Doctors' 5 Most Common Financial Blunders

Dennis G. Murray, MA

Disclosures

December 02, 2013

In This Article

Financial Decisions That Sound Logical

2. Lending Money to Friends or Relatives

Because physicians went into medicine to help others, some of them have a hard time saying no to a friend or relative who asks for money. "Lending money to friends and relatives is easy to do but difficult to modify later," says Karen Altfest. "It's best to have a written agreement so that there are no misunderstandings."

She recommends a promissory note, a free download on many Websites. A simple contract like this, which you should have notarized and then file a copy with your attorney, obligates the borrower to pay you back within a certain time frame and at a reasonable rate of interest.

Altfest recalls a doctor who lent a substantial sum to his brother, only to watch his brother jet off to Paris on vacation later that same year. That was a bitter pill to swallow and it drove a wedge between the siblings. "A little thought and planning before you lend money can eliminate negative feelings down the road, while a fair rate of interest keeps the IRS from considering your loan a gift," Altfest says.

Do promissory notes represent an enforceable contract? Yes, but ask yourself whether you want to risk poisoning your relationship with, say, your sister or your good buddy by aggressively pursuing repayment. Only loan the money if you're comfortable with the idea that you'll never see it again, warns the National Foundation for Credit Counseling, which adds that you should always involve your spouse or partner in the decision to lend.

Also, think twice about cosigning a loan in lieu of lending money directly to someone. If the borrower defaults on the loan, you'll be obligated to pay whatever amount is due, plus your credit rating -- as well as the borrower's -- will be negatively affected.

3. Acting Impulsively on a "Hot Tip"

Cocktail parties are great for socializing and catching up with friends. But they're generally a really bad place to go for financial advice. After a couple of drinks, everyone is Warren Buffett, throwing out the latest "hot" stock tips. "People who whisper in your ear at parties may be telling you something that's self-promoting, and it's often only one side of the coin," says Karen Altfest.

Physicians often seem to be especially prone to wanting to invest in their friends' medical brainstorms, many of which never get to market, let alone prove profitable. "There are lots of wonderful ideas out there, but between the logistics of creating a product and the red tape of getting FDA approval, the reality is that very few are successfully executed," warns Matthew Kelley.

Still, those long odds don't seem to deter enough doctors. Says Altfest, "They assume that their medical training qualifies them to understand and analyze what's being pitched to them. But there's usually much more to it. With any new venture, ask to see a business plan and the names and backgrounds of the partners. Then invest cautiously -- if at all."

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