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  • Writer's pictureBetsy at RVPF

10 Financial Mistakes Physicians Should Avoid

Updated: Oct 5, 2021

No one said that one of the hardest parts of being a physician would be managing the money. But like most things in life, it’s rarely that simple. Read up now on ten common financial mistakes made by physicians.

1) Not Maximizing All Available Retirement Plans: The contribution limits for retirement plans such as 401(k)s, 403(b)s and IRAs are adjusted each year. Physician families should be working to maximize their work-based retirement plan and their individual accounts. In 2020, that’s $19,500 to a 401(k) and $6,000 to IRAs for each spouse. Many physicians think they make too much money for an IRA, but that’s where the Backdoor Roth IRA comes in. If you’re not doing both, you’re leaving tax-protected growth on the table!

2) Relying Solely on the Advice of Bloggers and Financial Celebrities: There has been a rise of well-known bloggers and financial celebrities who claim to hold the secrets to wealth. Physicians are uniquely susceptible to falling into the trap of trying to do it all themselves. While it’s smart to do research, relying on financial celebrities who claim that you can do it all yourself have something to gain, probably in the form of money from book sales or advertising dollars. With the right disclaimers, bloggers have no legal responsibility to provide the right advice despite declaring that they are helping you get a fair shake.

3) Taking a Passive Role: According to a 2019 Gallup poll, about half of married couples share decisions about saving and investing equally. Of those that don’t, men are almost twice as likely to take the lead. Women physicians are well-served by playing an active role in managing the household finances. That means doing more than putting a rubber stamp on plans suggested by someone else, whether it’s a spouse or financial advisor.

4) Holding Huge Cash Balances: It’s been said “The journey of a thousand miles begins with a single step.” The first steps into investing can be daunting and holding cash in checking or savings accounts is easy. Once a cash balance reaches a target level, often 3-6 months of expenses for an emergency fund, then it’s time to start focusing on building wealth.

5) Failing to Secure Disability Insurance: The ability to earn an income, or human capital, is the largest asset for early and mid-career physicians. Read more about how quickly human capital can be put in jeopardy here with my own family’s story.

6) Whole or Permanent Life Insurance: There are times when whole life insurance is a suitable product. But it’s not often. And it’s definitely not as often as the insurance salesperson makes it out to be. Be wary of financial salespeople who are dual-registered and sell financial plans, investments and insurance. Sometimes they even offer the financial plan for free. If their financial plan isn’t worth paying for, it’s probably not worth much. Their claim of being a one-stop shop for financial planning is rife with conflict-of-interest. Just as a pharmacist fills prescriptions, so an insurance agent ought to fulfill a CFP® professional’s recommendation. Seek out fee-only advisors who adhere to a fiduciary standard at all times (and are willing to put it in writing).

7) Neglecting Tax Planning: Tax law can be overwhelming and with the advent of online tax filing services it’s easy to work through an online wizard without understanding any of the tax code. There are too many tax breaks that are unused because of little or no annual tax planning.

8) Holding Debts Too Long: Medical school debt and big mortgages breed comfort with high debt levels. Avoiding lifestyle creep and living like the middle class can wipe out big debts that are a constant drag on prosperity.

9) Mismanaging Windfalls: Windfalls come in the form of signing bonuses, productivity bonuses, tax refunds and inheritances. It’s easy to spend this money in ways that don’t truly match the family’s financial mission. Don’t have a financial mission? Then it’s time to write one!

10) Not Developing a Generosity Plan: Almost every physician goes into medicine because they want to help others and challenge themselves. While most physicians are financially generous, it’s not always in an intentional way. Physicians who make deliberate and sizeable financial gifts to charity find unexpected purpose as a result. It replaces the cycle of scarcity and “never-enough” with one of abundance.

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