Personal Finance Basics for Physicians
A Primer

Learn the basics: how to develop a personal financial plan, pay back debt, invest, ensure you are prepared for retirement, and protect yourself. 

While there is no limit to what you can learn about personal finance, this page aims to teach you the basic building blocks of personal finance as a physician.  We are big believers that a large part of basic personal finance can be learned relatively quickly.  Nobody cares for your money as much as you, so investing some time (literally even a few hours) will be well worth the return on investment (ROI).  Many members of our community choose to manage their own finances, while many others choose to utilize a financial advisor.  Regardless of what you choose, getting a basic foundation in personal finance will go a long way in protecting what you’ve worked so hard to build for yourself and your loved ones. Even if you choose to go the financial advisor route, you should learn these principles so that you can distinguish good advice from bad advice, as the financial services industry is ripe with conflicts of interest.

*Please note, we are not licensed real estate, investment, accounting, legal or related licensed professionals, and you should do your own due diligence and confirm the information presented here before making decisions on the basis of information presented on this page.* 

Basics of Personal Finance for Physicians

 

Personal finance can seem very intimidating at first, as it's a huge topic, and nobody taught us about it in medical school.  Fortunately, as a high income professional, there are only a few basic principles that you need to know to ensure financial success. While there are nuances depending on specialty, practice setting, and geography, most physicians should be able to hit retirement goals by following these basic principles.

  • Resist the urge to live the "doctor lifestyle" too early.  This doesn't mean you should never have fun or splurge, but live below your means, and try and save at least 20% of your income if possible.  

  • Establish an emergency fund.

  • Get rid of high interest debt as soon as possible.

  • Insure yourself against financial catastrophe.

  • Fund your retirement accounts and tax advantaged accounts.

  • Time in the market beats timing the market.  Invest early for maximal growth.

  • Consider developing alternative income streams so that you are not solely dependent on your physician income.

 

Budgeting/Developing a Personal Financial Plan

Yes, even doctors need budgets.  Knowing what's coming in and what's going out is the key to saving.  Sitting down with your bills and credit card statements and mapping out all of your necessary expenses (housing, transportation, food, utilities, insurance, and student loans), and your discretionary expenses (vacation, eating out, and clothing, for example) is a good place to start.  This will also help you determine how much you need in your emergency fund.

When you are in survival mode (ahem, residency), having a financial plan doesn’t always seem necessary.  Depending on the cost of living, you may have found yourself in a place where your expenses equaled or even exceeded your earnings.  However, once you finish training, having a financial plan becomes much more important, as it will guide your financial decisions.  You should sit down, alongside any major decision makers in your life like your spouse, and think about when you want to retire, how much money you think you'll need to retire, how important it is to have cash flowing investments, how important it is to be debt free, and more.  This will help you answer questions about what to do with extra money like bonuses or money left over after expenses have been paid, whether you should invest in real estate, what your asset allocation should look like in the market, and more.

We will walk you through some of this in this guide, but if you want more handholding through the process, you can consider reading some books or taking a personal finance course.  Any investment you make in knowing more about personal finance will pay itself off with dividends.

 

Emergency Fund

You want an emergency fund to be very liquid and immediately accessible (i.e. you shouldn’t have to sell stock or otherwise go through any major hoops to use this money).  The reason for this is that you don’t want to have to take out high interest debt, sell stocks while they are down, or touch your retirement accounts if you have a sudden need for money.  This is the money that will allow you to have some breathing room if an unexpected job change or major expense arises, or if you are unexpectedly disabled, allow you to ride things out financially until your benefits kick in.  It is based on your monthly expenses, not your income.

Emergency Fund.jpg
 

Insure Against Financial Catastrophe

Insurance exists so that you don’t lose what you’ve worked so hard to build, but you also shouldn’t insure against things that won’t make you broke.  Most people with their attending salaries will be able to self pay or use their emergency fund for minor expenses.  Despite this, physicians generally need a lot of insurance to maintain the lifestyle that they want for themselves and their families.  The insurance most physicians should carry include:

  • Malpractice insurance

    • Every physician needs this to protect against malpractice judgements.  You should get whatever the norm is in your state.  In most states this is "$1 million/$3 million", which means they will pay $1 million per claim to a total of $3 million per year.  If you are in a very litigious location or specialty, you may want more.

