9 COMMON FINANCIAL ERRORS AMONG PHYSICIANS
Despite doctor’s collective reputation as poor money managers, I suspect that physicians make financial management mistakes at about the same rate as every other working person. However, the consequences can be more concerning for physicians for two principle reasons:
Pursuing the Risky
After residency, physicians have the considerable advantage of a good stable income, but can and many times do, squander that hard-earned gift by pursuing strategies that are much more risky than required to ensure a safe comfortable life free of financial worries.
Not Having a Pension
Unlike teachers or other salaried employees, doctors generally do not have pensions but must plan well to create their own. Failure to take careful steps early on and build carefully, can lead to major stress when planning retirement.
Despite doctor’s collective reputation as poor money managers, I suspect that physicians make financial management mistakes at about the same rate as every other working person. However, the consequences can be more concerning for physicians
This list is not exhaustive, but these are some of the most common financial missteps I've observed while discussing with fellow physicians:
Not having a plan.
This may seem very obvious, but professionals faced with the challenges of post graduate education, debt, child care, housing and the host of other issues often fail to take stock of their present circumstances and future goals long enough to formulate a plan. It is very hard to get anywhere if you are not sure where you are and where you want to go. Simply writing down your present assets and debts (Net Worth Calculator) as well as future anticipated needs, will help you think about getting from here to there. (see Aleandro’s story)
Procrastination
Physicians who delay starting a savings plan or other investment basics, fail to fully appreciate the value of time in terms of long term financial success. The power of compound interest cannot be fully understood until you enter numbers into a calculator and see the results for yourself (see A Tale of Two Brothers)
Impulse buying
Often the procrastinator will attempt to make up for delays and buy into unrealistic promised returns such as hedge funds, where I have seen more than a few colleagues lose several years of income in a few months. The habit of “taking fliers” on high risk but potential high return penny stocks is a related problem and almost always a waste of time, money and intellectual energy. I have seen this most frequently among surgeons and wondered if it has something to do with chats in the lounge between cases on a busy operating room day.
Spending on useless things
At any stage of their career, some physicians are inclined to waste money on vehicles or real estate or other non-essential items in ways that do not make them happier, but instead they can be weighed down with possessions and saddled with expenses that impair their ability to save. (see Jeff’s story).
Early incorporation
Incorporation for physicians is still an attractive option despite efforts by the federal government to strip away the benefits. However, the plan rarely makes sense in the early stages when doctors are still dealing with debts and mortgage payments, and have not yet fully contributed to their RSPs and TFSAs. I have encountered many physicians who are paying the increased legal and accounting costs associated with incorporation before they are in a financial position to derive any worthwhile benefit from those extra costs. (See Shane’s story)
Tax deduction schemes
No one loves paying taxes, but buying some product based on promised tax savings is rarely a good idea if you do not understand the underlying asset. I have seen many doctors lose most or all of their investments in things like ‘flow-through shares” or real estate trusts that were poorly managed. Physicians should follow the advice to “not buy what they cannot understand or explain to someone else”.
Tolerating substandard results
Whether you have a full service financial advisor or you do it all yourself, as a minimum you must insist that each year you understand the amount you started with and how that changed to gauge progress compared with market norms and your personal risk tolerance. I have met with doctors who are not sure of their assets and/or do not understand what their advisor told them. Others have shown me statements where they are paying well north of 2% in fees with returns far below market average for multiple years. The consequences can be severe including delayed and highly financially constrained retirement.
Emotional investing
Physicians seem to be like everyone else: inclined to jump into the market buying stocks with excitement in a rising market and then running for the exits in a falling market. This pretty much guarantees poor results by buying high and selling low. Slow, steady investing while ignoring the background noise of financial predictions, fear and exuberance is easy to say but hard to put into practice.
Letting your RSP get too big
Unlike the issues above, this can be safely described as a “champagne problem”, but still reflects poor money management as it results in excess payment of taxes that could be avoided with better planning. The concepts are straightforward and explained in detail in Cristina’s story.
While physicians may not make financial mistakes more frequently than others, the consequences can be particularly severe due to their high incomes and lack of pensions. From failing to establish a clear financial plan to procrastinating on savings and falling into risky investments, these missteps can have lasting impacts on their financial well-being. Physicians must take proactive steps to avoid common pitfalls, such as impulse buying, early incorporation, and emotional investing, to secure a stable and stress-free financial future. By planning carefully and making informed decisions, physicians can safeguard their hard-earned income and build a comfortable retirement.