Are you good with money? Deserved or not, physicians have a reputation of neglecting their personal finances. But the fact is that they struggle with the same issues as everyone else: debt, saving for retirement, taxes, and questionable spending habits. Physicians just have more money to wrestle with (and the higher tax bracket that goes with it).
Money Tips for Ophthalmologists
Getting—and staying—on firm financial footing is the key to building wealth that lasts long after your practicing years are behind you. And there are basic, concrete steps you can take to get there. In this post, we’ll disucss money tips for ophthalmologists to master early on.
Goal: Build a Solid Financial Foundation
The early years are all about setting up—and then following—a financial plan. And that plan should start with savings. Physicians spend several years in post-grad education, residency, and maybe even a fellowship, so they’re already at a disadvantage when it comes to putting money away. Many physicians are in their early 30’s by the time they are fully licensed and ready to start practicing (and contributing to retirement accounts). “They’re starting from behind, for sure,” says Michael Lewellen, CFP, director of financial planning and partner at wealth management firm OJM Group.
What’s the big deal about a being a few years behind? “If they wait to start saving, physicians miss out on a lot of years to take advantage of compounding interest,” Lewellen says. He calls it “the cost of procrastination,” and here’s how it works:
Compounding interest is basically interest that you earn on interest. It’s the same thing that can make credit card debt spin out of control so quickly, only in reverse.
Maria, aged 20, opens a Roth IRA and contributes $5,000 to it each year. Assuming an eight percent interest rate, she’ll have $1,932,528 by age 65. If Maria had waited until age 30 to start saving, she’d have to put away $11,215 annually to reach that same amount. “Don’t wait to start saving,” says Lewellen. “If you can start early, you can get to those big numbers.”
Student Loans: The Ball and Chain
You might be wondering exactly how you’re supposed to start saving early—or even much at all—when you’ve likely graduated with a boatload of student loans. In 2018, the median student loan debt for medical school graduates was $192,000. As you probably know, those monthly payments put a serious dent in your savings plan. Should you contribute to retirement accounts, or pay off your student loans as soon as possible?
“There’s a balance to that,” says Lewellen. “If your loan has a higher interest rate, that’s going to negate some of the interest that you earn on your contributions,” he explains. In that case, don’t neglect your savings, but you may want to pay down your loans as soon as possible.
The financial component isn’t the only thing you need to consider when determining where to put your extra dollars. There’s also an emotional component: how comfortable are you with debt? “I’ve seen cases where the interest rate is really low, and the person could really be maximizing their retirement contributions, but the person just can’t stand having debt,” Lewellen recalls. You must balance what’s financially sound with what’s comfortable for you, but “don’t let it become too emotional,” he warns.
Refinancing student loans can be a good option depending on your situation, says Bob Peelman, CFP, director of wealth advisors at OJM Group. Benefits include lower monthly payments, the ease of one monthly payment, and the ability to defer payments if you get into a financial pinch (depending on how your loan is structured.
Use Debt Strategically
One of the best money tips for ophthalmologists (or anyone, really) is to eliminate bad debt. When it comes to cash flow, eliminating debt (and the interest rate that goes with it) is one of the best things you can do to firm up your financial foundation. And while your student loan debt will probably stick around for a while, you should get rid of any bad debt as soon as possible. (Yes, there is such a thing as good debt.) Bad debt drains your income, but good debt can actually help you increase your net worth or income.
Revolving lines of credit (credit cards)
Personal loans for discretionary purposes
Any debt with a higher-than-market interest rate
Low interest rate student loans
Low interest loan to invest in something where value will grow (i.e. buying into a practice)
Future Financial Planning Q & A
Q: Do I really need estate planning? Isn’t that only for multimillionaires?
A: If you are married and have a child/children, you should at least get basic estate planning in place, recommends Lewellen.
Q: Okay, LegalZoom is cheap, right? I could get it done this weekend!
A: Yes, there are several websites that allow you to create legal documents on your own, but this isn’t really something you should DIY, says Lewellen. “From a cost standpoint, it’s worth it to have an attorney do it,” he says. “But at the end of the day, something is better than nothing.”
Don’t Forget Protection
There are two basic types of insurance you need at this point:
- Disability: Your greatest asset is your ability to earn a living. Should you become unable to do that, disability insurance will help replace your income and avert financial catastrophe.
- Term Life Insurance: This is essential if you have a family that relies on you, and it’s an inexpensive way to get the protection you need.