The more income you earn, the more challenging it can be to figure out how to spend, save, and invest your money. But with a strong financial plan you can build wealth over time, create financial security for generations, and enjoy financial independence for life.
For physicians and other high-income earners, creating a financial plan early on in your career is essential, but you have to know how to begin.
Ready to learn how to make such a plan?
Here are our five top tips for navigating financial planning as a physician.
Establish an Emergency Fund
Whether you’re still earning a resident’s salary or are making hundreds of thousands of dollars per year in private practice, every physician needs an emergency fund. Experts recommend that your emergency fund should cover a minimum of six months of living expenses.
To help create your emergency fund, consider following the 50/30/20 rule of budgeting.
With the 50/30/20 rule you devote 50% of your earnings to needs, 30% of your earnings to wants, and 20% of your earnings to savings and debt payments. Even as a young physician, following this classic budgeting rule can make establishing your emergency fund a bit easier.
Set Up a Retirement Savings Plan
It’s never too early or too late to start saving for retirement. As soon as possible, set up a retirement savings plan such as a 401k or IRA that will grow in value throughout your career. Not only are retirement plans a way to save for your future, they’re also a way to reduce your tax bill, as contributions are tax deductible.
Create an Investment Plan
Thanks to inflation, every dollar you earn today will be worth less in the future. The way to increase your assets rather than watch them deplete over time is to make smart investments.
Your investment plan should be diversified. For most physicians, that includes a portfolio of stocks, bonds, and real estate investments. While both the stock market and real estate market fluctuate, these are sound investments that typically generate net gains, especially over long periods of time
While young physicians that are still paying down student loan debt might not have the ability to invest significantly in stocks and bonds, they do have the opportunity to start investing in real estate, even at the start of their career.
Young physicians, and even residents still in training, can take advantage of physician mortgage loans that offer zero or low down payment options and no PMI. Checkout this site to learn more about physician mortgage loans available in your state.
Protect Your Income with the Right Insurance Policies
There are several types of insurance policies that physicians should buy to protect their income, increase their wealth, establish financial security, and protect their practice:
- Disability Insurance: This is income protection insurance that allows you to continue to collect a portion of your income if you become too ill or injured to work. It is an absolute must for all physicians.
- Life Insurance: If you have dependents, you need life insurance. Before purchasing a policy, learn more about the differences between whole life and term life so you can choose the one that’s right for you.
- Malpractice Insurance: In addition to paying damages if you’re found guilty of malpractice, professional liability insurance will also cover your legal defense costs.
- Business Overhead Expense Insurance: BOE insurance covers the costs of business expenses such as rent, employee salaries, and utility bills if you become disabled and cannot operate your business as usual. It is only necessary for physicians that own their own practice or are partners in a practice.
While no one enjoys paying insurance premiums, these policies are well worth it and can prevent you from losing your income, depleting your savings, and going into debt.
Understand Your Tax Obligations
An important part of financial planning is understanding your tax obligations, especially if you own a practice, are a partner in a practice, or work locum tenens as an independent contractor.
As a self-employed physician you don’t have an employer to withhold taxes for you throughout the year. It is your responsibility to withhold your own taxes and make quarterly payments to federal and state tax bureaus.
Before investing a large sum of money into a new investment or making a large purchase from money you’ve saved, be sure to consult with a tax professional to understand what your quarterly obligations will be.
Physicians that do have employers can also benefit from speaking to a professional tax advisor to learn how they can minimize their taxable income rate and maximize their deductions.
Financial planning is something you don’t have to go at alone. From financial advisors to mortgage specialists to insurance agents, there are plenty of professionals available to assist you in building wealth, providing financial security for yourself, and creating a long-lasting financial safety net for your family, dependents, and loved ones.