Avoid the Mistakes Young Physicians Make

Physician's Money Digest, May 2006, Volume 13, Issue 5

Starting a new medical career is anexciting time in the life of a youngphysician. Whether you are completingmedical school and moving toresidency, completing residency andmoving to fellowship, or starting yourfirst real job as an attending physician,avoiding common financial mistakesearly in your career may help strengthenyour financial future.

As a pediatrician completing a fellowshipin neonatology this year andentering academic medicine, my father(a longtime private practice surgeon)suggested I meet with a financial planner.Reviewing my finances, I realizedsmall, simple changes I could havemade at the start of postgraduate trainingwould have paid large dividendsnow as I complete fellowship. Medicalschool, residency, and fellowship colleaguesreinforced to me how oftenthese mistakes are made. Here are fivebig financial mistakes and how toavoid them.

•Buying the big gift. You havegraduated, finished one stage of yourtraining, and will be starting anotherphase of your career. Most physiciansuse this landmark to reward themselveswith a gift. My medical schoolroommate celebrated graduation bybuying (on installment payments) avery expensive watch. Such gifts arenice, but if you need to increase yourhigh-interest credit card debt to fundthe present, it is best avoided.

High-interest credit cards eat upyour disposable income, preventingyou from investing in retirement savings.Even worse, if you make only theminimum payment on your creditcard, your overall credit rating is hurt,which makes obtaining everythingfrom future mortgages to businessloans for a new medical practice moredifficult. In short, forget the big giftand pay off your credit cards monthly.After realizing a few months later hecouldn't keep up the payments, myroommate returned the watch andmoonlighted for months to pay off hiscredit card debt. He is now a financiallysecure anesthesiologist.

•Forgetting to save for retirement.People in their 20s and early30s tend not to think about retirementand life in their 60s and 70s, andyoung physicians are no exception. Butstarting to save early will pay off handsomelyas you grow gray. If you investin a fairly aggressive mutual fund(which is prudent considering youryounger age), you should expect yourmoney to double every 7 to 10 yearscompounded annually. So if you onlystart saving for retirement when youget your first attending job, you havemissed anywhere from 3 to 10 years(depending on the specialty) for yourmoney to compound. If I had savedmore for retirement as an intern, mymoney would have almost doubled bythe end of fellowship.

Most residents should considereither making the maximum contributionto their 401(k) plan, especially iffunds are matched by the hospital, orto a Roth IRA, depending on yourincome. The downside of a Roth IRAis that your contributions are taxed upfront—money that you may need rightnow. But if you can live without it,allowing those investments to growtax-free and remain untaxed when youwithdraw them upon retirement savesyou money in the long run.

•Leasing instead of buying.Leaving the confines of your medicalschool dorm or apartment shared withfour or five people for the comforts ofyour own apartment in a big city is a riteof passage for newly minted doctors.Because I didn't have a lot of time to finda place to live, I rented the first niceapartment closest to the hospital that Icould afford. If I had researched more, Iwould have understood that owning myown place would have paid huge dividendsafter 3 years of residency.

Many hospitals will offer somedegree of home-ownership assistance,from helping you obtain favorablemortgage rates to even cosigning amortgage for the term of your postgraduatetraining. When I started residencyin Durham, NC, I could have purchaseda townhouse financed with a fixed-ratemortgage and yielding a monthly paymentequal to my rent. The equity builtin the townhouse would have translatedinto a nice profit when sold to anotherincoming resident.

The hard part, of course, is the downpayment. If you can scrape together adown payment or can get the hospitalto help you purchase real estate bycosigning, then you are better off buying.Even if you don't sell the propertyat the same price you purchased it, thetax savings and equity from the mortgagepayments plus the benefits toyour credit rating are worthwhileinvestments in themselves.

•Deferring loans. The averagemedical student will graduate with acombined $125,819 in debt, and moststudents tend to defer payments inpostgraduate training. If possible, trynot to defer loans. Interest on most studentloans is tax-deductible up to only$2500, which isn't a lot on a debt of$126,000. It's better to start paying offschool loans 3 years earlier and saveon interest. In addition, you would befinished paying off your loans thatmuch sooner and can focus your attentionon investing in a 401(k). Not onlywill you contribute more, but yourcontribution may also allow you todrop to a lower tax bracket.

•Planning finances on yourown. With the constellation of loanpayments, car and home financing,and practice and educational expenses,it's easy to get overwhelmed and makea wrong move. Since missteps now canlead to more financial problems overtime, it's worthwhile to meet with afinancial advisor.

Many larger commercial banks andhospitals will have a physician-specificadvisor. Meeting every year with 1040forms, W-9 forms, credit reports, andexpenses to chart your progress is thebest financial habit you can start, becausethese annual checkups will ensureyour fiscal health. Learning your specialtyis a lot to handle; you shouldn'thave to address these concerns withoutthe help of an expert consultant.

Shetal Shah, MD, is a fellow in neonatology

in New York and is married to a vice president

at Morgan Stanley Investment Management,

who has helped him correct some

of these early money mishaps. He welcomes

questions or comments at shetaldoc@hotmail.com.