Financial Preparedness: Are You Flunking?

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Would you score well on a Financial Preparedness test?  I would give most physicians a C+.  Quite a few deserve an F.  Does that bother you?  It should.

Physicians are used to getting A’s on their report cards.  Schoolwork came easily to most.  Others had to really go all out to achieve the top grade levels.  They mastered that and hundreds of other complex topics.  Despite this many are failing at a subject much more important than the Krebs cycle: Financial Preparedness.

Financial preparedness includes a high savings rate, an emergency cash cushion, minimal or no debt, substantial retirement funds, and an adequate knowledge of the basic concepts of personal finance and investing.  So how many of us “rich doctors” make the cut?  Not many.

It amazes me how many physicians do not prepare well for their financial future.  The AMA and Medscape survey results are worthy of our attention.   Some of the stats that shocked me:

“BAD” DEBT

• 40% have car loans.  17% pay car lease payments.
• 25% (1 in 4) have credit card debt.

“GOOD” DEBT

• 63% still have debt in their 60’s.
• 48% still paying med school debt in their 40’s.  10% in their 50s.

SAVINGS RATE

• If you save you live below your means.
• With our high incomes, we should ALL live below our means.  Less than half do (25% to 40%)
• 1/3 of doctors in their 40s and 50s don’t max out their 401k/403b.

FINANCIAL PREPAREDNESS

• 30% of doctors have no emergency fund.
• Only ½ have an updated will! (47% in 40s and 56% in 50s)

RETIREMENT

• 25% of residents are “very concerned” about saving for retirement. 
• Only 11% of all doctors think they are “ahead.”
• 40% of physicians consider themselves “behind” in saving for retirement.
• A minority in their 50’s and 60’s have several million in retirement savings.
• Only 37% of U.S. physicians have >1M saved for retirement.  Keep in mind that it would only generate 40K / year.

NET WORTH

• Majority of physicians have <1M
• About half of practicing U.S. physicians average less than $500k in retirement savings.
• Of those in their forties 15% have 1-3M, 4% have >3M. 
• In their fifties, those numbers increase but not by as much as they should: 38% and 10% respectively.

KNOWLEDGE

• Part of the issue is a lack of financial knowledge.
• 18% are “very knowledgeable” about personal finance.
• 58% have invested in “bad” investments and 20% haven’t invested at all.  

I would like to think that the explosion of physician blogs and books have helped increase financial knowledge.  So far there is some evidence that it actually isn’t getting better.

ARE RESIDENTS BETTER OFF?

We all have anecdotal evidence that physicians have very little training or understanding of personal financial management. Now there is published literature supporting this.  The International Journal of Medical Education (IJME) reported results of a study involving medical residents and fellows.  They were given 20 questions on personal finance and 28 questions about their own financial planning, attitudes, and debt.  Here are some of the results:

RESIDENT “BAD” DEBT

• 79% reported high debt levels with a combination of mortgage, credit card, and student loan debt.
• 20% of respondents had credit card debt that would not be paid off at the end of the month. 32% of whom expected to carry more than $10,000 to the next month.

RESIDENT “GOOD” DEBT

• More than two-thirds had student loan debt and nearly half owed over $200,000.

RESIDENT FINANCIAL PREPAREDNESS

• Despite having in income like the national median income, nearly 1/3 reported difficulty meeting their monthly expenses.
• The trainees also reported low levels of satisfaction with their financial status.
• The study participants were less satisfied with their personal financial condition than the average US citizen. 

RESIDENT RETIREMENT

• 38% reported no retirement savings. 56% of those who had retirement savings had under $25,000 worth.
• Fewer than half of the respondents had projected their necessary retirement savings.

RESIDENT KNOWLEDGE

• The mean quiz score was 52%.
• Only 13% correctly answered a question regarding no-load mutual funds.
• Only 20% understood the relationship between interest rates and bond prices.
• 60% of childless trainees didn’t know what a 529 plan was.
• Trainees showed low levels of knowledge about health insurance.
• Few knew that a high deductible health plan is needed for a HSA.  

Does 52% sound like a passing grade to you?  The authors concluded there were serious deficits in financial knowledge.  Those deficits covered a broad range of financial topics.  

This study confirms that personal finance has been largely neglected by the medical education system. This vacuum of education and knowledge makes physicians and trainees susceptible to advisors who charge excessive fees or who recommend inappropriate products. Physicians in training are at high risk for being a target for unscrupulous advisors.

The authors recommend coursework about the basics of personal financial planning, important financial considerations, and health insurance understanding. They recommend specific instruction in several aspects of financial education including:

1. How to make a monthly budget
2. Debt/loan management and credit scores/reports
3. Savings and retirement planning options
4. Life, health, and disability insurance
5. Estate planning strategies

What do you think? How is your current knowledge in these five areas? If you have a knowledge gap is it because you didn’t receive any education in personal finance during medical school, residency, or fellowship?  Should such training become mandatory?

There is a lot of work for us all to do!  Keep reading those physician finance blogs and other resources!  What about you?  Is your Financial Preparedness at A+ levels?  How about the younger doctors you know?  Are they in great financial shape?

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