    • Claims based vs. occurrence based:  Occurrence based covers all events that occurred when the policy was in place, regardless of when a claim is made.  Claims based is only in place during your insured period, and you have to get tail insurance afterwards (or have your new employer provide you nose coverage).

  • Disability insurance (www.physiciansidegigs.com/disability for more details)

    • Unless you yourself (not your parents, spouse, etc) are independently wealthy and don’t need your physician income to maintain your lifestyle, this is probably one of the most important things to secure immediately.  You should essentially do this the minute you graduate from medical school, as it will allow you to protect what you’ve worked so hard to build, is cheaper when you’re younger, and decreases the chances that something will happen in the interim that will preclude you from qualifying for coverage.  We as physicians know better than anyone that tomorrow is never guaranteed.

    • You want an individual, own-occupation policy, as there are several downsides to policies through your employers or policies that are not true own occupation.

    • Make sure you have a future increase rider so that you can increase coverage as your income goes up without having to requalify.

    • Our sponsors, who have helped thousands of our members obtain own occupation disability insurance: Pattern and Physician Financial Services

  • Life insurance (www.physiciansidegigs.com/lifeinsurance for more details)

    • If you have dependents that count on you for their lifestyle, this is good to get ASAP.  Some people elect to lock in on cheaper rates while they’re younger, knowing they’ll need it eventually and not wanting to take the chance that they won’t qualify.

    • At the beginning of your career you want term life insurance, not whole life insurance (or any other variant of permanent life insurance).  This will likely continue to be the case for the vast majority of physicians.

    • Our sponsors: PolicyGenius and Physician Financial Services

  • Home, auto, renters insurance

    • You will need these as applicable and should be generous with your coverage.  Once the opposing lawyer finds out you are a physician, they will likely sue for a larger amount.

    • Our sponsors: PolicyGenius

  • Umbrella insurance

    • Wraps around your personal home and auto insurance to cover amounts that exceed the policy limits on those policies, and is relatively very cheap (starts at a few hundred dollars even for a 1 million dollar policy).  Every high income professional likely needs a 7 figure umbrella policy, usually ranging between 1-5 million.  You usually buy it from whoever does your home/auto insurance.

  • Health insurance

    • As a physician, hopefully it’s obvious to you why you need this!  Medical bills can add up fast with certain diagnoses, and you just never know what will happen.

 

Retirement Accounts


Retirement accounts are a cornerstone of your financial plan in many ways.  Not only do you set aside money for retirement, this is tax advantaged money, and also carry the benefits of asset protection, as many retirement accounts are ERISA protected, which means they can't be seized by creditors.

  • 401k match: At minimum, you should always take advantage of your employer match for retirement accounts, as this is free money.

  • Most would advocate for maxing out your retirement accounts whenever possible, as this is tax advantaged money.  Understand that each employer sponsored retirement plan has its own rules, and you should read the plan documents to take maximum advantage.   

    • ROTH accounts: 

      • You should absolutely max out your regular ROTH IRA while you qualify on an income basis if you can (like when you are a resident or fellow; most attending physicians will not). This is post tax money that you can put in while you are at a lower tax bracket, and then you will never pay taxes on it again.  Additionally, there are no required minimum distributions on ROTH IRAs while you are alive, so you can pass the full amount on to your heirs.

      • The Backdoor Roth IRA - this is a legal way to make ROTH conversions and allow high income professionals to contribute to a ROTH IRA via the backdoor by contributing to a traditional IRA and then converting to the ROTH IRA.

        • ​You cannot do this if you have any IRAs other than a ROTH IRA (prorata rule) and you must fill out form 8606 on your taxes properly

        • ​You can also do a spousal backdoor ROTH IRA if married filing jointly (totally separate ‘individual’ accounts, two 8606s submitted each year to the IRS).

      • Many 401k, 403b, and 457s now offer a ROTH option.  

