Written by: Corey Janoff
This post was originally published on July 7, 2020 and has since been revised and updated.
The 2020-2021 academic year is behind us, which means there are approximately 45,000 new doctors entering practice in America (according to the ACGME Data Resource Book). That’s a lot of new doctors who have a fantastic opportunity to become financially independent (or even achieve fatFIRE) if they get started on the right foot. Today we are going to dive into six ways to achieve financial success as a new attending physician.
In one of our podcast episodes on transitioning from residency into practice, we touched on some tips for improving your odds of achieving financial independence in a timely fashion. I would encourage you to give that episode a listen if podcasts are your thing (look for Financial Clarity for Doctors wherever you get your podcasts). Below are six key takeaways from that episode if you are looking for the abridged version on ways on how to be financially successful.
1. Live Like a Resident
Before you get all excited about quadrupling your income overnight, take a deep breath. Yes, your income is about to go up, and you will have the ability to increase your standard of living. Instead of immediately enhancing your life, I encourage you to maintain your current standard of living and live like you are still a resident for a little while.
This will be short-lived, I promise! I want you to get your financial life on track and have a game plan for achieving your goals. You can have optimal financial success if you can maintain your residency lifestyle for a couple of years into practice. That significant increase in income can do wonders for your financial well being.
You can hammer away at debts, build up sufficient savings for a home down payment, get on a healthy trajectory for retirement, among other things. Once you have a solid foundation with healthy financial habits established, you can start to upgrade your lifestyle.
2. Crush All Bad Debts
Part of continuing to live like a resident as a new attending physician is so you can start digging yourself out of a hole, in addition to $200k+ of student loans, many residents and fellows complete training with personal loans and credit cards carrying high-interest rates. Use your newfound extra income to roundhouse kick all those bad debts out of the picture.
How do you decide what debts are bad? I’m glad you asked. I have a simple test you can apply to determine whether a debt is bad debt: the interest rate test. Also knows as the 7% rule.
The interest rate test is an easy one. If you have a debt with an interest rate of over 6-7%, I encourage you to pay that off aggressively. By paying off a debt, you are freeing up the interest expense that would otherwise accrue, essentially giving yourself a guaranteed return on your money.
By paying off a credit card with a 15% interest rate, you guarantee yourself a 15% rate of return on your money, because you are avoiding the interest that you would have to pay if you continued to carry a balance on the credit card. A penny saved is a penny earned. Easy money. There is no investment out there that can provide you anywhere close to that, guaranteed, so it makes sense to pay off your credit cards in full each billing cycle.
Once those consumer debts are paid off, pop some Martinelli’s to celebrate, but don’t turn around and add a new consumer debt to the picture. If you pay off a loan you took out for furniture only to turn around and take out another loan to buy a timeshare, you’re not making any progress.
3. Have a Plan for Paying Off Student Loans
As a new attending physician, there is a good chance you have a boatload of student loans. It’s wise to come up with a plan for how you will pay off those loans. I don’t care too much as to what the plan is, as long as you have a sensible plan.
You may plan to pursue Public Service Loan Forgiveness, aka PSLF (hopefully, you have already been making payments towards the PSLF program while in residency). There are other avenues for medical school loan forgiveness, such as the NIH Loan Repayment Program for qualifying medical research. Maybe you are considering refinancing your medical school loans.
Whatever the strategy for your medical school loans is, have a plan to get rid of them. That plan could change if the job situation changes, and that’s OK. I don’t want to see you still paying off student loans in your 50’s, as that will add a lot of stress to your life that you could avoid if you have a plan as a new attending physician. We’re shooting for financial success here, not financial mediocrity.
4. Invest 20% of Income for Retirement
You just started working in your first real job, and we’re already thinking about retiring? Heck, you probably started thinking about retirement as an intern during all your sleepless nights.
To maintain your attending doctor lifestyle, you will need a lot of money to retire (Related: How much money does a doctor need to retire?). You are also getting a late start at the retirement savings game. The good news is, setting yourself up for financial success in retirement is very doable. The key is to start early and be consistent and persistent.
Everyone’s circumstances are different, but for most of you, consistently saving at least 20% of your gross household income for retirement will set you on a healthy track to retire at a reasonable age. I define reasonable as early-to-mid-60’s for a typical new attending starting in their early-to-mid-30’s. If you want to retire sooner (or are getting a later start), save more (Related podcast: On FIRE with Physician on FIRE).
Start by maxing out your tax-advantaged retirement plans through work and your Backdoor Roth IRA. Add other accounts as needed until you are saving a sufficient amount to ultimately achieve your end goal.
How do you know how much you need to save and what accounts to use to achieve your goals? It really depends on your particular circumstances. Meet with one of our advisors to help you figure it out ????
5. Get Sufficient Own Occupation Disability Insurance
Your income is the linchpin to all this stuff working. Without income, you can’t pay off debt, you can’t save for retirement, can’t put food on the table, or have a roof over your head. You need income to make your world revolve. Without income, you’ll probably get stuck between a rock and a hard place.
As a doctor, the most significant risk of losing your ability to work and earn an income is an untimely illness or injury. Get an own-occupation physician disability insurance policy that protects your income if you cannot perform your medical specialty’s specific job duties.
You need it. You should already have it by now. If you have health issues, there may be some policies available through your residency or fellowship program with minimal medical underwriting (but you’ll need to act quickly if you have recently graduated).
The bottom line, get a healthy amount of disability insurance to protect your attending income, so you can achieve financial success even if you can’t practice medicine one day.
6. Wait to Purchase a House
I know, I’m such a buzzkill when it comes to home ownership. The first thing every new attending physician wants to do is what I’m telling you to hold off on. I believe owning real estate is beneficial in achieving financial success. As a new attending physician, though, a lot is going on in your world, and adding a big house to the mix will only complicate things.
The reason I want you to hold off on buying a house is two-fold. If you rush to purchase a nice “doctor house” as a new attending, you are saying sayonara to living like a resident. That will throw a wrench in your plans of quickly establishing a solid financial foundation.
Secondly, there is a decent chance you will soon be leaving the new attending job you just started. There’s about a 50% chance you’ll be changing jobs within three years of entering practice. Depending on where you live, a job change may require a move. And a move will require you to sell the house you just bought (likely with a small down payment physician mortgage loan).
Selling a house, you recently purchased is typically one of the more costly financial moves you can make. You likely haven’t paid down the mortgage much since most of your payments in the early years go towards interest. Also, the house may not have appreciated much in value – heck, it could even decrease in value. The commission you will pay to a real estate agent when the selling eats away much of the equity you have in the home at that point (if any), and you may even have to pay money to sell your house.
Rather than rushing to buy a house, wait six months to a year in your new job to make sure you like it, and you plan to stay in that location for the foreseeable future. I’ve seen too many people get burned by quickly purchasing a house as a new attending. As tough as it is to wait, waiting might save you a lot of money and headaches in the near future.
Again, everyone’s circumstances are different, so the optimal course of action may differ from your co-residents.
Now is an exciting time for all new attending physicians as they embark on their real careers as doctors. Make sure you get started on the right foot, so you are setting yourself up to achieve financial success.
Congratulations and good luck on your journey!