How Physicians Can Make Their Money Go Further
Different medical specialties mean doctors get paid unequally. Despite the stereotype that all make bank, in the lower paying fields, physicians make their money work for them out of necessity.
Physicians in lower paying specialties or fields of medicine are in a position to maximize their income as best as they can. It’s sort of like the old adage “do the best with what you’ve got.”
Fortunately, what you’ve got is a little pot of gold to spread amongst your obligations. Not a massive fortune but it is something, right?
It’s definitely not abnormal for physicians in a lower paying specialty field to want to understand how to be more frugal, smarter investors and better money managers to stretch their stash.
Well, at least that’s what Joe Saul-Sehy with Average Joe Money and Stacking Benjamins had to say about it. With him, we acquire a TON of knowledge about how physicians can make their money go further than they could have imagined.
So, let’s get into it, shall we?
Doctors tend to have bad money habits.
Bad money habits? A doctor.
Doctors tend to have bad money habits and sometimes it really is a matter of just acknowledging that you could do better. From observations, doctors tend to fall into a variety of bad habit categories when it comes to spending their hard-earned dollars, unfortunately.
Bad Physician Money Habits
Where do you lie? We won’t tell.
|Some physicians tend to spend their money without really paying attention to exactly how much they’re paying on any given product or service.
|On the other hand, some people know exactly how much they’re spending, but feel as though they work hard for their money and should be able to enjoy it.
|THE MEAN WELL-ERS
|You then have others who need a little bit of guidance on how to make better choices for their future such as retirement planning and investment decisions.
|THE SPENDER’S SOCIETY
|Let’s not forget the physicians that feel the pressure to live their lives in such a way that keeps them up to the standards of their peers. These would be your doctors that, right out of residency, go out and buy the brand new, expensive car or the big, fancy house.|
If you fall within any one of these categories, then it may be time to learn how to go about doing the opposite—save by spending consciously.
There are several different options to help physicians with spending their money more wisely and make smarter financial choices overall.
Whether you’re on the high or low end of the income scale, these easy money-making and money-saving strategies are not too hard and they can work for everyone.
Establish and follow a budget because before you know it…
Some people are of the mindset that you should get the worst part over with and everything is downhill from there.
That’s exactly where the highly appreciated “B” word comes in.
You know which one we’re talking about… BUDGET.
It’s a word that nobody wants to hear, much less do, but it is necessary to get ahead.
The word “budget” tends to stir a lot of negative emotion around it and is something that everyone should understand fully.
It’s a way to help physicians be aware of their cash flow, so their finances are much more smart, much more responsible, and work much more in their favor.
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You should set a budget for yourself and commit to sticking to that budget no matter what.
Budgeting, or cash flow planning, is basically forecasting what you expect to pay for certain services or products and ensuring that you set enough money aside to cover expected expenses.
There are different ways to look at your expenses, so that you can stretch your money a little bit further with budgeting or cashflow planning, much like you would if you did your own thing business-wise.
Think of money as a business
Physicians make their money work for them by changing the way they approach it. Most of us tend to make very logical decisions when it comes to a business, but then when it comes to our personal lives, logic goes out the window.
Think about a long-term goal to work towards because a budget is going to be based on financial goals.
If you have monumental long-term goals you should restrict your budget now, so that you have more money for your future goals.
Have Money Talks with Your Spouse
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At home, when it comes to money, one person seems to know all the details about where the money is going and the other person is completely oblivious.
Painfully true this is.
This is where money talks are ideal, and we can even go so far as to make it a money date (What is a money date? Check out the podcast where we talk about getting financially frisky.)
These money dates don’t have to be boring and stressful.
By all means, make them as enjoyable as possible by doing things that you both find fun.
Maybe send the kids away to a babysitter, put on some music, and prepare or order a nice meal in while talking numbers.
During your meeting, discuss upcoming bills, extra expenses, such as school clothes or school supplies, and decide who is going to take care of handling what task/bill/expense.
Another good thing to do during a money talk would be to discuss what your goals are as a family, such as vacations, traveling, or family outings that you’d like to take.
Reduce your monthly expenses
Reducing monthly expenses such as homeowners insurance, opting for an economical car, and switching car insurance (Geico seems promising) go a long way.
