Money Matters: 6 financial pitfalls physicians should watch out for

Not every physician is financially successful. It takes planning and execution to achieve your financial goals. However, success is not always dictated by what you do right as much as by what you may do wrong. Time and again, we see physicians make avoidable mistakes that hinder or delay their ability to reach their financial goals.

Jeff Witz, CFP

These common mistakes include the following:

Procrastination. The No. 1 reason we see physicians fail financially is procrastination. Whether through educational programs, self-research, or working with a financial professional, physicians know what they need to do to become financially successful. However, too often we hear physicians say, “Life gets in the way.” We get it! Physicians work long hours and already have limited free time to spend with family or on hobbies they enjoy. However, you need to carve out the time to implement the mechanisms that will allow you to become financially successful. The longer the wait, the more difficult and costly it is to get on track.

Lack of clearly defined goals. Vague goals often result in vague plans, and when you have a vague plan, it is easy to deviate from that plan and get off track. It is important to be specific about your goals so you can design a detailed plan for reaching them. Each area of financial planning has its own questions that need to be asked and answered. For example, when thinking of your retirement goal, at what age do you want to retire? What level of income do you want in retirement? What sources are your savings coming from? What rate of return will you need to earn on your investments? By answering these questions, you can start designing a plan that should tell you how much you need to save each year, which accounts to invest that savings into, and which investment strategy will give you the best probability of accomplishing your goals.

Late-start saving and investing. Compound interest and growth are powerful tools for growing wealth. What are compound interest and growth? You can think of them as interest earned on your interest or growth earned on your growth. By reinvesting interest or dividends or allowing your money to stay invested so you get a recurring rate of return on past growth, each compounding event causes the value of your investments to increase. With adequate savings and 30-plus years of compounding investment growth, many physicians can reach their long-term financial goals. The cost of waiting is substantial. Whatever your long-term savings goal, the amount required to save increases by roughly 3 times for every 10 years you delay the start of your savings plan. If you wait too long, you simply may not earn enough money to be able to catch up.

Absence of an investment strategy. An investment strategy holds a physician accountable for what types of investments they purchase, when they will get in and out of the market, and what their asset allocation will be. The investment strategy protects the physician from him or herself so they don’t react emotionally when markets are performing very well or performing poorly. Emotional reactions to market movements are some of the most impactful reasons physicians’ investments underperform and physicians do not reach their investment goals. An investment strategy is designed to protect the investor from their own emotional decisions.

Failure to prepare for the unexpected. Simply put, many physicians don’t have enough disability and life insurance. Without adequate coverage, your financial goals and the goals of your family are at risk in the event of a long-term disability or your premature death. Protect yourself so you and your family can still reach financial goals even if you are unable to work or if you die early. Additionally, many physicians do not finish the process of creating a will or other estate planning documents. This can cause confusion at death and even cause assets to go to unintended recipients, such as ex-spouses or siblings, instead of current spouses and children.

Lifestyle creep. Frequently, we see physicians start splashing the cash right out of their residency or fellowship programs. They buy a big home or a new car, dine at fancy restaurants, and generally start living an extravagant lifestyle. This often comes at the expense of saving for financial goals later in life. The realization that their focus needs to change comes too late, and there isn’t enough time or money available to catch up. Be careful about how you spend your money, especially early in your career.

All these mistakes are avoidable. If you want the best chance for financial success, be cognizant of these mistakes while executing your financial plan.

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