        • This is a complicated decision because you don’t know what tax rates will be during retirement, so you don’t know when it’s better to be taxed.  In general, if you have a low earning year, you may want to take advantage of the ROTH option as you will be in a lower tax bracket.  When in doubt, you can just split the money. 

    • Traditional 401k, 403b, 457, you put money into these accounts pre-tax, decreasing your taxable income for the year, and they grow for decades.  

      • You will be taxed when you take the money out, but the theory is that you will be in a lower tax bracket during retirement.  Additionally, while that money is making money and creating dividends and gains, you won’t be taxed on it until you remove the money from the account.  This eliminates the tax drag that you can see in your taxable accounts, as more money is making money.

      • There are required minimum distributions on this money starting in your 70s.

  • See this section for more details on individual retirement accounts and self employed retirement accounts.

 

Paying Down Debt

​At the beginning of your financial journey, your relationship with debt should be fairly straightforward.  If you have student loans, you’ve likely seen the effects of compounding interest, where it can be difficult to decrease your balance because of how much money is going towards interest.  Additionally, monthly interest payments significantly impact how much money you have left over to do the things you want, and limit your ability to make decisions like working less or retiring early because of the need for monthly cashflow.

You should pay down all high interest debt (credit card debt, personal loans, potentially student loans), as the amount that you are paying in interest is likely to outweigh what you can make on that money by investing it.  People vary on what they refer to as the bottom limits of what’s considered high interest debt, with some saying as low as 5% and some saying as high as 10%.  Remember that you pay interest in post tax dollars, so you actually have to earn significantly more than the interest rate to come out ahead.  If you have very high interest credit card debt, you may want to consider getting a personal loan to pay this off, as it may lower your interest rate.

 

What you do with lower interest debt such as a mortgage or student loans is a very personal decision.  The first decision you should make is whether you are going for PSLF (Public Student Loan Forgiveness) or another forgiveness program.  If you are and work for a qualifying employer, you should strategize accordingly which repayment programs you enter.  If you are not, you should consider refinancing your student loans to a lower interest rate.  More about student loans and student loan refinancing here.  If your mortgage rates are high, you should also see whether refinancing your mortgage makes sense.

 

Healthcare Savings Account (HSA)

Triple Tax free (not taxed on contribution, growth, or withdrawal).  This is amazing and a stealth IRA.  You should contribute to this if you have qualifying high deductible health insurance (usually at least 2500).  2021 Contribution limits are 3600 self, 7200 family, 1000 catch up 55+). ​ Because of this, if you can't both fully fund your retirement account and your HSA, you should fund your HSA after putting in the amount necessary to get the employer match in your 401k.

  • Different from flexible spending account which is use it or lose it in that HSA money rolls over indefinitely 

  • HSA contribution is tax deductible.  Ideally do it through your employee to save on payroll taxes as well. The money grows in a tax deferred way, and you don’t get taxed when you take it out as long as you spend it on healthcare 

    • If you take the money out prior to age 65 and spend it on something besides healthcare, you have to pay taxes on the withdrawal and a 20% penalty; after age 65 you just have to pay the taxes

    • You can save your receipts for years and then apply the money later - no limit to when you have to use it against there by, so let it grow!

 

Basics investment options

When it comes to investing in real estate syndications, doing your research is essential. It’s critical to have an understanding of the real estate deal itself, the market it is in, and perhaps most importantly, to properly vet your syndicator.  For us, the process of vetting a deal comes down to three things - vetting the sponsor, vetting the market, and then vetting the deal itself.

 

Taxable accounts

 

 
 

Housing

Housing is difficult from a financial perspective, because in some ways it is an investment, and in other ways it’s not.  You need to like where you live, but you don’t want to be house poor.  Also, while houses generally appreciate in value, housing markets are fickle.  

  • Don’t buy too early.

    • Transaction costs for houses are high (6% when you sell, but also furnishing the house, inspections, insurance, maintenance, etc) so you shouldn’t buy until you’re sure you’re going to be there a while (in the current market, at least 5 years is a good estimate because you don’t want to buy high and then sell low))

    • Renting until you’re sure you have partnership or you like your job is probably financially smart.  Also as you become more financially secure, what you want in a house is going to change.  

