Transitioning to Practice

Debt

i. Good debt vs bad debt

➢“Good debt” is normally restricted to expensive items or experiences that retain long term value. Good debt usually comes with concrete contractual terms, low interest rates, and highly secured collateral value. We will cover Buying a Home, Buying a Car and Student Loans in the sections below.

➢In contrast, “bad debt”can come from many inexpensive and/or a few expensive items or experiences, which are usually consumable, depreciate significantly in value, and often have high interest rates.

The most obvious “bad debt” is credit card debt. Banks and credit card companies often extend high credit limits to medical students and resident physicians. Credit card debt has high interest rates and exorbitant fees, including fees for missed payments, cash advances, foreign travel use, and annual fees. The best advice is to reduce credit cards to a minimum and get them paid off as quickly as possible. Make your own lunches, buy second hand, limit unnecessary expenses. Whatever you need to do, pay this debt off! You can sometimes consolidate credit cards if the burdens of multiple payments become complicated, but know that consolidation will sometimes not be financially strategic. Never open new credit card accounts to pay off old credit card accounts because high balance transfer fees are involved; this is far more likely to lead to increasing debt rather than successfully paying off card balances. If you don’t have credit card debt, generally try to purchase only what you can pay for by the end of the month, especially if there are high interest rates.

ii. Buying a Home

The most obvious example of “good debt” is a home mortgage, which come with fixed, fairly low interest rates. Real estate property usually maintains or increases (appreciates) in value. The financial “break-even” time frame for home ownership tends to be 5-7 years, meaning that it will take that long before you fully recuperate the costs of purchasing your home and repairs. While often less expensive to purchase, older homes may ultimately be more costly due to higher upkeep and utility costs.

Some residents buy a house during residency but, in deciding whether to become a property owner, you should consider the time and cost of repairs and maintenance. An affordable home for a resident may not be the home you will want to live in as an attending physician. Furthermore, if you move after a 3-year residency, you may not “break even” on the cost of buying your home. Renting out your property may be a good option but also comes with its own set of financial risks and benefits (see Real Estate, under Investing principles, below).

Buying a house after residency is generally a good financial option, especially if you plan to remain in the same area long-term. However, an estimated 50% of physicians will leave their first practice after residency within 5 years—and a number of them leave within the first two years! Many contracts have non-compete clauses (restrictive covenants), which would mean you might have to relocate for a new position so you would probably also need to sell your home. The break between residency and starting a new job can be a good time to look for a home and get settled, especially if you have time to do your research and make a non-rushed decision. For many new physicians, however, this transition is often to a new area and can be a stressful and busy time. High stress and uncertainty can potentially lead to poor decision-making if you rush the decision, so instead of purchasing a new home immediately, some physicians choose to rent short-term, while deciding if they are well suited to their new practice and location. This also allows them to spend time looking for their ideal home, save for a substantial down payment (ideally 20% or more), and pay off other debt.

“Buyer beware” is a common warning, especially with large purchases. Borrowers like you must be careful when applying for a mortgage. Banks and realtors know that physicians have higher than average incomes, but may have little financial experience. They may give bad financial advice to encourage new physicians to buy a more expensive home and try to prove to you that you can “afford” it. A larger house can lead to becoming “house-poor,” wherein a substantial portion of your paycheck goes to pay for a disproportionally expensive house. Often forgotten are the additional costs of purchasing new furniture, appliances, and decorations to fill the larger house. Additionally, a more expensive home typically comes with increased property taxes, homeowner’s insurance, utility costs, and homeowner association (HOA) fees. Other expenses include trash services, appliance repair and replacement, HVAC cleaning, landscaping and tree care, mowing and leaf/snow/branch removal, pest control, cleaning services, driveway and fence/deck/patio/pool upkeep, foundation repairs, outside painting and lighting, and security systems. The more “house” you own, the more expensive it is to maintain and protect.

Some simple general formulas for new home buyers:

➢The purchase price should be no more than two times your family’s yearly income.

➢Your total monthly mortgage payments should never exceed 25% of your family’s monthly salary.

Be aware that these formulas may not apply to your specific situation or your region of the country, but it can be helpful to use as a ballpark for a reasonable total cost. The next critical strategy is to maximize your down payment. This should be at least 10%, but 20% is much better since it prevents the additional expense of buying private mortgage insurance (PMI). There are also “physician mortgages” that allow you to forgo the down payment, but these come with high interest rates or special fees. Neither a PMI or physician mortgage without a down payment is in your best interest. A larger down-payment also reduces the amount you pay each month (and accrual of complex interest) and should be maximized, if possible.

Next, take time to “crunch the numbers” to decide on the length of your mortgage repayment period. If the mortgage allows curtailment of principle (which we recommend having as an option), you can accelerate the repayment period to reduce the total interest cost each month. Before you accelerate payments though, consider reducing any other debts, which may involve much higher interest rates than your home mortgage. If debt is paid off or has a low interest rate, you may also wish to invest your income, which may provide a greater return on investment. In other words, investments may provide a higher interest rate than what you pay in your mortgage or on interest. It is important to look at capitalization, fees, and risks of investing, which we cover later on. Additionally, some people prefer the security of having a house fully paid off rather than investing or saving money for retirement, even if it is not financially the most high-yield.

As an example of accelerating mortgage payments, if you pay extra payments per year (including the escrow payment) and apply this towards your principal, a 30-year term conventional loan will obviously be paid off much faster. In fact, only paying 1 extra month per year will reduce a 30-year term conventional loan to approximately 23 years. With 2 extra months per year towards the principal, it will be paid off in approximately 18 years. If needed, you can easily stop the additional payments to return to your original 30-year payment plan, but even with only a few years of accelerated payments, you’ll still usually “come out ahead” because you save substantially on compound interest, especially early on. Having the option of accelerated payments (curtailment) allows the financial flexibility of a 30-year conventional term loan that could be paid off much faster. You can calculate it exactly with an online loan calculator.

If you don’t want to crunch numbers, just know that a 20% down-payment with a low-interest fixed-rate conventional loan and a 30-year or 15-year term is generally considered a good option.

When you purchase a house, the down payment and the closing costs must be paid in full (not rolled into a mortgage loan). Closing costs are often around 4% of the price of the house and cover appraisal fees, home inspections, credit reports, attorney fees, etc. Along with your monthly payments, there are also monthly property taxes and homeowner’s insurance. These are usually placed in an escrow account and automatically included in your total monthly payments to your mortgage company. Most mortgage companies require basic homeowner’s insurance and may suggest a list of preferred homeowner insurance companies. While you usually have the decision about which to purchase, you can't forgo homeowner insurance altogether, as long as you have a mortgage; the lender is also invested in the wellbeing of your property in case you default on payments and the property is foreclosed (taken back). Regardless, homeowner’s insurance is an essential annual investment because damage to your property may occur unexpectedly and be very costly otherwise. Homeowner insurance companies may offer a combined car and house insurance policy at a lower overall cost. While fire, wind, and hail damage (including damage caused by tornados) are usually covered, some policies have an exclusion for cosmetic damage and may only cover for structural damage. You may want to purchase additional flood, earthquake, or hurricane insurance if you live in risky areas, as these threats are usually not covered in a typical policy. Homeowner insurance may also protect you against liability from accidents that occur on your property. However, some insurance agents recommend purchasing additional liability insurance, especially since some people apparently target physicians, intentionally having “accidents” on physicians’ properties because they expect a higher settlement. Having an umbrella policy covers this possibility and is typically relatively inexpensive. An umbrella policy may also include coverage for libel, slander, or invasion of privacy, such as people filming you on your property. Additional insurance coverage is also available for specific expensive items on your property (eg, jewelry, expensive electronic equipment), which should be discussed with a reputable agent or financial advisor if you need these policies.

Prior to signing for a home purchase, always insist on a home inspection, including a sewer scope, so you can factor costs of any needed repairs into the negotiations. Use a knowledgeable real-estate agent who has your best interest in mind. Generally, you should try to avoid buying directly from friends, family or colleagues, as this may strain relationships.

iii. Buying a Car

A car loan may also be considered a good type of debt, but only if it is absolutely necessary. It is generally better to “pay-in-full” rather than make monthly loan payments which typically include interest. However, some loans allow temporary deferment of interest and, if possible, you should try to pay off your vehicle before the interest-free period ends. Additionally, unless you are putting very high mileage on your vehicle, a car lease (renting the vehicle) is not considered the best option.

New cars depreciate vastly in the first several years, so buying a brand new car is rarely the best financial option. Buying last year’s model of a vehicle as soon as new models come on the lot may be better, if not a vehicle that is even older. However, this has to be weighed against cost/concerns of potential repairs of used cars and how long you plan to keep the vehicle. Many factors impact this decision, including the age and mileage on the car, the reliability of the car, and the cost. A practical, reliable vehicle is generally a better financial decision than the newest model of a luxury vehicle. And be aware, too, that insurance costs increase significantly with the value of the vehicle, along with certain colors and models (eg, red sports car have higher insurance premiums). A fun car right out of residency, like a big house, could end up limiting future financial options.

Cars eventually become too expensive to maintain, usually at around 10 years (although some good brands may last longer with routine upkeep and low mileage). For a new practicing physician, if you need a newer vehicle, consider buying a reliable vehicle around 1-3 years old, one with good gas mileage, and then selling it at around 10 years. While this should limit car maintenance and repairs, be sure to factor some costs into your yearly budget, along with car insurance and registration renewal. Some companies, like Consumer Reports, offer reliability data about various cars which can be helpful when considering which car to purchase.

The Kelley Blue Book provides information on the actual value of a used vehicle. You should also recruit a good negotiator with good knowledge of car sales before you make a purchase. Keep in mind that the total value has to be adjusted for additional car features beyond the listed car trim line. Negotiate the purchase price of the car separately from discussing a trade-in of your old vehicle, since the seller may otherwise use the trade-in to make the bottom line look inappropriately enticing. The dealership makes money from financing (interest on car loans) so you may not want to mention your preference to pay-in-full (without a loan) until after you agree on the purchase price and the trade-in value from your old vehicle.

Finally, don't feel obligated to buy immediately, regardless of what the dealership says—and they frequently try to pressure you. Always feel free to walk away and shop around. Fully understand the terms of the contract if you are leasing or taking out a car loan.

iv. Student Loan Debt

Student loans are generally considered “good debt,” but they vary significantly in types, terms, and conditions. Student loans may be direct or indirect, subsidized or unsubsidized, federal or private, and offered with fixed or variable interest rates.

1. Types of Debt

• Direct loans go directly from the lender to the borrower.
• Indirect loans are awarded through a third party. Federal loans are generally direct loans although there are a few indirect options (such as the Federal Family Education Loan—your parents receive the loan on your behalf).
• Federal direct loans can also be subsidized, meaning you don't accrue interest during medical school or during the 6-month grace period following medical school graduation, but you would if you deferred your loans during residency.
• Some federal direct loans are unsubsidized,meaning you begin accruing interest immediately upon receiving the money, including during medical school.

Capitalization occurs when each month’s interest is added to the principal of the loan if the interest isn’t paid each month. The following month, you will owe interest on both the principal and the interest of the previous month. The month after that, you owe interest on the increased principal amount. This is called compounding interest and results in an ever-increasing loan balance. Yikes! Obviously, subsidized loans are better because interest only begins accruing during residency when you have some income to begin interest payments. In sharp contrast, unsubsidized loans accrue interest during medical school and produce a much higher balance by the time you finally have a paycheck.

