Ten Financial Mistakes Doctors Make

Physicians go through extensive training to become doctors bringing in a high income. Unfortunately, they have no training in how to manage all that money. Consequently, we make a lot of money mistakes. 

I have taught personal finance for the last three decades. It has been both fun and rewarding, especially when someone finally realizes how much better life is when they spend less than they earn and only spend money they actually have. Borrowing money to buy fun stuff is not a good plan. 

Following is a list of the most troubling financial mistakes I repeatedly come across. My hope is that if we see ourselves in this list, we will realize that we have a problem and will now have the power to make the changes needed to become better financially. 

Choosing the wrong job

After many years living on borrowed money during our training, we unfortunately tend to only look at the salary and bonus when we seek our first attending job.

Salary should be one of the lowest priorities when picking a job, since all physician positions earn a great salary. Our salary is not what makes us happy doctors. Being miserable but having a bigger bank account is not a great place to be. 

There are many other important things to consider, which I cover extensively in The Doctors Guide to Starting Your Practice/Career Right. Things such as proximity to extended family and hobbies, size of the city, how we feel about our coworkers, the ability to choose our nurses in the clinic, proximity to a place of worship, and liking the office staff we will be working with are all far more important to our wellbeing than salary.

If we find ourselves in the wrong job, a new job search will likely cost more than $200k to find and move into that new job. Pick the right job the first time.

Buying a home too soon and too big

Most physicians have in mind what their doctor home will look like. It is most likely way bigger than needed and costs far more than their income can afford. Most of us have the misguided thought that our home is an investment and therefore we should buy the biggest one we can make payments on. This is bad thinking.

Our home is an expense, and we should work to keep our expenses down. We should buy a nice home that will meet our needs, not one designed to impress others. Keep the cost (payment, tax, insurance, maintenance, repairs, upkeep) to less than a third of take-home pay. 

If we spend too much on our home, we will not have enough money left to do all the other fun things we want to do. This is called being house poor which can negatively affect us for decades. 

Also, we will not know for sure if we like our first job until we work at it for a while. If we have picked wrong, it is best we do not have a house to sell when we move to the next job. When moving to a new town, we should rent a house first. After we are sure the job is a good fit, then we can take our time looking for the right house.

Using a 30-year mortgage

The 30-year mortgage has become the norm. Yet it is a very expensive option. I detailed the true cost of this in The Doctors Guide to Eliminating Debt. There I compared paying off a mortgage in 7 years vs. 30 years. The interest saved by paying off the mortgage 23 years early is equivalent to 17,000 patient encounters. Paying the mortgage off in 7 years would therefore allow us to take every Monday off for ten years. 

But most people don’t pay off their mortgages in 30 years. Most people keep refinancing their mortgage, taking a little more money out each time, restarting the 30-year cycle all over again. By the time they reach retirement age they haven’t made any progress in paying down their mortgage and they owe as much as when they originally bought the house! They could have been done making house payments years earlier had they buckled down and made paying extra on their mortgage a priority. Carrying a mortgage into retirement means needing to save for several extra years to generate enough passive income to cover the mortgage payments.

Taking too long to pay off student loans

Being provided with a student loan is a privilege physicians are given to get the training we need to do our job. We should all strive to have our student loans paid off within five years of becoming an attending. 

Don’t spread out the payments and pay extra interest that could be better used elsewhere. Remember, as our families grow, and kids get older, cash needs will increase. So, eliminate student loans right away. It is a sad moment when I hear of a physician who has been in practice for 20 years and is still making payments on student loans.

Not maxing out retirement plans

On the first day of a new job, we should always ask to have the maximum amount deposited into our retirement account (401(k),,,) with every paycheck. Since our income will take a significant jump from our residency salary, we will never miss this money being tucked away for the future. If we don’t start saving for the future at this juncture in life, we will become accustomed to our higher income and may never set aside enough to retire. 

Not cultivating our marriages

The most expensive mistake we can ever make is a divorce. A divorce will cost more than 50% of our income and net worth. We can’t afford to become such a work-a-holic that we neglect our spouses. Date nights are likely to yield the highest rate of return of any of our investments. 

Many doctors say their family is their first priority but cannot prove it by looking at their calendar. If family is a priority, we should be sure to schedule special outings and events with our spouse and kids. During these special outings be sure to leave work behind and be present. Our families should know they are a priority.

Playing the stock market

Doctors are smart people. So much so that they often think they can do everything well, including picking stocks. It has been studied extensively and proven time and again that professional stock pickers are unable to consistently beat the market. If those who pick stocks for a living can’t do it, we can’t either. Stop trying.

I learned this lesson a long time ago and stopped playing the market. In fact, I don’t even watch the market anymore. Invest in index mutual funds that follow the market, and returns will be better than 80% of the investors who think they can time the market. NEVER ask “what should I do in the current market?” Smart investing habits do not change from year to year. 

Borrowing on a credit card

Credit cards make it way too easy to borrow money to buy stuff we can’t afford. If there is an unpaid balance on a credit card at the end of the month, this is indicative of purchasing things with money we don’t have by taking out a very high interest loan. These cards exist so the banks can make a fortune off our desire to “have it now.”  

Use a credit card only for convenience, never to borrow money. The price is way too high.

Thinking life insurance is an investment

Way too many physicians get caught in insurance salesperson traps. These salespeople are very good at convincing us to buy their products, especially the ones that will make them the most commission. NEVER buy any life insurance that accrues cash value. NEVER.

We should only buy enough level term life insurance to cover our family’s needs in the event of our death. Then we can invest the rest of our money someplace other than with a life insurance company. Once we retire, we have no need for life insurance. So why buy an expensive plan that is designed to last forever?

Buying a second home

Many physicians think they should own a vacation home. This is a very poor idea. Homes we use are not investments, they are expenses. Many doctors tell me they took their family on a vacation to their lake house and the family had a lot of fun. I then asked what the doctor did that week. The doctor proceeds to tell me about all the time he spent fixing things at the house. 

We should never blow our vacation working on the house we stay in. Instead, rent a place for a vacation and invest our money somewhere else. Renting also allows us to go to different places as our interests evolve over time.

Never forget the saying that we will be financially best off with: 

One house. One job. One spouse.

If you need help making changes in your financial life, reach out to me. I love helping people transform their financial lives.