Avoid These 17 Physician Money Mistakes

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Physicians make a lot of money mistakes. These mistakes prevent us from building the wealth we deserve. The more you can learn about and prevent the most common errors, the better off you will be.

[This is a guest post by Yuval Bar-Or, Ph.D. He is an Associate Professor of Finance at Johns Hopkins Carey Business School. He is not a physician but comes from a medical family and is well-aware of our financial challenges. He earned multiple degrees in engineering and economics. As well as a Ph.D. in Finance from Wharton. He is passionate about improving financial literacy, especially among physicians. I had the pleasure of meeting him in person, hearing him speak, and viewing his online free educational videos. His personal site is Pillars of Wealth which provides a framework for his ideas and teaching.

I asked him if he would write a guest post and fortunately, he agreed. He has noticed doctors making a lot of the same mistakes over and over. I agree as seen in my own post on this topic. His post covers some of the top financial mistakes physicians make – in no particular order. -WD]

1. Procrastinate.

Doctors are masters of procrastination. This may be partly due to their medical training. In medicine, it is best to wait for the body to heal itself instead of jumping to surgery or drugs. Unlike in medicine, when it comes to finance, time is the enemy. Every day that goes by without action is lost forever, along with its growth crucial to our nest eggs.

2. Keep large amounts of cash.

Physicians park hundreds of thousands of dollars in checking accounts. They are unsure how to proceed with investments and are suspicious of financial markets and advisors. But checking account balances pay zero interest. Savings accounts are not much better. Even a low-return (low-risk) investment is better than zero.

Do something with your money. Consider stocks, bonds, or real estate. If you prefer very safe investments, consider money market accounts, certificates of deposit (CDs), a high yielding savings account, or US Treasury securities. You can conveniently purchase the latter through the government site: TreasuryDirect.gov. Just do not sit on the cash.

3. Do not have a household budget.

Without a budget, you don’t know! What don’t you know? A lot! Like: whether you’re living within your means; whether you’re building or depleting your nest egg. You don’t know whether your expenses are too high or how much more efficient your finances could be.

A budget may seem like an unwelcome waste of time. But budgeting is one of the more important personal finance processes. You can and should do this. The process is as important as the destination. It forces you to think critically about where your hard-earned money goes. My seminar attendees routinely admit that going through this process proved helpful. Capture the big-ticket items first. Over time move on to the smaller ones.

4. Overspending – the biggest physician money mistake.

I am reminded of a story recounted to me by an accountant. His client, a physician, enters the office, sits down, and hangs his head. “My income is down from $600,000 last year to $400,000 this year.” Then the doctor wails, “My income is too low!”

The accountant points out that $400,000 puts the doctor in the 99^th percentile of earners nationally and suppresses the urge to grab the doctor by the shoulders and shout at him, “you don’t have an income problem, you have a spending problem!”

In fairness, once we grow accustomed to making a lot of money it’s natural to also spend a lot. And it may be fair to argue that doctors earn the right to spend. You study and work hard for many years and may well be entitled to splurge on occasion.

But those who elect to live within their means can more quickly: pay down all their debt, reduce their work hours, spend more time with family, engage with their hobbies, or retire early if they so choose.

5. Rely blindly on an advisor.

Doctors often find it easier to identify an advisor they trust and let the advisor make all decisions. Many physicians have no interest in money matters. They prefer to spend their time on medicine and family.

The problem is that “When the cat’s away, the mice will play.” You are the cat and you are electing to not oversee your advisors’ (the mice) activities. They may act in ways you wouldn’t condone.

The resulting misunderstandings undermine trust and foster anxiety. In extreme cases ignoring advisors’ activities can result in crimes of opportunity or fraud.

6. Fail to communicate openly and fully with spouse/partner.

Financial matters are the main cause of relationship discord. Physician households face many stresses including long work hours, high expectations, and responsibility for patients’ health. Failing to communicate openly with a partner regarding financial matters is a self-inflicted wound.

It is avoidable. Sit together. Catch up. Learn important facts and decide as a team.

7. Fail to get employer’s matching funds in retirement plans.

Matching funds are “free money.” Don’t leave it on the table. Make sure you understand your employer’s match. Grab every dollar the employer is willing to give you.

The contributions you make also lower your current year’s tax bill. So the hit to your take-home income is lower than the amount you contribute to the plan.

