Physicians need to develop financial skills to properly grow their assets and avoid the pitfalls that can come with managing the unique circumstances of a physician income.  Compound interest over a prolonged time horizon is the single greatest tool for building wealth and financial independence. 

1- Delayed Gratification

Most of the reasons physicians are known for being bad with money come from an expectation that they can have an amazing lifestyle after starting an attending physician job.  Most of us go through the years of residency training living on what is actually a typical USA household income, but with the knowledge that there will be a huge balloon in income after the training years are complete.  It can be super tempting to spend big on a house, cars, and vacations to make up for all the time on a more modest income.  However, it just doesn’t make financial sense to spend heavily on lifestyle upgrades when we are so far behind others in retirement savings and student loan burden.  The adage “live like a resident” is sage advice to every physician in their early years as an attending. 

2- The Math Has to Work For Everyone

I have been amazed to encounter physicians and others with advanced degrees who are so bad at financial life.  When doctors finish medical training all they really have is a paper saying that they spent a tremendous amount of time and energy becoming a physician.  It is a great investment in future income and the ability to make a difference in the lives of patients who rely on us to care for them in their most difficult times.  It can be tempting to try to fit the mold of a high earning physician even when the math does not make sense.  First, pay off debt and invest in financial tools that will earn compound interest for decades to come.  Then slowly increase in lifestyle when your financial house is in order.  Invest in low-cost index funds, keep cash in high yield savings accounts, and avoid lifestyle creep. 

3- The Financial Industry Wants Your Money

Becoming a physician is one of the most reliable ways to secure a high middle-class income.  Society has traditionally held physicians in high esteem because of the years of selfless dedication to healing the sick. Relatively speaking, physicians command both high respect and high income. Salesmen masquerading as “financial consultants” prey on newly minted physicians.  They see the future potential earnings of a physician and are motivated to sell professional-sounding financial products that appeal to young physicians.  See if this story sounds like your own experience or that of someone you know. At the end of residency I was approached by a friend of a friend who wanted a few minutes of my time to teach me about protecting my assets and investing in a secure financial future. Unfortunately, he was not an independent financial advisor who could teach me about financial products for a reasonable fee, but rather was working for one company selling whole life insurance and plans that would lock in assets under management.   I was clueless and it sounded like a good deal, so I invested in the plan. Thankfully I was quite poor so I could not invest very much, and I learned about the pitfalls of listening to a salesman rather than seeking independent fee-only financial advice. I fortunately learned that the only financial advice I could trust would come from someone not trying to sell me something. 

4- Become a Stealth Multimillionaire

Because physicians typically don’t start their first “real job” until they are over age 30, we lose out on years of compound interest.  Thankfully physicians usually have a larger income to make up for lost time in the market. However, regardless of income, financial independence and retirement savings are heavily dependent on the power of compound interest. The lack of ability to invest significantly during the years of education means that physicians must begin the process of investing as soon as possible after residency.  Compound interest over a prolonged time horizon is the single greatest tool for building wealth and financial independence. 

Take a moment to nerd out with me on compound interest.  On average, whatever you put into the stock market on a low-cost index fund will double approximately every seven years.  The rule of 72 says that you take the number 72 and divide it by the projected return on the investment and the result tells you the number of years it is projected to take to double your investment.   Average S&P 500 index returns have been around 10% for many years. Hence 72/10 = approximately 7 years. The money invested in your 30s has the power to grow much more than money invested later in life.  For this reason it is important to slowly increase lifestyle and use the early years to invest heavily in retirement savings.  For example, if you invested $5000 per month every month for 10 years into an S&P Index mutual fund and conservatively assume an 8% rate of return you would be a millionaire by year 11, depending on the stock market performance during that time period. You can be more conservative if you want. Even if you invest in high yield savings accounts where you have FDIC insurance and are guaranteed a 5% return on investment the amount available after year 11 would be nearly $900,000, assuming the interest rate remains stable during that time period.   With either strategy you would be a millionaire by your early 40s and even if you never saved another penny that amount would likely double every 7-10 years thereafter (COAST FI).   There are many other investment tools and considerations, but the point is that early investing makes a HUGE difference on wealth and future flexibility.  If you live carefully in the first few years then buying the nice house and cars or vacations or whatever you want can be easily within your grasp without compromising your financial independence. 

5- Get Out of Debt      

Student load debt is a necessary evil for most physicians. It’s way too easy to take on additional debt as a medical student or resident.   There is no real estate associated with the debt and no asset that can be sold to pay it off if we cut back work as a physician.   Other debts are typically associated with an asset or collateral that could be used to offset the debt in the event of default on a loan. Student debt has no such benefits.  It’s appropriate to compare the interest rate on debt vs the interest rate on a high yield savings account or potential returns from stock market investment.  However, there is tremendous peace that comes from being out of debt. Especially debt that has no associated asset that could be sold if needed.  

If possible, find a way to pay off student loan debt as soon as possible by working for a non-profit or working in an area where physicians are needed.  Most of these locations have student loan repayment programs that will either forgive or pay off the debt completely over time.  In my case, I was able to work in a rural area with a high HPSA (health professions shortage area) score and the national health service corps loan repayment program combined with a state rural physician loan program paid every cent of my loan over a five year period. There are many similar programs nationwide in areas where physicians are in high need.  One of the best kept secrets of medicine in rural areas is that a physician can live in a low cost of living area, have debts completely paid by someone else, and earn a higher income than average. If you like living in rural areas and have a passion for outdoor activities then it’s a win – win.   

6- You Won’t Want to Work This Hard Forever

It is a true privilege to be a physician.  I am so thankful for the ability to help my patients, and I will forever be thankful for the amazing health professionals who have helped me. It is an honor to work in the medical field and to be able to help people in such an important and personal way.  There is nothing like it on earth and I do not mean to diminish the importance of what we do as physicians.  That being said, there are parts of the job that everyone dislikes, and the hours can be overwhelming. The best way I know to combat burnout is to regain control of time and have the ability to say “no” when I am asked to do something that is not in the best interest of my patients or my personal life.  The freedom to have this type of control is closely linked to financial independence.  If you invest heavily and live frugally in the first years after residency the foundations of financial independence will be in place when you want to use them.   

Do you have a story about a financial pitfall you avoided (or fell in)?  Any advice you would share with other physicians?