The physician role can be lucrative, but like with any other professional position, making the wrong wealth management choices, not setting financial goals, choosing the wrong advisers or being reckless with investments can hurt your financial standing and future.
Let’s look at some common mistakes made around budgeting and a few good practices to consider.
Don’t Chase a Luxurious Lifestyle Too Much
Most of us crave the finer things in life. But if given the opportunity, many of us may get too caught up in obtaining and maintaining a certain lifestyle. For example, when a young physician moves from residency to full-time practice, there can be a natural tendency to immediately purchase expensive cars, homes, etc. And if their peers are doing the same, the desire to keep up can become a focus. That’s not to say you can’t enjoy nice things – it’s your money, you’ve earned it and you should enjoy a certain quality of life. But do it smartly and don’t let “keeping up with the Joneses” become an obsession.
Fully Understand the Impact of Taxes
Having a full understanding of your after-tax income is a key step in smart financial planning. For many dermatologists in states with higher taxes, the marginal tax rate may approach 50%. This can greatly impact your savings, spending and planning. To avoid any major tax surprises, consider after-tax income amounts when financial planning, whether with tools like Microsoft Excel or with a professional financial adviser.
With bills, mortgages, car payments and other everyday expenses, a checking account can be drained quickly if going without work or income for some time. That same effect also occurs when entering retirement, especially if other additional passive income methods are not an option. To retire comfortably in your 60s or 70s, multi-million dollar savings may be needed to maintain the same lifestyle you have become accustomed to (depending on where you plan to retire). And with inflation, you may need even more. Start planning out your retirement early on and take the necessary action to ensure you’ll be set to live the lifestyle you want.
The power of compound interest can be a great way to build wealth over time. Making regular contributions to diversified and risk-optimized investments (stocks, funds, bonds, etc.) that compound over time can greatly enhance the wealth you can accumulate.
Don’t Believe That Income Will Remain Set No Matter What
While earning a high income each month for the rest of your working life may be the ideal goal, that income may not remain completely steady. During the COVID-19 pandemic and because of its effect on the economy, many physicians experienced a drastic reduction in income. Although certain things like disability claims can be insured against, many disruptive happenings such as COVID-19, team member issues and board suspensions are not insurable. Hopefully, issues like this are few and far between, but things can happen unexpectedly that can harm your ability to produce income. Plan and save accordingly, so if faced with one of these situations, you’ll have the ability to ride it out.
Is more practice support or a long-term exit strategy part of your financial plan? We’re always a phone call or click away to help. Schedule a consultation with one of our practice management experts today!