With this post, we’re hoping to address the challenges of transitioning from residency to an attending physician. There are plenty of businesses that want to sell you their services and our goal is to help you weather the sales storm.
Getting off to a strong financial start as a newly minted attending physician has a disproportionate impact when compared to any investments you could possibly make. The compounding effect of good early financial habits is second to none when it comes to your financial future.
“In your first few years as an attending spend like you’re a resident” – Wise, financially independent Doctor.
1) Create a Debt Plan
In medical school, you cannot really pay down your debts absent of a significant contribution from parents/inheritance. The best you can do is focus on not racking up more debt than required.
In residency, you have an income. Some residents can chip away at their debt, but the magnitude of it can still be overwhelming. Do your best to pay some off but it’s not uncommon for it to continue to expand.
Debt Consolidation – First we recommend that you look at your various debts (LOC, student loans, consumer debt) and consolidate them to the lowest rate available. This means putting it on your LOC in most cases, if you have the room. Most of our medical students/doctor clients can get a line of credit at prime minus 0.25% personally and in their corporation.
Some Advantages of LOC Consolidation:
- Simplicity – All your debt in one place
- Flexibility for payments – You can often just pay the interest if needed or make larger payments when able.
- Lower interest rates – Canada Student Loans are at Prime +2%, ASL/OSAP (insert province) is Prime +1%
Important Debt Considerations – Be aware that some banks send you a letter post-residency that your LOC will be changing from a “Medical Student LOC” to a “Professional LOC”. Be sure to read this and negotiate the best deal for yourself. (Prime -0.25%)
Debt Repayment Plan – Remove the desire to buy that new car or oversized house for the first little bit. Focus on reducing your debt and mitigating taxes paid.
2) Pay Down Debt or Invest?
There is an argument that with interest rates so low currently, that it is better to not pay your debt down. Rather, invest the money and earn a higher return. For example, a balanced portfolio of 60% equity and 40% fixed might return 8% while your debt is costing you around 4%. The arbitrage seems obvious. But…
Pay down debt first
- The average return of a 60/40 portfolio over the past 90 years has be 9% per annum. This return is random and fluctuates quite dramatically. “You can’t destroy risk, it can only be transformed”. Debt on the other hand can be destroyed. Therefore, for behavior and mental reasons, we recommend that our clients focus on what makes them feel the best. This is often in the form of debt reduction.
- With debt at Prime minus 0.25%, you need to beat a 3.5% bogey after-tax to outperform debt reduction on an absolute basis. Our clients are advised to fill their TFSAs and RRSPs then pay down that LOC and student debt.
- Paying down the LOC also gives our clients room to absorb the unanticipated costs and fluctuating income that is typical when starting a practice
3) Debt reduction + Investing
At GIM, we first set our clients up with all the tools they need to get started:
- Non-Registered accounts
- RESP (Registered Educational Savings Plan)
- RDSP (Registered Disability Savings Plan)
- Corp accounts if/when appropriate (wait until you’re keeping significant earnings in your corporation before. There’s no sense in paying unneeded accounting fees until debt is reduced and your personal accounts are full)
During the first few months, you’re going to notice that your income is higher than it was before, and for our clients we recommend making use of the above accounts in this order.
TFSA first – the sooner you start contributing to this account the longer you can enjoy the benefits of compounding.
RRSP second – reduce your tax burden; reinvest the tax refund; compound the growth on a tax-deferred basis.
Investment strategy at GIM is simple but tried and tested. We use an evidence-based approach of utilizing index ETFs accompanied by a geographic and sector tilt and systematic rebalancing. The evidence is overwhelmingly in our favor that high-fee, actively managed funds underperform a low-cost, passive ETF strategy. Many advisors out there will suggest that their mutual fund managers have the best chance to outperform the market. However, over a 20-year period, only 2% of managers have proven to outperform the index net of fees. Indicating to us that it’s incredibly difficult to pick the 2% of managers after the fact. We steer our clients clear of financial salespeople.
One of our greatest value-adds as an advisory team is our ability to deliver a repeatable process with competitive performance for the right price.
4) New Income vs. Resident Income – What to do
As a resident, you received a steady paycheque every two weeks. You paid your rent/mortgage and living expenses. Your financial life was predictable.
Now this all changes. As an attending physician, a financial buffer is more important than ever.
Income Volatility – As you know, your work load is lumpy – whether it be for locums or extra shifts to cover shortages. We’ve found that no one physician client is the same.
There is this image of the wealthy physician lifestyle that is very attainable for nearly everyone. But there is one thing that often gets in the way. It isn’t $4 Starbucks coffee. It isn’t a vacation to Europe or updating the wardrobe. It’s the big-ticket purchases that can derail success. Getting the big purchases right is incredibly important to ensure your financial freedom. We’ll never be the nagging advisors that tell you to cut out vacations or Starbucks coffee. But we will encourage you to get the big purchases right.
5) Insuring your biggest asset – Your ability to earn income
We find its imperative to review our client’s personal insurance. Going from residency to a full time attending comes with its own unique liabilities. When thinking of insurance, we want our clients to make sure that they have enough to cover their expenses and responsibilities.
Life Insurance – You want enough life insurance that if you were to die that your financial obligations of your family are met.
- Covering debts
- Leave enough money to pay for your dependents in your absence
Term life insurance is usually the most efficient way to insure these obligations. The premiums are cheaper than whole life insurance. Without complicating things, we don’t recommend a whole life strategy until there is a business protection, tax reduction or income reduction need for the client.
Keep it simple. Keep costs low.
Disability Insurance – With a longer-term disability, this type of insurance is to cover the loss of income. We recommend clients have “own occupation” insurance which ensures that they don’t have to go back to work in another field of work.
What to consider before deciding on the monthly amount:
- Paid with personal or corporate dollar
- Your business expenses
- Cost of personal Lifestyle
Umbrella Liability Insurance – This is an extension of your home or auto insurance. It covers for liability beyond those policies and payouts that exceed the usual coverage. Unfortunately, as high-income earners, Physicians are at high risk to be sued.
We at GIM hope that this article helps you get started in preparing for your new life. If you’re interested in hearing more from us then please reach out here.