10 Money Principles All Doctors Should Know for Financial Success
- 22 hours ago
- 11 min read
While medical school does a great job of teaching students how to become doctors, we don’t do a great job of preparing medical trainees for all aspects of physician life. Personal finance is one of the areas commonly overlooked, and we get a ton of questions in our online physician community from residents, fellows, and early career attendings asking about basic personal finance. We’ve put together a personal finance primer for doctors and a guide to personal finance for graduating residents and fellows, but if you’re looking for a place to start, there are a few core money principles all doctors should know that we wanted highlight, regardless of what stage of your career you’re in.
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10 money principles for physicians
The 50/30/20 rule of thumb for budgeting
Regardless of how much you earn, most physicians could benefit from having a budget to ensure that they are meeting their retirement savings goals.
Doctors who have never budgeted before, especially those starting their first attending position and getting that first paycheck out of residency or fellowship, may not know how to create a budget. The 50/30/20 rule is a common budgeting guideline that can be a great starting point.
The 50/30/20 principle for budget suggests allocating:
50% of your after-tax income to essential expenses, which include:
Rent or mortgage (including HOA fees and escrow)
Utilities
Insurance premiums - don’t skip these! We cover this more below
Loan payments (student loans, car loans, etc.)
Food and transportation
30% of your income to discretionary spending (nonessentials you enjoy), such as:
Dining out and entertainment
Hobbies, gadgets, and streaming services
Luxury purchases
Weekend getaways and vacations
20% of your income to saving or debt repayment, such as:
Paying off credit card debt or personal loans
Contributing to tax-advantaged retirement accounts (401k, IRA, HSA, etc.)
Investing in taxable accounts once you’ve maximized your retirement accounts
Given your high earnings potential, you may wish to adjust these percentages depending on your lifestyle, but this can be a great blueprint to get you started. Once you’re ready to move onto more personalized goals, read this article about how much of your earnings to save by stage of life and earnings.
Related PSG resources:
YNAB (You Need a Budget) is an impressive app laser focused on budgets. It's not free, but reasonably priced, and many of our members swear by it.
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Save 3-6 months of expenses for an emergency fund
Speaking of emergency funds, everyone should have one to help them weather unexpected expenses or job losses. Your emergency fund should be separate from your retirement savings and should remain highly liquid. The goal of your emergency fund isn’t to make you money, it’s to help prevent you from going into debt if unexpected expenses or life circumstances arise.
A common money principle is to have 3-6 months of expenses (not income) saved and earmarked as your emergency fund.
When in doubt, err on the side of caution and opt for the 6 month side of the range. In times of particular uncertainty, you may want to increase this all the way up to a year.
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Learn more about emergency funds for doctors.
Pay yourself first to stay on track for financial independence
One of the most powerful financial habits you can develop is routinely investing. Instead of saving what’s left at the end of the month, prioritize saving and investing by treating your savings as a bill you pay to yourself. In the 50/30/20 budget example above, this covers the 20% for savings mentioned.
You can put this money principle into action by automating your retirement savings. Make sure you have contributions to your employer-sponsored 401k, 403b, or other retirement account pulled automatically from every paycheck. If you have an HSA through work, you can set up automatic contributions from your paycheck as well. This helps you fund your future before you ever see the money, helping prevent you from accidentally reallocating this money somewhere else during the month.
Set up automatic transfers to your IRA, either monthly or annually (and make sure you check annually and adjust if the annual contribution limit changes). If you still have part of your 20% savings left after maximizing these accounts, set up an automatic transfer from your checking account to your investment account (or emergency fund, depending on your current savings goal).
Treat these automatic withdrawals as non-negotiable bills you have to pay yourself. Your future self will thank you.
Related PSG resources:
Time in the market beats timing the market
One of the most reliable principles in investing is that steadily investing in the stock market over time is more important than trying to time the market by purchasing specific assets at the “right” time. History has shown that trying to time the market leads to emotional investing that could result in big financial mistakes, and if you have a long investment horizon, it’s better to just stay the course and trust that over time, the market will go up.
Investing early in your career and consistently contributing regularly builds that investing muscle early and keeps it going.
While you may hear anecdotes of somebody making a huge amount of money on a single stock, cryptocurrency, or investing at a particular time, these activities are higher risk. If you’ve been focusing on crypto and single stocks and aren’t sure what you should be considering as alternatives, we have resources to help. Explore:
If ups and downs in the stock market leave you nervous or nauseous, consider outsourcing your investments management to help you stay the course and prevent you from panic selling.
Options include:
Hiring a financial advisor. A trusted financial advisor can help you ride out volatility in the stock market and guide you through retirement planning so you stay on track. Explore our financial advisors database for physicians.
Using a robo-advisor. This harnesses the power of AI to help lower the costs of guided investing. Learn more about using robo-advisors. We have partnered with Wealthfront to provide robo-advisory services for our members. Learn more and set up your robo-advisor account today. They have a quick and easy setup process. You can start investing in just a few minutes.
