New doctors have a lot on their plates, from landing a killer first job to building a new routine to starting to repay the mountain of student debt on their shoulders.
The first few years after residency or fellowship can set the tone for your financial future, and we want to help you make the healthy and productive money moves that will give you more confidence right out of the gate.
Here’s the guide all new doctors shouldn’t be without.
1. Negotiate Your Contract.
Far too often, new doctors simply sign the first contract put in front of them. Do yourself a favor and evaluate your contract. Are there areas you want to negotiate? Perhaps you were hoping for a higher starting salary or a more robust benefits package or a set bonus structure. Not sure where to start?
First, know your value. Our team can help analyze benchmark data such as the Medical Group Management Association (MGMA) to evaluate your offers. We can use it as a launching off point to negotiate for what you’re worth.
Negotiating, even if you don’t walk away with everything on your list, demonstrates that you most likely received the best offer available from that particular employer. The worst case is that the employer says no and the best case is that you elevated your offer to match the unique skills you bring to the table.
Ready to start negotiating like a pro? Check out our webinar to walk into every negotiation with confidence.
List and Rank Priorities
With contract negotiations, it’s all about give and take. Before you start the process, think about what’s most important to you. Then, rank those priorities from most to least important. This way, you likely set yourself up to achieve your top priorities. Remember, you likely aren’t going to get everything you want, so be sure you fight for the elements that matter most to you both now and in the future.
Picture the Worst-case Scenario
Most people don’t walk into a job already planning their exit strategy, but understanding your liabilities and responsibilities may be crucial before putting pen to paper. Ask yourself,
- What could happen to you should the job not work out?
- If you’re let go, are you subject to a non-compete? Will you owe tail coverage? Do you have to pay back the signing bonus?
These questions might not be at the forefront of your mind, but they can be critical components of your contract. You need to walk into the situation with both eyes wide open, fully understanding the risks.
Contract Negotiation for The High Producer: A Case Study
Let’s face it: most doctors are overachievers. That work-ethic not only helped you ace your classes, but it should also be factored into your contract. How? Let’s take a look at how one doctor’s high production led to a more favorable contract.
We were evaluating a contract for a radiation oncologist, and at first glance, the base salary looked solid, sitting around the 50th percentile of MGMA. But as we modeled his compensation formula, we realized that if he were producing in the 75th percentile, he’d be underpaid, and if that production jumped to the 90th percentile, he’d be severely underpaid.
We approached the hospital with a counter-proposal that demonstrated these production metrics, and the doctor signed a much better contract that factored in his high production. Our instincts paid off because after two years that doctor was already producing in the 90th percentile.
Ready to enlist a pro? Take a look at our contract negotiation service.
2. Pay Yourself First.
Doctors require a sophisticated savings strategy to accomplish all their goals. You’ve likely heard the advice that encourages saving 20% of your income for retirement. Doctors likely need to tack on another 20% outside of workplace retirement plans to amass enough to reach their goals.
If you’re overwhelmed by that number, take a deep breath and a step back. You can work toward that goal throughout your career. As with most personal financial advice, the earlier you start, the better off you should be in the long run.
A top mistake we see new doctors making is having too much of their paycheck spoken for to cover expenses and other commitments, making additional savings a challenge. We suggest starting your savings journey early and base your expenses on the remaining amount. That way, you’ll develop strong habits from the start.
Take your savings journey one step at a time. There are several things you need to save for over the years like a robust emergency fund, retirement, high-interest debt, etc. But not all of these goals can be accomplished at once. Prioritize and make a realistic plan.
Generally speaking, new doctors should concentrate on amassing a strong emergency reserve, then turn their attention toward high-interest debt, and follow that with long-term goals like retirement.
Let’s say your goal is to save $5,000 per month during your first year. The first step is to spend 6 months building your emergency savings (3 months’ worth), 3 months paying off high-interest debt, then pivot that $5,000 to long-term investing.
3. Don’t Buy Too Much House.
While all the bells and whistles might sound nice in a sales pitch, it might not be the right time to spring for the house with the double oven and the square-footage that rivals an indoor stadium. You may not want to be house poor when you’re pulling late nights at the hospital and making student loan payments.
When it comes to buying a house, know your priorities! Remember, a house is more than a mortgage payment, you’ll need to factor in property taxes, maintenance, utilities, and any upgrades you want to make.
Next, take a look at how those costs fit into your other financial needs like long-term savings and student loan repayment. You likely don’t want your mortgage debt eating into the money you could have used to save for retirement or pay down debt. Generally, it’s best to keep your mortgage within 2 or 2.5 times your gross income for your finances to work. This is just an estimate and it might be higher or lower than that depending on your situation.
