Where Did All My Money Go? Financial Tips for Young Doctors

Beth Braverman

March 10, 2020

Since starting practice as a dermatologist 4 months ago, Matthew Mansh, MD, 33, has already been spending money differently.

"There have been a lot of new financial issues," said Mansh, whose husband also recently got a pay bump when he made partner at his law firm.

"We work hard now, so why not take a vacation if we really want to?" Mansh said. "But we've been trying not to go overboard. We don't like having loans, and we're trying to get rid of them as quickly as possible."

Experts say Mansh's experience is fairly common. After many years of training, young physicians often see their paycheck dramatically jump when they go from residency to attending or to working as a practicing physician. They are often tempted to upgrade their lifestyle accordingly.

"They've had delayed gratification for so long," said Trent DeBruin, MBA, CFP, a cofounder and financial advisor with MD Wealth Management. "They've spent so many years in education and training, and they finally want to enjoy that income when they have it."

However, that income boost often doesn't go as far as they had hoped. Mandatory expenses (taxes and expenses taken out of one's paycheck, as well as nondiscretionary expenses like rent or mortgage) can quickly eat up a young physician's paycheck.

And for a double whammy, many young physicians consider retirement to be so far off that they're not ready to start saving for it now.

"Sometimes, physicians want to wait to start saving for retirement until they've paid off their debt, but that's not always the right way to go, especially if it means missing out on benefits like employer matching," said Sean Wilson, a senior director of financial planning at TIAA, New York City. "The amount of time that you're invested is a huge factor [in how much you're able to save], and the earlier you can start, the better."

"My Paycheck Started Out Big but Ended Up Small"

One common challenge for young physicians is the danger of "lifestyle creep."

Lifestyle creep, or the tendency to let your discretionary spending increase along with your salary, can make it harder to increase savings or pay down debt. The quintessential example of this, says DeBruin, is the young doctor who goes out and buys a Tesla as soon as he becomes an attending.

But often, it's not as dramatic.

"Lifestyle creep doesn't happen overnight," said Scott Snider, CFP, a certified financial planner and partner with Mellen Money Management, Ponte Vedra, Florida. "It's an accumulation of impulsive decisions that weren't given careful consideration over an extended period of time."

One reason that physicians fall into the trap of overspending is that they've been delaying gratification for so long.

"By the time young doctors start earning their true physician income, I think there's a sense of wanting to finally enjoy it and some pent-up purchases they have been wanting to make for years," he said. "I think this can be true not only for the doctors but also for their spouses or partners, since they also sacrifice a lot along the way."

Although it's not necessary to continue "living like a resident," it is important to make sure that you're spending at a level that still allows you to make progress toward other financial goals. Part of that means being mindful about comparing your financial situation to that of others.

"Once a physician completes training and starts working as a young attending, the peer group suddenly shifts from other residents and fellows to other attendings," DeBruin said. "Many of the physicians in the new comparison group are older, more advanced in their careers, and often earning more. Because of this and the fact that the older physicians have had more time to save and accumulate different possessions or a certain lifestyle, it can be a difficult comparison for the young physicians."

If you're looking to get yourself in good financial shape, these tips from experts can help you get started:

1. Pay attention to where your money is going.

Even if you don't live by a strict, line-by-line budget, it's important to have a general sense of how you spend your money. An easy way to do this is by using an app such as Mint (published by Intuit, which makes Quickbooks and TurboTax) to track your spending. That makes it easy to see whether the way you're spending your money lines up with your financial priorities — and if there are areas where it might be time to make a change.

"Cash flow planning is the number one priority for people coming out of residency," said Erin Manganello, CFP, vice president and senior wealth advisor at the Colony Group, Boston. "That analysis has to be done to set yourself on the right path and understand what's discretionary and what's nondiscretionary."

