Even smart doctors do one or more of the dumb dozen. Don’t be like that. Know about these risks.
I have had the privilege of working with dozens of brilliant, caring physicians. I have learned so much from them. That is a debt I could never payback.
Even so, these brilliant clinicians didn’t always make the best money decisions. We are all human. We can only know so much. Even for those of us who have a lot of knowledge, it is almost impossible to make rational decisions. Our fears, past experiences, misconceptions, and peer-pressure influence our behaviors.
I have made many of these mistakes. Knowing and doing are two different things.
Even though you won’t make perfect choices all the time, it is worth knowing the more common pitfalls. Being vigilant and aware of them will reduce your risk.
1. Buying Too Much House
Housing costs are expensive. It is in the top three on any list of expenses. Transaction costs are significant and often buried in a pile of closing documents. Inspections, closing costs, and loan initiation fees can total in the thousands. Selling a house can cost even twice as much as buying.
We focus on the sale price and often ignore ongoing expenses. Taxes, utilities, maintenance, etc. can add up to 5-10% of the price every year.
Annual mortgage interest payments exceed $1,000 per month. Some justify the mortgage arguing alleged tax benefits. Paying interest to get a third or less of it back isn’t a way to build wealth.
Large houses come with spending peer pressure, landscapers, and homeowners association fees. Workers will add a “doctor discount” and increase charges. That impressive house will cost you in many ways.
The millionaires studied by Thomas Stanley lived in modest homes. He concluded that a large home and a large mortgage are obstacles to accumulating wealth.
He recommended we never get a mortgage more than twice your annual gross income.
As a specialist living in the Midwest, I have been able to buy my homes at a total price equal to my salary. Any mortgages were brief and less than 1x salary.
I realize that won’t work for a pediatrician in San Francisco. Realize the barrier that the high cost of living is putting before you.
2. Leasing a Car
Dave Ramsey refers to leasing as the “fleecing of America.” I tend to agree. A lease is like renting a car using a car loan. The asset is depreciating. Lenders charge fees and interest rates that are hard to even find or calculate in the contracts.
It could only be helpful to someone who wants a low monthly payment. And if they need a new car every 2-3 years. But who would need that? If money is in short supply in your life, buy a used car for cash. The term “used car” has a negative connotation. Some think “pre-owned” sounds better.
Whatever the name, it is the best deal around. Most of the depreciation happens in the first 1-3 years. After that, the prices stabilize some. That is the sweet spot. A 3-year-old car has almost all the best technology and safety features at a discounted price. Cars used to be unreliable after a few years. Now some brands are getting warmed up at 50,000 miles.
If you are a millionaire, then you should have no guilt when buying a new car. Use cash and shop around to get the best deal. Either way, leasing is rarely your best option. I could afford a new car, but I still enjoy getting a good deal on a used one.
3. Not Having Umbrella Insurance
People know doctors make high incomes. That puts a target on your back. People see you as having “deep pockets.” Others will blame you for anything that goes wrong to someone’s health and safety.
One worker who falls off a ladder in your garage can be the beginning of your financial downfall. Or if your dog bites a neighbor or your teenager drives into a pedestrian.
Consider getting several million dollars of coverage. The limits will pick up where your home owner’s and auto insurance leave off. You worked too hard to have it all crash down by a plaintiff attorney. You can manage this risk for a few hundred bucks per year.
4. Skipping Disability Insurance
We are much more likely to become disabled than we are to die. Your “human capital” accounts for a big chunk of your assets. As a resident, I always laughed when people thought I was a “rich doctor.” My net worth was negative. I was more broke than the homeless people on the street.
In financial terms, I had no cash. But I had been building the value of my primary asset. My knowledge, skills, and certification as a physician. I needed to convert that asset into financial assets through labor over time.
A disabling injury or illness would derail that conversion. That would be catastrophic. You wouldn’t dream of owning a house without homeowner’s insurance.
So don’t own your asset of “human capital” without disability insurance. An own-occupation disability policy how you insure against that loss.
5. Having Kids but No Will
It isn’t pleasant to think about death. Preparing for it is even less fun. But consider the alternative. If you die “intestate” the state will determine who gets what and when. Do you want to let that happen? Make a simple will. You can even do it yourself if you don’t want to pay a lawyer.
It is worth it to pay for legal help to get the paperwork in order. I paid for a few hours time for the work of a competent attorney. That gave me peace of mind that we complied with state law and covered all the bases. We competed for all our estate documents at once. Including will, trust, power of attorney (POA), living will, healthcare POA, and guardianship.
A few years later we met again and updated them. There were changes in the names of banks and trusts and some minor interval changes in state law. We waited eight years, but updating them every five years or so is a good idea.
6. Owning Life Insurance with No Dependents
If no one is dependent on you, you do not need life insurance. It seems simple. It is amazing how many have unnecessary life insurance. I even know a young single woman (no kids, no dependents) with a policy! Crazy.