The 4% rule for determining how much you need to retire
The 4% rule is a quick rule of thumb to help you set a framework for how much you need to retire.
The 4% rule states that you can safely withdraw 4% of your investment savings in the year you start retirement, and then withdraw the same amount, typically adjusted for inflation, and still leave enough in your nest egg for your retirement.
This applies for investments for a 30-year retirement and does not include your net worth that’s in your home equity, cash accounts, etc.
If you have, for example, a $3 million dollar retirement portfolio, you could withdraw 4% of the total balance, or $120,000 for the year, as your retirement income. Depending on your lifestyle and other potential income sources in retirement, this may or may not be enough for your situation.
The 4% rule can help you determine how much you need to comfortably retire given your goals. A quick caveat noted above is the 30-year retirement assumption. For physicians looking to gain financial independence and retire early, the 4% rule may need some adjustments, but it can still be a great starting point to help set goals.
Related PSG resources:
The rule of 72 for tracking your FI number
This is another good benchmark for physicians focused on retirement planning that helps assess the growth potential of investments. The rule of 72 is a simple way to estimate how long it will take to double your current money.
Divide the number 72 by your investment’s average rate of return to determine the number of years it will take your investment to double in value.
This can help you plan for retirement in conjunction with the 4% rule. If you know how much money you’ll need to maintain your lifestyle at the 4% withdrawal rate, you can use the rule of 72 to help estimate when you’ll hit that mark.
Related PSG resources:
The 3x rent rule
Housing is one of the biggest expenses in any budget. The 3x rent rule is a simple guideline for those trying to determine what is reasonable for their housing costs:
Your gross monthly income should be at least three times your monthly rent.
Your gross income is your income before taxes and other deductions are taken out, such as your automatic retirement contributions.
The 3x rent rule is a common requirement landlords use when assessing leasing applications.
If your gross monthly income is $24,000, then your rent should be under $8,000.
This principle can be especially important for residents and fellows who aren’t making an attending salary yet. By keeping rent and other monthly expenses low, you can help stretch your income to hopefully start investing for retirement, or reduce the amount of student loans taken out to cover living expenses.
Related PSG resources:
The 2x mortgage rule
We have a similar money principle for physicians looking to shift from renting to homeownership. There are a few common guidelines to help determine how much house you can afford, so we’re going to cover two in one here.
Your mortgage should be no more than 2x your gross annual income.
AND
Many also suggest 2x-3x of your gross annual income for the max purchase price, regardless of how much you finance.
Our gross annual income from our rent example above was $288,000. In this case, you would want a mortgage no more than $576,000 and should let your real estate agent know when you’re hunting for homes that the $576,000 - $864,000 range is the top end of your budget.
Related PSG resources:
20/4/10 rule for car loans
Cars are one of the most common luxury purchases physicians make, especially after completing residency. We have nothing against upgrading to a nicer vehicle if you want, but this principle can be a practical guideline to help avoid too much lifestyle creep early on as you also work to start building your retirement nest egg.
The 20/4/10 recommends:
Putting down at least 20% of the car’s purchase price as a down payment. This can help prevent you from getting underwater in your car loan as your car depreciates over time.
Keeping your loan term to 4 years or less. This can reduce the amount of interest you have to pay on your car over the life of the loan.
Keeping your total car expenses at 10% or less of your income. This includes your car loan monthly payment, insurance, gas, and maintenance.
When looking at the total expenses versus income, this money principle is a little more lax for gross versus after-tax income. Use your best judgment for what fits your needs and goals most.
Protect your financial well-being with insurance
While this is our final money principle, it’s certainly not the least important. A good defensive strategy to protect your lifestyle and earnings potential is just as important as saving and investing for the future.
Life insurance, disability insurance, and malpractice insurance are especially critical for physicians. As your net worth and assets grow, umbrella insurance becomes important, too.
A few guidelines for insurance:
A general rule of thumb is to have term life insurance coverage for 10x-12x your annual gross income. (Note, this may be too much for very high earning physicians)
Residents and fellows typically need about $5,000/month for a disability insurance policy benefit, while attendings typically need $10,000-$15,000, depending on their lifestyle.
The sooner you lock in life insurance and disability insurance policies, the lower your premiums can be. Our partners for insurance agents for physicians have access to trainee discounts for residents and fellows.
Related PSG resources:
Conclusion
While the money principles above aren’t all inclusive, they can be a great starting point for physicians looking to learn more about personal finance as they put together their first financial plan. These principles can be great guidelines, but they aren’t always applicable in all situations given the assumptions they’re built on. Take the time to assess your current situation and think about your future goals. Once you have an idea of what you’d like the future to look like, you can begin to reverse engineer it, using these principles to help.
Additional financial resources for physicians
Explore related PSG content:
If you’re a resident or fellow, check out our transition to practice guide, which includes a link to sign up for our free educational series of events we run every year.
Sign up for our PSG weekly newsletter, where we include announcements and registration for all our free events, including our financial grand rounds for physicians in all stages of their careers.