 

  • Default option for residents and fellows should usually be to rent

  • How much to spend - do NOT spend the maximum amount a bank will lend you

    • General rules of thumb: 

      • Housing related expenses should be less than 20% of your total income

      • Mortgage should be less than 2x your gross income (may not be possible in high COL area

  • Mortgages - Shop around and negotiate - use one against the other - they expect you to negotiate

    • Physician mortgages - good for when you don’t have a down payment or when you have other places the money should go to (high interest debt, funding retirement accounts, buying into a practice)

      • Allows you to put down less than 20% without paying PMI (private mortgage insurance - you pay to protect the lender from you defaulting on your loan, essentially throwing money away)

      • Only requires a contract - no past w2s required, just looks at student loan payment instead of total loan burden

      • Don’t use a physician loan to buy more house than you should or just because it’s an option not to put down a down payment - remember even if the interest rates are the same, you’ll be paying more interest because it’s on a higher amount

  • Paying off your mortgage early

    • 15 year versus 30 years gives you financial freedom

    • if you’re not comfortable with 15 year you should consider whether you can really afford the house

    • If you decide you have to do 30, pay off as quickly as possible

 

 

Financial Advisors

While many of us are big fans of DIY, many people prefer the comfort of having an additional set of eyes on their investments.  Advantages to this include making sure you stay disciplined about your approach, educating you, helping with things like rebalancing your portfolio, and providing backup if something happens to you.  Make sure you only purchase what you need, because fees can add up quickly, and often times you’re better off buying some services a la carte from relevant expertise (accounting, law).

How to choose a financial advisor

  • Fiduciary Duty - signed statement - willing to commit to you that they will do what’s in your best interest - make sure they actually sign it, regardless of their certification

  • Certifications

  • CFP: 200 hours of course work, 3 years of experience, gotta pass a test

  • Chartered financial consultant (ChFC) CFP type coursework but without the test

  • CPA + PFS (personal financial specialist)

  • The hardest one to get is the CFA - Chartered Financial Analyst - 750 hours of coursework and 3 exams over 18 months

  • Ask about their investing strategy and make sure it’s reasonable

    • Are they buying individual stocks and do they believe in active management?

    • Are they using low cost funds?  Avoid advisors that use high cost mutual funds as they eat into your returns.  

    • Are they advocating for whole life insurance or do they sell insurance?  Be careful about conflict of interest.

  • Assets Under Management (AUM) vs. Flat fee

    • Make sure the fees are clearly defined, and that you ask them every way that they make money from you.

    • AUM: many as high as 1% or above of your total net worth - this may not seem like a lot when you’re first starting out, but it will add up quickly and significantly eat into your returns.  Also creates a conflict of interest because they want the most money under management to make max money, so may tell you not to pay off debt or contribute fully to tax advantaged options.  These fees can be negotiated, so do that!

    • Flat fee: Annual retainer and you know the costs upfront.  The potential COI is that since they’re getting paid the same regardless, they may not want to spend as much time on things.  

    • Hourly: Nice in that you only pay for what you use, but may disincentivize you from asking questions when you have them.

  • Even if you use a financial advisor, be involved and learn.  That way you can be an active participant in discussions and decisions (and maybe eventually cut out fees and DIY). 

  • Other options:
    - Roboadvisors, Fidelity or Vanguard (can use their people for free or low fee)

  • Sponsors/Advertisers: Wrenne Financial Planning and Zoe Financial

 

Taxes

 

Marginal tax brackets

 

What is a marginal tax rate?

The marginal tax rate is the amount of additional tax paid on the next dollar of income that is earned. Under the progressive income tax method used for federal income tax in the United States, the marginal tax rate increases as income increases. 

Under marginal tax rates, tax payers are divided into several brackets based on income levels. This then determines the rate applied to the taxable income of the tax filer.  the first dollar earned will be taxed at the rate for the lowest tax bracket, the last dollar earned will be taxed at the rate of the highest bracket for that total income, and all the money in between is taxed at the rate for the range into which it falls.



 

Tax Deductions vs Tax Credits

 

Tax deductions and tax credits both reduce the total that you’ll pay in taxes, but they do so in different ways. A tax credit is a dollar-for-dollar reduction of the money you owe, while a tax deduction will decrease your taxable income, leading to a slightly lower tax bill.

