Getting off to a strong financial start as a newly minted attending physician has disproportionately large impacts longer term. In the preceding post, we touched upon some major work and lifestyle choices that new attendings face. A few years of continuing to work, live, and spend like a resident yields financial dividends early on that can compound over a career.
I likened the training of a physician to the lifecycle of a caterpillar, with a new attending being the butterfly emerging from the dark chrysalis of residency. Making some good work/life choices helps to dry your wrinkly-new-attending-wings for flight. In the next two posts, we are going to learn to navigate through some of the financial winds that can buffet you around.
The big forces that can blow a new attending off course and how to deal with them.
Your personal and professional finances will intermingle. So, there will be some overlap. However, for this first post, we will focus on the personal financial recalibration needed upon entering practice. Next week, we’ll shift more to the business side of starting a medical practice.
#1 You need to read this post and get educated.
Duh. That is why you are here. Well, that and the funny pictures and questionable jokes. I am stating this upfront because most docs find finance a bit [gasp] boring and I want to motivate you to keep reading. Plenty of people want to sell you their services and share in your newfound pay raise. They will be very motivated.
Since financial professionals are making money for providing you with their expertise, they can have biases towards their “products” and services. You do need the expertise of many of these professionals, but it pays to be an educated client. This is why we need unbiased physicians to help teach physicians about what to look for in choosing the right professional help. Plus, the basics of the advice or services they provide.
Unfortunately, this is not generally covered in medical training. So, here we are bravely venturing into the eye of the storm.
#2 Take a look at your debt and deliberately plan how to deal with it.
Winter is here… The debt millstone has hung around the necks of medical students and residents’ heads for long enough that some are oddly numb to it.
In medical school, the vast majority can’t really pay it down. The best you can usually do is focus on not racking up more debt than needed. That is behaviourally difficult due to the ease of using a line of credit (LOC) now coupled to the promise of future riches to pay for it later.
In residency, you actually have an income. Some residents do nibble away at their debt, but the magnitude of it can still be overwhelming. Like micturition into the ocean. Continuing with that medically sopissticated analogy, early independent practice is like getting a two liter bolus of saline – you now have both the urgent need and means to pay down that ocean of debt rapidly.
The first step is to look at your various debts (LOC, student loans, consumer debt) and consolidate them to the lowest rate. This generally means putting it on your LOC, if you have the room. Most medical students or doctors can get a line of credit at prime for personal LOC or sometimes prime -0.25% for corporate. Many docs will have already consolidated their debts to a LOC in residency, particularly if student loan repayment becomes an issue.
Consolidating to a LOC has the advantages of:
- Lower interest rate: Canada Student Loans are at Prime +2%, OSAP is Prime +1%
- Simplicity: All of your debt in one place
- Flexibility for payments: You can often just pay the interest if needed or make larger payments when able.
The main disadvantage to consolidating to your LOC is that it may cap your total access to credit. For example, if you have $70K on your $100K LOC and put your $30K student loan onto it. Then, you don’t have any more easy line of credit space.
If you incorporate, there may be some other strategies like using a share-holder loan. However, that is a complex one and will warrant a separate post at some point. Finding a good accountant is definitely a prerequisite for considering this approach.
The Bait and Switch
Be aware that some banks will send you an innocuous looking letter post-residency that your line of credit is changing from a “Medical Student LOC” to a “Professional LOC”. Be sure to read this and negotiate the best deal for yourself.
The default position is usually to start making repayments plus an interest rate increase. Sometimes monthly fees on top of that. Again, the goal should be Prime or Prime -0.25% with no monthly fees.
To find where the deals are, do a LOC search on the Facebook Group page. It may take some persistence and the right contacts.
Make a Debt Repayment Plan
If you still have debt, the main dilemma with a larger income coming in should not be what to buy with it. It should be: Do I put the extra money towards paying my debt or towards investments?
#3 The Pay Debt vs. Invest Debate
There is an argument that with interest rates so low currently, that it is better to not pay off debt. Rather, invest the money and earn a higher return. The mathematical argument is that Prime is currently 3.7% and equities historically return around 8%. It can also be viable with different rates over longer periods. It is a personal decision. However, my advice would be to pay off debt first and fast.
My rationale for why trashing debt is the better option for a new attending:
- 8%/yr is an average return on equities. It fluctuates up and down. You can reduce investment risk, but you cannot eliminate it. The reason for a risk premium in expected equity returns is because they are riskier.