Federal student loans have fixed interest rates (generally between 4.45% to 7% depending on the year the money was borrowed), and they stay fixed at that rate throughout the duration of the loan. Perkins loans are also fixed, usually at around 5%. Private loans, however, are generally offered at higher rates of 8% to 10%, and these may be fixed or variable. Variable interest rates will change over time depending on the market and are obviously more risky. Unless you are enrolled in a time-based loan forgiveness program or have very, very low interest rates (where it may make sense to save a larger proportion of income towards retirement), strive to have your loans paid off within 5-7 years of graduation after residency, if possible. Look at the cost of interest you will pay on your loans over the life of the loans to determine the financial benefit of paying these off quickly.

2. Loan Repayment During Residency

Unless you obtained a scholarship program for medical school (or have a rich uncle!), you will likely graduate with several types of loans from multiple lenders. Payments can certainly be simplified with “autopay” or direct deposit options—and some loans do offer interest rate discounts if you pay automatically from your bank account or make regular, on-time payments for a period of time. Don’t miss out on this saved money! Still, the total monthly payment may exceed what a resident’s salary can afford. If so, you have the option of beginning income-based repayments, consolidating loans, or deferring.

➢Income-based repayment

Income-based repayment (IBR) options are designed to fully repay your loans over a period of 10, 20 or 25 years, much like a mortgage on a house, but they allow you to make smaller payments during residency, proportionate to your relatively low residency income. When your salary increases after residency, your IBR payments will proportionately increase as well. Due to capitalizing interest and relatively low initial payments, you will ultimately pay much more than the value of the loan itself, and even more than other repayment options.

There are several IBR plans and some factor in your family size, your spouse, and whether your spouse is working. It’s important to carefully review the types of plans available since this choice can significantly impact your immediate loan repayment amount as well as how you file for your taxes. Many residents begin IBR after the 6-month grace period during their intern year. Remember, however, that unsubsidized and private loans are already compounding interest during the grace period, whereas subsidized loan interest only begins to compound after the first 6 months of your intern year. Making immediate payments that at least cover the interest of your unsubsidized and private loans may be wise. Also of note, you should start IBR as soon as the grace period is over, especially if you plan to pursue the Public Service Loan Forgiveness (PSLF) program, described in the next section.

3. Student Loan Consolidation

Another option to help simplify loan repayment is loan consolidation, which means that multiple loans are lumped into one loan with only one (usually lower) monthly payment. This loan can be paid over a longer period of time, although usually at a higher interest rate. Federal loans can be consolidated into a Direct Consolidation Loan . There are also private financial companies that will gladly “help” consolidate your loans into one payment, but they aren't necessarily supporting your best financial interests.

Benefits:

• You have a lower monthly payment amount.
• One payment is much easier to manage than multiple payments to different loan companies.
• While unlikely, you might be able to refinance your higher interest rate loans to a lower interest rate.
• If you don't like your federal loan servicer, consolidation also allows you to switch to a private lender.

Disadvantages:

• Your average consolidated interest rate is usually higher.
• The repayment term is usually longer.
• You will ultimately pay more overall.

However, if you have a single high interest rate loan and many other lower interest rate loans, you may choose to consolidate all of the lower interest rate loans together to obtain a lower overall interest rate for the consolidated loan. Then you can quickly pay off the separate, single higher interest loan.

Note that if you consolidate using private lenders, you give up Federal loan benefits and protection.

➢Deferment

Some residents choose to defer loan repayment altogether during residency. Residents still have the option of paying any amount each month, but there are no required payments. However, as stated above, interest will capitalize and compound, unless you pay it, resulting in an increase of your loan balance throughout residency. Given that IBR is usually quite reasonable, you should pursue deferment only for truly pressing reasons or if you are certain that all debt will be entirely covered through some service program that doesn’t require direct payments. If you know you will eventually repay these loans, however, at least pay the loan interest.

➢Forbearance and Defaulting

There are two additional loan possibilities: forbearance and defaulting.

• Forbearance can be an option if you have a true financial emergency, such as a medical emergency that precludes you from working for an extended period of time, but this option must be addressed directly with the lender to determine if you qualify.
• Missed or forgotten payments lead to delinquency, penalties, and ultimately result in defaulting on the loan. Above all, never default on your student loans. This will significantly impact your credit scores, making other loans difficult, and may result in legal problems. While of course we don't advocate this as a debt-management strategy, total permanent disability and death will lead to federal loan discharges—dissolving of the loan, if properly filed. Private loans, however, will still require repayment from your estate and assets.

4. Scholarships and Repayment Programs

You are probably aware that you can sometimes pay off loans with service time instead of money. Some scholarship programs allow you to avoid taking out traditional loans because they pay for it directly. Other programs award money toward your loans based on the amount of time you agree to serve at a qualified organization. Many options exist, but it is important to pick the right program for your personal and professional goals. Remember that while student loans can be substantial, you can still pay them off with good financial strategies. The repayment option you pick should enable you to work in a setting that fits your goals and needs.

a. Public Service Loan Forgiveness

The Public Service Loan Forgiveness (PSLF) program will forgive your direct loans after 10 years, if you work full time (at least 30 hrs/week) for 10 years for the government, a 501(c)(3) non-profit organization, or a qualified not-for-profit organization that doesn’t operate as 501(c)(3). During these 10 years of service, you must make IBR payments on your loans. After 120 payments, the remainder of your direct loans will be forgiven, including any compounded interest.

The federal loans included in the program are:

• Direct Subsidized and Unsubsidized Loans
• Direct PLUS loans
• Direct Consolidation Loans (which can include Perkins, Federal Family Education loans and a few other qualified loans)

Loans can be for undergraduate or graduate studies. If any federal loans are consolidated into a direct consolidation plan, only the consolidation payments will qualify for the 120 required payments. It is probably best to consolidate all federal loans with a Direct Consolidation Loan in order to have them all qualify for the PSLF program. Be aware that you will still owe any private loans: they can't be included in the federal direct consolidation plans.

You should carefully compare the two most common plans for IBR:

• Often influenced by whether you are married, if your spouse is working, and whether you and your spouse are filing separately or together.
• Whichever option you pick, you must pay the full IBR amount and can't make partial payments.
• Also, if you make advanced or lump-sum payments beyond the IBR, these additional payments only count as one payment, so there is no advantage to paying more or paying in advance.
• You must make 120 on-time payments of at least the IBR. It is vital you keep up with payments if you hope to be eligible!

In order to apply after 10 years (and 120 payments), you:

1. Must complete the Public Service Loan Forgiveness (PSLF) Employment Certification Form (ECF).
2. Must complete the same form every year to ensure that your employer still qualifies for PSLF and to maintain an auditable “paper trail.”
3. Don't need to have ten consecutive years at a qualifying organization in order to apply; your years of service can be interrupted with part-time work, work for a for-profit organization, independent contracting, or taking a break from medicine altogether.
4. Will need to “prove,” prior to applying, that you have been employed by a qualifying organization in full-time work (30 hrs/week minimum) for a total of 10 years, and have made 120 regular payments during that time. Turning in the ECF for every year of public service simplifies the application process at the end of 10 years by keeping you on track. Your employer also has to provide evidence of your employment.
5. Must still be employed full-time with a qualifying employer when you turn in your application for the PSLF at the end of 10 years, as well as when your loans are finally forgiven. In other words, you can't apply to the PSLF program while working for a for-profit organization nor can you apply and then quit public service while waiting on the final approval.

Note: if you worked at another organization before returning to a PSLF qualifying organization, you must make monthly payments the whole time. Usually, your payments will be higher because your income has increased (therefore your IBR amount increases proportionately).

Good news:

Many family medicine residency programs, as well as some fellowships, actually qualify for PSLF. This includes residencies within the government system, a nonprofit, or a not-for-profit. If you decide early on to pursue the PSLF program, the sooner you get started, the sooner you start your 10-year count-down. Check with your residency program to see if it qualifies. If so, and if you have been making regular income-based repayments (rather than deferment), you should still be able to receive “credit” for these years. And even if you neglected to fill out an ECF each year of residency, you can still get “credit” if your residency program later sends the form to “prove” your full-time employment status for those years. This can be a good option for those planning to serve with an international NGO or medical mission nonprofit, as well as with the Indian Health Services or other governmental agency.

Bad news:

1. If you (a) “mess up” and fail to make timely payments, (b) are unwittingly employed by an organization that doesn't qualify or loses its 501(c)3 status, or (c) decide to take a for-profit job and never return to complete your 10 years, you will still owe your remaining loans. Not only that, you may owe much more than if you had made more aggressive payments during that time.
2. You can't work less than 30 hours/week and still receive credit for that time-period. This may be a consideration for physicians who want to work part-time indefinitely or take time out of medicine.
3. The PSLF program is looking for reasons to deny you payment, not looking to find reasons to pay you. Any mistake on your part could cost you a lot of time and money. Initially, only 1-2% of people were actually approved at the end of their 10 years! You are probably more attentive to details than the average college graduate, but beware that your mistakes won’t be overlooked.
4. While PSLF is contained in the Master Promissory Note (good news), there is always the remote risk that this federal program may be dissolved.

For further information, see Public Service Loan Forgiveness

b.National Health Service Corps

The National Health Service Corps (NHSC) is another good option but requires you to practice at a qualified medical practice in an underserved and/or rural area immediately after residency. NHSC options are available only to US citizens or nationals and require a commitment to a primary care specialty. Unlike the PSLF program, you must formally apply and be accepted by the NHSC.

For those entering medical school or already in medical school, there are two NHSC options (described in Appendix A). A third option is the NHSC Loan Repayment Program (LRP), available during residency (or potentially even later in your career), but has a strict yearly timeline for applications. The initial financial awards for scholarships are made after 2 years of work at a qualifying location, and range from $15,000 to $50,000.

➢Full-time workresults in greater reimbursements and is defined as a minimum 40 hours/week for 45 weeks/year for two years. Direct patient care must involve 32 hours/week, with no more than 8 hours/week spent on practice-related responsibilities and no more than 8 hours/week in clinical teaching.

➢The half-time option is also for 2 years, but requires a minimum of 20 hours/week for 45 weeks/year. Direct patient care must involve 16 hours/week with no more than 4 hours/week spent on practice-related duties or teaching.

After the initial 2-year commitment, you can apply for renewal and those who renew typically have priority over new applicants. The payment from the NHSC LRP is often given as a lump sum, deposited directly into your personal bank account, to be used for loan repayment over the allotted time of the NHSC. You will be required to prove that you have done so.

If you are able to pay all or a portion of the NHSC LRP funds upfront as a lump sum towards your student loans, instead of dividing it into equal monthly payments, this will save you considerable interest in the long run.

Types of practices that can qualify for NHSC physician recipients include: Federally Qualified Health Centers (FQHCs), FQHC-look-alikes (LALs), Indian Health Service Facilities, Tribally-Operated 638 Health Programs, Urban Indian Health Programs (ITUs), Federal Correctional Facilities and Immigration and Customs Enforcement (ICE) Health Service Corps. Others that are eligible include: state or local health departments, community outpatient facilities, school-based clinics, Medicare-approved critical access hospitals (CAH), state correctional facilities, some mobile and free clinics, community health services (CHS), rural health clinics (RHC), and some private practices.

Most NHSC scholarship or LRP recipients work as salaried physicians at these locations and receive reasonable benefits. You will, however, be unlikely to earn a highly competitive salary compared to private practice. You may also potentially have some practice limitations on scope or patient population. Some of these practices can struggle with financial limitations and, due to higher staff turnover and inconsistent clinic management, physician dissatisfaction can occur.

The NHSC qualifying practices, listed above, are stratified into a yearly scoring system, based on need, called the Health Professional Shortage Area (HPSA) score ranging from 1 to 25 for primary care. Only after these scores are released (each year in the spring) can PGY3 residents interview and sign contracts. Scores for particular locations and cut-offs for financial reimbursement both vary over time. You can’t assume an organization that serves an “underserved” population, or that previously held a qualified HPSA score, will be an option when you graduate. You will still need to interview at places meeting the HPSA score and you’ll certainly have the ability to choose among these, but the organization you ultimately sign with may not be your ideal practice. For example, if you are interested in a hospital-based, full-scope or obstetrical practice, or are wanting to practice in a particular location, neither may be an option. Additionally, you may be precluded from pursuing fellowships, especially non-ACGME Certificate of Added Qualifications (CAQ) fellowships.

