Smart Money MD

It’s okay to make mistakes in life.  That’s the only way to learn.  Hopefully the major mistakes get made earlier in life so that we have less to lose and more time to “make up” for faltering. But hey, life wouldn’t be interesting if challenges aren’t presented to us.  Let’s look at ten of the common doctor financial blunders that have either happened to me or my coworkers:

1. Borrowing too much from your future self.  The potential of having a stable career in medicine makes spending a breeze.  I still remember the day I applied for a credit card as a resident and my approved credit line was actually greater than several months of my salary! I think that there are provisions these days to prevent excessively leveraging your credit, but as doctors we are still given relatively broad leveraging freedom.
   
2. Growing too quickly into your income.  This has happened to me on multiple occasions.  We work hard in our jobs. Sometimes we get a lucky break and get a bonus or raise.  It’s very tempting to use that additional income as a reward for our headaches at work.  I certainly did that once by purchasing a car in cash.  Was it better than financing the car at 2.9% for five year? It’s still not clear to me, but if you make too many of these spontaneous purchases, your wallet will eventually feel it.
3. Buying a timeshare.  Those marketing and salespeople are fast to close the deal.  They offer free breakfasts or free show tickets for a 2-3hr timeshare session.  What’s ten or twenty thousand dollars amortized over the course of your lifetime, especially if you consider how much you could potentially spend on vacation? There are annual HOA dues to most timeshares which dig into the budget as well. 
4. Buying a vacation home.  This is probably worse than buying a timeshare.  Perhaps you decide that you like Hawaii very much, but you don’t live or work there.  What’s wrong with buying a vacation home in Hawaii so that your family can stay there any time of the year?  There’s nothing wrong with owning a second home, but there are costs to owning relatively expensive secondary homes.  There’s only value in these investments if you sell them at an inflation-adjusted profit in the future.  You be the judge if that is likely to happen.
5. Job hopping. You don’t like your hospital or boss.  You hunt around and find that there are other better options, but the problem is that it’s halfway across the country.  Pack up the family and move. The problem is there is opportunity cost to moving.  If you switch jobs, then you will have downtime where you will not be earning income. 
6. Living as if you can work forever.  If you spend exactly as much as you earn, then your net worth will never grow.  I have had colleagues who do a great job spending down every paycheck.  Be aware that at some point in your career you might not be able to sustain the same work hours that you did when you were younger.
7. Lending money to family/friends.  This is a touchy subject as different cultures treat borrowing money differently.  In some parts of the world, it is expected that more successful family members support those who were less fortunate.  Unfortunately, you may never expect to receive any repayment for family loans.  I once knew one nephrologist who ended up having to moonlight in order to help pay for his brother’s mortgage.  Tough situation.
8. Thinking that all doctor incomes afford the same lifestyle.  Face it. There is a difference between a neurosurgeon’s and internist’s salary.  There is no way that the lower income profession can live the same lifestyle as the higher one.
9. Thinking that you are different.  Don’t delude yourself into living a life that your existing wealth cannot afford.  Just because one of your coworkers spent her way into bankruptcy doesn’t mean that you are immune.  You aren’t.  If everyone else you know lost big on a syndicated apartment investment, don’t think that you’ll be different.
11. Expecting a windfall.  This is a bizarre concept to me—some coworkers somehow justify a lifestyle with the expectation that a windfall will bolster their existing incomes.  It could be an expected raise, an inheritance, a winning lotto ticket, or a huge payout from an investment.  Anything could happen, but wait until the windfall comes before you make life decisions based on a particular outcome.

What other financial mistakes have you or your coworkers stumbled on?

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Apart from a minority number of academic physicians (a la @PassiveIncomeMD), nearly all of the physicians openly discussing finance matters online are either retired or in private practice.  The data might be skewed since most practicing physicians don’t work in academia anyway.  What might be interesting is to compare the percentage of financially literate academic physicians to that of those outside of academia.  I would venture to surmise that academic physicians might be more financially literate than everyone else simply because they are likely a more analytic bunch—I guess it also ultimately depends on how we define financial literacy.