- If investing outside of a TFSA or RRSP, there is also exposure to tax. Even with a debt at Prime minus 0.25%, you need to beat 3.5%/yr after-tax to come out ahead.
- Conversely, paying the debt at 3.5% is like making a 3.5% after-tax return. If you are in the 54% tax bracket, that is like a 7% pre-tax return with no investment risk. Try to find that somewhere else. You won’t.
- Paying down your LOC also gives you room to absorb the unanticipated costs and fluctuating income that is typical when starting a business.
#4 Debt reduction rules, but some investing is also a good idea.
I know, I am so indecisive.
My main reason to suggest this is to get yourself off on the right foot and avoid getting seduced by fee-laden investing.
You can learn how easy it is to manage your own investments to make more per hour than anything you do in medical practice. That will hopefully give you the confidence to strut your investing stuff without excessively expensive investment advisor lingerie.
A great simple way to get started is to open a self-directed TFSA at a discount brokerage.
You can use Q-Trade, Questrade, MD Direct (at MD Financial), or whatever platform your bank uses. Opening an account is as simple as filling out some online forms. It is free.
Put in a few thousand bucks. Or if you already have a mutual fund or “high interest” savings account type of TFSA, have the funds transferred directly (without your personally withdrawing them) to your new TFSA as cash. The receiving institution will do this for you. You don’t even have to talk to The-Nice-Lady/Guy-At-The-Bank and break their heart.
Next, buy a single ETF like XAW (all the world except Canada). The trade commission at a discount brokerage will be under ten bucks no matter how much you buy.
Voila! You are investing and have the start of a broadly diversified equity portfolio.
I suggest using the TFSA first since it is most powerful when allowed to grow over time.
The sooner you start, the more time it has. A broad equity ETF, like XAW, is a good option since equities will likely grow the most in the long run. You just don’t know which parts of the world will do the best at any given time. So, best to own it all! Well, you are missing Canada. But, fear not, Canada is a small market. You can build up Canadian equities later in other larger accounts where the favourable tax treatment actually matters.
Once you do this once, you will realize how simple it is and not want to spend 2%/yr on high mutual fund fees.
The weight of historical evidence suggests that high-fee actively managed funds underperform low-cost passive ETFs. Mutual fund sellers will always tell you that they use the best managers who have the best chance to outperform the market. They can even manipulate the numbers to look better over certain periods of time. Only a very small percentage of individual managers actually beat the market over long periods. I would not bet that I could pick the right one at the right time.
By avoiding the mutual fund fee-trap, you can easily save a million dollars over your career.
You will need to learn to save and invest. In fact, you will have to do so in a massive way.
The delayed start to saving for retirement due to years training, followed by catching up on debt and establishing your life has consequences. Time for returns to compound and grow is the biggest ally of an investor, and you will need a much higher savings rate to catch up. Likely 20%/yr or more of your income.
You may still want to hire a financial advisor using a more cost-effective fee model to help you with the non-investment aspects of financial planning. Or even intermittently for a second opinion on your investments.
#5 Riding The Revenue and Expense Waves
As a resident, you got a steady paycheque every two weeks. You paid your rent and living expenses. With the exception of the occasional theft, vehicular breakdown, or a binge, expenses were pretty consistent. Your financial life was pretty predictable, but some financial reserve was needed. This is now even more true as a new attending when income and expenses both become larger and less predictable.
As an attending, money comes in fits and spurts.
That may be because work comes in clusters – like opportunities for locums or extra shifts in the summer or around March break so that guys like me can go surfing. It is very common when starting out, and even later, to have multiple small or medium jobs that together constitute your practice.
Even with a full-time job at one location, the money can fluctuate. With a fee-for-service model, the income per week fluctuates depending on activity. It also usually only pays out once per month, with a one-month lag time. Stipended work or call stipends can pay out at different times. Sometimes, only once every 3 months, or even once per year.
Expenses will also be more sporadic, and well… more expensive.
Royal College exam fees are a large (hopefully one-time) expense. After walking those hallowed marble-clad halls, you will understand your ongoing fee rates better. Once you pass your exams and start independent practice, the annual membership fees will also jump. Provincial regulatory college dues will also bite and CMPA premiums plump up. Everyone wants to skim money from you. Since you are now a rich doctor, the same things cost more – whether justifiable or not.
The costs of running a practice can also vary. Other than a stethoscope, most equipment was supplied as a resident. Depending on your practice, equipment or supply purchase and maintenance can be significant. Rent is predictable. If you own the real estate of your practice, that brings other sporadic maintenance costs and periodic expenses like property taxes.