Some residents are comfortable with delaying the signing of a contract until the end of PGY3, while others find this extremely challenging. However, should you find yourself unsatisfied with your signed practice, you can switch to another one with a similar HPSA score, but you would need to interview and be hired at that new location (with approval by NHSC). Special stipulations apply for the time period between locations, which should be considered, especially if crossing state lines and applying for a new medical license. The HHS contract and NHSC stipulations should be reviewed carefully. You’ll need to inform them and your employer of parental leave or any other work interruptions, keeping in mind that unapproved reasons for a leave of absence may result in defaulting on your service period.

In summary, the NHSC program is a good option for the right physician. It is much less risky than PSLF and it WILL pay your student loans. NHSC generally has the incentive to keep physicians satisfied with the program, however, unlike the PSLF program, once begun, you can't leave the program without notable penalties.

➢Combining NHSC and PSLF Options

You may benefit from combining the NHSC and PSLF options. The first option is to pursue the NHSC Scholarship Program, followed by the NHSC Loan Repayment Program. You might do this if you only received the NHSC Scholarship for a few years during medical school, but have additional student loans from undergraduate education and medical school. You would finish your scholarship repayment service time first, then apply to the NHSC LRP for the additional loan coverage. You may even be able to remain at the same NHSC qualifying practice.

You can also incorporate the PSLF with the NHSC if you have significant federal education loans since many of the NHSC-approved sites will also qualify for the PSLF. The payment from the NHSC LRP is often given as a lump sum and deposited directly into your personal bank account to be used for loan repayment over the allotted time of the NHSC. Thus, you would then pay monthly federal loan payments to the PSLF, as income-based repayments, not as a lump sum. This can be somewhat tricky to “pull off” without errors but there are reported successes.

c. United States Military

Medical school costs can be covered by serving with a branch of the US military, specifically the Army, Navy, or Air Force. Given the complexities of this option, it won’t be discussed here in great detail, however, there are specific eligibility requirements: for example, you must be a US citizen, within a particular age range, and able to satisfy physical fitness, professional, and ethical standards. For those joining the military before or during medical school, there are options listed in Appendix B.

If joining the military during residency (or later), you can still receive significant financial benefits, including sign-on bonuses that can be applied to your student loans. To join after residency, you must carry a valid license and be board-certified or eligible for such certification. Depending on the military branch, some programs that focus on loan repayment include Financial Assistance Programs (FAP) and the Health Professions Loan Repayment Program (HPLRP).

In addition to securing loan repayment, joining the military can be an excellent financial option and career. Military service provides many additional benefits, including bonuses, travel discounts, retirement benefits, and college funding for children. However, don't join the military if the military lifestyle, culture, and commitments aren't attractive to you or your family. Notable service requirements abound beyond those associated with being a physician. Any verbal assurances which purport to guarantee a specific location should be provided in writing before you sign a service agreement, particularly so if the desired location is non-negotiable.

For more information, see each program below:

Note: you can also apply to the NHSC while you are in the military reserve or to the PSLF while on either active or reserve duty. If you do so, you must still complete your required military training weeks and weekends with the reserves—but be aware that you may also be called to active duty. With the PSLF, the military is a government employer, so you can still use the time served in active duty towards your mandatory 10 years. If you apply to the NHSC, however, it’s important to carefully review the NHSC policies regarding transitioning to active duty. Also be aware that you’ll forfeit the service time in active duty that would otherwise have gone toward completing your NHSC service requirement.

➢Department of Veterans Affairs

The Department of Veterans Affairs (VA) has several scholarship and loan repayment plans for those pursuing a career in medicine. When applying to medical school, veterans, themselves, may be eligible for the Veterans Healing Veterans Medical Access and Scholarship Program (VHVMASP). For both veterans and non-veterans, there are two options: the Health Professions Scholarship Program(HPSP) and the Specialty Education Loan Repayment Program.(SELRP). All three programs give financial support in exchange for service at a VA facility after finishing residency.

Veterans with less than 20 years of prior Active Duty service, who subsequently work for the VA or any other federal civilian agency, and plan to remain for at least five years, should investigate the option of “buying back” their creditable military service. Doing so may increase their federal civilian pension payments.

d. Other Loan Repayment Options

A competitive NHSC State Loan Repayment Program(SLRP) exists separately from the national LRP. Many of these provide the best financial benefit if you apply during medical school, but there are also options for residents. https://www.ruralhealthinfo.org/funding/types/loan-repayment-programs

Most individual states also provide loan repayment assistance options to those willing to work in rural or otherwise underserved areas within that state. Given the great variety of requirements and payment amounts (which frequently change), you should carefully review available programs in your state. Ask physicians who have used this option about their experiences. There may be significant penalties if you opt out later or move to another state.

Finally, for those interested in medical education and who come from disadvantaged backgrounds, there is the Faculty Loan Repayment Program.

Student Loan Payment as an Employment Bonus

Student loans can also be paid through bonuses included in your first job contract. You may want to negotiate for this, but be aware that this money is taxed as income! Even if you are promised $25,000 per year in student loan payments, mentally be prepared to take out a significant amount in taxes. Additionally, if you leave your position before the contract is over, you may have to repay that money, including taxes or penalties!

Savings Principles and Setting a Budget

Now that we have covered debt, including student loans, we will discuss savings and budgeting. The widely accepted piece of advice is to maintain 3-6 months of living expenses in your savings account (or some other easily extractable investment, such as a money market account). This provides a financial cushion should you lose or quit your job unexpectedly. This is perhaps less likely for physicians than for the general population, but easily accessible savings is still important for emergencies, such as unexpected house or car repairs, medical emergencies, or unexpected travel. Think of this money like an insurance account, protecting you against a greater expense (eg, the expense of 14% interest rate after you put a large amount on a credit card, or the expense of a penalty when you pull money from a long-term investment).

Another general rule is to save at least 20% of your income for retirement. However, this assumes you began saving in your early twenties. Many physicians only begin thinking seriously about savings after residency or fellowship. Post-residency you will have much higher earning potential and can often “catch up” on savings for retirement, although you will have “lost” the interest you could have been earning earlier. In any case, assuming a traditional timeline through medical school, a general target is to have three times your physician salary saved by age 40. By age 50, you should have saved 8-10 times your yearly salary and 10-15 times by age 65. Obviously, a large part of these savings will come from the growth of your investments. It’s true that you will likely have debt and also that family medicine isn’t the most financially advantageous specialty, however, physician earnings are still in the top 1% in the United States. With a modest but comfortable lifestyle, sound investments, and disciplined debt management, you can save for a healthy retirement!

➢Making a Budget

Making a budget is critical to financial wellness because it allows you to choose the best strategies to pay off debt, save for the future, pay expenses, and still have discretionary funds. A budget promotes good financial habits before you start “living into” your new salary, especially since temptations to spend money will abound. You will soon be busy building your new practice so you need to make time now. Believe it or not, a budget gives you freedom, not restraint:

• It allows you to spend money on what really matters to you!
• It puts you in control of your money by assigning a purpose to each dollar.
• It will ultimately give you peace of mind.

Rule # 1: Always know where your money is going. “If you don’t know where your money is going, you’ll wonder where it went.” Good budget apps, like Mint, Every Dollar, or You Need A Budget, can track your spending and automatically put expenses into categories for you. Most banks also offer apps that show you where you spend your money. This can help give you a visual “birds eye” view of your day-to-day spending. You can set limits and targets for various types of expenses, with alerts when you exceed those amounts. You should periodically review your expenses at set intervals (initially every 1-3 months, then perhaps every 3 to 6 months) to make sure your financial goals are still reasonable and you are sticking to them.

Rule # 2: Prioritize debt management and savings. The 50-30-20 rule is a common one, wherein 50% of your net salary goes to needs, 30% to wants (which you may be able to reduce or eliminate), and 20% to savings. However, you will likely also have debt, which may need to come out of your 30%—and saving is always better than spending, so spending 30% on wants may not be prudent. Pick your discretionary expenses wisely.

You can find many sample budgets online. Find a way that works for you and work it!

Now that we have covered debt, including student loans, we will discuss savings and budgeting. The widely accepted piece of advice is to maintain 3-6 months of living expenses in your savings account (or some other easily extractable investment, such as a money market account). This provides a financial cushion should you lose or quit your job unexpectedly. This is perhaps less likely for physicians than for the general population, but easily accessible savings is still important for emergencies, such as unexpected house or car repairs, medical emergencies, or unexpected travel. Think of this money like an insurance account, protecting you against a greater expense (eg, the expense of 14% interest rate after you put a large amount on a credit card, or the expense of a penalty when you pull money from a long-term investment). 

Another general rule is to save at least 20% of your income for retirement. However, this assumes you began saving in your early twenties. Many physicians only begin thinking seriously about savings after residency or fellowship. Post-residency you will have much higher earning potential and can often “catch up” on savings for retirement, although you will have “lost” the interest you could have been earning earlier. In any case, assuming a traditional timeline through medical school, a general target is to have three times your physician salary saved by age 40. By age 50, you should have saved 8-10 times your yearly salary and 10-15 times by age 65. Obviously, a large part of these savings will come from the growth of your investments. It’s true that you will likely have debt and also that family medicine isn’t the most financially advantageous specialty, however, physician earnings are still in the top 1% in the United States. With a modest but comfortable lifestyle, sound investments, and disciplined debt management, you can save for a healthy retirement!

➢   Making a Budget

Making a budget is critical to financial wellness because it allows you to choose the best strategies to pay off debt, save for the future, pay expenses, and still have discretionary funds. A budget promotes good financial habits before you start “living into” your new salary, especially since temptations to spend money will abound. You will soon be busy building your new practice so you need to make time now.

Believe it or not, a budget gives you freedom, not restraint:

•  It allows you to spend money on what really matters to you! 
• It puts you in control of your money by assigning a purpose to each dollar. 
• It will ultimately give you peace of mind. 
  

Rule # 1: Always know where your money is going. “If you don’t know where your money is going, you’ll wonder where it went.” Good budget apps, like Mint, Every Dollar, or You Need A Budget, can track your spending and automatically put expenses into categories for you. Most banks also offer apps that show you where you spend your money. This can help give you a visual “birds eye” view of your day-to-day spending. You can set limits and targets for various types of expenses, with alerts when you exceed those amounts. You should periodically review your expenses at set intervals (initially every 1-3 months, then perhaps every 3 to 6 months) to make sure your financial goals are still reasonable and you are sticking to them.

Rule # 2: Prioritize debt management and savings. The 50-30-20 rule is a common one, wherein 50% of your net salary goes to needs, 30% to wants (which you may be able to reduce or eliminate), and 20% to savings. However, you will likely also have debt, which may need to come out of your 30%—and saving is always better than spending, so spending 30% on wants may not be prudent. Pick your discretionary expenses wisely.

