Best Financial Planning Tips for New Physicians
If you are a Doctor in or around Lakewood, Colorado you probably spend much of your time seeing patients and looking out for their well being. Thinking about your own well being, specifically, your financial planning and your retirement planning, may not be the highest priority on your to-do list. In this article, we will take a look at some financial planning tips that both new and seasoned Physicians in the Greater Denver, Colorado area can benefit from.
Physicians typically have a high disposable income, so many doctors may not see the need for a financial plan. It’s important, though, to realize that a financial plan is a crucial tool for realizing your life goals. Especially if you are just starting out as a new Doctor. As you are beginning, you may be trying to balance paying off your student loans while saving for a home or retirement. How can you balance it all?
Asking yourself the following questions can help:
Do you want to travel extensively in a few years? Have a large family? Open your own practice? Live abroad and work with international agencies? Retire early? Purchase a house in the mountains? Have a second home on the ocean? Only you can name the goals most important to both your life and career. But without a financial plan specifically designed to reach those goals, you can end up not achieving them.
Beginning Physicians Face Challenges
In fact, the generally high disposable income of most physicians can present its own set of challenges to financial planning when you’re first starting out. Let’s take a look at some of the most common.
First, you may have been in medical school, residency and fellowships for a decade or more. For many people, that means deferring gratification. As a result, now that you’ve started to practice in Colorado, you might have an entirely understandable desire to start spending on all the things you couldn’t while you were a medical student. Food, wine, travel, a great house – you might have been looking forward to them all. You need to make sure, though, that fulfilling material gratification doesn’t lead you to neglect other areas of your financial life, and thus the achievement of your life goals.
Second, the very fact that you now have more income than when you were a student may make you feel that money is unlimited. That can be a risk, as even the highest incomes are finite. Plenty of physicians are cash-strapped. You don’t want to be one of them. You want a plan that lets you live comfortably while meeting your goals.
Third, it’s increasingly common for new physicians to have large amounts of student loan debt. Debt service on student loans can dwindle even the relatively high disposable income of most physicians.
Fourth, you might feel that you have to keep up with the other physician Joneses – to have the same lifestyle as the other physicians in Lakewood with your specialty and your practice, perhaps.
So how can you avoid making mistakes and develop a financial plan to reach your goals? Here are some tips:
Tip #1 Write down your goals
Don’t leave conceptualizing your goals to daydreams. Write down where you’d like to be in both life and career in five and ten years. Then, plan to work toward those goals.
You can always revise your goals. In fact, both the progress toward your goals and the goals themselves should be revisited at least once a year.
Tip #2 Develop a budget
Think of a budget as a cash flow model. It lets you know how much income you have coming in every month. It lets you know your spending every month, by category.
An accurate cash flow model is, therefore, an essential building block in a financial plan, because it provides accurate statements of income and spending.
Start by mapping out the essentials you must spend, on categories like housing, food, and transportation. If you have student loan debt payments, add those.
Then, map out the part of your income that you spend on nonessentials. Think about whether the nonessential spending is getting you toward your five- and ten-year goals, and how it may be adjusted if not.
Tip #3 Develop a complete financial plan
After you’ve mapped out a budget, it’s time to develop a complete financial plan. In general, these consist of:
- Retirement savings
- Risk management (insurance)
- College savings for your children
- Estate planning
Let’s look at each of these in turn:
It’s prudent to have a savings of from three to six months’ worth of salary. After that, target your investments to your goals.
Make plans to discuss your risk tolerance and choices in investment options with a financial advisor.
Everyone needs savings for retirement. The sooner you begin, the more your savings can grow over time.
In fact, many people believe that young physicians should start saving in a 401(k) immediately. You can start with a small amount, such as 2 to 3 percent of your income, and raise it as your earnings expand. If your employer offers a 401(k) match, you are leaving money on the table if you don’t participate.
Insurance can play a key role for physicians. If you have a family, you should have life insurance.
More than 60 percent of physicians over the age of 55 have been targets of malpractice suits, so medical malpractice insurance should be part of your risk management strategies as well. Many financial planners also recommend disability insurance for physicians. A practice is only worth the value of your future earnings. If something happens to you, that dissipates, and disability insurance is a protection against that.
If you plan a family, a 529 or other college savings plan can help defray the rising costs of tuition and other expenses for your children’s higher education. Many 529s offer tax advantages as well.
Think you’re too young for estate planning? No one with any sort of assets is too young. At minimum, an estate plan should include a will, plus powers of attorney for both your finances and your healthcare. A power of attorney gives a designated person the ability to take care of your finances and make decisions about your own healthcare should you become incapacitated.
Work With a CERTIFIED FINANCIAL PLANNER™ Professional
Physicians should see a financial advisor with certain skills and experience. First, look for the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. CFP® Professionals must meet standards of expertise in all the areas of comprehensive financial planning and in taxation as well. They are required to demonstrate years of experience.
CFP® Professionals are also fiduciaries. Fiduciaries exhibit the highest level of financial responsibility and trustworthiness.
Second, it’s a good idea to look for a CFP® Professional who is located in Lakewood or nearby. A local CFP® Professional will be best positioned to keep abreast of taxes, real estate costs and other local issues pertinent to you. Plus, with as busy as your work life is, having a local advisor that you can easily visit is a time saver.
Third, consider a CFP® Professional who has experience advising other physicians with net worth similar to yours. Physicians can have financial issues that are unique to them. A CFP® Professional who has advised other people in your position may be best suited to advise you appropriately.
At The Normandy Group, we have a strong understanding of the benefits and common challenges that Physicians face. We are a group of professional financial advisors who seek to create financial balance for our clients. Contact The Normandy Group today and get better prepared for your tomorrow.