Let’s talk finances…
When you become a physician, it can feel taboo to talk about finances with family and friends. Depending on your background, you may be surrounded by individuals who assume you have made it. They believe you have endless money and fail to consider the student loans and years of lost wages that occur while pursuing your dream. It is not their fault, this assumption is more of a cultural issue in the United States and it is pervasive. It can be the downfall of many a poor young physician, allowing the pressures of societal expectations to push them into living outside of their means. In many ways, the odds are stacked against you, especially if you are starting with a negative net worth from funding that fancy education.
We must be honest with ourselves; we did not get into psychiatry to make money. We love taking care of the most vulnerable members of our society and are genuinely interested in understanding the mind. Naturally, we find ourselves in one of the lower earning specialties in the house of medicine. If we look at the Medscape compensation report for 2022, the average annual compensation for psychiatry is $287K, so our earning potential is nowhere near a specialty like cardiology for example.1 This is not necessarily a bad thing, but we clearly need to be more careful how we spend and save money.
As physicians, we are all incredibly busy and sometimes personal finance takes a back seat. What can we do to ensure our family is financially secure while still spending some of that hard earned money?
Protect Your Assets
If you are an early career psychiatrist and not lucky enough to grow up independently wealthy, then chances are you have a negative net worth when you graduate medical school. You might be thinking, what assets do I have to protect? The simple answer is you need to protect yourself from the potential loss of future income. If you were to become disabled to the point where you could no longer perform your job duties, that fancy medical education will not be worth much. The path to financial independence begins with some up-front costs such as own occupation disability insurance and term life insurance. You want to lock these policies in while you are young and healthy. As you get older, insurance companies are less likely to waive the requirements for a physical and blood work and generally premiums will be higher.
Get Right With Student Loans
This is a difficult topic to make a blanket statement about. There is no one size fits all when it comes to student loan advice. I believe the major decision comes down to, will you pursue student loan forgiveness through the public service loan forgiveness program (PSLF), or do you plan to pay off your debt completely? This will largely depend on your debt burden. If you are like me and you have a very high debt burden and you are willing to work in community mental health, then PSLF can save you a lot of money. If you have a much lower debt burden, it may be in your best interest to refinance your federal loans with a private student loan servicer at a lower interest rate and pay them off over the first 5 years post residency. Either way, getting into the right repayment program and choosing a course of action early can save a lot of money on the back end.
Create an Emergency Fund
Everyone should have some liquid cash available in case of an emergencies. How much cash you keep on hand will depend on your situation. The rule of thumb is you should have 3 to 6 months of living expenses saved in cash. You can calculate out all your expenses in 1 month and decide if 3 months or 6 months is more appropriate for your situation. For younger physicians who do not have families or own homes, they may not need as much in cash savings and can focus more on building wealth through investments.
What many fail to realize is that when you are a doctor, you do not automatically become rich. In many cases, we have lost a decade or more of investment and savings opportunities in pursuit of your passion. While our college friends are building up retirement funds and buying houses, we are living with roommates hoping to make it through medical school and residency training. Investing is not high on the priority list. This is another difficult topic to make a blanket statement about because the type of investment account you use will be different depending on your circumstances. In general, during residency training the best option is use a Roth IRA account. These are tax advantaged accounts that use posttax funds and grow tax-free. It can be a real advantage to start contributing as a resident knowing that your income will change drastically after completing training. It is often recommended that residents max out these accounts, if possible, over the 4-year psychiatry training program. You can still contribute to these accounts as an attending physician you just need to do a “back-door Roth contribution.” There may be some cases where investing in a 401K or 403B would make more sense; for example, individuals in PSLF who want to reduce their adjusted gross income to reduce federal student loan payments can do this. Either way, just start investing your money because you need to make more than the standard interest rate offered by most banks to start building wealth. Once you are an attending physician, you should be contributing to your Roth IRA and maxing out you 403B or 401K at a minimum each year.
What To Invest In
This is another question that will depend on the individual’s risk tolerance and goals. I personally do not use a financial advisor, as the fees can be quite high. Many have a flat fee of 1% on your account balance regardless of whether you make money. It might not sound like much, but once your investment account starts growing, it can be a substantial amount of money. Many advisors make big promises but only deliver returns similar to those that can be had by indexing the stock market. Opinions on this will differ, but I created simple portfolios using only low expense ratio index funds and you can too. A discussion about the details of which funds is beyond the scope of this discussion, but there are many good books and blogs dedicated to helping you decide which funds are right for you.
Understand Building Wealth is a Long-Term Game
There is nothing sexy or exciting about this strategy. We are all psychiatrists so it should be obvious that the reason most individuals fail with money is psychological. We all wish the process was faster, and it can be easy to get caught up trying to “keep up with the Joneses,” and miss some key opportunities. If you can delay gratification (which we are all good at by now), live like a resident for the first 3 to 5 years after residency, and invest your money, you may end up being one of those people who can call themselves a millionaire.
Dr Rossi is an inpatient and consultation liaison psychiatrist who also performs electroconvulsive therapy services at AtlantiCare Regional Medical Center in Pomona, New Jersey. He currently serves on the board of the New Jersey Psychiatric Association, where he worked on advocacy projects, including enhancing access to collaborative care in New Jersey.
1. 2022 Physician Compensation Report. Medscape. Accessed February 21, 2023. https://www.medscape.com/sites/public/physician-comp/2022