Medical professionals are often recognised for earning a lot of money. However, what is often less recognised, is the level of complexity faced by doctors in their day-to-day lives, as well as the fact that money can often be a real source of stress for many in the industry.
When it comes to financial planning, there are a number of common pitfalls that we often see doctors face. Many of these are easy to avoid, and avoiding them can make a real impact on your wealth accumulation – the trick is knowing what to look out for.
Having worked with medical professionals for many years, our team at Oxlade Financial have put together this list of the 8 most common pitfalls doctors face. Oxlade Financial is one of the few truly independent financial planning firms in Australia. If you have any questions about any of these pitfalls, please reach out to our team.
Pitfall 1 = Taking out no, or inadequate, personal insurance
As doctors, often your biggest financial asset is your future earnings capacity throughout your career.
Frighteningly, many medical professionals don’t adequately protect their incomes from disruptions caused by sickness or injury. As your career and income grows, it is likely too that your debt and responsibilities will grow. Without sufficient personal (life, disability and income protection) insurance, this can leave you hugely exposed.
Not only is it important to get insurance in place, it is also important to continually review it to ensure it reflects your current position. Sometimes, doctors are provided with a small amount of cover automatically through their super fund when they start work. However, without reviewing this cover, particularly at stages where income really changes, it can quickly become outdated and provide insufficient cover if things go wrong.
Getting adequate cover put in place early is also critical. The older you get, the more likely you are to accumulate health issues that insurance companies wont cover for, which can impact your insurability in time.
Finally, we often see many doctors take out insurance for themselves, but not for their life partner. Even if your partner is not working or earns a very low income, having them adequately insured is very important. If not, in the event that something happens to them, this could result in a hugely costly outcome for you.
Pitfall 2 = Paying massive insurance premiums
While some specialists don’t have enough insurance in place, others are paying way too much in insurance premiums, which can really add up to a huge financial impact over time.
This can happen for a number of reasons.
Firstly, and perhaps the most costly of all, is that many medical professionals partner with advisers or brokers who are compensated based on the cost of the insurance taken out. In fact, they can receive a commission of as much as 66% of your insurance coverage costs, which is built into your premiums, and therefore hugely adding to the overall insurance cost. Not only does this add to your costs, but arguably could lead to you being recommended higher (and more costly) cover than you really need. The easiest way to avoid this is to work with a fee-for-service or independent provider who doesn’t receive any commission.
Other times, medical professionals put adequate insurance in place at a point in time. Over the years, however, sums insured and premiums may rise significantly, and required insurance may likely change, but no review of the insurance is completed to ensure the cover (and cost) is still appropriate.
Finally, what we often see is that a specialists’ need for insurance reduces as their assets build and life expectancy reduces. Insurance companies automatically increase the level of cover in line with inflation, leading to ongoing premium increases, so whilst insurance needs may actually be decreasing, costs are increasing. Working with your provider to reassess your insurance needs as your career progresses is therefore vitally important to avoiding massive premiums.
Striking the right balance between being adequately protected and not paying too much in insurance premiums is key. As your career progresses, and your financial situation changes, your insurance position should be regularly reviewed.
Pitfall 3 = Making investment decisions solely to reduce tax
As medical professionals, you will likely pay a lot of tax in your life, certainly much more than the typical Australian. The reality is that there’s no real way around it.
We’ve seen many doctors make investment decisions with the primary objective of saving tax. The reality is that most often, not only do they save tax but they lose money too. There have been many schemes in the past that offer to reduce tax, but that have instead cost medical professionals greatly.
Negative gearing of properties is another example, where the focus is often on the tax deduction, rather than on whether the property itself can deliver long-term capital growth for you (which is what you ideally want).
The quest to reduce tax can lead to poor investment decisions. At the end of the day, any investment that saves you tax is likely losing you money. Instead, the focus needs to shift to the merit of the investment itself, and whether it can deliver you an attractive long-term return.
Pitfall 4 = Adding too much complexity into your financial affairs, when you already have enough in your life
Having worked with medical professionals for many, many years now, we do often see a tendency for them to unnecessarily overcomplicate their personal financial situation.
Medical professionals wear many hats. Taking care of your patients, staying up to date with research, sometimes running practices, working alongside other specialists, managing financial affairs and so on. And this is on the work front alone.
