Doctors often make mistakes when it comes to their personal finances and wealth building strategy. We are human, after all. Private forums, blogs, and podcasts are full of horror stories of doctors being scammed into buying expensive whole life insurance, having disability insurance that didn’t include self-occupation coverage, and being ripped off by financial advisors. steered toward high-fee investment vehicles. There are also countless situations, such as messy divorces, the risks of doing business with family, and choosing the wrong specialty or business partners that can derail our financial lives.
It’s hard to admit, but we’ve all made mistakes. Having just finished ten years of clinical practice after residency, I have had time to reflect on things that I cannot undo. As Soren Kierkegaard says: “Life can only be understood backwards; but you have to live it forward.”
1. Not maximizing investment in tax-advantaged retirement accounts. While I always maxed out my employer-sponsored retirement plans, like 401(k)s and 403(bs), I never bothered to explore what other options I had for tax-advantaged investments. For example, what do you do with income from side gigs? Everyone talks about a backdoor Roth IRA, but the contribution limits are only $6,000 in 2022. If I had learned something like a participant 401(k)/solo 401(k), I could have budgeted better my substitute income 1099. This allows self-employed individuals (or businesses with no other employee) to contribute 25 percent of self-employment income as an employer contribution. The 2022 limit for this employer contribution is $61,000 compared to a “regular” 401(k) where your contribution limit as an employee is $20,500. This has two benefits: tax-deferred growth from the $61,000 investment, and any contributions you make as an “employer” will be tax-deductible (subject to IRS maximums) and therefore lower your taxable income.
Back in 2012, I was not producing enough 1099 income to maximize this employer contribution. With knowledge, planning, and budgeting, you could have saved $25,000 as an employer contribution. Even doing this just once, compounded over 30 years at an assumed return of 7 percent in a diversified stock market fund, would probably yield a return of $190,306.38 that I’ll never see. The returns will be enviable if you have the foresight to do this every year with even a portion of your 1099 independent contractor or business income.
2. Not having a student loan strategy. My lack of knowledge about student loans increased the amount I owed and the length of the payoff. I entered medical school with altruistic goals and as the first doctor in my family. The loans looked like Monopoly money at the time. I just assumed that by becoming an assistant, my loans would magically fix themselves with automatic payments coming out of my paycheck.
During my last year of residency, I entered a loan forbearance. Living in New York, I thought this would be a great idea and give me some well-deserved financial freedom. Forbearance allows the borrower to suspend payments for up to one year at a time. I guess I missed that last line when signing the documents: Interest continues to accrue during forbearance! So the balance on my $150,000 loan increased by about $7,000, which grew in subsequent years.
For many years after I graduated from residency, I continued to make the minimum payments required by my income-based payment plan (I’m not sure they represented my additional 1099 work income, so the monthly payment amounts seemed like a little low). With interest rates between 2.5 and 4.8 percent, I told myself this was ‘free’ money. I did not budget any savings to pay my loans with a faster and more experienced lifestyle. In addition to contributing to my 401K and saving a down payment on a house, I spent my money freely and therefore did not invest in any income-producing assets.
In 2016 I refinanced my loans from Navient to SoFi and finally started making small additional monthly payments. An email appeared on Wednesday June 30, 2021 at 12:55 pm saying that my loans have been paid in full. The general problem was that I had no strategy to repay my loans. Public service loan forgiveness wasn’t even on my radar, and to make matters worse, I made the above mistakes. Do not do this. Keep in mind that compound interest is real, and have some strategy, so your loans don’t skyrocket.
3. Invest in things you didn’t understand. Many doctors make the mistake of jumping to the next big thing. We believe that somehow our academic prowess will translate into investment success. There are so many victorious posts from peers on social media that it’s easy to forget that a diversified portfolio is often more reliable and less risky in the long run than individual stocks or speculative investments.
Just the other day I was listening to a personal finance podcast where a doctor was talking about betting his $2 million savings on an investment. It was heartbreaking to hear, and he was despondent and seeking reassurance that one day he would be able to rebuild it. I imagine more doctors have had similar experiences, but are reluctant to discuss them.
My story is less dramatic, but I have thousands of dollars in unrealized losses watching me for decisions I made investing in individual stocks and crypto. I don’t expect to get any of this money back. I should have known better. Most of us should either forget about stock trading or act on the crypto tips of our best friend from high school, our foodie cousin, the crazy money guy who yells at us on midday TV or the Reddit group r/wallstreetbets.
I hope that as doctors we can be less shy about sharing our own experiences. We have more access to information and to each other than any previous generation of doctors. If we optimize our financial success, chances are we can continue doing what we love on our own terms and for a longer period of time.