 

Tax deductions

Tax deductions reduce the amount of your taxable income that is subject to taxes.

These deductions lower your taxable income by the percentage of your highest federal income tax bracket. 

Example: If you’re in the 10% tax bracket, a $1,000 deduction would only reduce your taxable income by $100.

 

Tax deductions lead to a slightly lower tax bill. There are two ways to claim deductions. 

  • Standard Deduction: This is the kind of deduction that any taxpayer can claim automatically. How much you can deduct depends on your filing status. The largest standard deduction is set aside for married couples filing a joint tax return.

  • Itemizing: Itemizing involves listing out individual expenses that you want to write off on your return. Itemizing your deductions generally makes the most sense if your total deductible expenses are higher than the standard deduction.

Examples of deductible expenses include:

  • Charitable donations

  • Mortgage loan interest

  • Tuition and fees



 

Tax credits

Tax credits directly reduce the amount of taxes you owe, giving you a dollar-for-dollar reduction of your tax liability.

Your ability to qualify for a particular tax credit depends on several factors, including your income, age and tax filing status.

If you qualify for a $1,500 tax credit and you owe $3,000 in taxes, the credit would reduce your tax liability by $1,500.

 

Examples of tax credits include:

  • Child and Dependent Care Credit (designed to help offset the cost of childcare or taking care of an elderly parent)

  • Adoption Credit (for adoption expenses)

  • Lifetime Learning Credit (for higher education expenses)


 

  • Nonrefundable tax credits: If you don’t owe a lot in taxes to begin with, you don’t get the full value if the credits take your tax bill below zero. In other words, a $600 tax bill combined with a $1,000 nonrefundable credit doesn’t get you a $400 tax refund check.

  • Refundable tax credits:If you qualify to take refundable tax credits — things such as the earned income tax credit or the child tax credit — the value of the credit goes beyond your tax liability and can result in a refund check.

  • The IRS lays out specific criteria you must meet to qualify for both non refundable and refundable credits.


 

Alternative minimum tax

 

Alternative minimum tax(AMT) is a tax system imposed by the US government that requires taxpayers to calculate their tax liability twice. Once, under ordinary income tax rules and then under the AMT and pay whichever amount is highest.  The AMT is the excess of the tentative minimum tax over the regular tax. It is owed only if the tentative minimum tax for the year is greater than the regular tax for that year. 

 

How to calculate AMT?

 

  • Compute taxable income eliminating or reducing certain exclusions and deductions

  • Subtract the AMT exemption amount

  • Multiply this by the appropriate AMT tax rates

  • Subtract the AMT foreign tax credit

 

Purpose of AMT

AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. The alternative minimum tax (AMT) applies to taxpayers with high economic income by setting a limit on those benefits. It helps to ensure that those taxpayers pay at least a minimum amount of tax.

 

529s and other savings plans for children:

529
​​- Originally designed for college savings, but current tax laws allow you use it for private k-12 or homeschooling

  • You pay in with post tax dollars and then it grows tax free.  Therefore it’s a good idea to fund as much as you can as early as possible, to allow for maximum growth.

  • In some states you get a state tax credit or matching programs.  Different states have different expenses and investment options.  If your state doesn’t have particular advantages, you don’t have to use the state you live in, so use the ones with the lowest fees (examples, Utah, NY)  

  • Some states have multiple options - usually a higher fee one that brokers sell and a lower fee one for DIYers.  We’d encourage you to use the DIY.

  • If the kids decide not to use it: 

    • If your child receives a scholarship you may be able to pull an equivalent amount out of the plan without paying a 10% penalty

    • If your child doesn't go to college then you can transfer to a sibling, other family member or yourself

    • Otherwise you can just pull it out and pay the 10% penalty.

 

Coverdell Educational Savings Account (ESA) - some people used them in the past for K-12, but now that 529s can be used for that, there may not be an advantage because they have lower contribution limits and no state tax breaks.

