In 2019, the average graduating physician entered the workforce with $201,490 in combined student loan debt.1 Making inroads into that kind of liability rarely happens overnight. Over the course of a subsequent 3-5 year residency (potentially longer if a sub-specialty fellowship is required), the average physician will only earn about $61,200 annually2—not exactly the kind of income that brings financial freedom, especially if you’re looking to settle down and start a family. So, where do you begin?
It all starts with thoughtful, comprehensive long-term financial planning. Once you step back and realize that you still have a 30 or 40-year accumulation time horizon, it affords an opportunity to recalibrate and balance the competing priorities of debt reduction, lifestyle expenditures, and investing for future goals such as retirement. These five simple guardrails can help keep you moving in the right direction.
1. Don’t give in to delayed gratification
Even after your residency is completed and income begins to rise dramatically, try to avoid fiscal over-indulgence. “After years of medical training, it’s only natural to feel a bit behind peers in other professions and want to quickly catch up with lifestyle purchases like the million-dollar home or high-priced car,” explains Truist Wealth Medical Specialty Group advisor Veruschka Halligan. “But it’s important to think very carefully before making expensive purchases, as they may take a long-term toll on your wealth.”
Creating a thoughtful, realistic budget and spending plan can be an invaluable tool in helping to keep you on track. In fact, rather than feeling limiting, it often proves liberating—letting you know exactly where your money’s going each month. Over time, as your income grows and/or your goals shift, your budget and spending plan can easily adjust to accommodate.
2. Focus first on building an emergency fund
Physicians are often so focused on paying off student loan debt that they forego establishing an emergency fund. As quickly as possible, try to set aside six months of fixed and variable expenses in cash (or three months if you’re married with a similar earning partner) to protect against the unexpected. Not only will this afford you peace of mind, it can protect you from having to prematurely liquidate long-term savings which could trigger taxes and penalties.
3. Identify your financial priorities
Wanting to pay off your student loan debt as quickly as possible is admirable, but it shouldn’t come at the expense of saving for retirement or building liquidity. Creating a well-structured financial plan starts with paying yourself first. Strive to maximize contributions to your employer-sponsored retirement plan (or at a minimum make sure you contribute enough to take full advantage of any company match provisions). Then, on the debt side, you’ll want to prioritize paying down your highest interest debt first. Depending on the structure of your loans, debt consolidation may also prove beneficial.
Given historical average annual stock market returns of around 8%,3 if you take your time paying down lower-interest (6% or less) student loans and investing the excess funds, there’s a good chance your portfolio will grow at a higher rate of return than the interest you’re paying on the loan.
“It’s really a balancing act that requires trusted guidance,” said Halligan. “When I sit down with a physician, we go through a thorough cash flow analysis—looking at income, expenses (including loans), goals and risk tolerance to find a comfort zone. Often, it’s as simple as making a couple of additional monthly payments each year to reduce both their interest payments and loan term, while still affording them an opportunity to save for retirement.”
4. Seek out unbiased insurance advice
When we sit down with younger physicians, we often discover that they purchased an expensive permanent life policy at some point during their residency. For a healthy professional just embarking on his or her career, the comparatively low-cost level premium of a term life policy typically provides greater value.
Rather than spending around $5,000/year in premiums for a $500,000 cash value whole life policy, your financial picture could look much better owning a $2 million term life policy for around $1,200/year and investing the $3,800 difference each year to fund longer-term goals like retirement. Down the road, as your life evolves, you can review your coverages in light of other wealth goals to decide if the cash value, optional long-term care riders, and wealth transfer tax benefits of a permanent life policy make sense.
5. Be strategic about buying into a practice
Buying an equity interest in a medical practice is a financial investment in your future, but also a major financial commitment. An ownership stake certainly can be lucrative, but it’s important to be thoughtful and well-informed as to the particulars of any buy-in loan. You’ll want to make sure you can easily cover monthly loan payments with after-tax distributions. Keep in mind that while annual distributions from equity can make a huge impact on your total annual compensation, the corresponding monthly loan payments can create liquidity and cash flow challenges if not properly managed.
Your advisor can work with you to secure a buy-in loan. But more importantly, they can help you ensure that any associated debt is actually helping rather than harming you financially.
Eliminating student loan debt is a vital step in building a secure financial future. But there are strategic ways to go about that mission—without sacrificing short-term liquidity or delaying your long-term savings and investments.