You can find many sample budgets online. Find a way that works for you and work it!  One way to create a budget is outlined below:

1.     List take-home income for your household.

2.     List all fixed expenses, most expensive to least expensive:

a.     Student loan repayments (vs. optional deferral)

b.     Housing expenses

i.      Rent or monthly payments

ii.    Property taxes (if a homeowner), divided by month

iii.   Homeowner’s insurance (if a homeowner) and/or other insurance

iv.   Homeowners Association fees (if a homeowner)

v.     Other fixed household expenses (trash, yard work, cleaning, security)

vi.   Utilities (water, gas, electric)

vii. Maintenance: Set savings account for routine maintenance and repairs based on the average expenses for a home your size/age

c.     Car expenses

i.      Payments (if applicable)

ii.    Average gas per month

iii.   Set a savings account for routine car maintenance and repair

d.     Childcare

e.     Work expenses (if not covered by practice or CME)

i.      Subscriptions or organizational membership fees

ii.    Supplies

b.     Family member’s educational expenses (if applicable)

c.     Subscriptions and other routine fees

i.      Electronics: landline phone, cell phone, internet, software fees, online storage accounts, organizational accounts, financial management programs

ii.    Fitness/Clothing/Amusement subscriptions: Gym membership, Country/Yacht clubs, Coffee/wine subscriptions, Food box deliveries, Clothing boxes, Netflix and/or other TV/satellite programming, Paper/Electronic Newspapers, Music apps, Audiobooks, Photo editing, Paid phone apps (Be VERY careful of these, as they tend to accumulate; know which you can live without and periodically review which you are no longer using!)

d.     Charity/Donations

i.      Tithes, charitable giving, donations

2.     Variable expenses

a.     Household: food, toiletries, clothing, pet expenses, discretionary

b.     Vacation/Travel/Amusements

c.     Taxes

Always know what is reducible, what is essential, and have a plan to adapt as needed.

A few final pieces of advice

•  Gambling is not investing and can lead to financial ruin; it’s truly “not your best bet!” 
• Food and alcohol expenses can also be substantial, especially if you entertain frequently. 
• Avoid purchasing vacation time-shares unless you are absolutely certain this will save you money.  Many, if not most people, regret purchasing time-shares. 
• Subscriptions and membership fees add up quickly: golf and yacht clubs, and other expensive memberships or exclusive clubs often marketed to physicians.

Investing

Preparing for retirement is one of the main reasons for saving money and this is best achieved through investing. It may seem preemptive to start thinking about retirement now; after all, you are just starting your first “real” job! However, it is important to begin saving early so you don’t miss important “hidden” opportunities to save through your employer, which can make a huge difference if pursued early. While many family physicians often continue to work beyond the traditional retirement age of 65-67 years, most physicians still need financial stability when they do retire. Rule of thumb: In order not to run out of retirement funds, you will need to save enough before retirement so that you can live on 4% each year of the total saved amount. This section describes basic investing concepts and how to avoid major pitfalls.

➢    Financial Advisors

Studies show that untrained individuals (even smart ones like you!) make poor financial decisions compared to trained financial professionals. Investment resources abound (books, blogs, websites, podcasts, community message boards), including the White Coat Investor and Dave Ramsey, however, generally speaking, physicians should seek the input of a good financial advisor who can review your personal portfolio and provide recommendations specific to your best interests. Think of that advisor as a “primary care physician” for your finances. 

Financial advisors calculate your retirement needs based on when you hope to retire and project the best options for managing your specific debts and assets. Based on your risk tolerance and investment preferences, they then provide guidance on which types of retirement investments to pursue and how to balance your investment portfolio. Financial advisors may also act as asset managers, taking an active role in managing your investments to enhance their growth, some with access to additional investment options.

Financial advisors can be paid individually by a fee-per-hour, fee for specific tasks, or by an annual retainer. If managing your assets, they may also be paid with an annual flat fee, as a percentage of your asset’s growth, or, if they are part of a company, with a percentage of their company’s overall growth. If they are paid by receiving a percentage of your investments (which are hopefully growing), this can be reasonable, at least initially. However, as your investments grow, that percentage can become a considerable amount of money and this siphons money out of your retirement funds. Depending on your personal preference, your trust in your new financial manager, and on whether you think you can follow the plan and manage your assets, you may initially consider paying a one-time flat fee or fee-per-hour to develop a financial plan instead of making a long-term commitment to pay an ongoing percentage of assets. Keep in mind that, unfortunately, some financial advisors will try to make as much money as possible through fees and commissions. Some may not be acting as a fiduciary (someone who is committed to act only in your best interest).  Seek input from trusted mentors to find a financial advisor with real experience and price around so you know specifically how they are paid.

i. Investing principles: Compound interest, Pretax vs Post-Tax

➢   Compound Interest

One important principle of investing is compound interest. Simply stated, it is an exponential growth of money and is directly impacted by the time required for invested money to grow: the more time your investments have to grow, the faster they grow. The interest from your investments is added to the balance and can be compounded daily, monthly, quarterly, biannually or yearly. Obviously, the more often the additional money from interest is compounded, the sooner it begins to earn interest on itself and the quicker the balance grows.

“Compound Interest is the eighth wonder of the world.  He who understands it, earns it...He who doesn’t...pays it.” ~Albert Einstein

The US Securities and Exchange Commission offers excellent information and an investment calculator. Below are three examples of how monthly investments benefit from compound interest. The amount of time, rate of interest, and frequency of compounding combine in effect, resulting in a big difference in the final yield.

1.     $100 invested each month for 10 years:

○   $12,000 in a shoebox under your bed

○   $12,133 at 0.06% interest rate (average savings account), compounded yearly

○   $15,256 at 5% interest rate, compounded yearly

○   $15,611 at 5% interest rate, compounded quarterly

○   $15,996 at 6% interest rate, compounded yearly

○   $16,461 at 6% interest rate, compounded quarterly

  2.    $100 invested each month for 30 years:

○   $36,000 in a safe buried in your backyard

○   $80,158 at 5% interest rate, compounded yearly

○   $83,009 at 5% interest rate, compounded quarterly

○   $95,444 at 6% interest rate, compounded yearly

○   $99,983 at 6% interest rate, compounded quarterly

Rather than keeping money in a savings account, you can see how important it can be to invest early and wisely in order to gain the most benefit. The sooner, the better, even if it is a small amount!

➢   Pre-tax vs Post-tax

Another important investment principle involves knowing whether and when your investment money is taxed. There are unique advantages and disadvantages to the various options.

The pre-tax or tax-deferred option moves money into an investment account before you pay yearly income taxes. Taxes on this money are paid only when money is withdrawn from the investment plan (usually after retirement). You then pay taxes on whatever amount you withdraw, which includes any growth on the account over those years. Pre-tax investments immediately lower your annual gross income (AGI), which lowers the total amount of taxes you owe that year. This can be beneficial for physicians on the edge of a tax bracket (see the tax section) who want to pay fewer taxes immediately. The disadvantage is that the investment is taxed later when you withdraw it (at an unknown future tax rate), just as if it were earned income, and will include taxes on the growth too. 

Post-tax options involve paying income taxes before you make the investment, obviously meaning a smaller initial investment with less added interest. Later on, however, when you withdraw the money during retirement, you won’t pay taxes again and there are no taxes on the growth of the funds either!  In some situations, that growth can be substantial—and it’s all yours!  A disadvantage is that if you withdraw the money prior to retirement, there may be significant early withdrawal tax penalties.

In an ideal situation, some would recommend an investment of about 50% each in pre-tax and post-tax retirement funds, allowing you to “get the best of both worlds.” You may not be able to achieve this (some people may have limited post-tax investment options), but this is a great aspiration and depends on the options available to you, which you should explore carefully.

In either case, you must keep track of which accounts are pre-tax and post-tax. File a personal paper trail so you can remember that you did, in fact, already pay taxes on your post-tax investments, otherwise you might end up paying twice!  Every year in which you make a post-tax investment you’ll also need to report it to the IRS (Form 8606). 

ii. Retirement Saving Options

There are a wide variety of retirement savings or investment plans, which you must understand fully. A good financial advisor should guide you in which investment accounts are best for your particular circumstances, budget, current tax bracket, and retirement goals, etc. The principles below are for your general education and consideration (once again, remember the general rule that you’ll need to live on only 4% of your total retirement savings per year so you won’t worry about using your savings too quickly). Another word of wisdom: Always ensure you have listed a beneficiary and a clear paper-trail of all your accounts, which will really help you and your loved ones.

1.     Social Security Payments

Social Security Administration (SSA) money is automatically withheld from your employment earnings and paid back to you as a small stipend during retirement. Assuming the current status quo of SSA, it should provide about 40% of your annual pre-tax retirement funds (taxed annual income).  Even if the total monthly check is substantially more than that received by most Americans, it may not be enough to live on comfortably for most physicians, but it will certainly help to supplement your retirement.

In order to qualify for SSA, you need to accumulate at least 40 credits of work. You can earn up to 4 credits per year (1 per quarter) so 10 years of full-time work over the course of your career would qualify. Any year you worked and filed taxes qualifies, as early as high school. Unless you essentially stop working after residency, you should easily be able to achieve your 40 credits and receive your full retirement benefit package. If you work more than 40 credits (most people do), it won't accumulate into higher retirement funds per se but it can impact the amount you get: the amount of your monthly SSI check will be 40% of the highest annual income average of 35 years of your work. If you work for 10 years at a relatively lower income (i.e. high school, college, and/or residency income) followed by 35 years of higher income (i.e. physician salary after residency graduation) – you will ultimately get more SSI based on your 35 years of higher faculty salary (the lower income from the initial 10 years of work won’t be averaged and only the higher faculty salary).  On the other hand, if you only work for 15 years, and stop working for the remaining years (i.e. to raise children), you will significantly decrease your 35-year average income (since the years not worked are still averaged into that) and will receive less money.

Consider also that you will receive much less money, proportionately, if you choose to start receiving checks before age 67. You will maximize your SSA reimbursement if you wait until age 70, but no further increases are available thereafter. If you can live off other retirement funds until age 70 before applying for SSA, you will maximize your monthly checks. You can track your personal reimbursement amount and credits at the SSA. 

Benefits for SSA Disability and Medicare won’t be discussed here. Pension plans, sometimes referred to as “fixed benefit plans,” still exist in some settings (i.e. military), but are relatively uncommon and also won’t be discussed.

2.     Employer Sponsored Retirement Accounts

Most employers sponsor retirement accounts as an employee benefit and may “match” the money you direct from your paycheck into these accounts. If you choose this matching option, your portion will be automatically deducted from your salary each pay period and your employer will provide an equivalent amount or a sliding scale. This is free money and part of your benefits! There may be pre-tax (tax-deferred) and/or post-tax investments, depending on the employer options. For most employed physicians, this is the first place to build your retirement savings, long before private investing.

Employer-sponsored retirement plans fall under the following names: 401k, 403b, 457, and 401a. 

• • • Most private employers offer a 401k plan.
    •  401a and 457 plans are more typical of nonprofits and state or local governmental employers.
    •  A 403b plan is usually sponsored by educational institution employers

Note: Roth 401k, Roth 403b and Roth 457 plans are also available, which are post-tax, while traditional 401k/403b/457 plans are pre-tax (tax deferred).  Ask your employer which plans they sponsor and try to maximize investments into these accounts, especially if they are “matched.”

Employer-sponsored retirement funds are usually invested well and provide good growth. A financial advisor will often be available through your employer to help guide your growth plan, based on your preferences and risk tolerance. Even if you leave your employer, this money will still be yours and will continue to grow. If the account isn’t growing as much as you’d like, you can transfer (“roll over”) these funds into other retirement investment accounts. This isn’t the same as withdrawing the funds, which carries a penalty if done before retirement age (i.e. you lose money). Smart physicians maximize all employer retirement account matches because it is free retirement money! Here are types of plans that may be available:

A.   In an employer-funded plan, as an employee benefit, your employer contributes money directly to a retirement fund for you. This isn’t part of your salary but these plans often come with strict rules, including:

●      Vesting rules: A number of years of employment may be required to become eligible for the employer-funded retirement account benefit.

●      Matching rules: The employee may be required to contribute funds to their retirement from their own salary, and the employer contributes a “matching” amount at a set percentage. The matched amount and applicable laws may vary.

For example, an employer might match each 1% of salary if the employee contributes up to some maximum amount, often 3-8% of your salary, but can be more.  You should maximize this benefit by contributing the maximum amount that your employer will match.

