Young Doctors’ 10 Most Common Financial Mistakes And How to Avoid Them (Part One)
By Wesley W. Lyon, II February 2019Personal Finances General/Other
By: Wes Lyon, CPA, CFP®*
Whether we’re helping a new doctor just starting out, or an established doctor, our firm ends up correcting many of the same mistakes that began right out of dental school. Below, we discuss ten strategies designed to help keep young doctors from falling behind early—and empowering them to make the right decisions from day 1.
1. Improper insurance – Insurance agents disguised as financial advisors are on virtually every dental school campus, offering to “protect” young dentists from financial ruin. The truth is, many of these agents’ number one priority is not the doctor. To illustrate, one doctor we recently consulted with was paying over $77,000 per year in insurance premiums. To make matters worse, he was over 50 years old and had been paying these excessive premiums for years!
You can avoid this disaster by working with a reputable financial planner (not an insurance agent disguised as a financial planner) who can calculate your true life, disability, and business overhead insurance needs, and provide you with an analysis that backs it up. Once you know your true coverage needs, purchase the life, disability, and business overhead expense policies through the ADA or AAO for tremendous cost savings. For example, a 30-year old doctor can purchase $3,000,000 of term life insurance coverage through the ADA for less than $500 per year!
2. Not having a budget – The average dentist is now retiring at age 69, compared to 65 back in 2001. The most common reason for this delayed retirement is lack of savings. However, not having enough money is merely a symptom of a much bigger problem. Doctors are increasingly living beyond their means, which usually dates back to their first paycheck. Without a budget, you can easily fall into the trap of ramping up your lifestyle each time your income increases. Over the past year, we’ve encountered multiple doctors owning private airplanes, 12 doctors with auto payments over $1,200 per month, and some spending over $75,000 per year on vacations.
In order to avoid living beyond your means, create a budget NOW that allows you to save at least 20%, and preferably 30%-40%, of your income monthly. Track your expenses each month to ensure you‘re staying within your budget. See our January 2019 article “Top 3 Budget Apps To Improve Your Personal Finances” for apps to simplify the process and help keep you on track!
3. Saving in the wrong places – To make matters worse, on top of excessive life and disability insurance premiums, many doctors also purchase life insurance policies that double as savings vehicles, such as whole life or variable universal life policies. These policies have exceptionally high fees that eat away at your investment return. However, there’s an even higher cost that you’re not made aware of—excess taxes! Saving on an after-tax basis means the government takes their share first—up to 37% federally. Just recently, a couple in a 40% marginal federal and state tax bracket was convinced to invest $8,000 a month after-tax into a Variable Universal Life policy. Unfortunately, the couple had to earn over $160,000 pre-tax—then pay $64,000 in taxes—in order to invest $96,000 annually with the insurance agent.
Now that you have decided to eliminate costly life insurance as a savings vehicle, where should you put your money? This couple should have been maximizing their retirement plan savings instead, to the tune of $56,000 each in 2019, for a total of $112,000. Had they done so, they could have saved over $44,800 in federal and state income taxes each year by putting their money to work in the right place.
4. Poor debt management – The average new graduate leaves dental school with over $287,000 in student loan debt, making proper debt management a top priority. However, an even more dangerous debt mistake is building a balance on your credit cards. The intention almost always starts with a new credit card offering rewards such as cash back, but usually ends up with the doctor paying interest at rates of 15%-25% on their balances. Recently, we met with a doctor who was making extra payments on his low-interest (3.5%) home mortgage, while making the minimum payment on his credit card balance with an interest rate over 18%!
The best way to avoid this problem is to eliminate credit cards all together. Doctors who spend with cash or debit can easily reduce their discretionary spending by up to 30%, and eliminate related high interest charges.
If you’re looking to get out of debt faster by prepaying, consider the interest rate, total balance, and monthly payment before deciding how to attack your loans.
You can gain momentum by paying off the smallest loan balance first, rather than attacking the highest interest rate debt. Once you pay off the first loan, you’ll be motivated to attack the next smallest loan, continuing this process until you’re debt-free!
5. Concentrating on salary – High student loan debt not only affects your ability to get out of debt, but also your career path. More than ever, we’re seeing young doctors abandon practice ownership opportunities in favor of higher upfront salaries. This leads many young doctors to sign non- compete agreements in the area they plan to live, without considering the long-term consequences of their actions.
Once a doctor decides to be a practice owner, and subsequently has found the right practice with an agreeable doctor, it’s important that they sign practice transition documents before they start working. Many doctors are lured in with only a promise and end up wasting valuable time working somewhere that ultimately doesn’t work out. Patrick Craig, JD, a practice transition attorney with McGill and Hassan, P.A., recommends having a specialized attorney review your practice transition agreements before making any final commitment.
Next month, we’ll discuss the remaining 5 young doctor mistakes and how to avoid them.
* Wes Lyon is a CPA and CFP® specializing in customized tax and business planning for young doctors. For more information on his services, call at 877.306.9780.
The McGill Advisory content is provided for informational purposes only and does not constitute legal, accounting, or other professional advice.
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