According to Joe, most people tend to look at this whole money saving process a little bit backwards.
They start off with clipping coupons or cutting down on certain bills, such as their phone or cable bills. Instead, they should be working from the top down like a housing expense.
They will rent out certain spaces or spare rooms in their home, which is a great source of side income that can help pay off a mortgage early, especially if you took out a physician mortgage.
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Check around with different companies for your homeowner’s insurance as well. Finding the right company could save you big-time money.
On top of housing expenses would be transportation expenses.
Unless you’re in a profession where you use your vehicle as part of your job, such as in real-estate; you really don’t have to have this super-expensive, fancy car that screams “I’M SUCCESSFUL!”
The smarter alternative would be to go for a less expensive, more economical vehicle. An expensive car may rank you in status with your buddies, but it will also put a huge damper on your financial well-being.
How about car insurance? Switching to a different car insurance company can drastically decrease how much you allocate every month to maintain.
Reduce Your Tax Liability
The next thing you need to look at is how you can be better off tax-wise. Some physicians get huge lump sums of money at one time and then have to go long periods of time without any more compensation. A mistake some make is they get this lump sum of money and blow through it in no time.
Then, they are left waiting for their next lump sum of money to come in, so they can do it all over again.
This is not a logical way to manage your money.
Don’t just leave that large sum of money sitting in cash or invest it in a regular brokerage account because then you’re paying tax on the capital gains/dividends.
Instead, what you should do is max out your 401k and health savings account during the year, even though you may run a little bit of a deficit during that timeframe.
Some may have to live off some of that money to supplement the budget, and also be able to invest. You should put as much money as possible in tax shelters, so that you’re not paying as much in taxes.
Take Care of Your Student Debt
Another big expense many physicians are faced with is student debt. Being that we have a $2,000,000,000,000 student loan debt problem in this country, this is obviously a huge issue.
There are some options to help with the student debt dilemma. Two options would be to either leave it in the federal program or refinance it. Another possible route would be to have your parents refinance it.
Maybe your parents have a paid-off house and they could get a lock at three and one-half percent. That would be much cheaper than you refinancing it somewhere else. Your parents would obviously would have to be able to trust you in that situation.
If you’re not working for a 501c3, and you’re not going for Public Service Loan Forgiveness, you should definitely look into refinancing your student debt. This is not the best option for everyone; however, I’ve seen clients knock hundreds, and even thousands of dollars off of their monthly payments with a shorter payment.
Physician Mortgage and Other Mortgage Options
When saddled with student debt, there are also different home mortgage options available.
When you’re loaded down with student debt, you have to be a little strategic in what type of mortgage you choose. Many people don’t like debt, and because of that, they instinctively go for a 15-year loan.
In Joe’s opinion, physicians in this situation should really consider taking the 30-year loan, so that they have a lower payment.
Then, they can take that extra money by not taking the 15-year loan, and do something with it, like making an automatic payment into something like an S&P 500 mutual fund.
This can be “pay off the house early” money.
Historically, over 15-year periods of time, interest rates are almost always beat. If something unexpected was to happen and they needed access to some money, they could stop the automatic payment into the mutual fund and now they’ve got the flexibility of the 30-year loan.
If money is not actually put into an S&P 500 mutual fund, then this will not be a good option for a physician. In essence, all they’re doing is stringing out debt for a longer period of time.
Otherwise, people should go with the 30-year loan and pay on it as if it were a 15-year loan. Note: This is only a viable option if you used a conventional 20% down mortgage. If you used a physician mortgage loan, this would not be an ideal option for you.
Physicians are being paid more based on their location because a high need for physicians in those areas.
This may not be an ideal option for some people, but it can prove to be a very beneficial way to earn more money, get debt paid down quicker, and put more money away for your retirement or other investment options of choice. Even if this isn’t the preferred route, being intentional about where a physician wants to live and structuring their budget around that area is something that will prove to be very beneficial.
There’s a trade-off involved that has to occur when faced with this situation; but when it comes to a physician’s happiness, the trade-off is well worth it.