B.    In an employee-funded plan, you voluntarily contribute money from your paycheck. The employer’s “matching” funds, if any, are also placed in this plan. Similar to IRA accounts (discussed below), these plans impose limits on your individual yearly contribution, however, the limits increase periodically.   For example, the limit was $19,500 in 2021, with an additional, optional “catch-up” amount for those over 50.

C.    A third employer-sponsored plan isn’t a savings plan for retirement, per se, but can certainly be used that way. The Health Saving Account (HSA) is for those who choose a high-deductible health plan (HDHP) as opposed to a Preferred Provider Organization (PPO) insurance plan. This is a pre-tax account, withdrawn automatically from your salary. It typically provides modest growth and allows the account to be used to pay medical bills without taxation (entirely tax-free!). If you use the money towards non-medical expenses, you will pay tax. You always control this money and it is yours to keep (as opposed to a Flexible Savings Account [FSA]). If you choose an HDHP with HSA, you should maximize your contributions to this account as well (see Health Insurance, later in this chapter).

  3.     Traditional and Roth Individual Retirement Accounts (IRA)

➢   Traditional IRA

Regardless of whether you are employed or self-employed, everyone is eligible for a traditional individual retirement account (IRA). IRAs come with complex rules and anyone who invests in an IRA should thoroughly understand their choice. Individuals can invest up to the annual contribution limit (which was $6000 per year for 2021). If married, each spouse can each get their own IRA and contribute up to the contribution limit. Individuals over 50 years old can invest a little more, a “catch up” concept that is also available in other retirement accounts. There are also spousal options (for married couples where one spouse is not working), which can be very good investments

A contribution to an IRA is tax deductible on your IRS Form 1040, which effectively turns what would otherwise be post-tax money into pre-tax money. There are limits on the maximum amounts you can contribute however ($6000 per year if under 50 years old; $7000 if over 50 years old for 2021). Traditional IRAs also impose early-withdrawal penalties (usually around 10%). If you didn’t get a tax deduction on the invested money, you need to remember how much was contributed when the funds are withdrawn. You need a paper trail because you will be facing this question thirty years later and you don't want to pay taxes twice! However, be aware that income taxes will still need to be paid on all the additional growth, regardless of whether it was tax deductible or not.

➢   Roth IRA and Converting Traditional IRA to Roth IRA (“Back-Door Roth IRA”)

Whereas traditional IRAs are “pre-tax” (in the sense of being tax deductible), a Roth IRA is a post-tax investment. There are a variety of Roth options available. The most common is the Roth IRA. Contribution limits are the same as traditional IRAs (for 2021, this was $6000 for those under 50 years old and $7000 for those above 50). There are also spousal Roth options (for married couples where one spouse is not working). You can withdraw qualified educational expenses from a Roth IRA without paying an early withdrawal penalty.

You can make contributions into both a traditional and a Roth IRA, however, whether you are investing in just one or spreading it over both IRA accounts, you can't exceed the maximum total contribution allowed per year, ($6000 for those under age 50). Roth IRAs are unique in that you can withdraw the contributions before retirement age without penalty (and it’s still tax free!), but you can’t withdraw the growth earnings early without significant penalties. The earliest you can make this kind of withdrawal is at 59.5 years old and no earlier than 5 years after the investment was made.

While you can contribute directly to a Roth IRA as a resident physician, because there are income limits, you probably won’t be able to contribute at an attending physician’s salary. In 2021, the income limit (modified adjusted gross income) was $140,000 for individuals and $208,000 for a married couple, filing jointly. However, that doesn’t completely rule out the Roth IRA since investment rules allow you to move (“convert”) funds from one retirement account to another. Currently, there is a legal allowance for you to convert contributions from a Traditional IRA into a Roth IRA, regardless of your income. Thus, you can contribute the standard $6000 to a traditional IRA and then immediately (within 60 days) “convert” the money into a Roth IRA via this “back-door” option. Since the Roth IRA is a post-tax account, if the traditional IRA develops any earnings before you roll it over, you will need to pay taxes on it (a small amount earned in 60 days or less). For this reason, many suggest doing the rollover from traditional IRA to Roth IRA the day after you contribute to the traditional IRA since there won’t be much to pay in taxes at that point (very little earnings in 1 day).  There are several ways to mess this up, but it is a great option!

iii. College Savings Accounts

Saving for your children’s (or potential children’s) future education is also important. The money you invest in a college savings plan is always post-tax, however, the growth of your investment can be tax-free income—if you spend the money on appropriate college expenses. Also noteworthy, funds from one child’s plan can be moved to another child's account; you maintain control of how the funds are spent.

One of the most popular and common types of college-savings plans is called a 529 plan. Each state sponsors a plan that you can invest in, regardless of your state of residence. If you live in Florida, for example, you can invest in the Nevada plan. Performance varies, fees can range by a factor of 5, and some states may also offer tax benefits, so it’s important to research various state plans! There are no income restrictions or contribution limits and 529 plans are generally quite flexible. Some parents invest aggressively early on and then become more conservative as the child approaches college age, which allows them to take advantage of exponential growth with compound interest!

Another similar plan is the Coverdale Educational Savings Account. Coverdale accounts do impose income and contribution limits, but are also considered to be very resistant to downturns in the market. Some states, such as Florida, offer pre-pay programs as an investment in tuition credits; essentially you are paying for college now, but at a lower rate (avoiding inevitable, historical tuition increases). These credits are restricted to the individual state, however, and usually to state-sponsored institutions: if your child ends up going out-of-state or to a private college or university, they may still be able to use the value of the plan, but it probably won’t cover their entire tuition as you may have intended. 

Uniform gifts to minors and uniform transfer to minors is a third option, however, this investment strategy has a key disadvantage: once the fund transfer or gift occurs, the parent loses control of the money and the child can use it for college education—or not. 

Finally, parents can withdraw money early from individual Roth IRA accounts for qualified higher education expenses—with no penalty!  Using a Roth IRA for college savings permits parents to save for this expense even before a child is conceived!

iv.  Additional Investment/Saving Option

There are additional saving and investing options, which we recommend after you have maximized other retirement options (i.e., employer-sponsored plans, traditional or Roth IRA plans, 401(k)/403b/457 plans). Some financial information claims that investments grow at 12+% per year, but this is generally unrealistic. Most investment plans grow and compound at between 6 to 8%, and are subject to market fluctuations. It will take time for your money to grow in private investments. A good financial advisor and plan can help you calculate this growth more reasonably.

1.     Stocks, Bonds and Mutual Funds

Stocks are shares in a company, which have higher risk because companies can lose share-value or go bankrupt, but they also have a higher chance for large gains. 

Bonds are loans and tend to be more secure investments, but tend to have lower gains. Thus, to reduce the overall risk of your investment profile while making decent gains, you will want to diversify your portfolio with some combination of both stocks and bonds. 

Another type of investment is real estate (property). 

Mutual funds (and exchange traded funds [ETFs]) are collections of stocks, bonds and real estate to include diversification such that the risk associated with each is reduced. Mutual funds can be actively or passively managed. The balance of stocks and bonds will change over time according to your age and risk tolerance. If you hope for more growth, you want to have more stocks (including within mutual funds or ETFs). If you want less risk and are willing to have slower growth, you would favor bonds.

When financially untrained people take over the investment “reins,” particularly in the stock market, bad things can happen. They can and do make profound mistakes, such as selling when fearful because the market took a short-term dip, investing too much in one area, or missing key investment options and opportunities. If you are unsure you can be disciplined and follow a well-designed investment plan, this might be a good reason to hire a financial advisor. If you choose to invest your money without professional support and are less comfortable picking funds, look at index mutual funds, which tend to produce average gains with reasonable levels of risk. A financial advisor can discuss the advantages and disadvantages of opening a brokerage account and managing these accounts for you.

2. Brokerage Accounts

Investment companies sponsor brokerage accounts. This money is post-tax and you will also be taxed on yourinvestment earnings, which are reported each quarter. Because a brokerage account isn’t a retirement account, you can withdraw the money anytime. Brokerage accounts have a wide variety of investments (stocks, bonds, and combinations of mutual funds) and tend to have more stable growth with less overall volatility. You decide how aggressive you want to be and/or the level of risk you can afford with your investments, acknowledging that it is possible to ultimately lose some—or a lot—of the money you are investing. Still, the growth can be significant over the course of your career.

Despite its greater risk, early in your career you should generally choose a more aggressive (although still balanced) growth strategy. As you approach retirement age, because there is less time to allow for recovery of the market, you should move to a more conservative approach. You can also make some decisions about what sort of companies to invest in. For example, if the environment is important to you, some mutual fund options only invest with “green” companies.

3. Savings Accounts

Bank or credit union saving accounts are a very safe post-tax option, and are insured up to certain limits. Unfortunately, they offer almost non-existent interest rates. Unless you are actively saving for a very short-term goal, such as buying a car or a down payment, only your emergency savings should be kept in a conventional savings account (and some would still advocate keeping that in a money market account).

Money Market accounts are cash investment accounts (mutual funds) usually offering better interest rates than regular savings accounts, but much lower rates than brokerages. These funds are invested in extremely safe investments and are nearly guaranteed to produce some financial gains. At banks, money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) and at credit unions, the National Credit Union Administration (NCUA), so you won't lose your deposits even if the financial institution goes out of business (up to the listed limit). This money is usually easily accessible, without penalties, if a withdrawal is needed.  

4. Certificates of Deposit (CDs)

CDs are issued for specific dollar amounts and invested for specific durations of time (eg, 3, 6, 9 months or 1-5 years), after which you withdraw the money (with any interest) or roll it over into a new CD account. This is a post-tax deposit and the interest growth is taxed when withdrawn. CDs are offered by many banks and credit unions and usually have predetermined interest rates: the longer the time commitment, the higher the interest rate. These can be a good option for saving over a set time-period (and perhaps longer), allowing modest interest to be earned. Your money isn't easily accessible for other uses, however, since an early withdrawal comes with substantial penalties.  Thus, this should be money you are ok not accessing during the defined period of time. 

5. Immediate Annuities

An immediate annuity is another option that essentially acts like an insurance company. You give a lump-sum contribution early in your career, with the expectation to receive a set amount each month for the remainder of your life. They are banking on you dying early enough to make it worth the return on the investment they make on your money—whereas you are banking on living a long time and the security of having a set income every month! Some people are choosing this option because of fears that Social Security funding will disappear when the proportion of elders increases drastically in the coming years. Unlike other investment options, this money disappears if you die. 

There are many kinds of annuities as well as mixed reviews on the benefits of this strategy, as compared to investing this money yourself. There are fees and other considerations. If you decide to invest in an annuity, a single premium immediate annuity (SPIA) may be a good option. Some options allow the purchase of an annuity at the same time you invest in a Roth IRA or Roth 401(k). Taxes vary depending on the type of annuity, however, employer-sponsored retirement plans and Traditional or Roth IRAs should be maximized first.

6. Real Estate

Real Estate is another investment to consider adding to your investment portfolio. It does take some work, even ifyou choose to use a rental or property management company, but the potential return on your investment can be significant over time. There are several ways real estate can result in a good return on your investment:

1)    Cash flow from rental income, minus any expenses. 

2)    Capital gains on the gradually increasing value of the property itself when sold (remember how most property increases in value, or appreciates). 

3)    Depreciation on property improvements can lead to tax benefits. If you consider the rate of increased value of the property, plus the “forced savings plan” as you pay off the mortgage(s), you increase equity. Real estate can become a substantial portion of your total net worth. However, with enough properties, you should consider this to be a part-time job and invest ample time in understanding principles of real estate before you begin buying property.

v.  Saving and investing vs paying off debt

You already know to prioritize paying off credit cards and all other “bad” debt. Strategies for repaying “good” debt can be more tricky. Assuming you aren't enrolled in any loan repayment programs, should you pay off your student loans (or even your house) as fast as possible? Or should you instead make minimum payments on your loans while contributing those funds to your retirement accounts?