8. Accept default investment fund choices in retirement accounts.

Some retirement plan participants forget to specify the mutual funds they’d like purchased on their behalf within their plan. The Wall Street companies that administer retirement plans have an incentive to direct your retirement plan contributions to investments that allow them to charge you more.

This motivates them to set up default investment destinations that have higher fees. Decades of higher fees will cost you a lot of money.

A few years ago I pointed out this very issue to a friend employed by a university on the West Coast. We discovered the default investments she unknowingly accepted were costly. Switching to similar investments with lower expenses saves her $1,400 a year!

9. Don’t have a partnership agreement.

Some private practitioners ignore the need to summarize their partnership terms in writing. Wise businesspeople understand that putting terms in writing protects everyone.

It removes the confusion and distrust bred by the absence of documentation. Writing a partnership agreement forces careful thought in advance about issues that may arise. For example, what would happen in the event of a partner’s death or disability? Such events can produce conflict in the absence of planning.

10. View financial decisions as ad hoc or random.

It’s common for busy people to make financial decisions randomly as they arise.

After learning the importance of disability insurance, a young medical resident hastily picks a policy. The next year she scrambles to get life insurance. The year after that she rushes into a 529 College Savings plan for her child. Each decision is made in a vacuum.

Our fatigued resident fights random brush fires instead of following a process. She’s constantly under stress wondering when the next financial need will arise.

A better approach would be to have a plan at the outset. The plan helps you navigate unavoidable tradeoffs. If you buy too much disability insurance, you may not have enough money for proper life insurance.

Under the ad hoc approach, you don’t realize that other needs will arise. Uninformed decisions deprive you of options down the road.

Financial planning is not rocket science; it is a well-documented process any high-school student can follow. The key is to be exposed to it early so we can get our arms around it. Doing so also reduces our stress levels regarding money.

11. Fail to collaborate/cooperate with professionals.

When it comes to financial advisors and insurance agents, there’s  a lot to criticize. However, some subset of this community (I put it at about 20-25% of all advisors) consists of capable people who genuinely care about their clients.

Working with such an individual can help, but only if you do your part. While researching the first editions of my Pillars of Wealth book series I encountered financial advisors, insurance agents, accountants, and attorneys who serve physicians.

I was shocked to hear them express the common sentiment that, “life’s too short to work with physicians.” Much of their frustration came from dealing with doctors who failed to go to meetings, arrived unprepared, forgot to complete documents, provide data, or undertake necessary tasks.

In much the same way that physicians need the cooperation of their patients, advisors need your data and cooperation. If you’ve decided to pay someone to help you with financial matters, make sure you support them so they can do the job properly.

12. Invest in wild money schemes.

Everyone likes to get in on a good deal. We can’t wait to tell others about our successes.

Over the course of your career, hundreds of people will offer you deals. The offers may come from neighbors, in-laws, former schoolmates, peers, work colleagues, etc. The deals may involve new medical devices, pharmaceutical compounds, or real estate.

Each will claim to offer a lucrative once-in-a-lifetime opportunity. You will be seduced by promises of dizzyingly high returns with minimal risk. In reality, most of these ventures end in tears and sometimes lawsuits.

Money truisms include: “Money doesn’t grow on trees,” and “There’s no free lunch.” If something seems too good to be true it most likely is too good to be true.

Only a tiny percentage of business ideas survive and evolve to investing success. Stick with what you understand. For most of us, that means a passive strategy focused on diversification and low fees. All other opportunities should be viewed with a healthy dose of skepticism.

13. Listen to well-rehearsed sales pitches.

Doctors have high confidence in their own intellect and they should. It’s almost a certainty that your insurance agent or financial advisor has a lower IQ than yours.

But they have a distinct advantage over you. They are backed by billions of dollars of consumer research. Their marketing techniques have been honed over decades by every bit of relevant human psychology research ever produced. They spend hours going over their pitches to maximize the probability of “hooking you and reeling you in.”

It doesn’t matter how smart you are, or how insightful your observations and questions are, they’re prepared for them. They’ve heard them all before, and their answers are designed to draw you in even further.

You may have done a rotation in psychiatry, but seasoned agents and advisors are masters in psychological manipulation.

The key to getting what you want from interactions with advisors is to place them under some stress early. Don’t let them get rolling with their well-rehearsed pitches. Instead, ask them challenging questions (prepared in advance).

