Five common financial mistakes and how to avoid them

Physicians are among the highest-earning and best-educated professionals in the country, but their combination of education and income does not prevent them from making personal financial mistakes.

“Money is like a [foreign] language to them,” says W. Ben Utley, CFP, owner of Physician Family Financial Advisors in Eugene, Ore. “None of this is rocket science, but it’s the first time for a lot of [physicians]. They don’t know how a bank works or what a CD is.”

Indeed, the lengthy education and single-minded focus it requires to launch and maintain a career as a physician doesn’t leave a lot of time to become educated on personal finances. Financial errors can wreak havoc in doctors’ careers and personal lives. And because physicians begin earning later than most professionals, they have less time to accumulate wealth or to recover from errors.

Below are five common financial mistakes doctors make and ways to avoid them: 
 

Lack of planning

Most doctors earn higher than average salaries and they can mistakenly think that negates the need for financial planning.

That was the case with a surgeon client of Joel Greenwald, MD, CFP, owner of Greenwald Wealth Management in St. Louis Park, Minn. The client earned $450,000 a year. He and his wife, who didn’t work, had three children headed to college.

“They’ve just been sort of winging financial planning,” Greenwald said. “They hadn’t had a financial planner and hadn’t dedicated themselves to doing it on their own.” Consequently, the family hadn’t saved enough money to send the children to college and the surgeon has had to push back his retirement age by several years.

Planning is particularly important for physicians because, while they usually make comfortable livings, they typically don’t start earning it until their late 20s or early 30s, well after other professionals.

“Doctors get a really late start, like 10 years behind everyone else, and they’ve got to make up for lost time,” says Ryan Inman, MBA, owner of Physician Wealth Services in Las Vegas and creator of the Financial Residency blog and podcast.

Mishandling student loan debt

Student loan debt is a reality for most physicians, particularly younger ones. A recent Medical Economics survey of physicians of all ages found that two-thirds had more than $90,000 in debt upon graduating medical school, and that 30 percent had more than $200,000 in debt. The American Medical Association found that the average medical student in 2016 graduated with $190,000 in debt. And there are a number of mistakes in handling that debt that can have long-term repercussions for physicians’ careers and personal lives.

The worst mistake is to ignore student loan debt, says Greenwald: “Many [doctors] are consumed by debt, but they’re also paralyzed by it. They can’t see how they’re ever going to get out of it. They don’t know where to start.”

Ignoring the debt won’t make it go away; it will just make it grow. Thus, medical school students should begin planning their loan repayment before they graduate, advisers say. Doctors with multiple loans from commercial lenders should consolidate and refinance them at a lower interest rate as soon as possible, Inman says, adding that a fixed rate loan is preferable to one with an adjustable rate.

Some physicians with direct federal loans are eligible for partial debt forgiveness (see below), but even those who aren’t can refinance them. However, refinancing federal loans with a private lender removes some borrower protections provided by the government. Federal direct loans also can be consolidated through the U.S. Department of Education for lower interest rates and reduced monthly payments. While this can increase the amount of time to repay the loan, it also can result in more payments and more money spent on interest.

The Public Service Loan Forgiveness (PSLF) program is a great way for eligible doctors to erase some debt, but many doctors don’t know how to use it. PSLF makes federal student loans to physicians eligible for forgiveness after 10 years of working for a government or 501(c)(3) not-for-profit organization. In some cases, an organization without the 501(c)(3) designation that serves the public as its main objective might be eligible. However, working in private practice or for a for-profit hospital is disqualifying.

From an overall financial standpoint it’s often a mistake to choose a higher salary in a for-profit practice than a lower-paying job that qualifies for PSLF, Utley says. Recently, he advised married primary care physicians to take jobs with nonprofits rather than in a for-profit organization. He based his advice on their anticipated combined earnings of about $400,000 and a combined debt of $775,000. He estimated they would have to earn $1.5 million before taxes in order to pay off the debt and earning that $1.5 million would require delivering about $10 million in medical care.

In the end, the couple would be significantly better off financially by taking jobs that would allow much of their debt to be forgiven under PSLF than by earning more, but having to repay the entire debt, Utley says.

Inman offers another PSLF tip: The program requires 120 months of payments before loan forgiveness and offers a variety of income-based repayment plans. Because the monthly payments are calculated on the borrower’s income the previous year, most new residents, who did not earn anything as medical school students, do not actually owe any money the first year. However, they can still make zero-sum payments that first year to earn credit for 12 monthly payments.

“Not starting those payments right away can cost them thousands of dollars at the back end,” Inman says.

Expanding lifestyle too quickly

Most doctors earn relatively little during their training, but when they complete their training and get jobs suddenly they find themselves with substantial incomes-sometimes as much as five times more than they earned as residents. And that can be a problem, says Inman.

Flush with larger salaries and coming off years of relative austerity, many new physicians adopt an expensive lifestyle. “Immediately, they think, ‘I need a big house and a car. I want a loan. I’ll deal with the debt later’,” Inman says.

That can start a disastrous, career-long habit of putting an expensive lifestyle ahead of investing and saving. “Once they start inflating the lifestyle, it’s hard to go back in the other direction,” Inman says.

He advises young physicians to give themselves a “raise” of $60,000 to $90,000 over their earnings as residents and live within that budget. The rest of the money should go to paying off student loans, savings, and investments, he says.

Newly employed physicians should wait at least a year until buying a house, says Utley. Doctors often change employment after a year or two in their first job and having to sell a recently purchased house can lead to a loss, or at least complicate a relocation, he says.

Taking out a physician mortgage loan

Lenders know that many doctors emerging from residency are eager to buy their first home. However, most young physicians do not yet have the savings to make a large down payment or a lengthy work history.

That would be enough to prevent most applicants from getting a mortgage, but many lenders make exceptions for physicians because they know they are good credit risks and eventually will earn a large salary, says Inman.

Lenders are so eager to get doctors’ business that they’ve created mortgages with special terms, such as zero percent down and no requirement for private mortgage insurance. Banks will accept a job offer letter as proof of income and don’t count student loans as part of the debt-to-income ratio used to decide if an applicant is creditworthy. However, to compensate for the generous terms, these mortgages come with higher interest rates that often are adjustable. The result can be tens of thousands more in interest payments than would be paid under a conventional loan, Inman says.

Those special terms can be hard to resist, but Inman says they can tempt doctors into taking on too much debt too soon, particularly when a house payment is coupled with student loan debt.

Not planning for retirement

Physicians tend to retire later than most professionals and later than they originally planned. According to a 2016 study in the journal Human Resources for Health, one of the main reasons for delaying retirement is insufficient savings and continuing financial obligations.

Saving for that retirement goal while simultaneously repaying student loan debt can seem contradictory, but a financial planner can show physicians how to get started.

Careful planning and avoiding mistakes like those described above can make it easier for physicians to achieve financial security while pursuing the career they love. The important thing, Greenwald says, is to be proactive.

“Ignoring it and thinking it’s all going to work out is a mistake,” he says.