There may not be simple answers to these difficult questions. You can always “crunch the numbers” to see which strategy will yield the best financial outcomes for you. This can be a challenging process, though, because student loans come with guaranteed and predictable interest rates, whereas rates of return on financial investments aren't always predictable or guaranteed. You can, however, determine what you’ll ultimately owe if you only pay the minimum amounts, and then compare that to the average earnings on typical retirement investments. Seeking loan repayment as part of your employment contract is also an excellent way to pay off loans. Finally, some people simply feel more secure with money saved for retirement while others prefer to be debt free. 

➢   Some additional pieces of advice:

●      Be wary of investing in pharmaceutical or medical device companies, even if they seem like potential “winners”:

1)    This can cause bias in prescribing, even unintentionally.

2)    It may result in you needing to make disclosures during lectures or publications that could impact your credibility.

3)    Even if a medication or device seems promising, the value of the stock itself is equally dependent on other market forces.

●      When considering high risk/high reward investment options (i.e., gold, cryptocurrency, medical device companies), these should not be done for mainstream retirement planning. These are very high risk and you could easily lose all the money. If you think you have a solid retirement plan in place and want to have a small investment in these high risk/high reward options, then it may be reasonable. However, you should carefully research these alternatives before investing and only if you already have a good retirement “nest egg” in place. 

●      Anyone offering their services for free or discussing a get-rich-quick plan that seems “too good to be true” is almost undoubtedly “too good to be true!” Some people WILL try to take advantage of you with investment schemes and financial planning assistance simply because you are a young physician. 

Taxes

i.      Property Taxes

Property taxes are included in your monthly mortgage payments for any loans on real estate you own. These advance payments will be saved in an escrow account and, when due, the escrow company will pay your taxes without any hassle on your part (however, this means you lose access to money that could be earning interest during that 6-12 months). If you purchase a home and pay less than a 20% down payment, property taxes are required to be withdrawn and paid by your mortgage company. If you have the option to manage your taxes yourself, or if you no longer have a mortgage, property taxes must be paid every 6-12 months (depending on state laws). Some states/locales give you a “discount” if you pay property taxes early.

The amount of property tax is determined by your property value and the local property tax rate. Property value is appraised periodically every 1-5 years (thankfully this amount is usually less than market value). However, major renovations or additions to your home and property (i.e., finishing a basement or adding a pool or deck) may increase your tax assessment (the amount you owe) when the property is reappraised. The millage or effective tax rate are determined locally by your local jurisdiction. While they may be frustrating, your property taxes cover five important S’s of your city: Schools (K-12 public schools and public libraries), Safety (emergency response, police and fire departments), Spaces (city parks and playgrounds), Streets (road construction and maintenance) and Sanitation (street cleaning, city trash collection, storm and wastewater management).

Cars are also taxed in most states. Some simply include these fees in the state registration renewal (aka “tags”) through the Department of Motor Vehicles (DMV)—don’t forget to renew your tags! Vehicle taxes may actually decrease each year because of depreciation. Other types of vehicles and personal property (motorcycles, four-wheelers, boats, airplanes, drones) may also require payment of state or local taxes. Keep track of these tax payments since you may be able to deduct them when filing income taxes.

ii.      Income Taxes

Personal and corporate income taxes must be filed yearly, usually on or before April 15. If you owe taxes, you must pay that amount by the April 15th filing date or you’ll have to pay a penalty (percentage rate) until it’s paid. Make sure you pay everything owed by the deadline one way or another!

➢   Tax Brackets:

You pay taxes incrementally based on your annual salary but your whole salary isn’t taxed at the same tax percentage. In other words, just because you are placed at a “32% tax bracket” doesn't mean you pay 32% in taxes on your total income. Instead, you pay a lower tax percentage for the amount of your total salary that falls into the lower tax bracket. Once your salary “spills over” into the next tax bracket, only that higher portion of your salary gets taxed at the higher percentage. Overall this results in a lower total tax percentage than your “tax bracket” would suggest--but still, the more you make, the more you are taxed and at incrementally higher rates.

After graduation from residency, you will likely find yourself in a higher “tax bracket.” For example, you may go from a 22% tax bracket on your resident’s salary to a 24%, 32% or even a 35% tax bracket with your new physician’s salary. Some practicing physicians may discover their salary is on the “edge” of another tax bracket; how they file their taxes could reduce not only the total amount of taxable income, but also the percentage of taxes payable for the additional income in the next tax bracket. 

For example, if your total income is $200,000 and the tax brackets are defined as

●      20% tax bracket up to $100,000 of income

●      25% tax bracket from $100,000-$150,000 of income

●      35% tax bracket for $150,000 to $200,000 of income

●      you only pay the higher percentage of tax (35%) on 25% ($50,000) of your income ($150,000 to $200,000) and your overall effective tax rate may end up averaging only 25% when looking at your total income. 

➢   Reducing Taxes

There are several ways to reduce your taxes:

●      Look for ways to lower your Adjusted Gross Income (AGI), the income amount taxed by the US Internal Revenue Service (IRS).

1) Maximize any contributions to “pre-tax” retirement accounts (reduces taxable income).

2) Paid student loan interest (there are salary limits for this tax deduction though and a practicing physician’s salary may not qualify).

3) Paid state taxes (tax deduction)

4) Real estate mortgage interest (tax deduction) 

●      You can claim other tax deductions. You will need to decide whether you want to accept the government’s standard deduction or if you want to itemize your unique deductions. The standard deduction amount depends on whether you are married or single ($12,550 for filing as single and $25,100 for married couples filing jointly for 2021). Itemization is only worth the record-keeping effort if the resulting deduction exceeds the standard deduction amount. It includes any valid business expenses and charitable giving (usually up to a certain amount). Deductions are discussed in more detail below.

●      If you are married, carefully consider the financial impact of filing jointly or separately from your spouse. This decision is dependent on your spouse’s income and deduction options, but it’s generally best to file jointly. Although we don't suggest having a baby every year (at least not simply for the tax break!) having dependents can also be beneficial. For children under age 17 you can claim a Child Tax Credit (currently $3600 per child <5 years old and $3000 per child 6 to 17 years old for 2021). You can only claim up to a certain amount, however, and this credit phases out as your AGI increases, so it may be a moot point for most physicians. Similarly, you can claim a Child and Dependent Care Credit to help cover the costs of day care or other caregivers for your dependents, but again, phases out if you are above a certain income. There are some Adoption Credits as well for adopted children.

●      If you are an employed physician, an additional part-time self-employed position may allow you to claim additional business expenses not otherwise deductible under your W-2 income alone. This may be especially helpful if you are transitioning from an employed to a self-employed position (i.e., growing your own business before permanently leaving your employed position), or if you are employed but have occasional locum work or other business income on the side. You can itemize essential expenses for your locum work or for your additional business, which can reduce the taxes paid on that extra income. This can be very helpful as long as the itemization is financially worthwhile for the additional time and energy you or your tax preparer spend on it.

●      Finally, flexible spending accounts (FSAs) offered by some institutions allow you to contribute pre-tax money (up to a predetermined maximum limit) from your paycheck to an account that can then be used to pay for designated expenses. The Healthcare FSA can pay out-of-pocket medical, prescription, dental and vision claims for you and your family. The Dependent Care FSA can be used for out-of-pocket expenses for daycare, after-school care for children and potentially also for disabled parents/spouse/children needing full-time care. The details of these plans may differ, but the concept is the same. These accounts are a way to save taxes (federal income and social security taxes) on money that you would normally use for those expenses. This is much better than paying taxes on that money and then turning around and using it to pay these expenses!

You are required to submit itemized receipts for these specific categories of expenses so you need to stay on top of them, however, some of the tracking can be done in a streamlined way, electronically or using an app, depending on who is administering your FSA.  You may be reimbursed for these qualified expenses from your FSA or sometimes it can be directly debited from your FSA.

Depending on your family’s projected needs, you decide how much you want to contribute to the FSA, up to the maximum annual federal limit (in 2021, the Healthcare FSA limit is $2,750, and the Dependent Care FSA limit is $10,500 for married couples filing jointly and $5,250 for single filers), but you typically need to spend the money you’ve contributed to the FSA in a designated calendar year. You may be allowed to rollover a specified amount to the following year, but the rollover amount allowed may vary from year to year. For instance, previously the Healthcare FSA only allowed a rollover of up to $500, but with the COVID-19 pandemic, any amount was allowed to rollover in 2020-2021. You should become familiar with these rollover amounts when deciding how much to put into the FSA to ensure that you can use it before it “expires.”

➢   Employed physicians:

When you are newly employed, you will fill out a W-4 form that asks how many “allowances” you want to claim. A withholding allowance is an exemption that reduces how much income tax an employer deducts from an employee's paycheck. The more tax allowances you claim, the less income tax will be withheld from a paycheck, and vice versa. There will always be some withholding for federal and state taxes, as well as Social Security and Medicare, but the tax withholdings will be lower when you increase withholding allowances” and you can update this at any time. When you file your yearly taxes, you may have to pay more or less in taxes, depending on whether your withholdings were sufficient to cover your required taxes.

➢   Independent contractors:

Independent contractors, including locum tenens, will receive an IRS Form 1099 statement and are considered self-employed for that portion of their total income. A Form 1099 is used by taxpayers to provide information to the IRS about all of the different types of income they receive throughout the year, outside of their regular salary. Unlike an employee paid with a W-2 form, no taxes are automatically withheld. You will owe money for state income and federal taxes, as well as for Social Security and Medicare. You will also pay taxes as both a self-employed person and as an employer (yes, you are technically employing yourself!). If you work as a self-employed physician, you must be prepared to save some of your income for taxes. As a resident, a general rule of thumb is to save 25-30% for taxes. If you decide to exclusively pursue locums as a full-time position after residency, you may well find yourself in a higher tax bracket by the end of the year and should probably plan to save 30-35% to cover for both self-employed and employer taxes.

As an independent contractor physician, you must also be prepared to pay estimated taxes quarterly, rather than yearly (unless this is your very first year of moonlighting: if you have been in good standing from a tax perspective, i.e., if you filed as an employed physician the previous year, you won’t be expected to file quarterly). It is still a good idea to pay quarterly your first year but, if not, just be prepared to pay up to 30% of your income in taxes when you file your first year of self-employment.

If you underestimate your taxes, or forget to make these required quarterly payments, you’ll incur a penalty when you file your annual income taxes. To avoid these penalties, plan to pay about 90% of your current annual estimated taxes (or 100% of the prior year’s taxes), paid evenly over 4 quarters. These taxes are both state and federal taxes, although the percentages will vary depending on the laws in your state. Obviously if you overestimate and pay too much, you will be refunded when you file your yearly taxes, but you won’t be able to save and earn interest on these funds. If you make your 4th quarter tax payment before December 31st, you can take advantage of this deduction for the current year, if you are itemizing your tax deductions.

Here is a tax estimator for independent contractors: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

➢   Self-Employed Business Owners:

Taxes for self-employed business owners are more complex and can’t be fully covered in detail here. Businesses include privately owned medical offices and direct primary care (DPC) practices, and are typically established as a corporation or limited liability company (LLC). The differences in structure and benefits of each type is complex. In general, LLCs tend to be much more simplistic to establish and operate. Corporations may give financial and tax advantages to slightly larger businesses with more employees, but have added complexity and expense.

