5 Mistakes Physicians Make in Managing Their Money (and How to Avoid Them)

Grace Williams

Ben Utley, a certified financial planner and investment advisor who specializes in working with doctors at Physician Family Financial Advisors, offers a word of caution for physicians:

“Physicians are no more likely to make financial mistakes than everybody else, but when they do make mistakes, they’re larger because they involve more money.”

When it comes to your physician finances, making even small money mistakes like not writing off expenses or opening a standard savings account rather than a high-yield savings account can add up over time, costing you both time and money in the long run.

Two financial advisors who specialize in working with physicians shared the financial mistakes they encounter most often among physicians, and how to overcome them.

Mistake 1: Missing Tax Strategies for Physicians

If you’re among the average physicians earning between $250,000 and $350,000 a year without deductions and credits, it’s possible you could be responsible for paying between $50,000 and $100,000 in taxes. But if you’re not strategically filing your taxes, you could be leaving money on the table in the end.

According to Mark Eid, managing director of Acts Financial Advisors, many physicians are missing out on vital credits, tax breaks, or incentives. For example, depending on whether you work in private practice or for a larger healthcare organization, expenses like equipment, scrubs, malpractice insurance, and continuing education could be deducted from your total taxable income.

Working with a financial professional like an accountant, especially those familiar with the nuances of working in medicine, is a crucial step to avoiding paying more in taxes than you may need to.

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Mistake 2: Not Prioritizing Long-Term Planning

Eid notes that for physicians, long-term financial planning often falls by the wayside due to busy schedules or simply pushing things off until later. Prioritizing retirement savings, building an emergency fund that covers three to six months of living expenses, and planning for major life purchases like buying a house are crucial for long-term financial wellbeing.

One tactical step physicians can take is to use a retirement calculator, like this one from Ramsey, to help plan for retirement on their timeline.

Here’s an example of how planning in advance for retirement could have an outsize positive impact.

Scenario: Dr. Dan is an internal medicine physician. He is deciding when to start saving for retirement. When should he?

Option 1: Dan starts saving for retirement at 35 years old when his annual salary is $300,000. He plans to retire at age 67, and he commits to allocating 15% ($3,750) of his monthly income to his retirement accounts with an anticipated annual rate of return of 6%. If he starts planning for retirement at 35, by age 67 his retirement account would be $4,341,303 ($1,440,000 of contributions and $2,901,303 investment return based on contributions).
Option 2: Dr. Dan doesn’t start saving for retirement until age 40, at which point his annual compensation is $350,000. By age 67, his retirement account would have $3,528,642 ($1,417,500 in contributions and $2,111,142 in returns based on contributions). So, by delaying saving for retirement for 5 years, even if Dr. Dan is making more money, he is still losing out on the money that would be generated from his investments.
Option 3: Dr. Dan waits until he's 45 and his annual compensation is $400,000. If he contributes 15% of his monthly income ($5,000) to his retirement accounts with an expected rate of return of 6%, he would retire at age 67 with $2,731,129 ($1,320,000 of contributions and $1,411,129 of growth).

Conclusion: These are overly simplified scenarios that don’t account for inevitable fluctuations in the market and the individual preferences for how much or how little to save for retirement each month given one’s specific financial circumstances. However, the main takeaway is clear: In most scenarios, investing in retirement accounts earlier rather than later will yield the most favorable outcome.

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Mistake 3: Ignoring High-Interest Debt Repayment

Eid has seen this play out often enough to flag it. In medical school, it is likely you’ve subsisted on a hefty sum of “bad debt” for a substantial amount of time. This is not necessarily student loan debt (although it can be), but rather credit card debt or even debt from taking out high-interest personal loans.

Some types of debt can have high interest rates and perhaps may even have compounding interest rates which increase over time, meaning that the longer you wait to pay off the debt, the more expensive the debt is to pay off. To ensure compounding interest doesn’t sweep away too much of your salary, Eid advises that “it is crucial for physicians to manage their debt levels carefully to maintain financial stability and support long-term wealth growth.”

Mistake 4: Failing to Diversify Physician Investments

There are many benefits to taking a “set it and forget it” approach to investing. But, remember that as a high earner, spreading out your investments across asset classes can lead to a better overall outcome when it’s time to cash in. This is known as diversification, and Eid says for physicians it sometimes creates a paradox because “strategies for wealth accumulation, often focused on practice income and real estate, differ from those needed for wealth preservation.”

One way to counteract this potential mishap is by ensuring your investments are diversified into enough strategies. This likely means you’re working with an advisor to be certain you are invested in what Eid calls “non-correlated assets,” such as real estate, stock, or bonds that are not directly affiliated with other investments. “Managing these stages effectively is essential for ensuring lasting financial wealth,” he says.

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Mistake 5: Not Asking Enough Questions

Whether working with a financial advisor or not, it is crucial for physicians to be upfront and honest about where they stand in terms of financial education and understanding of key concepts. Openly asking questions and voicing concerns about whether you are saving enough for retirement and filing taxes correctly are necessary for physicians to maintain control over their financial future. Eid also warns against chasing trendy or risky investments opportunities. He advises physicians against “investing in high-risk ventures or speculative investments, underestimating potential risks, and overlooking the importance of proper due diligence.”

For additional resources, check out this article on Offcall: