When you become a physician, it can feel taboo to talk about finances. Depending on your background, you may be surrounded by individuals who assume you have endless amounts of money and fail to consider the student loans and years of lost wages you spent pursuing your dream.
It is not their fault; this assumption is a pervasive cultural issue in the United States. It can be the downfall of many a young physician, who may allow societal pressure to push them into living beyond their means. In many ways, the odds are stacked against you.
We must be honest with ourselves; we did not get into psychiatry for the money. We love taking care of the most vulnerable members of society and are genuinely interested in understanding the mind. Naturally, we are in one of the lower-earning specialties in medicine.
According to the 2022 Medscape compensation report, the average annual income in psychiatry is $287K, so our earning potential is nowhere near that of a cardiologist, for example.1
This is not necessarily a bad thing, but we clearly need to be more careful about how we spend—and save—money. As physicians, we are incredibly busy, and sometimes personal finance takes a back seat. What can we do to ensure our family is financially secure while still spending some of that hard-earned money?
1. Protect Your Assets
If you are just starting your career and were not lucky enough to grow up independently wealthy, chances are you have a negative net worth. You might be thinking, what assets do I have to protect? The simple answer is that you need to protect yourself from the potential loss of future income. If you were to become disabled to the point where you could no longer perform your job duties, your medical education would not be worth much.
The path to financial independence begins with some upfront costs such as own-occupation disability insurance and term life insurance. You want to lock these policies in while you are young and healthy. As you get older, insurance companies are less likely to waive requirements for a physical and blood work, and generally premiums will be higher.
2. Figure Out Student Loans
This is a difficult topic about which to make a blanket statement. There is no one-size-fits-all advice when it comes to student loans. The main decision you must make is whether to pursue student loan forgiveness through the public service loan forgiveness program (PSLF) or pay off your debt. Your choice depends largely on your debt burden. If you have high debt and are willing to work in community mental health, PSLF can save you a lot of money.
If you have lower debt, it may be in your best interest to refinance your federal loans with a private student loan servicer at a lower interest rate and pay them off over the first 5 years after residency. Either way, getting into the right repayment program and choosing a course of action early can save a lot of money on the backend.
3. Create an Emergency Fund
Everyone should have some liquid cash available in case of emergencies. How much you keep on-hand depends on your situation. You should have 3 to 6 months’ worth of living expenses saved in cash. You can calculate your expenses for 1 month and decide whether 3 or 6 months is better for you. Younger physicians who do not have families or own homes may not need as much in cash and can focus more on building wealth through investments.
4. Start Investing
Many fail to realize that, as doctors, you do not automatically become rich. In many cases, we lose a decade or more of investing and savings opportunities in pursuit of our passion. While our college friends are building retirement funds and buying houses, we are living with roommates and hoping to make it through medical school and residency training. Investing is not high on our list of priorities.
This is another difficult topic to generalize about because the type of investment account you choose will depend on your circumstances. In general, during residency training, the best option is a Roth IRA, a tax-advantaged account that uses after-tax funds and grows tax-free. It can be an advantage to start contributing as a resident, knowing your income will change dramatically after training. It is often recommended that residents max out these accounts, if possible, over the 4-year psychiatry training program.
You can still contribute to these accounts as an attending physician; you just need to make a “back-door” Roth contribution. Sometimes, investing in a 401K or 403B makes more sense; for example, individuals in PSLF who want to reduce their adjusted gross income to reduce federal student loan payments can do this.
Either way, start investing your money because you need to make more than the standard interest rate offered by most banks to build wealth. Once you are an attending physician, you should be, at minimum, contributing to your Roth IRA and maxing out your 403B or 401K every year.
5. What to Invest in
This is another question that depends on individual goals and risk tolerance. I do not use a financial adviser, as the fees can be quite high. Many charge a flat fee of 1% of your account balance, regardless of whether you make any money. It may not sound like much, but once your investment starts to grow, it can be substantial.
Many advisers make big promises but only deliver returns similar to those that can be attained by indexing the stock market. Opinions on this differ, but I created simple portfolios using only low-expense-ratio index funds, and you can too. There are many books and blogs dedicated to helping you decide which funds are right for you.
6. Build Wealth
There is nothing sexy or exciting about this strategy. It should be obvious that the reason most individuals fail with money is psychological. We all wish the process were faster, and it can be easy to get caught up in trying to “keep up with the Joneses” and miss opportunities. If you can delay gratification, live like a resident for the first 3 to 5 years after residency, and invest your money, you may end up being able to call yourself a millionaire.
Dr Rossi is an inpatient and consultation liaison psychiatrist who also performs electroconvulsive therapy services at AtlantiCare Regional Medical Center in Pomona, New Jersey. He currently serves on the board of the New Jersey Psychiatric Association, where he has worked on advocacy projects, including enhancing access to collaborative care in the state.
1. 2022 Physician Compensation Report. Medscape. Accessed February 21, 2023. https://www.medscape.com/sites/public/physician-comp/2022
Do you have advice for early career psychiatrists or an experience you want to share? Email us at [email protected].