Physician owners of medical practices have a variety of ways to be compensated, from both business earnings and with personal earnings generated from the practice. These medical business models may vary widely, based on business structures, operating agreements, and income streams from employed or partnered physicians, meaning income taxes will also vary. Advice from a good accountant and financial advisor are well worth the expense, especially for self-employed business owners.

iii.    Deductions

For employed physicians, recent changes in tax law (part of the Tax Cut and Jobs Act) have imposed significant limitations on tax deductions for business purposes. Some physicians now just choose the “standard deduction,” which is much simpler. However, it’s still possible that itemizing deductions is a better option for you to keep more of your earnings. A professional tax advisor can also help you determine which business expenses will still “count.”

Note: you can’t deduct CME costs or professional membership fees, even if they aren't reimbursed by your employer or they exceed your CME allotment. Business expenses for self-employed physicians are handled differently (see below).

If you choose the standard deduction, you can deduct some of your charitable giving, but the amount is dependent on your income. If you choose to itemize your deductions, you can deduct higher amounts of charitable donations. Deductible donations should be to 501(c)3 registered non-profits which have a charitable donation tax ID. Donations can include both financial gifts and the cash value of any donated items, such as donations to qualified thrift stores. Keep receipts for all donations over $250.

A self-employed physician may be an independent contractor with locum tenens, a solo-practice business owner, a full partner in a physician-owned practice, or a physician who does expert witness work on the side. Such physicians can itemize many more expenses since there is no one to “cover” such business expenses. If used for your business, these expenses can include:

●      Medical licensing, board certification, and DEA registration

●      Professional medical organizations

●      Malpractice insurance

●      Payroll taxes for employees

●      CME costs (including registration, travel, lodging, food)

●      Internet access, pager and/or cell phone costs

●      Office equipment

●      Work clothing and medical equipment (stethoscope, scrubs, white coat)

●      Home office expenses (computer, business programs, virus protection)

●      Business-related car expenses and travel miles (not including daily commuting)

●      Fees for taxes, accounting and retirement

●      Meals while on locum assignments (only 50% deductible)

●      Entertainment is not deductible (e.g., you can't claim scuba instruction expenses just because you are on a cruise-ship for a CME course).

It is extremely important to itemize your expenses and keep all receipts. You should try to deduct everything appropriately considered a business expense, however, keep in mind this may place your aggregate deductions above the IRS normal “range.” An IRS audit is somewhat more likely, but that shouldn't prevent you from claiming true expenses as tax deductions.

iv.    IRS Audits

Many physicians inappropriately fear an IRS audit, but for most an audit simply amounts to an inconvenience. Audits are actually very rare, and, in many cases, an audit results in money being refunded to the taxpayer! Audits almost never lead to criminal charges, but you may have to pay fees and/or additional taxes if yours were inappropriately filed. There are some areas that may “flag” your return for IRS attention. Flagging is based on a scoring system called the “Discriminant Index Function” (DIF) and yours will be high if you:

●      Work locum tenens or do other forms of contract work

●      Own your own business, especially concierge, DPC and cash-only clinics

●      Fail to report income, like investments that generate a tax trail

●      Report excessive deductions for your home office or business

●      Report business expenses that are accidentally classified by the IRS as a hobby (such as flying for an interview for a new locums position)

●      Report excessive charity donations

If you lose an IRS audit, you will probably only receive a “deficiency notice” that requires you to pay more taxes and possibly a penalty, equal to 20% of the underpayment. You may be able to avoid the penalty if you can show a “reasonable basis” for why you filed inappropriately.

The IRS has 3 years to file an audit after you submit a return, so you should keep your tax return files for a minimum of 3 years (with receipts for any deductions, including business deductions). Most experts suggest maintaining records for at least 7 years, given some potential loopholes and exceptions—while other experts recommend keeping records forever since they provide a financial “paper trail” of your major purchases, loan repayments, retirement deposits, etc. If you can easily store these, then there isn’t much downside to keeping tax records long-term.

v.   Seeking Help

There are two kinds of professional tax advisers: Certified Public Accountants (CPAs) and Enrolled Agents (EAs). An EA specializes only in taxes. There are also many unlicensed tax consultants. Using licensed certified professionals can be expensive, but may be advantageous because they can legally represent you if the IRS audits you. Their main goal is to organize your documents, enter the data into the 1040 Form, help you decide between the standard deduction or itemization, and to file your taxes. In many cases, using an expert will save you both time and money, and if the IRS comes knocking, they will be of service to you.

Health Insurance

Health insurance plans and medical bills can drastically affect your finances. Furthermore, there may be ways you are wasting money on unnecessary healthcare coverage. Most employers offer several health insurance plans and you can often purchase additional dental and vision plans. Sometimes it makes more sense to have your spouse under your own plan, versus having your spouse stick to their own employer or buy their own coverage in the market. If you are self-employed, you will need to purchase healthcare coverage for yourself and your family. Above all, don't go without coverage, even for a short time. Many of us underestimate the true financial burden of major health catastrophes and we underestimate our own health risks. One accident or unexpected health problem without coverage can be catastrophic, not only health-wise but also financially!

There are Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs), High Deductible Healthcare Plans (HDHP), often combined with Health Savings Accounts (HSA), and Exclusive Provider Organizations (EPOs). With all plans, you pay a certain amount in monthly premiums, typically withdrawn from your paycheck. Generally, the more you pay monthly, the more they will cover. You typically have a co-pay, paid at the time of service, then you receive a further bill later, showing the portion covered by your health insurance company. There may also be deductibles (the amount you must pay before your insurance begins payments), as well as maximum out-of-pocket costs you are responsible for before your insurance kicks in.

Particular physicians and healthcare facilities may not be covered by insurance or may only be partially covered, depending on whether you have a PPO, HMO or EPO. In seeking care, you may need to make sure both the physician(s) and facility are covered before you seek care there (which is hard to do in an emergency!). For example, if you have an obstetrician in-network, but the anesthesiologist and hospital aren't, you may have a pricey bill when you have your baby!  PPOs provide a list of preferred providers/facilities, but will still cover some amount of the bill if you seek care outside of their preferences.

HDHPs have lower monthly premiums, but much higher deductibles (both minimum and maximum). If you have a major catastrophe, you will have to pay a lot more to meet your minimum deductible, and the maximum out of pocket deductible is also much higher. In 2020, the deductible was at least $1,400 for an individual or $2,800 for a family. An HDHP’s out-of-pocket expenses can't exceed $6,900 for an individual or $13,800 for a family per year. Most physicians could ultimately afford to pay this deductible out of pocket, however, many insurance companies won't pay for out-of-network services after you meet your minimum deductible. You really need to make sure your medical expenses are in-network, if possible. As with PPOs, if you plan to get pregnant, you should carefully compare available plans to make sure everything is covered in-network.

Compared to other insurance plans, a HDHP with HSA can be a good option. Most employers will often match the amount you direct into your HSA or you can sometimes purchase one. HSAs are tax-free and you own and control the money; however, you can only use the HSA for healthcare bills. Qualifying healthcare expenses include any amount that contributes to your deductible, such as copays (after you meet your minimum deductible), doctor’s visits, hospital bills, ambulance, laboratory and radiology, dental care, vision care, hearing aids, durable medical equipment, over-the-counter and prescription medications, physical and psychological therapy, gym memberships, and even some things like support animals, therapeutic massage, chiropractic care or acupuncture (sometimes requiring a Letter of Medical Necessity). If you use HSA funds for other things, they will either be denied or you will have to prove medical necessity. Your HSA account is always yours, even into retirement and has slight growth over the years. Note: it is legally unclear whether HSAs pay for a monthly Direct Primary Care membership, but many use it for this purpose. Also note that it will take time for your HSA to build up. You will have to pay for medical bills out of pocket your first year. Regardless of how your medical bills are paid, you need to keep receipts to “prove” your deductible was met and for tax purposes.

If you are self-employed, or opt out of your employer-sponsored healthcare plan, you’ll need to purchase traditional health insurance of some kind. The Affordable Care Act (ACA) offers plans which may be a reasonable choice: although the cost of an ACA plan increases based on your income, you may have less income when you are just starting your business.  Alternatively, you might consider healthshare plans, which tend to be significantly less expensive, however, they may have limited coverage for particular services. Healthshare plans should be carefully researched, especially the maximum amounts covered in case of a catastrophe. 

There are no right or wrong answers in choosing healthcare coverage—except that you need to have it and be comfortable with your ability to use it, whether for routine care or in the event of an emergency. The Dr. Wacasey Equation can help you determine the relative cost effectiveness for insurance coverage in the case of an emergency, “catastrophic coverage,” however, it does NOT include the cost of routine care, such as high deductibles or copays that may discourage routine use for non-emergent care. You need to consider both routine/preventative and emergency care, pick a plan that best meets your needs, and (especially if your health has changed or your family has grown) review all plans carefully every year to compare options.

Advance Directives and Beneficiaries 

We all advise our patients to sign advance directives, and we need to take our own advice! At a minimum, you need to have someone serve as your healthcare surrogate or medical power of attorney: signing a living will and discussing it with them can help them understand your wishes so they respect your choices, and it will also take the burden off family and friends. You also need to designate someone as your financial power of attorney, preferably someone who could also serve as your individual executor. A beneficiary should be listed on all assets. If you have children or other dependents, you will want to name legal guardians. Later in your career, you will need to pursue estate planning. Meanwhile, you may want to find an attorney familiar with your state laws and to help notarize any documents. The best time to do this is always now! 

Malpractice Suits and Asset Protection

Most physicians have concerns and questions about the personal financial impact of a malpractice lawsuit.

1. The vast majority of cases against family physicians are settled, dismissed before a verdict is given, or given a verdict in favor of the physician. 
2. Your liability coverage is almost always sufficient to cover the lawsuit if you lose.
3. The best way to avoid malpractice lawsuits and related issues is to practice good medicine, have good communication skills with your patients, and good documentation of your care and communication (avoiding and 
4. You must fully understand your policy and have no gaps of coverage, which might include purchasing tail insurance for claims-only liability (for more details, see Contracts - Liability). 
5. Research state laws to learn if your personal property, retirement and/or investments are protected. Some states protect your home equity, meaning that you may want to pay down your mortgage quickly so the house will be exempted from liability losses.

•    You can protect your assets from losses by no longer having them under your own name, or at least not exclusively under your name. One common example is to simply put all your assets (except any unique-to-you retirement accounts) under your spouse’s name. Obviously this is unadvisable if you are considering divorce (see Divorce, below). You can also have your property titled under both you and your spouse’s names, which exempts your home if you are the only one listed on a malpractice suit.

•    You can make a large gift to your children in the form of a Uniform Gift to Minors or Uniform Transfer to Minors (see College Savings). This can be done 5 years prior to them receiving the money, so it could easily be done in the middle of a lawsuit, if you suspect the verdict won't be in your favor and would be above your liability coverage. You can also place your money in an irrevocable trust, although there are downsides to this option.

•    Finally, some life insurance policies and annuities are also exempt from liability losses (although we don't necessarily recommend these as a general financial strategy).

•    As we mentioned under homeowner’s insurance policies, physicians are sometimes targeted for personal (not malpractice) lawsuits. Again, these can be substantial and you may want to consider maximizing your vehicle and homeowner’s insurance policies by purchasing an umbrella policy. This won’t cover losses from a malpractice suit, but it will cover you against other types of lawsuits.

Divorce

Divorce is perhaps the greatest threat to your financial and personal wellbeing, and possibly even to your professional wellbeing. Intentionally prioritizing and investing in your marriage will pay dividends. Similar to how preventative health care can prevent some health problems, routinely seeking ways to have positive connections with your partner can prevent some relationship problems before they arise. Medicine changes over time requiring dedicated time and energy to keep up with them.  Both you and your partner will also change over time requiring similar dedication of time and energy as you face the emerging stresses of having children, a new practice, health changes, and the whole gamut of life’s positive and negative human experiences. It is worthwhile ensuring your marriage flourishes during all of this! If you are already encountering relationship issues, marriage counseling should be pursued early, before a crisis emerges from emotional and physical separation.

Some financial experts recommend obtaining a prenuptial agreement, which describes the settlement arrangements for your property and assets in the event of a divorce or death. These can be signed before or even after you are married. This is a very personal decision, impacted by personal values and your net financial worth at the time you marry. While obtaining a “prenup" may be prudent financially, some evidence shows that it may actually correlate to a higher chance of divorce. The most important thing is to pursue good communication and try to avoid divorce.

Bankruptcy

While it may seem shocking, it’s possible physicians will need to declare bankruptcy. This can happen when divorce and/or poor debt management collide: compounding student loans, poorly managed credit cards, overwhelmingly high mortgage payments, and/or excessive lifestyles. Bankruptcy isn’t uncommon for physicians who own their own medical practice since these can be financially risky. Finally, personal healthcare costs can also result in bankruptcy: it is vitally important for you to have adequate health insurance coverage.

Summary

No good decisions are made at night or when you are stressed, hungry or sleep deprived!

Financial wellness is achievable! In summary, we recommend you make a reasonable budget, adjust it over time as needed, live within it and, if married, strive to be on the same page as your spouse. Live far below your means as long as possible and know where your money is going. It is never too early—or too late—to begin saving and investing. Avoid overspending on a house and car. Avoid credit card debt and, if you have it, pay it off! Manage your good debt; pay it off as quickly as you reasonably can. Implement a balanced investment plan, maximizing any employer sponsored plans first, then utilizing pre-tax and post-tax investments utilizing a financial planner’s advice as needed (usually weighted toward maximizing a Backdoor Roth IRA first). Invest in brokerages that traditionally have good return on investments. Avoid any “get rich quick” schemes.

Wellbeing Inventory

We recommend you take the time to create an inventory of your current wellbeing at the end of residency. Medical school and residency generally involve an extremely challenging lifestyle where there is limited ability to advocate for personal wellbeing. Whatever you are experiencing, it is important to fully acknowledge it. 

1. Schedule out a day or two to review the last decade of your life. What events, emotions, or regrets do you need to process? Have any negative coping mechanisms emerged as habits? Do you need to seek professional help for mental or physical health? Take the time to honestly assess these and ask others for input.
   
   
2. Recognize that there may be strain in your relationships. Spend time with your loved ones taking a similar wellness inventory. Have you grown apart? Are there issues that have been pushed aside or neglected? Is there frustration or resentment that needs to be addressed
   
   
3.  If you find that the wellbeing of you or your key relationships are struggling, take time to address these before starting practice. You may want to schedule several months off before starting a practice, or work part-time to improve your wellness. Consider attending a retreat, go on a special vacation with family or friends, or find a therapist. Always remember: YOU are NOT your job. You are YOU, a unique human being with indescribable value and worth. You must take care of yourself and your loved ones, first and foremost. Without this, you will have little satisfaction in your career.

Wellness Budget

After creating an inventory of your current state of wellness, consider making a wellness budget.  Some key investment areas in your wellness budget include physical, emotional, spiritual and social health, which are outlined below. As you create this, ask yourself: What takes energy out of my life and what puts energy in? What healthy habits do I need to prioritize? How will I prioritize these when life is busy? After making a wellness budget, consider scheduling intentional time to review your wellness priorities. For example, every 3 months or so, you might systematically reassess your wellness budget: are you “spent” and “in the red,” or are your personal and relational ‘investments’ growing? This can be done individually or with a partner, friend or life-coach.

You may find that maintaining healthy habits may not be possible, even with prioritizing changes. If professional responsibilities continuously encroach on your wellness and/or if relationships are spiraling downward - take action! During your career, you may need to cut back on responsibilities, switch to a part-time position, or leave your current position. Do whatever is necessary in order to be a flourishing person with healthy relationships.

Physical Health

Every physician knows caring for your physical health is important and you now have more of a budget to help support your health. Take the time and money to build healthy habits and make it easier to maintain as your practice gets busy. 

Firstly, sleep matters! As you transition into your new job, invest in a comfortable sleeping space, such as room darkening curtains, a comfortable mattress, a “white noise” machine if needed, etc. Try to practice good sleep hygiene and avoid dependence on medications or alcohol.

Secondly, eat a healthy diet. Residency often provides access to cafeteria food and some employed positions provide food as well, but these may not include healthy options. Some suggestions for busy physicians include:

• Use a healthy grocery delivery service or boxed meal service
• Hire a personal chef (these may be cheaper than you think!)
  
• Use a slow cooker, pressure cooker, air-fryer, etc.
• Find healthy simple recipes that you can circle back to regularly

Thirdly, exercise! We all know this is important but must be continuously prioritized:

• Put exercise on your daily or weekly schedule – yes schedule it!
• Find an exercise partner or accountability partner
• Prepay and register for classes
• Hire a personal trainer (you can likely afford it now!)
• Invest in good home exercise equipment (and use it!)
• Sign up for races, events, or active hobbies

Finally, get routine medical care. This is a very difficult thing for physicians but we must “practice what we preach” in terms of preventive and chronic care management.

Emotional Health

Physicians are more likely than the general population to experience mental health disorders, including depression, anxiety, substance use disorders, and even to attempt suicide. And yet we are less likely to seek help, often due to stigma around mental illness. If you think your mental health is suffering, please seek professional help. Take any expressed concerns of your family, friends or mentors seriously. It’s not a weakness or failure to seek help; it only makes you stronger. Even without a diagnosis, life transitions and practicing medicine are both challenging, and professional therapy can be very beneficial.

Compartmentalization is a particular concern for physicians, who often learn to compartmentalize emotions and experiences from work. Some physicians become quite adept at “creating boxes” as they move through training. Compartmentalization can be a helpful temporary coping skill to “store” emotions or memories; you can even visualize yourself placing them in there and closing the lid, allowing you to function in stressful or busy situations. However, we also must take the time and space to “unpack these boxes” which takes emotional work. It takes time and energy to intentionally open the box and systematically examine the emotion or memory. This can be done through personal activities like journaling or artwork, or by intentional communication and processing with a friend, family member, mentor, physician support group, or licensed therapist. Each person will unpack their boxes differently, but the important thing is to create a regularly scheduled habit to review the day, week, month, or year for any unfinished “business.” Otherwise, overflowing boxes can lead to unhealthy coping strategies and damage to relationships over time.

Physicians also must prioritize purely relaxing activities, which is harder for some than others, and such activities are often “put on hold” for significant lengths of time during training. Such activities are important, allowing us to reintegrate with our unique personality, passions, and interests. There will always be more work to do, so these must be considered essential. You need this to rejuvenate from professional and personal stressful activities!

Spiritual Health

The practice of medicine is often deeply spiritual work, and many enter the field of medicine because of their spirituality. It’s important to schedule dedicated time in your life to explore and cultivate your inner life, such as what brings you purpose, meaning, joy and fulfillment. How you practice your spirituality will obviously vary significantly, but studies have shown that established religious habits have significant and important positive consequences on health and wellbeing. Gratitude, mindfulness and centering practices have also been consistently shown to be beneficial. Besides engaging in formal communal or personal religious practices, some resources to consider include:

• Mindfulness and Meditation:
  

○      Mindfulness-Based Stress Reduction

○      Headspace App

○      Mindfulness App

○      Calm App

○      Stop, Breathe, & Think App

○      Mindful Living Programs

○      Mindful: Taking Time for what Matters

○      ChiRunning

○      Running with the Mind

○      Yoga Download

○      Center for Mindfulness in Surgery

• Gratitude: Focus daily on what you learned or a positive patient encounte
  

○      Expanding Gratitude

○      Gratitude Journal for Physicians

○      State what you are grateful for at family dinner every night

 

Spiritual connections can also be important for processing moral injury. Having access to a trusted religious or spiritual advisor can provide support in the event of a bad patient outcome, a personal or professional challenge, or a catastrophic event. At some point, there will be challenging situations that benefit from a spiritual community and from trusted mentors to process emotions and help rekindle meaning and joy.

Social Health

Physicians also need to establish boundaries around work to maintain healthy personal connections and relationships. Make sure to schedule time to nurture personal relationships on a regular basis, such as scheduled time with family and friends. Always use your vacation. Guard this sacred time so that it doesn't get rescheduled with other responsibilities.

If you don’t have a set of key relationships in your new location, take time to seek them. Making friends and developing relationships after residency can sometimes be hard, but is crucial for your wellbeing. Obviously pursuing fun activities and hobbies are a great way to connect within the community. Try to build connections before you get busy with your new professional responsibilities.

Boundaries

Once you have created a wellness budget focused on physical, emotional, spiritual, and social wellbeing, you need to place clear boundaries around each category. Just like a financial budget, these boundaries give you freedom—not constriction! There will be numerous demands on your time and no work-hour rules. You may happen to have an agreeable personality that makes you say “yes” to requests. You may also want to advance your career or pay off debt quickly by working more. Over time, this can result in ever-increasing responsibilities and no wellness reserve. Instead, it is important to prioritize good habits and spend a few hours every quarter to review your wellness budget, boundaries, and current commitments. If you need help with this, seek a life-coach or mentor who can hold you accountable.

Here are some recommendations on setting boundaries:

1. Say “no” to new commitments outside of your required work for 1 year (or at least put intentional guardrails on new responsibilities). Soon after you start your position, you will be asked to serve on various committees and perform various administrative tasks. If at all possible, politely thank them and JUST SAY NO.
2. Ask to be reconsidered after settling into practice. Remember: being a new practicing physician is enough responsibility and adjustment. Additional work responsibilities will increase over time and you will want to constantly assess and align these with what is important to you and your career goals.
3. Schedule all personal and professional responsibilities (including wellness) into your day; always look for availability before you say “yes” to additional areas. Don’t bump wellness for professional activities.
4. There will ALWAYS be more paperwork than can be reasonably done. Advocate for an administrative half-day or full-day per week, and for adequate support staff to manage your paperwork. If tasks creep into your vacation and off-hours, you need to advocate for more administrative time.
5. Schedule time out: plan times into your day, week and month where you do NOT check email and are completely off of responsibilities. Let colleagues and staff know you are unavailable during those times. If possible, avoid the habit of writing work emails, non-urgent texts or making non-urgent phone calls to colleagues after-hours. Doing so not only leads to burnout, but sets an expectation for others to work after-hours.
Use all vacation time each year and schedule it in advance. Do not allow yourself to feel guilty: vacation time is yours and is necessary for your wellbeing. Try not to use your vacation time for work-related projects or “catching up.” If you use this for yourself and your family, studies show you will actually be more productive at work.
6. Avoid working from home, if possible; if you must, schedule time and space for these responsibilities as separate from personal life.

That said, while boundaries are important, truly rigid or absolute stipulations are not always achievable or even desirable. Many physicians are able to enjoy good personal wellbeing by having good boundaries, while also remaining somewhat flexible in particular pressing circumstances. Deciding where and how you are able to bend and accommodate is also important for you and your colleagues, where unexpected events take place. Without any flexibility, it can put strain on professional relationships when there are sudden changes out of anyone’s control. If your boundaries are frequently or continuously infringed upon, outside of such unusual circumstances, it is important to communicate this to your team prior to feeling frustrated or burned out. Team-members and administrators are often not aware of the additional burden of unexpected responsibilities until things have escalated past the point of repair. No one wins if you burn out, so proactive communication is beneficial for everyone. And in the end, if you feel that you are unable to maintain your personal wellness, despite being proactive and advocating effectively, you should consider other professional opportunities.

Personal Wellness Summary

In summary, it is important to take care of your mind, body, soul, and your relationships. Proactive strategies will develop and support healthy habits and boundaries. If you can implement wellness planning into your career as an obligation, you will be better able to identify and implement positive changes before a crisis emerges, and experience much more success in personal and professional endeavors.