Financial Planning for Physicians

Managing cash flow is important for everyone, but it’s especially vital for new doctors who are about to complete their residency or fellowship. If you’re nearing the end of your medical education and preparing to begin your career as a physician, you’re likely looking forward to the paycheck that accompanies your chosen profession. Perhaps you’re getting the itch to buy a new house or car. Or, maybe you’re anxious to start paying down the student debt you’ve accumulated. Before you open the spending floodgates, take a moment to set up a straightforward, meaningful cash flow structure to help you achieve your long-term goals. The following steps can help you get started.

Step #1 – Build an emergency reserve

The first step in managing your cash flow is to build an emergency fund. You should have three to six months’ worth of expenses set aside for emergency use. If you have a secure job, it’s okay to be on the lower end of this range. On the flip side, you should have at least six months’ savings if your job is insecure, if your monthly income varies greatly or if you prefer to be a bit more conservative.

Step #2 – Determine your base balance and target balance

A good cash flow structure is one that puts you at the managerial (not clerical) level for your finances. You should be able to glance at your accounts at any time throughout the month and quickly understand if you’re on track or if you need to make adjustments. To do so, establish a base balance and a target balance within your accounts.

  • Base balance – Setting a pre-determined base balance in an account can help you identify fluctuations relative to the base. If the account balance continues to increase well above the base amount month after month, you’ll know that you can likely save or spend more. On the other hand, if the account balance declines below the base balance, you are likely spending more than you are putting into the account. Sometimes, it’s okay to drop below the base balance if you’ve planned to make a specific large purchase. Other times, dropping below the base balance is a warning sign that you are overspending.
  • Target balance – Setting a target balance in an account can help you track your progress toward reaching a specific goal such a building your emergency fund or saving for a big purchase. A target balance can be especially helpful when you are just starting out in your career, as this is typically a phase of life when many short-term goals require prioritization. Once you hit your target balance for one goal, move on to the next. If you continue to hit your targets, consider what to do with any excess savings. For example, increase your retirement savings, save for a child’s education or pay down debt.

Step #3 – Distinguish between discretionary and non-discretionary expenses

The next step to managing your cash flow is to distinguish between non-discretionary and discretionary expenses.

Non-discretionary (or fixed) expenses are those you must pay each month. Examples include:

  • Rent/mortgage
  • Minimum credit card payments
  • Car payments
  • Insurance
  • Utility bills
  • Cell phone

Discretionary expenses are costs you choose to take on that are not essential for living your life. These are wants, not needs. Examples include:

  • Eating out
  • Movie and concert tickets
  • Streaming TV subscriptions
  • Gifts
  • Vacations

Consider having separate accounts for your non-discretionary and discretionary expenses. The non-discretionary account will help ensure your base standard of living is met, regardless of what happens. The balances in each account become your management report, allowing you to quickly identify where you stand just by looking at the current balance relative to the base balance. If the balance remains above your base, you don’t need to worry. If the balance is below the base, you may need to make some changes to your spending.

Step #4 – Plan for retirement

Once you have successfully funded your emergency reserve, prioritized your goals and created a cash flow structure that works for you, it’s time to start saving for retirement. While it may seem crazy to think about retiring when you’ve barely started your career, saving early and consistently is the key to accumulating wealth over the long term.

Contributing to an employer-sponsored retirement plan, and possibly a health savings account (HSA), is a simple and effective way to save. Because contributions are taken from your paycheck, you won’t be tempted to spend the money you otherwise could have saved.

When participating to your employer-sponsored plan, be sure to contribute at a level that allows you to receive the full value of your employer’s matching contribution, if offered. Once you’ve achieved that level, gradually increase your savings until it equals 15 to 20 percent of your pre-tax income.

Establishing your cash flow management strategy is an important financial step for any new physician. As your balances grow and you achieve your short-term goals, begin to focus on your long-term goals. With steady, focused attention, you will be able to work your way toward financial independence.

At Creative Planning, we understand that physicians face unique financial planning challenges. We work with medical professionals to help them implement strategies related to saving, spending, investing, managing student loan debt, risk management, practice management and more. Our experienced advisors work with you to understand your specific goals and challenges as they build a custom financial plan specifically designed to help you achieve your long-term goals. If you’re ready to start planning your financial future, please contact us.

Sam is a Certified Financial Planner™ who specializes in comprehensive wealth management with a financial planning led approach. Sam graduated from the University of Wisconsin-Whitewater with a bachelor’s degree in Finance and received his Master of Business Administration degree from the University of Wisconsin-Milwaukee. He has over 15 years of experience in the financial service industry in both compliance and wealth management. He has adjunct taught at the University of Wisconsin-Milwaukee and Wisconsin Lutheran College and was the treasurer for a free health clinic in Milwaukee.