Author: Joel M. Schofer, MD MBA RDMS FAAEM
2014 Secretary-Treasurer, AAEM
2013-2014 President, Virginia AAEM
Commander, U.S. Navy Medical Corps
Originally Published: Common Sense July/August 2014
Dr. Schofer offers some excellent advice below, and his ongoing series on basic personal finance for emergency physicians is shaping up to be one of the best things Common Sense has published under my editorship. I hope all our residents and new attendings read it carefully.
Although I have done more things right than wrong, I have made a few painful financial mistakes in my 55 years. One of the two worst mistakes I made was buying “variable universal” life insurance rather than term insurance — one of the topics Dr. Schofer mentions below. The other was trading in an overseas wine futures market. That ended badly…
There is one other thing I feel compelled to mention. While most families ought to have 3-6 months of income saved for emergencies, as Dr. Schofer says, I believe emergency physicians should have 6-12 months of income saved in a fairly liquid, easily accessible form. Every single emergency physician is virtually guaranteed to lose at least one job unexpectedly, and most of us will lose more than one. Be prepared.
— Common Sense Editor
There are a number of steps a physician should take to establish a sound financial plan. Older or more established physicians have likely taken many if not all of these steps, but those who are younger or just starting their career may find that a number of these basic steps remain on their to-do list. The steps to build your financial foundation are listed below in order, from those you should do first to those you should do last, although your personal situation may vary. These topics will all be discussed in detail in future columns.
1. Make Sure You Are Adequately Insured
In general, there are two types of insurance. There is insurance you don’t have enough of, and insurance you have too much of. Rarely do you have the right amount of coverage, unless you annually review your insurance needs.
Usually you will need and want include malpractice, health, auto, renters or homeowners, umbrella liability, and disability insurance. Insurance you may or may not need, depending on whether you have others who depend on your income, includes term life insurance. Insurance you probably don’t need includes any form of permanent or “cash value” life insurance.
2. Build an Emergency Cushion
Most financial experts recommend that you have 3-6 months of living expenses stashed away for emergencies. Potential emergencies will vary based on your situation, but some common concerns include lawsuits or legal expenses, unexpected car or house trouble, family emergencies, or medical bills. The best place to have this emergency money is in a bank savings account or money market fund. A money market fund is almost as safe as a bank account, but historically has offered a higher rate of return. The reason it is “almost” as safe as a bank account is that a money market fund is not FDIC (Federal Deposit Insurance Corporation) insured, while bank accounts are.
3. Be Smart About Your Debt
You should pay off your high interest debt before you begin investing. The reason is that paying off high interest debt, like your credit card balance, is the equivalent of earning that interest rate as an investment return. In other words, if you are being charged 15% interest on your credit card, paying it off is the equivalent of earning 15% on that money — which is a pretty nice return! In general, you should pay off any debt before you start investing if the interest rate you’re being charged is more than the after tax rate you could receive on an investment. This number will vary based on your investments, but if you’re looking for a number, you should probably pay off any debt with an interest rate of 8% or greater, and consider it if the rate is 6-7%.
Finally, Burton G. Malkiel, Chair of Economics at Princeton University and the author of the best-selling book A Random Walk Down Wall Street says, “Keeping a balance on your credit card is about the worst financial move you can make.” I have to agree. If you carry a credit card balance, you need to pay that balance off and keep it off with a disciplined budget.
4. Invest MAXIMALLY in Tax-Favored Retirement Plans
Certain savings vehicles offer tax advantages to encourage saving for retirement. These plans most commonly include 401(k), 403(b), and Individual Retirement Accounts or IRAs, such as a Roth IRA. The tax benefits of these plans offer massive benefits over time, which allows your investment to grow larger. For example, if you make a $4,000 contribution to a taxable investment account each year for 45 years, you’ll end up with approximately $600,000 — assuming an 8% annual return on your investment. If you make this same investment in a tax-deferred plan that yields the same 8%, you’ll have approximately $1.7 million. Which would you rather have?
5. Invest in Stock and Bond Mutual Funds
Investing in stock and bond mutual funds (not individual stocks and bonds) is the simple way to both diversify your investments and get higher returns than more conservative investments such as bank accounts, money market funds, or certificates of deposit (CDs). In addition, it is the only way you can invest and stay ahead of inflation. If you put your money in a savings account that earns 2% but inflation is 3.5% that year, you just lost 1.5% of your purchasing power. With the historical inflation rate averaging 3%, you can’t even keep up with inflation and break even without taking some risk and earning a return of at least 3%.
Investing in stock and bond funds is not for the weak of heart, as you can lose money in the short term. But over the long term, taking on higher risk leads to higher return. Only you know how much risk you are willing to take, but you should take as much as you can while still sleeping at night. I don’t remember which investment book I read this in, but if you invested $1 in the following investments in the year 1800, this is how much money you would have had in 2005:
- Gold — $27
- Treasury Bills (low risk government bonds) — $4,828
- Corporate bonds (moderate risk) — $17,843
- Stocks (the highest risk investment on this list) — $11,000,000
I ask again, which would you rather have? Increased return means increased risk.
6. Consider Buying Instead of Renting
This decision is more complicated than simply comparing your monthly rent versus the amount of a mortgage payment. Things you will have to consider include tax breaks, fees associated with buying a home or condominium, how long you think you will you live there, and other factors. In general, the benefits of home ownership include the fact that mortgage interest is tax deductible and significant gains on home value are tax exempt when you sell. In addition, home ownership forces you to save by making mortgage payments and building equity in your home. In most situations, you should own a home if you can possibly afford it. Owners get rich, renters do not.
If you have ideas for future columns or have other resources you’d like to share, email me at jschofer@gmail.com.
The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Department of the Navy, Department of Defense or the United States Government.