Financial Planning for New Physicians
Posted on: December 15, 2020
Financial Planning for New Physicians
Once you finish your residency and you are no longer a student, your entire financial situation changes. Suddenly, you’re left navigating a new financial situation that your medical training couldn’t prepare you for. Between managing your cash flow, billing for your services and collecting payment, paying off your student debt, and learning to invest and manage your taxes, there are a lot of new skills you’ll need to learn quickly as you adjust to your new reality as a physician.
The first few years after residency can often be categorized as paying off your debt, deferring gratification by maintaining a more frugal residency lifestyle and learning about all of the financial aspects of being a doctor that you weren’t taught in medical school in order to set yourself up for future financial gains.
According to the Faculties of Medicine in Canada (AMFC) the average medical school debt is roughly between $80,000 and $140,000. Over 13.6% of students graduate with over $200,000 of debt. Paying this off can be quite overwhelming and is often the first major financial goal of new physicians. During residency, even though you are making a salary, it is often significantly lower than the amount of debt that you may have. When you factor in living costs, simply servicing your debt and not borrowing more, unless necessary, is often the most you can do until you start earning more as a physician.
The first step to becoming debt free is to look at your various debts, including your line of credit, credit cards and other debt to get an overview of what you need to pay off first and which debts have the highest interest rates. It is usually advantageous for you to consolidate your debt in the facility with the lowest cost interest rate, which is usually your line of credit, if you still have space.
Professional Line of Credit:
Once you graduate from residency, most medical student lines of credit are converted to Professional Lines of Credit where you are required to make payments of interest and principal. With the big 5 banks in Canada, you should aim for an interest rate similar to your Medical Student Line of Credit of Prime: 0.25%.
One of the big benefits of a Line of Credit is that the debt can be repaid at any time. By repaying the debt you are giving yourself room to pay for any unanticipated costs.
Investing vs Debt Repayment
One of the most difficult decisions for a new physician is the debate between investing vs. debt repayment. Early in your career, it can be beneficial to take advantage of registered investment accounts like an RRSP and a TFSA before you incorporate. An RRSP can be beneficial as you are able to withdraw $35,000 tax free from it with the First Time Home Buyer Purchase Plan while reducing your personal taxes. A Tax-Free Savings Account (TFSA) is extremely beneficial as you are able to shelter investments from taxes, which is beneficial for long term investment growth and can also be accessed for shorter and medium term goals, such as buying a house. As well, you are able to recontribute any funds that are withdrawn from the TFSA.
Initially, you may want to focus on paying down your Line of Credit until it reaches a manageable payment before you decide to start investing.
Once you start developing excess funds in your savings account, after accounting for lifestyle expenses, taxes and your debt repayment plan, it is time to start putting those funds to work in investment accounts.
Buying a House
One of the biggest goals of a new physician is to save to purchase a house. In the GTA, it is common for most “starter” houses to be close to $1 million dollars, which can require a down payment of at least $200,000. Between managing your debt repayment and saving for a house, it often makes sense to push this goal back slightly until you have built up some savings in your RRSP and TFSA.
Additionally, it is important that you only consider putting down roots and purchasing a house if you have a stable position and are in a place you’re expecting to stay for a at least five years. Between real estate selling commissions, land transfer taxes, and annual property taxes, purchasing a house with short-term plans to live there may set you back unless your property appreciates greatly in those first few years. If you’re not planning to stay where you are for long, you may be better off renting, paying off your medical student debt and investing the additional income for a house in the future in a location you will live more permanently.
Income and Expenses
One of the biggest changes from residency to being a “full” physician is that your income structure completely changes. In residency, you were employed by your University’s Post Graduate Medical Education department, received a bi-weekly paycheck and had medical and dental benefits. A regular paycheck makes financial planning extremely easy and allows you to automate any payments and have confidence in your finances.
As a physician, your income becomes much more irregular, even with full time positions. With a fee-for-service model, your income will fluctuate based upon your activity level and you’re often only paid once per month. When you include call stipends and other stipend work, you may only be paid quarterly, further increasing the volatility of your income.
