Top 5 Mistakes Doctors Make with Their Finances and How to Avoid Them

Having a steady wage after years of living hand-to-mouth in residency can be an unexpected challenge for many doctors. The urge to spend what you make is tempting, but it’s also a quick way to spiral into unmanageable debt or forget to plan for the future.

Whether you’re just starting out or have been practicing for years, it’s never too late to focus on getting your finances in order. Even if you’ve already made mistakes and put yourself in a position you’re not satisfied with, you can learn from those errors and grow. In fact, that’s what many physicians do! In this guide, we’ll share the top 5 mistakes doctors often make with their finances, along with suggestions to help you avoid repeating them.

Mistake #1: Keeping Up With the Joneses

There’s a longstanding stereotype that doctors should have the nicest cars and biggest houses on the block (in the best neighborhoods). The correlation between your success as a physician and your possessions can tempt you to try to “keep up with the Joneses,” buying the latest and greatest gadgets and living outside of your means.

This mistake creates a vicious cycle of needing to work harder and longer hours to afford your lifestyle, yet never actually enjoying the life you work so hard to pay for. However, a simple solution is to create and stick to a budget that allows you to have nice things while also paying off debt, such as student loans, and saving for the future.

Strategies like the 50/30/20 rule, where you ensure your necessities fall within 50% of your salary, can help you choose a mortgage or rent and car payment that are manageable.

Mistake #2: Skimping On Asset Protection

As a doctor, you see how quickly life can change from an accident, an unexpected diagnosis, or an acute health condition. Health insurance is a buffer between these medical issues and your bank account, but what about the rest of your asset protection steps?

Neglecting to carry the right insurance coverage can be a costly mistake. Physicians require malpractice coverage to protect themselves from claims arising from their care. But don’t overlook the importance of other beneficial policies that keep your bank account safe.

Disability insurance gives you a paycheck if you’re ever sick or injured and can’t work, keeping your main bills paid. Life insurance can ensure your loved ones don’t have to struggle if you aren’t around, and can even help you prepare for retirement. Umbrella insurance kicks in if a claim payout exceeds your other covered policy limits.

Asset protection is more than insurance, though. If you own a clinic, creating an LLC (limited liability company) keeps your private assets and business assets separate. This article by OJM Group explains more about LLC asset protection.

Your financial advisor can help you determine which policies you should carry to keep your assets safe.

Mistake #3: Delegating Finances Blindly

Speaking of financial advisors, these helpful and knowledgeable professionals can be wonderful to work with. They often take care of your money, investing it wisely and adjusting your investments in line with market trends.

However, we caution against anyone delegating their finances without carefully vetting the businesses and individuals handling their funds, whether a financial planner, accountant, bookkeeper, or office manager. It’s also wise to educate yourself on what each person does and how your money is handled.

Yes, you can let the experts do the heavy lifting, but always know where your money is going and how much is coming in. Blindly trusting the professionals could be a mistake you might not catch until the money is gone.

Mistake #4: Not Paying Off Debt

We’ve already discussed living within your means to avoid taking on more debt than you can easily handle. However, another mistake many physicians make is accruing loans and credit card debt.

Physicians are in the top tier of lending. You are likely going to have credit card companies willing to throw massive (or no) limit cards at you, and lenders willing to offer you tens of thousands of dollars in loans. Many doctors make the mistake of accepting all of these offers, then finding themselves snowed under with too many “minimum payments” and no way to pay off the debt they built up.

Mistake #5: Avoiding Retirement Planning

No matter how early in your career you are, it’s never too soon to begin planning for retirement. Still, many physicians believe they have many years ahead of them and prefer to wait before starting to invest in retirement plans.

The sooner you get a jumpstart on this, the better the power of compounded interest works in your favor, and the more market ebbs and flows you can ride out in your investments. Start young and invest regularly at a good interest rate, and you may be a millionaire before you retire. But if you wait too long, you could find yourself working through your Golden Years to keep up your lifestyle.

Conclusion

Financial stability is the goal of most people, and doctors have a unique opportunity to reach this target faster than the average person. Yet, many physicians find themselves spinning their wheels, working more than full-time hours just to pay their bills without getting ahead. You can avoid falling into this lifestyle trap by learning from these top five mistakes early!