Next month marks the annual tradition of sifting through a year’s worth of receipts, filling out tax forms, and calculating deductions. For locum tenens physicians, that process can become complex when accounting for out-of-state assignments. Whenever dealing with tax issues, it’s best to employ the expertise of a certified public accountant.
However, financial planning for doctors entails far more than just what’s required on tax forms. In fact, your financial status, needs, and goals will most likely change over time. Early in your career, paying off student loans is top priority, whereas later the focus switches to saving for children’s college tuition or retirement.
While seeking the counsel of a financial planning advisor is always a smart move, here are six commonsense strategies you can adopt at any career stage to improve your financial health prognosis.
1. Keep a budget
Making sure more money comes in than goes out each month seems like a foregone conclusion; however, not everyone tracks every dollar. Even if you don’t obsess over every single transaction, committing the numbers of recurring bills to paper or an Excel file helps determine what’s needed to stay out of the red month after month. Even this basic budgeting exercise will clarify how much is available for discretionary spending. If you want a bigger cushion, taking locum tenens jobs on the side is a great way to supplement your monthly.
2. Review your spending patterns
Chances are as a student and resident, you pinched pennies. Did those spending habits change after residency when your paychecks grew? Or did you follow the adage of living like a resident for another two to five years?
“The most common mistake physicians make is that they allow their cost of living to grow into the size of their income. Consumption habits will grow to the size of their income if they’re not careful, and it’s very hard to reverse that habit once it happens,” cautions W. Ben Utley, a certified financial planner with Physician Family Financial Advisors Inc., a firm specializing in financial planning for physicians.
Rather than spending more once out of residency, planners recommend physicians use the increased earnings to build a stronger financial foundation. The rule of thumb is to save between six and 12 months of income for emergency purposes. Also, direct approximately 20 percent of annual gross income for retirement savings.
3. Reassess student loans
It’s no secret doctors carry large medical school debt loads. Utley suggests periodically reassessing the terms of those loans. Borrowers have payback options, including deferment and forbearance when faced with financial insecurity. Other possibilities include refinancing and income-based repayment structuring. For physicians practicing at qualifying non-profit organizations, such as federal or tribal healthcare facilities, there’s even a chance for loan forgiveness after 120 months. If it’s a goal to pay less interest on your medical school debt, consider locum tenens assignments as a means to generate extra cash to make extra loan payments.
Another piece of advice is to avoid assuming lots of new debt, especially early on in one’s career.
According to Utley, “The time to consider buying a house is at the end of your first 12 months of becoming an attending.”
4. Manage your cost of living
Even if you practice frugality, where you live dictates the cost of living — typically, metropolitan locales cost more to live in than smaller communities. Once again, where you choose to live may change as your career progresses and personal needs evolve — young doctors may be interested in the hustle and bustle of a big city, parents may prefer family-friendly suburbs or retirees might look for dream destinations. Accepting locum tenens contracts in different communities is one way to realistically evaluate the local cost of living before moving to a location to decide whether it fits your personal budget goals.
5. Protect yourself with insurance
As income grows or as you accumulate familial responsibilities, it’s wise to reevaluate your disability and life insurance needs in order to protect your finances in case your income is interrupted.
“You’re more likely to be disabled during the course of your career than you are to die. If doctors have children or dependents, they need a solid disability insurance policy. The next stop is life insurance; a good quality term life insurance policy,” recommends Utley.
6. Plan for the long-term
How you save for future financial needs depends on multiple factors. For example, financial planning often is influenced by age. It is usually wiser to invest aggressively earlier in your career than when approaching retirement. Parents can invest in 529 plans to prepare for children’s future college expenses. Employment status is another factor. Staff members benefit from employer contributions to 401(k) accounts, while locum tenens physicians have alternative savings options.
“A self-employed doctor has a lot more room to work the tax code, particularly around the area of retirement planning. The self-employed can get a tax break on a certain amount of their income. They also could do a Defined Benefit Plan to get themselves below the required threshold for another tax break,” says Utley.
Of course, before committing to any major financial decision, confer with a trusted financial adviser, accountant, and/or tax specialist.
What financial strategies have helped you plan for the future? Share your tips in the comments below.