If you are financially independent, you can skip life insurance. The income from your work isn’t required to maintain your household. That is the essence of financial independence. So when you die it won’t be a financial hardship. At least not a catastrophic one.
7. Confusing Speculating with Investing
I know doctors who claim to have picked the “next Microsoft.” Then they tell me about the company and it boggles my mind. Companies to ship air to China in little soda cans. Or to make all food become “organic” by a chemical process. Maybe to make a movie, build a satellite, or fund a trip to Mars. Wow.
And they think these are “investments!’ These are super-smart doctors mind you. They know a lot. Not how to assess the intrinsic value of a company. Or even the difference between an investment and speculation.
For those still wondering what the difference is, I refer to Benjamin Graham. He is the “founding father” of value investing. He also taught Warren Buffett who went on to be the most successful investor of all time.
Graham noted that something is an investment only if it is safe from loss. And that isn’t from guessing, but a reasoned financial analysis. One should expect only a modest return. If safety is not assured and high but unlikely returns are being sought, then that is speculation.
A lot of doctors think they can “out-earn” all their problems. They know they make a lot of money and so they don’t see the need to save.
“Cash is the most renewable resource I know” one surgeon stated. Or they save 5-10% of income. This is better than most Americans, but not enough. That is why only a minority of physicians have several million dollars in their fifties. One in four doesn’t even have a single million at age 65.
A 10% savings isn’t going to cut it. Not given the late start on a high income, large student loan debt, and lack of investing knowledge. Not even the Dave Ramsey recommended 15% is enough to ensure a comfortable retirement. 20% would do the trick if you are willing to work a full career of 30 years or more.
I recommend a higher savings rate of 35-40%. That will provide financial independence within 20 years. If you start a medical career at age 30 you will be set by 50. If you find yourself getting burned out or tired then you can cut back a bit or make changes to improve your work life. Without the stress of worrying about how you will cover the mortgage payments.
9. Choosing a Wrong Asset Allocation
Some are afraid of losing money. They play it safe. They won’t consider buying companies or real estate. Those could go down. So they stick to CDs, short-term bonds, and money markets.
Others are too aggressive. With 100% growth stocks, start-up small companies, market timing, and stock picking.
The asset allocation decision is one of the most important decision you will make. Your savings rate and your asset allocation determine your financial future. Spend time thinking about these two factors.
Even following a simple guideline would be better than no thought to the issue. Options are setting your bond percentage equal to your age (e.g. a 40-year-old would have 40% bonds). Adjust it every five years or so.
Or pick a target retirement fund. Or a balanced fund with a 40%, 50%, or 60% stocks and the rest in bonds. Set it and forget it and you will do fine. You will capture generous returns over the long-run but with little volatility.
10. Trusting the Untrustworthy
Some have a “money guy.” They met them at a “free” dinner at a steakhouse. They can’t tell you what their credentials or track record are. Yet they trust them to do a great job and look out for all their financial interests. Don’t be naive!
There are no specific legal requirements to call oneself a “financial planner.” We assume every professional has rigorous training and a high ethical standard. Many financial planners have minimal formal education in investments or finance. Some are brokers or insurance salespeople.
Most financial planners are good people trying to make an honest living. Their company-sponsored training convinced them their product will benefit you. They are also trying to provide for their own family in the process. There are conflicts of interest galore and their advice may turn out to benefit them more than you.
You don’t have to be a do-it-yourselfer like me. Not everyone enjoys finance the way I do. I get it. But no one will care about your money as much as you do. Understand what your advisor is doing and how they get paid. You can delegate. Oversee and understand the process. Abdicating your financial responsibilities can end in financial disaster.
11. Cheating and Getting Divorced
I know several doctors who seem cavalier about having affairs. These married doctors fool around with office workers, nurses, and even patients. This often leads to divorce. Then there are extraordinary financial losses.
Morality aside, the financial consequences are devastating. It can put you back a decade or more in your progress. Divorce often includes a loss of half of the assets. Not to mention years of ongoing expenses for alimony and child support. This pattern then gets repeated when remarrying. I have seen a few doctors go through that cycle several times. They are getting into their advanced years and have no hope of retiring.
12. Losing Your Medical License via Sex or Drugs
Physician misbehaviors can result in a loss of medical license. They cannot practice medicine without it. Their livelihood vanishes despite all the training to get there.
Review your state medical board’s list of reprimanded physicians and the reasons why. It will be eye-opening.
You will find many due to inappropriate sexual relations with patients. Fraud and embezzlement may make the list.
DEA controlled substance violations abound. Some sell drugs for cash or trade it for sexual services. I had two friends whom I respected a lot. They were brilliant, attractive, and well-trained. They got addicted to Oxycontin and began splitting the medicine with patients.
One lost his practice and license and became disabled. The other lost his job, license, investment income, and his stellar reputation. Later, he lost his freedom when confined in federal prison.
Learn all you can about the dumb dozen. Read a good book or two. The more you know the better your choices. Learn from the mistakes of others. Do you agree with this list? Any others? How many of these mistakes have you made?