The Biggest Mistake Young Doctors Make: Delaying Financial Planning

Why do so many young doctors put off financial planning? After years of intense education, it’s tempting to focus on other things. A higher salary, family planning, and a new location often take precedence. Student loan debt can also feel overwhelming, making financial planning seem like a distant concern.

But this delay can be costly. You miss out on early investment opportunities and the power of compounding growth. Critical needs like disability insurance and estate planning get overlooked. And student loan debt lingers without a clear strategy.

So, what’s the solution? Start now. You don’t need a perfect plan right away. Even small steps can make a big difference. Prioritize student loan management and take full advantage of any employer match programs. Consider a Backdoor Roth IRA to jumpstart your investments.

Imagine two doctors: one starts investing early, and the other waits five years. The doctor who starts early will likely have significantly more wealth over time, thanks to compounding. Don’t let that opportunity pass you by.

What if you could avoid the biggest financial regret many doctors face?

Choosing the Right Financial Advisor: A Simple Guide

Picking a financial advisor can feel daunting. How do you find someone you can trust? It starts with understanding how they get paid.

Understanding Fee Structures

• Flat Fee: You pay a set price for services, like a monthly subscription. This offers transparency and predictability. For example, you pay your advisor X dollars per month for their services.
• Assets Under Management (AUM): You pay a percentage of the assets they manage, usually around 1%. This aligns the advisor’s incentives with your portfolio growth. For instance, a 1% fee on $500,000 means you pay $5,000 per year.
• Commissions: The advisor earns money by selling financial products. This can create conflicts of interest if the advisor prioritizes high-commission products over your needs.

Key Questions to Ask Potential Advisors

Always start with this question: “How are you paid?”

Other important questions include:

• “What are your fees for specific services?”
• “Do you sell insurance products or investment products? If so, how are you compensated?”
• “Can you provide a breakdown of all fees and expenses?”

Beyond Fees: Personality Fit

Choosing an advisor is also about finding someone you trust. You’ll be sharing sensitive financial information, so comfort is key. Look for someone you can work with for years to come and who communicates in a way you understand.

The Interview Process

Interview several advisors to compare their approaches and personalities. Consider whether you prefer in-person meetings or are comfortable with virtual communication. Use the interview to gauge their expertise and assess their understanding of your financial goals.

Red Flags to Watch Out For

Be wary of these signs:

• Lack of Transparency: The advisor is hesitant to discuss fees or compensation.
• Pressure to Buy: The advisor pushes specific products without understanding your needs.
• Unrealistic Promises: The advisor guarantees high returns or risk-free investments.

Resources

Before making a decision, check out these resources:

• BrokerCheck: Verify an advisor’s credentials and disciplinary history.
• Read articles on choosing a financial advisor (aka “Google” them!).

Term vs. Permanent Life Insurance: Which Is Right for You?

Life insurance can be a confusing topic. Let’s break down the two main types: term and permanent.

The Basics

• Term Life Insurance: Provides coverage for a specific period (e.g., 10, 20, or 30 years). It’s affordable and simple to understand, making it ideal for young families, individuals with debt, and those needing coverage for a defined period.
• Permanent Life Insurance: Offers lifelong coverage with a cash value component. Types include whole life, universal life, and variable life. It can be used for cash value growth, potential tax advantages, and estate planning. However, it’s more expensive, complex, and can have high fees.

Term Life Insurance: Renting Coverage

Think of term life insurance as renting. You pay premiums for a set term. If you die within that term, your beneficiaries receive a payout. If you outlive the term, the policy expires. Just like renting a house, you pay for the period you need it, and it’s gone when you’re done.

Permanent Life Insurance: Owning Coverage

Permanent life insurance is like buying a house. You pay premiums for life, and the policy builds cash value over time. You can borrow against this cash value or withdraw it (with potential tax implications).

When Permanent Life Insurance Might Make Sense

Permanent life insurance can be a good fit for:

• High-net-worth individuals are involved in estate tax planning and wealth transfer.
• Those with long-term care needs, as some policies have riders to cover these expenses.
• Those with specific financial goals, like college funding or charitable giving.

Why Term Insurance Is Often Recommended for Young Doctors

Young doctors often have debt, families, and other financial goals. Term insurance provides the most coverage for the lowest cost and is easier to understand and manage than permanent policies.

Avoiding Common Pitfalls

• Beware of high-pressure sales tactics.
• Get multiple quotes.
• Understand the fine print.

How much life insurance do you really need? Calculate your needs based on your income, debts, and family obligations. A “couple” million is not a crazy number for most young physicians (friendly reminder- TERM life insurance).

Whole Life Insurance: Why the Pushback?

It’s essential to clarify the concerns around whole life insurance. The pushback isn’t against all whole-life policies. The main issue is with policies sold to young doctors with significant premiums (think $1,000 or more per month).

The “Baby Policy” Exception

Small, fully paid-up policies from childhood are generally fine to keep. These don’t represent a significant financial burden.

The Problem with High-Premium Policies

These policies can drain cash flow that could be used for other financial goals, like family planning, home buying, debt repayment, and investments, to name a few. This is what happens when commissions become more vital than the client’s comprehensive financial plan. 😞

The Alternative: Term Life and Investing

A better strategy is often to buy term life insurance for affordable coverage and invest the difference in premiums in a diversified portfolio. This can lead to better long-term financial outcomes.

One doctor was sold an expensive whole life policy early in their career. They later realized the opportunity cost of those premiums and regretted not investing that money instead. Don’t make the same mistake.

Making an Informed Decision

Understand the pros and cons of whole life insurance. Consider your individual financial situation and goals. Seek advice from a fee-only financial advisor who doesn’t sell insurance products.

Whole life insurance can be appropriate in certain situations, but it’s often not the best choice for young doctors (and then some). Prioritize term life insurance and investing.

Prenups: A Crucial Conversation Before “I Do”

Do you need a prenup? The answer is almost always yes.

Why Prenups Are Recommended

• They protect assets accumulated before marriage.
• They facilitate open and honest financial discussions.
• They establish clear expectations for asset division in case of divorce.

Addressing the Stigma

Prenups aren’t about mistrust. They’re about preparedness, a sign of maturity and responsible financial planning.

The conversation about a prenup is more important than the legal document itself. It forces couples to discuss their financial values and goals.

What a Prenup Typically Covers

• Separate property: Assets owned before the marriage.
• Future inheritance: Protection of future inheritances.
• Business interests: Protection of business ownership and assets.

Prenups can be customized to address unique circumstances.

When a Prenup Is Especially Important

• One partner has significantly more assets than the other.
• One partner owns a business.
• One partner has children from a previous relationship.

Postnups: A Second Chance

Postnuptial agreements are similar to prenups but created after the marriage. They can be useful if circumstances change during the marriage.

Think of it this way: Dating apps should require users to show their credit scores!

Avoiding Financial Turmoil

Maintain a healthy relationship and prioritize date nights. Relationship problems can significantly impact your financial well-being.

If you’re considering a prenup, consult with an attorney who specializes in family law and don’t wait until the last minute to start the process.

Prenups are a valuable tool for financial protection and clear communication. They’re a sign of a mature and responsible relationship.

Taking control of your financial future doesn’t have to be overwhelming. By avoiding common mistakes, choosing the right advisors, and having open conversations, you can build a secure foundation for yourself and your family. Don’t wait – start planning your financial future today!