One thing that you can control is your personal spending on luxuries.
There is an image of the wealthy physician lifestyle that your can attain. You just need to make sure that you do it in sequence and establish your financial foundation before building your dream home and fill its three garages plus barn with vehicles.
You cannot control the unexpected, but you should expect it.
There are two basic approaches to planning for this ebb and flow of money.
One approach is to build up and keep a buffer of money in your personal and/or business operational account as an “emergency fund“. The downside of that approach is that it is money sitting idle. I prefer to keep a small buffer of about a month’s usual expenses in each and keep my LOC empty and available if needed in a pinch.
Using Your LOC To Buffer The Cash Flow Tides
To use your LOC as your emergency fund, you need to have enough unused space in it. If you have an outstanding LOC debt, you need to aggressively pay it down with any unspent money. You can then put major expenses back on it when they come up. In the interim, you have saved on the interest. It is like depositing money into a “high-interest savings account” – except getting an effective 6-7% tax-free interest rate rather than a 1-2% fully taxed one.
Using a corporation opens the possibility of utilizing a corporate line of credit. It may be easier to get a better interest rate with a corporation. Further, the interest is considered deductible as a business expense for the corporation. So, the interest is paid with pre-tax money. Having a corporate line of credit obviates the need to have piles of cash around in case of emergency.
Two Important Behavioural Pitfalls Of Using A LOC For Your “Emergency Fund”
The first is to remember that, if using a corporate LOC, corporate money is not your money. If you need money personally, that means paying money from the corporation and then the personal taxes on that.
The second is that the LOC is for “emergencies”. You need to have the discipline to pay it off aggressively and only use it for real emergencies. Not because you have a “Critical Vitamin D Deficiency” that only the Mexican sunshine will cure when you don’t have the money to pay for it.
#6 Insure Against Personal Catastrophe
It is important to review your personal insurance because you may now have different liabilities as an attending. When thinking of insurance, you want to make sure that you have enough to cover your expenses and responsibilities. Not having enough insurance is gambling that the unexpected catastrophe won’t happen. Risky idea.
Conversely, you do not want more than you need. Taking more insurance than you need is like betting that your premiums will be less than the unlikely pay-out. Like buying lottery tickets. You are playing the odds against the underwriting department of the insurance company. Who do you think is better at calculating the odds?
You want enough life insurance that if you were to die that your financial obligations would be met. This means enough to pay off any debt. That debt includes a mortgage if you have one. It is often cheaper to buy enough term life insurance to cover your mortgage than to buy the mortgage insurance affiliated by your mortgage issuer.
You should also plan to leave enough money to pay for your dependents. That will vary based on the age of any kids, the employability of a spouse (if dependent on you), and the desired lifestyle you want them to have. Remember that an insurance payout is tax-free.
Term life insurance is usually the most efficient way to insure for these obligations. The premiums are cheaper than whole life insurance. Further, by the time the term is up, you may have fewer liabilities to insure for with your kids grown and mortgage paid off. Plus, if you have been saving appropriately, you will have enough of your own financial assets to act as your own insurance company.
This won’t kick in until several months into a disability. So, it is still important to have access to emergency funds as described in #5. However, with a longer-term disability, this type of insurance is to cover your loss of income. You will want to have “own occupation” insurance to ensure that you don’t have to go back to work in another field.
The amount you need should not be your gross income. If you pay for your disability insurance with personal money, then the payouts are in after-tax dollars. If you are buying disability insurance via your corporation, you do so with pre-tax dollars. However, a payout will be taxed when it passes from the corporation into your hands. Either way, you should plan on enough to cover your business expenses (if they can’t be frozen while disabled) and your lifestyle costs. Consider that your lifestyle costs may change, for better or worse, with a disability.
Umbrella Liability Insurance
This is an extension of your home or auto insurance. It covers for liability beyond those policies and payouts that exceed the usual coverage. Unfortunately, in our litigious society, payouts can be large. As a high-income professional, you are a prime target for lawsuits from everyday life. Fortunately, if you have your home and auto insurance policies with the same provider, there can be some efficiencies.
As a new attending, your personal and professional finances will influence each other.
Kind of like different weather systems colliding. In this post, we traced the big winds of debt, cash flow, and calamity that can buffet you in flight. In the next post, we’ll explore how to best handle our business finances. As new attending butterflies, we don’t want to beat our wings in one place and cause a tornado in another.