Raising children is another opportunity to save money. One of the biggest mistakes parents make is thinking their children must have everything new. Getting hand-me-downs for your children is a great thing, especially when you think of it in terms of how fast they outgrow their stuff.
Thrift shops are a great option for shopping for your children. If you like name brand stuff, thrift shops are the way to go. It’s really a win-win.
Kids get name brand products and physicians are spending a fraction of the price on them.
Get the Family Involved in Saving
Family funds are great mechanisms to plan for a vacation. You could also include your children in this money saving venture. Getting them involved by showing them how much money is being saved, and then letting them experience the rewards of saving that money is a great way to show them the value of a dollar.
Another good idea is to include your children in the family meetings and get them involved in the money saving process. A way to do this would be to set goals with them to lower utility bills, as an example.
Sit down with your children, explain to them how much a certain bill is, and then challenge them to work together to get that bill as low as possible.
Every month when that bill comes in, go over it with them and let them see firsthand how working together has accomplished a decrease in that particular bill. Maybe give them some incentive by offering them a reward if they can get that bill down to a pre-determined amount.
Physicians make their money work for them.
Joe was great to flush out ways in which physicians in lower paid positions can stretch their stash. By now, you should have a good idea of how to manage their money more wisely.
However, with all this talk about budgeting and saving, it’s important for physicians to understand that their happiness is priority. You have to figure out what makes you happy, then budget and plan around that. You need to determine what job it is that you want your money to do, and make it happen.
Basically, make your money work for you in a way that makes you the happiest. For some people, an extravagant house may be what makes them happy. For others, it may be a smaller house but a beautiful brand-new truck.
Some people may not care about big fancy houses or cars at all. For them, maybe it’s expensive vacations to exotic places, eating at extravagant restaurants, or traveling the globe and going on great adventures.
It doesn’t matter what it is, just make sure that what you’re spending your money on, lines up with what makes you happy.
For anybody who is unfamiliar with Joe Saul-Sehy, he has a show called Stacking Benjamins. This show is about the light side of personal finance and it airs three days a week. Their goal is to introduce you to as many different concepts and ideas as possible; and have fun, playful discussions the whole time. Be sure to check him out for more helpful insight into budgeting and finance, as well as many other helpful topics for high-income individuals.
This Week’s Journal Club – XRAYVSN.COM
Posted on the XRAYVSN.com site is a blog titled Your Financial Evolution: The Investment Policy Statement.
In it, the author discusses what an Investment policy statement, or IPS for short, is and why it’s a good idea to write one.
I quote, “An IPS serves as a written representation of your financial/investing objectives and the various strategies you are employing to achieve them.
This has an added benefit of providing a guideline to heirs in the event of your untimely demise and allows them to continue this investment philosophy without missing a beat.
This document serves as an emotional stabilizer during market upturns and downturns.
A good IPS will prevent you from chasing the market or abandoning the market by having set parameters in place ahead of time of what actions to take in any given scenario.
The ideal time to create an IPS is before you have much “skin in the game” investment wise so that you do not have undue prejudice from past investment returns.”
An IPS can be sorted out by time frame (short, medium and long term). It includes your asset allocation, re-balancing criteria and contribution rate into different investment vehicles.
It’s a non-binding document that prevents you from making knee jerk reactions when markets move and should be modified when changes occur in life.
What I like really about this article, which is short and to the point, is that it covers an area of finance that is typically overlooked. In my experience, I see that too many people just investing based on reactions or based on their gut, instead of using discipline. The #1 thing you can do for yourself as an investor is to apply discipline to your investment strategy.
An IPS can help with that, and it can be very basic or as detailed as you like. It should cover how you will invest your money, at what rate and should explain in detail your investing objectives. Beyond that, it’s up to you to decide how much you want to include. I find it helpful to detail out how various accounts will be managed. X% into ABC Fund and Y% into XYZ fund along with the expectation of how much you will invest each year (or month).
Your contribution rate is so important to your overall financial health that it really belongs here to serve as a reminder of what you should be doing. I’d also include a short paragraph as to WHY you are investing. What is the goal, never lose sight of your goals… With more emotion behind your savings and investing, you are more likely to achieve them. Remember that.
Thanks, XRAYVSN.COM for the insightful article!