2. Save more as you earn more.
Respondents to our Physician Compensation Report gave the following recommendations: “Pay yourself first,” “I put half of my bonus into an investment account no matter how much it is,” “I allocate extra money and put it into a savings account.”
Dr. Greenwald said, “I have a rule that every client needs to be saving 20% of their gross income toward retirement, including whatever the employer is putting in.”
Putting a portion of every paycheck into savings is key to making progress toward financial goals. Start by building an emergency fund with at least 3-6 months’ worth of expenses in it and making sure you’re saving at least enough for retirement to get any potential employer match.
Mr. Snider suggests increasing the percentage you save every time you get a raise.
“The thought behind that strategy is that when a doctor receives a pay raise – even if it’s just a cost-of-living raise of 3% – an extra 1% saved doesn’t reduce their take-home pay year-over-year,” he says. “In fact, they still take home more money, and they save more money. Win-win.”
3. Focus on paying down your debt.
Physicians told us how they were working to pay down debt with the following recommendations: “Accelerate debt reduction,” “I make additional principal payment to our home mortgage,” “We are aggressively attacking our remaining student loans.”
Reducing or eliminating debt is key to increasing cash flow, which can make it easier to meet all of your other financial goals. One-quarter of physicians have credit card debt, which typically carries interest rates higher than other types of debt, making it far more expensive. Focus on paying off such high-interest debt first, before moving on to other types of debt such as auto loans, student loans, or a mortgage.
“Credit card debt and any unsecured debt should be paid before anything else,” Mr. Snider says. “Getting rid of those high interest rates should be a priority. And that type of debt has less flexible terms than student debt.”
4. Great opportunity to take advantage of record-low interest rates.
Physicians said that, to save money, they are recommending the following: “Consolidating student debt into our mortgage,” “Accelerating payments of the principle on our mortgage,” “Making sure we have an affordable mortgage.”
With interest rates at an all-time low, even those who’ve recently refinanced might see significant savings by refinancing again. Given the associated fees, it typically makes sense to refinance if you can reduce your mortgage rate by at least a point, and you’re planning to stay in the home for at least 5 years.
“Depending on how much lower your rate is, refinancing can make a big difference in your monthly payments,” Ms. Guerich said. “For physicians who might need an emergency reserve but don’t have cash on hand, a HELOC [Home Equity Line of Credit] is a great way to accomplish that.”
5. Be wary of credit cards dangers; use cards wisely.
Physician respondents recommended the following: “Use 0% interest offers on credit cards,” “Only have one card and pay it off every month,” “Never carry over balance.”
Nearly 80% of physicians have three or more credit cards, with 18% reporting that they have seven or more. When used wisely, credit cards can be an important tool for managing finances. Many credit cards come with tools that can help with budgeting, and credit cards rewards and perks can offer real value to users. That said, rewards typically are not valuable enough to offset the cost of interest on balances (or the associated damage to your credit score) that aren’t paid off each month.
“If you’re paying a high rate on credit card balances that carry over every month, regardless of your income, that could be a symptom that you may be spending more than you should,” says Dan Keady, a CFP and chief financial planning strategist at financial services firm TIAA.
6. Give less to Uncle Sam: Keep it for yourself.
Physicians said that they do the following: “Maximize tax-free/deferred savings (401k, HSA, etc.),” “Give to charity to reduce tax,” “Use pre-tax dollars for childcare and healthcare.”
Not only does saving in workplace retirement accounts help you build your nest egg, but it also reduces the amount that you have to pay in taxes in a given year. Physicians should also take advantage of other ways to reduce their income for tax purposes, such as saving money in a health savings account or flexible savings account.
The 401(k) or 403(b) contribution limit for this year is $19,500 ($26,000) for those age 50 years and older. Self-employed physicians can save even more money via a Simplified Employee Pension (SEP) IRA, says Ms. Guerich said. They can save up to 25% of compensation, up to $57,000 in 2020.
7. Automate everything and spare yourself the headache.
Physicians said the following: “Designate money from your paycheck directly to tax deferred and taxable accounts automatically,” “Use automatic payment for credit card balance monthly,” “Automate your savings.”
You probably already automate your 401(k) contributions, but you can also automate bill payments, emergency savings contributions and other financial tasks. For busy physicians, this can make it easier to stick to your financial plan and achieve your goals.
“The older you get, the busier you get, said Mr. Snider says. “Automation can definitely help with that. But make sure you are checking in quarterly to make sure that everything is still in line with your plan. The problem with automation is when you forget about it completely and just let everything sit there.”
8. Save separately for big purchases.
Sometimes it’s the big major expenses that can start to derail a budget. Physicians told us the following tactics for large purchases: “We buy affordable cars and take budget vacations,” “I buy used cars,” “We save in advance for new cars and only buy cars with cash.”
The decision of which car to purchase or where to go on a family vacation is a personal one, and some physicians take great enjoyment and pride in driving a luxury vehicle or traveling to exotic locales. The key, experts say, is to factor the cost of that car into the rest of your budget, and make sure that it’s not preventing you from achieving other financial goals.
“I don’t like to judge or tell clients how they should spend their money,” said Andrew Musbach, a certified financial planner and cofounder of MD Wealth Management in Chelsea, Mich. “Some people like cars, we have clients that have two planes, others want a second house or like to travel. Each person has their own interest where they may spend more relative to other people, but as long as they are meeting their savings targets, I encourage them to spend their money and enjoy what they enjoy most, guilt free.”
Mr. Snider suggests setting up a savings account separate from emergency or retirement accounts to set aside money if you have a goal for a large future purchase, such as a boat or a second home.
“That way, the funds don’t get commingled, and it’s explicitly clear whether or not the doctor is on target,” he says. “It also prevents them from treating their emergency savings account as an ATM machine.”