Despite being in the high-income bracket, most physicians struggle with their personal finances. Only 6% of physicians are ahead of schedule when it comes to retirement preparedness. The financial challenges physicians face is due to their massive student loans. Costly professional expenses and a lack of personal financial literacy are also contributors.
Physicians can get ahead of their financial challenges by negotiating for higher salaries. Though physician salary negotiation can be uncomfortable, it is a must-do. The increased earnings will enable physicians to make progress on their financial goals. Here are five other tips for physicians struggling with their personal finances.
1. Develop an Investment Strategy
The first step to financial independence is saving money. But, saving alone is not enough. Due to inflation, the value of money saved will decrease over time. To create wealth, you need to invest the money you have saved.
There are many different investment ideas you can get into as a physician. However, index funds are the best. Index funds are passive, and they outperform many actively managed funds. The S&P 500 is one of the most popular index funds. In this fund, investors will own a small share of 500 companies that are listed on the U.S. stock exchange. Physicians can also invest in stocks, bonds, or mutual funds to earn dividends.
2. Be Aware of the Lifestyle Inflation Trap
Physicians struggle in the first few years of their careers as they pay off their student loans. Their counterparts in other fields are usually enjoying vacations, luxurious homes, and sports cars.
However, after their residency, most physicians start earning well. The race to spend and catch up with their counterparts begins. This results in more accumulation of debt. While it is important to enjoy the rewards of all the years of hard work, this should not be at the expense of your financial future.
The 10% rule is a simple technique that can be used to limit lifestyle inflation. Simply put, whenever you get a raise in your career you can only use 10% of your total income to buy whatever you want. You can buy anything your heart desires, but it cannot cost you more than 10%. The rest of the 90% should be used in other activities that create wealth.
3. Pay Off Your Student Debts
Physicians normally have student loans that are six times more than other professionals. You can use the snowball method or the avalanche method to repay your student loans.
In the snowball method, you start by paying off the smallest loans. Once you clear this loan, the money is channeled towards the payment of the next smallest loan. This process continues until all the loans are cleared. It can be quite rewarding as you clear one small loan after another.
In the avalanche method, you will start by paying the high-interest rate loans. In the same way, once this loan is paid off, you will move on to the loan with the next highest interest rate. As you’ll be paying the most expensive loans first, you end up paying less over time.
4. Protect Your Assets with Insurance
Life has its up and downs. Unfortunate events like accidents, illnesses, or injuries can significantly impact your finances. To guarantee long-term financial success, every physician must have a robust insurance policy. All physicians should therefore have health insurance, auto insurance, and life insurance.
Other insurance policies that physicians should consider are:
- Homeowners or Renters insurance: This will cover losses to personal property in case of disasters. It also provides cover for injuries that may occur on the property.
- Disability Insurance: This cover will provide physicians with protection in the event of injury or illness that may prevent them from working.
- Umbrella insurance: This is extra insurance that provides coverage beyond the existing limits of other policies. It can provide financial aid in case of property damage, injuries, lawsuits, or personal liability cases.
5. Raise Your Credit Score
As a physician, it is important to have a high credit score. High credit scores will qualify you for more financial products by lenders and low-interest rates. For example, rewards on credit cards, and affordable auto and mortgage loans. You can raise your credit score by making on-time payments on loans and lowering your debt-to-income ratio.
As a physician, you must master the art of living within your means. As you work on paying off your student debts, set aside money for investing. You could invest your savings in index funds, bonds, stocks, or mutual funds. This will ensure that you grow your wealth over time.
To protect yourself against life’s unforeseen events, every physician should have insurance. Homeowners/ renters insurance, disability insurance, and umbrella insurance are less known insurance covers that every physician should have. Finally, maintaining a high credit score could save you tons of money as you will get low-interest rate loans from lenders.