Financial Security for Young Physicians; Part 2: Lessons Learned

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In part 1 of this series, I tried to give you a simple framework with which to think about your post-training finances.  In part 2, I want to share with you some specific lessons that I’ve learned along the way about all things financial planning related.  Some of these points are reiterations of points made in part 1.

  1. A high income does not mean you’re wealthy.  With a little planning, discipline, and perseverance, you should be able to turn high income into wealth.  You increase wealth by increasing assets and decreasing debt.
  2. Live below your means.  You should be able to save about 20~25% of your after-tax income.  Living below your means does not mean not living well.
  3. Right out of training, save money and put what you save into things that will appreciate in value; you’ll see the powerful effect of compounding interest sooner.  The earlier you start saving and investing money, the sooner you will see the powerful effect of compounding interest.  That’s why what you do with your money within 5~10 years out of residency is so important.  
  4. Especially as a young physician, you should focus on your savings rate rather than high investment returns.  To someone starting, the amount he saves and invests is much more important than the rate of return.  A 100% return on a small amount is not all that helpful.  But having a larger base of money early, on which modest rate of return can work is powerful.  The rate of return matters a lot more down the road when you have a large sum of money.
  5. Investing is not nearly as difficult as it looks.  Successful investing involves doing just a few things right and avoiding serious mistakes.  First, don’t lose money.  Avoid risky investments; lost money can never be recouped. In the hopes of making a big return, you might take unacceptably high risks.  There is no reason to do so.  One financial advisor put in this way: “All they (physicians) have to do is systematically put 20 percent or more of what they make in nice, dull investments, and they’re set for life. Why kill themselves to hit grand slams when they’ve already won the game?”  
  6. Make your own investment decisions. You may seek the advice of others, but you must ultimately make your own investment decisions. Never invest in anything just because someone else does. Be wary of financial advisors and where their interests lie.  They want to make money off of you.  It’s really that simple.  They might like you as a person, but in the end, they want to charge you a fee so that they can take your hard-earned money.  Don’t think that you can just hire a financial planner to manage YOUR money.  Educate yourself by reading some good books on investing and financial planning.  I’ve read a few good books about investing and managing money, and the information I’ve gleaned has been valuable.  You should process the information critically, and see if the content makes sense for you.  I’ve attached a recommended reading list, by no means comprehensive.
  7. Fees are either money in your pocket or money in someone else’s pocket. Even small fees can represent large amounts of money over time. Most financial planners charge 1~2% of the money they manage which will directly eat into your rate of return.  Do not invest in any mutual fund that charges a “load.” Core investment positions for all physician investors should be broad market index mutual funds. If this sounds boring, think about this – doctors really have no reason to shoot for the moon. It’s one of the payoffs of having worked hard.  Don’t squander this advantage of being able to take low risks to achieve your financial goals.
  8. You can do a lot worse than keeping investing simple.  There may be a handful of alternatives that prove to be better than simply buying and holding a portfolio balanced between a total stock market index fund and a total bond market index fund over a long term (or just simply a target date fund), but the number of alternatives that will prove to be worse is infinite.  Regression toward the mean is a powerful concept: a stock picker, a financial planner, or a particular mutual fund might have a couple of good years outperforming broad market index funds, but most of them regress toward the mean over time.
  9. Have a will.
  10. Resist the temptation to buy a house as large as that of your colleagues. Real estate is not liquid. If you have not saved a 20% down payment, you cannot afford a home. Take out a low interest rate, 15-year fixed rate mortgage with no prepayment penalties, and try to have your home paid for by age 50~55, but most definitely before you retire.  You have no business retiring if you still have debt.
  11. Debt is compound interest in reverse, working to make someone else rich. Debt is seductive and can ruin your life. The longer the repayment period, the greater the burden of debt. Use unanticipated financial windfalls to pay off debt; there are few better investments. Do not lease a car. Never purchase stock on margin.
  12. The most expensive part of retirement will most likely be medical bills. The average senior citizen currently pays around $200,000 for out-of-pocket medical expenses.  So stay healthy, save as much money as possible and intend to spend some of it on your health in retirement, and have all your debts paid off before retirement. Have sufficient savings such that you can live off of 4~5% of your total assets per year.
  13. Don’t divorce.  Not only will you likely lose half of your net worth, you will also see a lot of your hard-earned money go to lawyers.  So if you’re married, be nice to your spouse.
  14. The five most important factors for obtaining financial security are frugality, patience, discipline, compound interest, and investing in what you know.
  15. The five most important factors that destroy wealth are divorce, debt, fees, trusting everyone, and not making your own decisions.

This list is by no means comprehensive, and I’m certain that it will grow in length over time.

Recommended Reading:

Bernstein, Bill.  The Four Pillars of Investing.  McGraw-Hill, 2002.

Bogle, John C.  Common Sense on Mutual Funds.  John Wiley & Sons, 1999.

Bogle, John C.  The Little Book of Common Sense Investing.  John Wiley & Sons, 2007.

Gibson, Roger C.  Asset Allocation.  McGraw-Hill, 2000.

Malkiel, Burton G.  A Random Walk Down Wall Street.  Norton, 2007.

Swensen, David.  Unconventional Success.  Free Press, 2005.

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