge your success and track your overall financial progress.” Having a written financial plan is the most important piece that many physicians ignore and doing so leaves them exposed for large financial mistakes. It not only guides your decisions but helps with the emotional aspect as well.
Mistake 2 – Choosing the Wrong Team to be There When You Need It
Writing a financial plan can seem overwhelming, especially if you have no idea where to start. Our first recommendation is to read up – there are many books on the topic. One we like is Ryan’s book, Financial Residency: Create your financial plan without the long hours and sleepless nights, co-authored by his wife, a pediatric pulmonologist for the US Navy. It gives a great step-by-step process on how to create a financial plan and even comes with lots of templates that guide you through the process.
Even if you are comfortable with writing your own plan, you will still need to surround yourself with a great financial team to support you throughout your career. Several professionals that will be incredibly valuable to you are: a fee only financial advisor, an independent insurance agent (for term life and disability insurance only!), a CPA, an estate planning attorney and of course a top notch contract review company that will help you understand the ins and outs of the contracts you will sign during your career.
This is one of the most critical steps to get correct because physicians who choose the wrong financial planner, the wrong insurance agent or even the wrong CPA could not just cost them tens of thousands but likely hundreds and hundreds of thousands of dollars throughout their lives. Feel free to call us here for horror stories! We hear them from our contract review clients all the time on the ‘bad eggs’ in this market. Many opportunistic sales people see physicians as easy targets.
We see far too often physicians choose the wrong type of financial advisors because their friend recommended it or because that advisor spoke at their residency program. If you decide that you would like a financial advisor on your side, please make sure to do your due diligence and hire the right advisor. Hire someone that is fee only, that is a fiduciary and that charges a fixed flat fee (not an asset under management fee structure) that will cost you hundreds of thousands of dollars over your lifetime.
Even worse, do not work with an advisor that can sell you insurance. There are too many conflicts of interest that they will not disclose to you when selling you financial products. Insurance should be sold by independent third party providers that aren’t tied to a specific company but will show you quotes from all the big 5 insurance carriers that specialize in physician disability products.
Mistake 3 – Lifestyle Inflation
Just as important as thinking through your goals (whether financial or not) is one half of the foundation of your written financial plan, understanding and managing your cash flow is critical to your success. This is where we are talking about a budget. Yes, we went there. As Inman calls it “the dreaded B word.” He says, “It’s when most people, not just physicians, shut down. Thinking it will restrict their ability to live life on their terms when, in fact, it is what sets them free.” Hey, I will admit it – I have one with my wife Ashley and have had since day one of marriage. It has changed, and that is ok, but we have one and it helps us make decisions and be on the same page financially (we have never argued over money!).
Most view budgets like dieting and sadly, just like most diets fail, so do most budgets. The key is not making it too constricting and learning first how money just flows in and out of your financial life. The worst thing to do is to start a budget and make all of these drastic decisions or changes right at the beginning. Too many changes, the higher probability of failure. Inman says, “first monitor how things are going, how much money hits your bank (your take home pay) and how much your current expenses are. Once you have a firm grasp on that, try and tackle one category at a time, not moving on until you are comfortable with any changes you have made. Don’t over do it all at once.”
Now the reason why cash flow planning is so important is because most physicians typically spend most if not all of their first paychecks not understanding how detrimental this is to their overall financial health. Not only is money going into (likely) material items like new cars, clothes, expensive vacations etc., it isn’t going into the items that really need your attention. Those would be the boring things like increasing the payments on your debts to more than the minimum, successfully completing backdoor Roth contributions to your IRA, or even just building a true emergency fund.
We know there is so much sacrifice, and not just financial sacrifice, that goes into becoming a physician. But on the financial side, you are at least a decade, if not further back, than your friends that didn’t decide to take a career in medicine and went into the corporate world. That is a decade of contributions to 401k plans and the compounding growth on those investments. That is a decade of debt paydown, a decade of savings for a down payment on a home and the list can go on. The point is, despite your new amazing 6 figure annual compensation you are now earning, you are likely at a negative net worth and need to superfund your investments or really become dedicated to paying down your debts. Physicians that inflate their lifestyles, saving little to nothing in their first few years as an attending, are really at a disadvantage towards the mid to later part of their careers when they crave more financial freedom and stability in their financial lives.
Mistake 4 – Buying a Home
Now before you judge that this isn’t a mistake because a home is an “asset”, hear me out. A home can be a great investment. You have likely moved several times for your training. College, medical school, residency and then maybe even for fellowship, it’s exhausting! Inman says, “We can totally relate to every physician and their family wanting to buy a home and put down roots. We have sacrificed so much as a family in medicine, having that one stable piece, a home, is really a huge emotional investment. But it’s not the best investment to make financially, especially the earlier in your career you are.” That is due to the fact that in order to have a home be a great investment, you really need to have lived in that home (or at least owned it) for 5-7 years to see a return on that investment.
Buying a home is expensive, the costs with home ownership extend far beyond paying fees and commissions to the real estate agents and the banks at purchase. Repairs and maintenance tend to be 2% of the purchase price of the home, if not more, on a yearly basis. Don’t forget to factor in the taxes and insurance when calculating how much home you can afford. “Physicians often get in financial trouble when buying a home for two reasons. One, they end up with the wrong calculations on how much home they can truly afford. A home should not exceed 25% of your take home pay.” That means, if your take home pay is $10,000 a month (estimated $180,000 gross annual income), the all-in cost of your home should not exceed $2,500 a month.
The second reason, Inman says, “is by confusing their first home purchase as their dream or forever home. When searching for homes, you might find the perfect home that you could see your family in for decades, maybe even forever. This will cause the emotional side of your brain to kick in and want to go all in on this forever home, causing you to pay top dollar and forget your budget all together. What is likely to happen, especially in ‘hot markets’ like we are in right now, you won’t end up getting an accepted offer and be back searching on the internet for a new home. The next home that you find could also be that ‘dream home’ so you put in an offer. I’ll put this back to you though, how can everyone searching and buying their home keep finding ‘dream homes or forever homes’? They can’t. It’s really easy to get caught up in the moment of looking for homes to start a family or to finally have a place of your own. Be diligent, have criteria that are very important to you in a home, and don’t go overboard.”
We agree, studies have shown that the average person lives in their home for 7 or less years. In medicine families, we see that number even lower. Right now, you might not have been able to have a proper onsite visit when interviewing. You might not know how the job is, what it will be like to live in that area or even if you like the climate. With so much uncertainty, it’s best to rent for a year and then reassess as you have more information. If that isn’t ideal for you and you are committed to buying, don’t overspend on a dream home, it could end up costing you more than you think.
“Don’t be an Ostrich”
As Inman calls it, “don’t be an ostrich. Don’t stick your head in the sand and say ‘oh I’ll get to that someday or some other time’. It’s no different than why you had your employment contract reviewed – it is just good practice to be proactive. Someday won’t come and too much time will pass until a major life or financial issue comes up and you are left exposed. You must take care of your financial health, it’s critical to not only your finances but to your overall happiness in your career and your lives.”
It’s easy to add something to your to-do list, you know we all have those tasks that always seem to be on the to-do list that never get checked off. Don’t let your finances be stuck in that loop. Address them head on, make a promise to yourself to not let these far too common mistakes that we see your peers make happen to you, and don’t be ostrich. The sooner you take an interest in your finances, the sooner you feel more in control of your career and your overall happiness.