While most medical residents welcome their first independent job as a physician with open arms (and rightly so!), there are also many challenges that come with their rise in income. While these challenges are much better than the challenges a resident faces on a $50,000 salary they should not be ignored. Here are three common mistakes that young doctors can easily make after landing their first good paying job.
1. Not making a budget (and sticking to it) – You wouldn’t think that you could spend all of your money after going from a salary of $50,000 to $200,000 or more, but I can verify that its possible. The old saying of “the more money you make the more you spend” tends to ring true more often than not. Yes, your income just increased dramatically but that doesn’t mean a budget is not appropriate anymore. If you have no budget it can become very easy to spend freely on luxuries and try to keep up with the Jones’s. Setting goals and having an appropriate budget to help you reach those goals is and always has been the best way to achieve them. The nasty “B” word does not mean you don’t get to have fun, it only means that you are going to adhere to some limits on that fun.
2. Buying a home that is not appropriate – The most common way this can go is to buy a house that is much more than what you should at the time. Notice I didn’t say what you can afford because you will likely be able to afford an expensive home, but that doesn’t mean it is the right choice. Spending a substantial amount of your income on housing may not be the best decision if you have a large debt load, no emergency fund and a late start on saving. For more information on what you should consider when buying a home, read my separate article on this topic.
3. Waiting to start retirement savings – The average medical student doesn’t become an independent physician until their early 30’s. Due to the later than average start it is important that physicians start saving immediately. Yes, as a young physician you have a bright earnings future ahead of you but what you are short on is time. Back in Finance 101 we learned that due to the time value it is better to save early for retirement rather than later. This doesn’t mean that paying off debt or building an emergency fund shouldn’t be a priority, but long term savings should be as well. If retirement is a priority then saving today is a must. The table below shows the value of money at different time periods if you are able to average a 10% return.
The table simply shows that the more you invest early the better off you should be in the future, so if retirement is a priority then saving now is a necessity.
Knowledge is power! The more knowledge you have the easier it is to plan for your future. Establishing a budget, buying an appropriate home and starting your retirement savings on day one will prepare you for a better financial future.
Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Individual needs vary and require consideration of your unique objectives and financial situation.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.