Provoke them with recommendations you’ve heard from other advisors, but don’t tell them where the suggestions came from. Observe their responses to these prompts. Do they get flustered? Do they get impatient? Are they willing to send you a summary of their opinions in writing (always a good test of their integrity)? Instead of getting drawn into their marketing funnel you’ll have them responding critically to each other’s comments. You’ll at least be in control of the conversation. The more you do this, the more you’ll learn. And the easier it will be to distinguish the truthful and committed advisors from all the rest.

14. Think they’re smarter than the Internal Revenue Service (IRS).

You may be smarter than the average IRS agent. But you’re not smarter than the IRS. Don’t play games with taxes. Use a conservative accountant who won’t take aggressive liberties.

Yes, it hurts to see a large chunk of each paycheck taken by the government. But playing in the gray area between tax avoidance (legal activities) and tax evasion (illegal activities) isn’t a good idea. The satisfaction of aggressively avoiding taxes for a few years vanishes the instant a nightmarish audit begins.

15. Accept advice from peers or mentors.

Asking peers and mentors for advice seems reasonable. Doctors are intelligent people. You trust and respect colleagues. You can also avoid the anxiety and suspicions associated with a financial advisor, save time, and avoid paying for advice.

But despite the best intentions, doctors are not trained to be tax accountants, attorneys, or financial advisors. Accepting their advice is risky for several reasons:

(1) It’s unlikely your peer or mentor has very broad and deep financial knowledge. She may be a brilliant doctor. But unless she stays current on financial planning rules and best practices, she’s not a financial expert.

(2) It’s unlikely your peer or mentor fully understands your circumstances. You may not be comfortable revealing all your personal financial details. This means the advice you receive may not be appropriate for your specific situation.

(3) Your peer’s advice will likely reflect his negative personal experiences and traumas. Just because a product or service didn’t work well for him, doesn’t automatically mean it’s wrong for you and your family.

I met an elderly physician who passionately taught his learners about financial issues. He wanted them to avoid the mistakes he’d made. But his financial advice was outdated. His scrapbook of yellowed newspaper clippings dated back 40 years. And his circumstances were very different from his residents’. This made his recommendations not just inappropriate, but potentially dangerous.

It’s very tempting to accept advice from peers and mentors. You respect, admire, and trust them. They provide advice sincerely because they’re your friends. Nevertheless, accepting their advice opens you up to risks. Ultimately, your most reliable ally is you! The more educated you are, the more you can help yourself.

16. Succumb to Grass is Greener syndrome.

Doctors are often driven, competitive people who reflexively compare themselves to others. Many of us have this tendency, not just physicians.

Such competitiveness can lead us to try harder and achieve more. But it can also cause us to over-extend ourselves and our finances. Think trophy home or a very expensive car.

There’s nothing wrong with having a nice house or car, but there’s a time and place for such purchases. For most early-career doctors, taking on the associated debt is inadvisable.

I encountered a physician couple who constantly talked about their million-dollar home, inground pool, brand-new luxury German cars, and perfect nanny. Outwardly, they presented a picture of affluence that others envied.

Several years later one of them admitted their terrible mistake to me. The debt on the house and cars burdened them with payments they struggled to make. The picture of perfection they showed to others was a facade.

17. Cut corners to save time.

You are busy! Your free time is limited due to patient meetings, paperwork, research, etc.

It’s tempting to hastily manage your finances. Consider a busy physician seeking to hire a financial advisor from several candidates. After the first person makes a reasonably good impression the doctor impulsively hires him. Not interviewing others saves several hours. But it prevents meeting the best candidate.

In the workplace, physicians rush to hire staff without properly vetting them. Skipping reference verification and background checks are dangerous. In other cases doctors don’t bother reading critical administrative documents, which can lead to financial losses, legal exposure, and fraud.

Yes, you’re busy. But hiring the right people and taking time for solid decisions are time well spent. Don’t cut corners on these.

Call to Action: Correct Your Physician Money Mistakes

Do you recognize any of these 17 money mistakes in your life? I know I do. Why not pick one or two and work on eliminating them over the next three months?

Check out my list of the Dumb Dozen or another carefully-chosen resource. Or read professor Bar-Or’s book, Pillars of Wealth: Personal Finance Essentials for Medical Professionals

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