As high-income professionals, doctors are at an especially high risk of making costly “financial missteps” in their personal lives, according to James Dahle, a physician and author of “The White Coat Investor.”
Here are the 10 most common financial mistakes doctors make, according to Dahle—and how they can do better.
1. Simply not paying attention
The No. 1 financial misstep doctors make, according to Dahle, is “simply not paying sufficient attention to their finances.” To avoid this misstep, doctors should view and manage their personal finances as though they were managing the finances of a business, Dahle says. “If you manage it well, it will be profitable and will support you long after you’ve stopped working,” Dahle writes.
2. Spending too much too early
Because doctors often experience a sharp spike in income after they leave residency, they’re often guilty of sharply increasing spending at the same time—even if they’re still burdened by student loan debt or need to save money to buy a house. The best way for doctors to “build wealth,” Dahle writes, is to live below their means after residency and use the leftover funds to pay off loans and save for the future.
3. Saving less than 20% of income
As a rule of thumb, physicians should save about 20% of their gross income for retirement throughout their career, according to Dahle. “No amount of fancy investing can make up for inadequately funding the portfolio,” he writes. “An adequately funded portfolio, on the other hand, can make up for a plethora of investing mistakes.”
4. Not having enough insurance
Many physicians fail to acquire adequate life, disability, and liability insurance to protect themselves and their family members from “financial catastrophes,” such as illness, disability, death, or loss of property. “Bad things happen regularly, and they can happen to you,” Dahle writes.
5. Investing in whole life insurance
That said, not every form of insurance is worth the cost: So-called “whole life” insurance, for instance, is often the wrong choice for physicians, Dahle writes. While the insurance product has some “niche uses,” it is often “inappropriately sold” to physicians who end up paying high premiums for life, rather than making more valuable investments or paying off their student loans—or purchasing term life insurance, which Dahle suggests is often a more appropriate choice. “Treat the purchase of whole life insurance like you would evaluate a potential spouse,” Dahle writes. “It’s either until death do you part, or it’s going to cost a lot of money to get out.”
6. Picking the wrong financial adviser
The right financial adviser will provide “good advice at a fair price,” according to Dahle. The best financial advice for a physician will come from an adviser who adheres to a fiduciary standard and understands the “unique financial situations” physicians face. A fair price, Dahle writes, is a four-figure amount each year. “If you are paying more than that, know that high-quality advice is available for less than you are paying,” he writes.
7. Failing to properly use retirement accounts
It is important that physicians understand how their retirement accounts, such as 401(k)s and IRAs, work, including “whether there is an employer match, what the investment options are, and what fees [they] can expect to pay,” Dahle writes. Independent contractors should consider creating an individual 401(k) or a personal defined benefit/cash balance plan, which can “lower [their] taxes, boost investing returns, facilitate estate planning, and, in most states, protect [their] assets from creditors,” Dahle explains.
8. Investing in individual stocks
Buying a single stock—rather than a diversified mutual fund—comes with greater risk, and unfortunately, “physicians are very unlikely to select stocks well enough to beat the market averages in the long run,” Dahle writes. Physicians are better off investing in “low-cost, broadly diversified” mutual funds that reduce that risk through diversification, according to Dahle.
9. Buying actively managed mutual funds
There is no use in paying expensive mutual fund managers to try to beat the market, Dahle says: A “low-cost, passively managed” mutual fund will perform better than 80-90% of actively managed funds in the long run. “Each year, some mutual fund managers will beat the market, but you are just as unlikely to succeed at choosing those managers a priori as they are to repeat their past performance,” he writes.
10. Gambling on exotic investments
There’s a reason why professors call exotic investments “deals that can only be sold to doctors,” Dahle writes. Due to their income, physicians have access to more investments than the general public. While these unusual investments might seem appealing, physicians should evaluate them carefully, Dahle warns. “[T]he principles of cautious due diligence and diversification still apply,” Dahle writes. “If it sounds too good to be true, it probably is” (Dahle, ACEP Now, 10/16).
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