How to navigate traps from sudden increases in earning power.

Michael TorneyCFP, J.D., LL.M. 

Physicians encounter a variety of financial planning opportunities inherently unique to their profession. One of those is the large increase in income that occurs after residency. Physicians typically go from making an annual salary of $50,000-$70,000 to five times that amount in a few days. This creates opportunity to set up an instant long-term wealth building plan. The danger is when physicians feel like they’ve “earned the right” to spend the increase in income.

The Most Dangerous Mindset: “I Deserve It”

You’ve spent years studying for exams and working long hours in residency while watching your peers take jobs and climb their respective career ladders. Most likely, you’ve made less than your friends for prolonged periods and watched them enjoy a lifestyle that quickly eclipsed yours. Of course, now that you’re a card-carrying physician with a disposal income, it’s natural to see this as “your turn.” Be careful with that mindset. Richer physicians than you have gone broke trying to live like kings and queens right out of residency. Rather than dreaming up all the ways you could start spending this hard-earned income, consider your long-term goals.

The Reality of Financial Planning for High Earners

Financial planning might seem easier for higher earners than those just scraping by. In truth, there are just as many pitfalls you need to navigate. It’s not that you don’t have the money; it’s how quickly the money disappears when you aren’t keeping track.

As such, even high-earning physicians need to dedicate themselves to a structured financial plan that supports them long-term. In our experience, this type of planning comes down to four issues:

  1. Catch-up savings: A new physician’s wealth is relatively low compared to others entering traditionally high-income positions right out of college. While peers were putting away a considerable sum during their early work years, residents can’t afford to do the same and they miss out on years of compound returns. Quite the contrary, they’re usually adding debt via student loans, which often leads to a negative net worth. As a result, they now have to save more on a relative basis to build the same amount of wealth.
  2. Establish a savings plan now: Once you allow yourself to enjoy a better lifestyle, it’s challenging to let that go. It’s much easier to give up the idea of a nice car you don’t yet own than to sell your current car for a more affordable option. Your new income provides an opportunity to start an automated wealth building plan without feeling like you’re depriving yourself. Doing so will gain you the benefits of compounding returns, thus requiring less net savings to accomplish the same net worth toward the end of your career. Use compounding interest to your advantage!
  3. Unaccounted expenses: Your income may increase five-fold, but it doesn’t mean your take home pay does, too. You’ll need to account for new expenses you didn’t consider before:
    • a. Physicians pay more in taxes as attending physicians than as residents;
    • b. Continuing medical education (CME) is an ongoing, annual cost of remaining in the profession;
    • c. Most residents don’t save for retirement, but now’s the time to start;
    • d. Want to send your kids to college? Disability and life insurance aren’t free either. The list goes on.
  4. Trust in social security, or lack thereof: Many retirees count on social security as part of their income stream. If you delayed your earning years while in medical school and residency, your social security income will be less as a result. So your savings will have to make up the difference. Plus, do you really want to rely on the government to fund your retirement?

Debt Will Ruin Your Financial Plan

You’ll certainly be able to afford the trappings of luxury you see other physicians showing off—luxury cars, new homes, old wine, the works. But don’t rush out and incur massive amounts of debt just because you expect big paychecks to roll in every month.

Rather than spending your income recreationally, wouldn’t it be better to have the peace of mind that comes from funding your long-term goals? Think retirement, education for your kids and those pesky student loan payments. Getting your house in order now will give you the flexibility to buy nicer things later on.

As you grow older, this freedom may become more important to you. Physician burnout is a real thing. It would be a shame to be stuck working long hours in your 60’s because of your poor spending habits today.

Of course, financial planning doesn’t mean investing every spare dollar you have into savings. With the right plan, you’re perfectly able to upgrade your lifestyle in plenty of great ways. What matters is that you choose the right upgrades that won’t ruin your long-term financial plans.

Quality of Life and Long-Term Savings: Physicians Can Have It All

You do deserve to celebrate, and you should feel comfortable upgrading your lifestyle a bit – just not in a way that puts you in a financial hole.

For example, consider smaller service roles that don’t cost too much, but give you more time to spend on leisure? Why not try a monthly house cleaning service or a weekly lawn care service? Take these expenses one at a time and add them to your budget. Try them out for a while and then re-evaluate your plan in 6-12 months. The idea is to try building out your lifestyle with small services that can easily be added or removed, depending on what your income can sustain.

That luxury car, on the other hand, could lose substantial value the minute you drive it off the lot. That type of expense isn’t quite as easy to walk back.

When Do I Get the Mansion?

You can’t have it all in life; not in the beginning, at least.

If your goal is a big home, figure out the math on how to have the home and hit your savings goals. Maybe that means you aggressively pay down debt for three years, build a down payment fund for the next three and purchase the home the year after. Along the way, you continue to make your retirement and education savings goals.

If you’d rather own a small home and go on lavish vacations each year, you can do that, too! Just make sure you plan ahead of time.

You deserve your new income, but you also deserve financial independence. That is much, much more satisfying. Live on your resident income (plus a little extra for rewards) and you’ll be well on your way to financial independence. It’s all possible with the right planning. And, if you need a little help with that, talk to a financial advisor who can help you set goals and secure your financial future.

© 2024 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.