Additionally, your annual dues for CMPA, regulatory college dues and annual membership premiums will increase significantly, which need to be budgeted for.
Managing Cash Flow
There are many ways for you to manage your lumpy income; including using debt responsibly to manage your cash flow. Using the debt available to you, you could use credit cards to access funds for lifestyle expenses and lines of credit as a way to budget in larger expenses such as CMPA, Insurance and Membership dues. It is extremely important to diligently pay off these debt payments once you receive your income so that it does not become unmanageable.
The biggest way you can control your spending when you are a new physician is to control your “lifestyle creep”. It can be very tempting when you start earning a higher income to start spending more funds on luxury items like a new car or expensive jewellery instead of taking care of the necessities like debt repayment and adjusting to your new normal.
Controlling your spending is the easiest way to control your wealth overtime. To do this, you need to control your expenses and create a budget. Make sure your spending aligns with your values and that you are not spending on things that do not bring value to your life.
One of the greatest skills you can develop for yourself is the financial habit of deferred happiness, which means spending less, saving more and building your wealth for future happiness. If you spend your first few years as a physician maintaining your residency lifestyle, while earning a physician’s income, you can clear your debt and create a large nest egg to put towards your future financial goals.
As a “self-employed” professional, your taxes are not withheld on your billings as they were when you were a resident. Come tax time, you are responsible to pay your personal income taxes. For many new physicians, their first tax filing can be quite a surprise as you may be responsible for paying tens of thousands of dollars in April.
One strategy to prepare is to work with your accountant to estimate your tax bracket for the current year and each time you are paid your billings. This will help you determine how much money to sequester away specifically for taxes so you are not caught by surprise in April.
Finally, it is important to have an emergency fund that can be used to pay for unexpected expenses. This can be your personal line of credit, but it is important to make sure that once your line of credit is used, it is paid off.
With any life transition, it is important to reassess your insurance coverage. After finishing your residency, you lose your University benefits and are responsible for your own coverage. It is extremely important to make sure that you and your family are adequately protected. While you hope you will never have to use it, you need to be prepared. Aim to get the best coverage possible at the most reasonable cost.
As a physician, one of your greatest assets is the physical capital you have developed through your medical training. The significant time and money that you invested in your medical training is reflective of your future income earning potential. The best way to protect your future potential income is through disability insurance. If you do not have disability insurance, in the unfortunate event that you get injured and are no longer able to work, you lose your future earnings power that you have worked so hard for. While there are many different disability insurance providers to choose from, two of the most popular options in Ontario are the group disability coverage through the OMA and private disability insurance through RBC. Considering that, as a physician, your ability to earn future income is one of your most valuable long-term assets, it is best to speak to an insurance specialist to ensure that your chosen policy fits best with your needs.
By the time you finish your residency, you may be planning for children or potentially already have a family. If this is the case, it is important to review your life insurance coverage because as a physician, you do not have any group insurance coverage through your employment. I believe that life insurance is a necessity for any family as it ensures that your loved ones are taken care of in case anything were to happen to you or your spouse. While life insurance payouts can be used for any purpose, oftentimes they are used to supplement lost earnings, pay off the mortgage on your home, and put your children through school.
Medical and Dental Coverage
Finally, as a physician, you no longer have the medical or dental coverage that you did throughout residency. Especially for a family, the cost of medication, dental and eye coverage can quickly add up. Depending on your family’s overall health situation and whether or not your spouse is covered through their work, you may choose to purchase additional private coverage or simply be included in your spouse’s coverage if their plan permits it.
Start Getting Professional Advice:
Now that you are practicing as a physician, the most valuable asset you have is your personal time. Enjoy the fruits of your labour and spend your off-hours on the things and people you love. Some of the most important administrative tasks in life can be the most time-consuming, like financial planning, investment management and accounting. By offloading these tasks to professionals you will free up your time to focus on what is important to you, while knowing that you are getting quality financial advicde without the hassle. Tax and financial professionals are specially trained to help you maximize your investments and reach your financial goals.