Before you buy a house, you should make sure you’re going to stick around. Most contracts have a non-compete, so if you decide to move on, you may need to leave the area, which makes renting the most ideal option in that scenario. Buying isn’t always superior to renting, it all depends on your personal needs.
Don’t Rush Into Homeownership: A Case Study
We worked with an anesthesiologist who moved to a new area for a job. It didn’t take long to realize that the work environment and community didn’t work for her or her family. Against our initial suggestion, they purchased a house and ended up moving less than a year later.
Since the house hadn’t had time to appreciate, we had to get them an unsecured loan just to front the money to sell the house. This process added additional financial stress to an already stressful time.
This isn’t to say that buying a house is always a bad thing, but that before you buy a house do your research. Are the financials a comfortable fit? Do you plan on staying in the area? Are you happy and fulfilled in your job? Do you have a community of family and friends nearby? Take your time before rushing in.
4. Protect Yourself
As a new doctor, you need to protect yourself by obtaining the right insurance coverage. In general, there are four types of insurance to consider.
Buying a disability policy during residency or a fellowship usually gives you access to good discounts on the life of the policy. Most discounts can be accessed up to 90 days post-graduation, so mark your calendars to not miss that window.
What type of disability policy should you get? Usually, your best bet is specialty-specific coverage. It’s carried by several providers like Principal, Standard, Guardian, Ohio National, Mass Mutual, and Ameritas.
Specialty-specific coverage protects you if you can’t do your job. If you are totally disabled, your benefit won’t be decreased by any income you make outside your medical specialty. It’s also important to increase your coverage as your income rises.
Not everyone needs life insurance, but if someone depends on your income it’s something to consider. The amount of life insurance you purchase takes your economic value (after-tax income times the number of years you’ll work), cash flow needs, number of dependents, etc. Though you can purchase a policy that covers your entire life (whole insurance), most young doctors benefit from term (set coverage period) insurance as it’s often simple and affordable.
Malpractice insurance covers you for incidents that occur in the hospital and is often given through your employer. Understand what type of insurance you have (claims made vs occurrence-based) and whether or not you’ll be responsible for tail coverage if you leave.
While malpractice insurance protects you from things inside the hospital, what about the things outside? Doctors need to be cognizant of their wealth and protect it from those who would try to take advantage of it. We usually recommend a $1 million umbrella policy in training and $3 million for those entering practice. As your net worth increases, so too should your umbrella policy.
Typically, when our clients make partner, they tend to have a $5 million policy. An umbrella policy isn’t the end all be all of insurance, it should be connected to your other policies. For example, a new client of ours had a $2 million umbrella plus a $300,000 auto limit. But the umbrella policy didn’t kick in until expenses exceeded $500,000, leaving the client with a huge and unmanageable $200,000 deductible.
Ready to optimize your insurance coverage? Vestia Insurance can evaluate your policies and help you build the right protection plan for you.
5. Take Advantage of Roth
Diversification doesn’t just apply to securities in your portfolio, it also applies to your tax situation. Prioritizing tax-efficiency is crucial, making Roth accounts wonderful assets in most cases. Roth IRAs are funded with after-tax dollars and all qualified distributions are tax-free, adding important flexibility to your cash flow in the future.
Young doctors should consider funding Roths early on in their careers as there are income thresholds to contributing. Once you phase-out of the income thresholds (which will likely be quick), you can convert income into a Roth account via a backdoor Roth IRA.
Another potentially great strategy to look into as you move into your first year of practice is converting your residency/fellowship 403b into a Roth. While you will have to pay taxes on the conversion, this stage of life will likely put you at the lowest income year in your career. You can pay taxes on the conversion and take advantage of current low tax rates. You won’t owe the taxes until April 15 of the following year, which gives you plenty of time to plan for the bill.
Our team at Vestia is passionate about empowering doctors to use their money in a way that enhances their lives. Ready to take the next step in your financial plan? Set up a call with our team today.
Investment advisory services offered through Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, and Vestia Advisors, LLC. Securities offered through Ausdal Financial Partners, Inc., 5187 Utica Ridge Rd, Davenport, IA. 52807 (563)326-2064. Member FINRA/SIPC. Vestia Personal Wealth Advisors, Vestia Retirement Plan Consultants, Vestia Advisors, LLC, and Ausdal Financial Partners, Inc. are independently owned and operated.
This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third-party sources and is believed to be reliable.