Given this, it really is wise to avoid creating a complex personal financial situation that ends up taking time away from your personal life or impacting your medical practice.
Medical professionals are often given access to many different opportunities and offers. Rather than being distracted by these, and inadvertently adding to the complexity of your financial affairs, it is better to set a long-term investment strategy and plan that will help you to achieve your financial goals, and then have the discipline to stick to it. Whilst this will mean you may have to say no to other apparent opportunities, it will deliver you the long-term outcomes you set out to achieve, and it will ensure that you avoid time-wasting or stressful complexities.
Pitfall 5 = Getting into too much debt
Due to relatively stable high incomes, doctors benefit from favourable bank lending policies that allow you to access significant funds. Whilst it is true that debt can be used to help accelerate wealth accumulation, it can also be a source of huge stress, particularly when things go wrong from time to time (the Covid pandemic being an obvious example).
Obviously debt needs to be repaid, so consideration also needs to be given to the timeframe you have to repay this debt, particularly if it’s significantly increased at a time when your income jumps (for example, upon specialisation).
Ideally, it is worth considering debt levels as part of your overall financial and investment plan, to ensure that you are working towards your own end goal or objectives.
Pitfall 6 = Failing to put money away for tax
Private practice specialists often receive 100% of their gross billings in hand, without any tax being withheld. This is different to public employees, where tax is automatically taken out of your pay.
As a result, private practitioners typically pay tax quarterly, as one much larger amount.
We often see specialists adjust their spending patterns to this higher pre-tax income, only to be left short of cash once the dreaded quarterly tax bill arrives.
To avoid this pitfall, care needs to be taken to consistently put away money in a reserve for these regular tax bills. Ideally, you should proactively review the appropriate amount of money to put away to avoid any surprise end of year tax bills.
Pitfall 7 = Trying to do too much yourself
Medical professionals spend many, many years studying and training to establish their career. This habit and skill of studying then sees many doctors try to take the same approach when it comes to their financial affairs – they try to learn how to invest for themselves (despite the fact that they are already time pressured and very busy!).
However, research consistently shows that individual investors who use online brokerage platforms consistently lose money and perform worse than the overall share market. The data also shows that those who trade the most frequently typically perform worst.
As a result, if investing and establishing a solid financial strategy is on your radar, the safest approach is typically to work with an adviser that you trust, who can help you to not only set a long-term plan, but to stick to it. This will allow you to focus on your medical practice, and everything else that matters in your life, without the stress or added complexity of trying to understand financial markets.
Pitfall 8 = Not taking the right amount of risk
When it comes to doctors and financial risk taking, its typical for us to see two extremes – taking too much, or too little, risk.
On one side, there are many doctors, most often medical specialists, who take on significant risk. Given the years of study and training required to specialise, specialists typically have a shorter working career once they have reached their full earnings capacity. These doctors then often try to do too much too quickly, take on too much debt, over-expose themselves to one asset class, or invest in high-risk investments that risk permanent loss of capital over the long-term.
On the other side, there are other doctors who spend so much time focused on their work that they simply don’t give thought to their personal financial affairs. This can mean a lack of a long-term plan, leading to lost opportunities or missed investment returns that compound over time.
The optimal approach is often somewhere in the middle, but of course, the right amount of risk for you is the risk level that will best enable you to reach your own financial goals.
At Oxlade Financial, we work with many medical professionals, so we understand the unique complexities and intricacies you face.
We are one of the few truly Independent Financial Planning firms in Australia. We help our clients to get the most from their money and achieve their financial goals. We manage our clients’ finances like they are our own, and we limit the number of clients per adviser to provide a personalised and focused approach.
As an independent firm, we have no in-house products, no affiliations with large banks or institutions, and receive no commissions. We are therefore free to provide unbiased advice that is truly in the best interests of our clients.
If you have any questions about these pitfalls, or want to speak to a Senior Financial Adviser about your situation and whether we may be able to help, please call us on 07 3667 7260 or email email@example.com to organise a cost/obligation free discussion.
Any information in this article is general in nature and does not consider any of your personal objectives, financial situation and needs. It is as intended, to be of a general nature only and NOT a recommendation to you. You should consider whether the information is appropriate to your needs, and where appropriate, seek personal advice from a registered financial adviser.