 

Disabled child prior to age 26 - ABLE account, contribution limits similar to 529 and can be used for anything that benefits disabled child 

 

Fees and Taxes

Fees - please see here under vetting a syndicator

Will the sponsor take advantage of tax savings techniques such as depreciation and cost segregation? The distributions from syndicated investments typically will be passive, and these can be offset with passive losses. One of the methods to do this is through depreciating the asset, and this can also be performed on an expedited basis such as bonus depreciation. Cost segregation studies are another tool used by developers to have passive losses that can offset their gains.

 

What’s the hold period for the investment?

Most deals will have a projected hold period, typically 3-7 years, on the investment. This time period varies and is entirely up to the sponsor. The goal here is to keep the property long enough to make necessary capital improvements, rent increases, etc, to increase cash flow, and then to sell the property once a preferred time arises. This may be ahead of schedule or later than expected based on market conditions.  However, you should weigh the projected hold period against your personal investment goals.

 

What is the entry and exist cap rate?

Capitalization rate, or cap rate, is the NOI divided by the purchase price of the asset. The entry cap rate is calculated as the net operating income divided by the purchase price. The market valuation of an asset is the NOI/the cap rate.  As the net operating income gets higher, at the same cap rate, the market valuation should also get higher.  Since cap rates have an inverse relationship with market value, as cap rates go down (cap rate compression), the value of the asset goes higher.  The value of the cap rate is determined by the market, and is not something that you have control of.  This is why increasing the net operating income of the property is important during the hold of the property.  If the exit cap rate at the time of sale is lower, this is an added bonus, as you are making additional money on appreciation.

 

To start, consider signing up for some of these sites

This will give you an idea of what kinds of deals and returns are out there, and practice in looking at and vetting deals.   Please note that we do not recommend or endorse specific opportunities, and you should do your own due diligence or consult appropriate expertise before investing in any opportunities.  Several of these companies are sponsors of our real estate education series on the group, and several of these links are affiliate links.  Scroll up for definition of accredited investor (not a test you have to take, but a set of criteria you meet based on income or net worth).

​​

  • Crowdfunding Platforms for Syndications

    • Crowdstreet (must be an accredited investor, commercial real estate investments around the country in many asset classes, including multifamily apartment buildings, commercial office buildings, medical office buildings, hotels, student housing, data storage, and more)

    • RealtyMogul (open to both accredited and non-accredited investors)

    • AcreTrader (much be an accredited investor, farmland syndications)
       

  • Private REITs (You do not need to be an accredited investor for these.)

  • Private Syndication Companies (You must be an accredited investor for these.  You should let them know that you are coming from PSG, in case they are offering perks to the group as part of their sponsorship of our real estate education series!)

 

If you want to learn more, here are some resources. 

​​

  • Multifamily Masterclass Course on syndications 

    • PSG Affiliate Link: https://mf-masterclass.teachable.com/a/aff_mz805mr7/external?affcode=779274_ybqrzpvu - use code PSGFAMILY to get the course for $497, normally $1800)

    • This course covers the most basic (what is a syndication?) to advanced topics in vetting, taxes, structuring deals, and more.  It is run by an experienced team that puts together these deals, and offers many videos you can watch on your own time, a live course community on Facebook where you can ask specific questions and see those of others as well as ask questions about deals you are considering, and occasional live Q/A sessions.

    • There is lifetime access to the content. There is also a money back guarantee if it turns out it's not right for you.

 

This page contains links to paid sponsors as well as affiliate links, which means we may receive compensation at no cost to you if you pursue these opportunities. 

 

We are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaim any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained on this page or relevant emails, events, online communities, or other interactions. We do NOT provide any legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought, who can help assess the appropriateness of any decisions in light of each individual’s specific goals, experiences, circumstances, and financial status. In addition, we do not endorse ANY specific investments, investment strategies, advisors, or financial service firms, and any references to these should be viewed as introductions to look into rather than formal recommendations or endorsements.  Past performance is not a guarantee of future performance.  While we may relay our personal experiences for conversational purposes, your personal results may vary depending on factors beyond our control, and we make no promises that your experiences will be similar to ours.Please do your own research and due diligence prior to making any decisions on the basis of anything you learn from our interactions or platforms.