Three Building Blocks of a Young Dermatologist’s Financial Foundation

Financial planning is crucial for young dermatologists as they embark on their careers. With the substantial investment required for medical education, it is essential for young dermatologists to have a clear financial strategy. Proper financial planning will allow savvy decision-making when it comes to balancing paying back student loans with setting aside funds for future goals, such as buying a home or saving for retirement. By planning early, young dermatologists can avoid the stress and uncertainty that comes with financial instability, allowing them to focus on their medical practice and patient care.

In this article, we will focus on 3 building blocks of financial planning: (1) saving and investing early to leverage compound interest, (2) securing insurance to shield the value of future income, and (3) developing a budget.

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1. Get an early start on savings to take advantage of compound interest.

Benjamin Franklin once famously remarked, “Money makes money. And the money that money makes, makes money.” Young physicians are best positioned to take advantage of this financial reality that Franklin recognized centuries ago.

In simple terms, 3 factors determine how your money will compound: the interest rate you earn on your investments (rate of return), the time horizon, and your tax rate. As discussed in other articles, tax-advantaged vehicles like Roth individual retirement accounts, 401(k)s, cash value life insurance, and 529 college savings plan accounts may allow tax-free growth and even tax-free access to play in your favor.

Let’s examine the power of compound interest and how it may impact younger doctors.

Case Study

Maria and Steve are both 25-year-old medical students. Maria begins saving in school, contributing $5000 per year into a retirement plan from aged 25 to 35 years—for a total of $50,000—and then stops. Steve begins making the same annual $5000 plan contribution, but he begins at aged 35 years when he begins his dermatology practice. Steve saves $5000 per year for 32 years—for a total of $160,000. Would you be surprised to know that when both are aged 67 years, Maria has more saved than Steve? Assuming the same 7% rate of return, Maria would have amassed $624,653, whereas Steve would have accumulated $571,671.

Although both physicians should be commended for their savings, Maria came out ahead with 22 fewer years of contributions—simply because she started saving earlier and thus had more time to benefit from compound interest.

Note: This hypothetical example is based on monthly contributions of $416.66 for Steve and Maria, made at the beginning of the month to a tax-deferred workplace savings plan and a 7% annual rate of return compounded monthly. Your own plan account may earn more or less than this example, and income taxes will be due when you withdraw from your account. Investing in this manner does not ensure a profit or guarantee against loss in declining markets.

2. Secure insurance to protect the value of your future income.

Insurance provides essential financial protection as young dermatologists build assets and take on more personal and professional obligations. Many physicians may not realize that one of their most significant assets to protect is the value of their future income. Disability and life insurance are key tools for dermatologists to protect this asset for themselves and their dependents.

Disability insurance should be secured early in a physician’s career to protect the value of their future income from the risk of a short- or long-term disability. Dermatologists who find that the group disability insurance provided by their employer does not fully meet their needs can choose to purchase individual disability insurance to ensure comprehensive protection against income loss due to illness or injury.

Life insurance is also an essential consideration for physicians as soon as they have a spouse, children, or others who are dependent on their incomes. After determining the amount of life insurance they need, dermatologists can choose between term life insurance and a wide variety of permanent life insurance products, each with their own advantages and drawbacks.

The coverage amount of the life insurance policy should be sufficient to replace lost income and cover outstanding debts, such as student loans or a mortgage. It’s important to review and update coverage regularly as personal and financial circumstances change, such as getting married, having children, or purchasing a home.

3. Develop a budget to avoid lifestyle creep.

Understanding cash flow and effective budgeting is fundamental to financial success. Managing cash flow can be challenging for physicians of all types, especially as they transition from the income earned in residency and fellowship to the higher salaries and bonuses often enjoyed by practicing physicians. By tracking income and both fixed and variable expenses, physicians can better manage their cash flow and ensure they have enough money to cover their financial obligations, enjoy personal lifestyle goals, and contribute to emergency funds and retirement accounts.

One popular budgeting strategy is the 50/30/20 rule, which suggests allocating 50% of income toward essential expenses such as housing, utilities, and groceries; 30% toward discretionary expenses such as dining out and entertainment; and 20% toward savings and debt repayment. Of course, dermatologists may need to adjust this guideline based on their individual circumstances and financial goals.

Financial tools and apps, such as Mint, YNAB (You Need A Budget), and Personal Capital (now Empower Personal Wealth), can aid physicians in budgeting, tracking expenses, and setting financial goals. These tools can provide a comprehensive overview of finances, help identify areas for improvement, and automate savings contributions.

In addition to improving cash flow management, a detailed budget can help young physicians overcome the tendency to succumb to lifestyle creep—an increase in spending equal to (or, worse, greater than) increases in income. Lifestyle creep is unfortunately too common among young dermatologists who finally enjoy a substantial income after years of training at low wages and want to “catch up” to other physicians with purchases of high-ticket items like luxury homes, expensive cars, and exclusive club memberships.

By creating a budget beforehand, one can be better equipped to avoid lifestyle creep impulses and emotions that inevitably accompany increases in income.

Conclusion

Financial planning provides young physicians with the tools to build a secure and prosperous future. In this short article, we have identified 3 planning tactics for young dermatologists to utilize in their financial journey. We also encourage them to find an experienced financial professional who can work with them to tackle financial challenges.

David Mandell, JD, MBA, is an attorney and author of more than a dozen books for doctors. He is a partner in the wealth management firm OJM Group (www.ojmgroup.com), where he can be reached at 877-656-4362 or at mandell@ojmgroup.com.

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Disclosure

OJM Group, LLC (OJM) is a US Securities and Exchange Commission (SEC)–registered investment adviser with its principal place of business in the state of Ohio. SEC registration does not constitute an endorsement of OJM by the SEC nor does it indicate that OJM has attained a particular level of skill or ability. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. For information about OJM, please visit https://www.ojmgroup.com/ or contact us at (877) 656-4362.

This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice or as a recommendation of any particular security or strategy. Investment involves risk and possible loss of principal capital. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently; accordingly, information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.