2. Build your financial safety net.

Because doctors often have higher expenses, such as student loans to be repaid, your emergency fund is even more important. Having a rainy day fund allows you to handle unexpected expenses, such as a car breakdown, a leaky roof, or a family medical emergency. That means you won't have to be in stress about money in an emergency or turn to higher-cost funding sources, such as credit cards or 401(k) withdrawals.

"For people with a less stable income as a household, such as having a nonworking spouse or one who earns commission, we might suggest 6 months of expenses for extra cushioning," said Snider. "For more stable incomes, we suggest 3 months."

If you do not yet have an emergency fund, start one by opening an online savings account, which can earn relatively high interest compared to other savings account options but is easily accessible in an emergency. Set up automatically recurring contributions to the account from your checking account. That way you won't have to remember to put money aside — and it will be out of sight, so you'll be less tempted to spend it.

Your safety net should also include appropriate insurance. For doctors, that typically includes life insurance, home insurance, and umbrella insurance. You should also consider own-occupation disability insurance, which protects your income should a medical problem leave you unable to work, and it provides better protection than a typical group disability policy that you might buy through work.

3. Have a plan of attack for student loans (and other debts).

Student loans are one of the largest expenses that young physicians face on a monthly basis. Last year's class graduated with an average debt load of nearly $200,000. Your goal is to reduce the overall amount that you pay in interest over the life of your loans. Here's what to consider:

For federal loans: See whether you're eligible for student loan forgiveness programs. Doctors who work for a nonprofit or public institution or who work in underserved areas may be able to have the balance of their federal loans forgiven if they remain in a qualifying job for 10 years and never miss a monthly payment during that time.

If you don't qualify for forgiveness (or if the amount forgiven amounts to less than twice your salary), it may make sense to consolidate your loans with one at a lower interest rate and that has shorter term.

For private loans: Consolidating your loans can lower your interest rate and streamline repayment, since you'll have only one balance to deal with. Shortening the term of your loans may result in higher monthly payments, but it also typically means paying less interest over the life of the loan. Plus, the sooner you pay off your loans, the more quickly you'll enjoy the cash flow boost from eliminating that monthly payment.

4. You just started your career! Now start planning how to end it.

When you're just starting out in your 30s, retirement may be the last thing on your mind. But doctors face additional challenges when it comes to saving for retirement. Since they often can't start contributing meaningfully until they're in their 30s, they may be missing out on a decade or so of compound growth.

That means it's even more important to begin saving for retirement as soon as you start receiving an attending's salary, even if retirement still seems very far away.

The best place to do that is in a workplace retirement plan like a 401(k) or 403(b). Contributions lower your taxable income, and your employer may match some or all of the money you put in. This year, you can contribute up to $19,500 in a workplace retirement account.

Once you've put money into a dedicated retirement account — leave it there. Taking out loans against it or cashing it out when you switch jobs can cause you to miss out on that valuable compound interest, and it could subject you to financial penalties.

5. Have a plan...but be flexible.

Your ultimate goal should be to save at least 15% of your annual income for retirement, but that's not always possible right away.

"New physicians have a lot of competing priorities," says Ryan Inman, MBA, a fee-only financial planner with Physician Wealth Services and host of the Financial Residency podcast. "There's student debt and wanting to buy a new house. They may want to start a family. Some of them are in the sandwich generation taking care of their parents."

You may have to multitask, Inman says. First, build up your emergency fund, put away enough cash for retirement to get your employer match (which is basically free money), and make sure you're paying the minimum balance owed on any debt. Next, focus on any high-interest debt, such as credit cards, and then move on to other debt, such as student loans or car payments.

As you whittle down your debt, you can start allocating more money toward retirement (up to 15%) and other shorter-term financial goals, such as saving for a home or putting away money for your kids' education.

Transitioning from resident to attending physician or physician in practice is a huge, hard-earned milestone. While you want to enjoy that new bump in your salary, remember that you can use it to build that doctor's life that you've been working toward. The trick is to be aware of where your money goes and take it one step at a time.

Beth Braverman is a freelance writer based in New York City.

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