Now hold it right there buddy! My medical school classmates who work in academics know squat about money!

Why academic doctors might be less informed about finances
Doctors as a group are intelligent—you might argue that there is a difference between intelligence and common sense, but in order to get through the training process to become anointed with an “M.D” (or D.O) not only requires a long time but an ability to troubleshoot at least the medical aspects of our jobs.  

You might also like: Are you turning away millions of dollars as an academic doctor?

Just as how any educator would assess her students, proficiency (or lack thereof) in a subject could be attributed to one reason:

Motivation — We’ve all known people who are gifted but don’t apply themselves.  I would argue that most people who didn’t flunk out of medical school should have the chops to open a Roth IRA or decide whether they can afford a new yacht every five years.  But no matter how much intelligence you have, going into a college final cold turkey can only get you so far. 

Lack of motivation could be summed up by a multitude of reasons:

• Too busy — This is not unique to academic medicine, but if your life doesn’t afford you the time to learn about finances you’re not going to understand it.  The barrier to understanding money is somewhat low compared to understanding metabolic acidosis from oral hypoglycemics, but if you’ve spent no time learning you’re starting with an empty deck.
• Pre-existing financial independence — It might be presumptuous to assume that one reason why you don’t spent time managing your finances is because you started out with a loaded deck. I know a few of those people in medicine, and we all wish that more people were as altruistic as these gals. Their trust funds are still being managed by somebody, however.  It would be nice if all of us had this luxury.
• Unawareness — A number of my colleagues simply think that their six-figure salaries can buy more than they can, so they don’t really pay attention to the details.  Once the kids move off the waiting list for the highly competitive daycare that all of your coworkers send their kids to, the $50,000 a year nanny would start looking inexpensive.
• Everything else — This is a catch-all bucket.  Maybe the lack of financial motivation is due to a combination of the aspects mentioned above.  Frankly, the norm is not to talk about finance as a doctor.  If your colleagues don’t seem to be worried about it, why should you?

Academic medicine somewhat highlights being “too busy” to be deeply knowledgeable about finance.  Aside from being a clinician, academic doctors may be responsible for a multitude of tasks:

• Training residents, students, and fellows. This includes ACGME mandated roles for residency directors.
• Drafting new grant requests, both within an institution or with the NIH.
• Conducting either laboratory or clinical research, along with going through dozens of revisions on multiple papers.
• Traveling to conferences across the globe to present their research.
• Sitting in administrative meetings.
• Participating in fund raisers for their departments.
• Scut monkey for their departmental chair

There’s only so much you can throw onto your plate before it spills.  

The financial ceiling of academic medicine
While most careers will have an income ceiling, it’s pretty well known that academic medicine will usually have a lower overall income ceiling over a normal career length compared to other clinical jobs.  What this means is that those doctors whose incomes are in the lower range of physician incomes will need to be more conscientious about their finances as they might not have the financial firepower to get themselves out of negligent spending.

Conclusions

What does this mean if you are in a career in academic medicine or are considering it? All is not lost! You don’t have to resort to owning a dozen rental properties just to make ends meet. You do have be aware of the pros and cons that your career choice offers and make appropriate choices:

• Be aware of your earning firepower, and make sure your lifestyle doesn’t exceed what your W2 shows.
• Some academic arrangements are actually private practices with academic titles.  This might confer the benefits of being in both academics and private practice.
• If you are working in the public sector, consider PSLF.  You could start the process while in residency and continue for a few years after you finish. It may not be as long as you think.
• Don’t try to compare yourself with others not in your shoes.  You will only be disappointed. 
• Make sure that you actually know what you want. Don’t make job choices based on what others think of you.  Do it for yourself and your family.

What other financial suggestions do you have for the academic physician?