Avoiding fiscal stumbling blocks

General financial advice abounds, but certain recurring money issues and scenarios are physician-specific. We talked to some financial experts who advise physicians about some of the key financial stumbling blocks they see to get some insights and solutions.

REGRETS, WE’VE HAD A FEW

Sometimes, after years of study, residency and early-career deprivation, doctors break out, break the bank and overspend—a case of too much too soon. Or they make an impulse purchase based on a colleague’s recommendation and live to regret it. Maybe they don’t pay attention to finances at all.

Dr. Mark Soth, a practising academic intensivist in Ontario, writes the Looney Doctor blog. He has a sizable list of common doctor missteps: “Not paying attention to their finances. Spending everything they make. Locking themselves into complicated fee-laden products, like whole life insurance, without really understanding what they are doing. Abdicating management of their money to someone else without knowing (enough) basics themselves to recognize whether what they are doing makes sense. Expensive cars. Buying a house before they know they will be there for at least five to seven years, or buying a much larger house than they need.

Marcello Aquilina is a senior financial planner at CIBC who mostly serves physicians. High on his list of financial regrets he hears about: high-end vehicles. “They are usually a depreciating asset,” he said. “Once the euphoria of the new vehicle wears off they are stuck with a big payment.”

But the mistake he hears the most often (whether or not regret follows) is someone investing in something just because other physicians were doing it. “Ideas such as buying rental properties, where it was not part of their goals or objectives,” he said. “We find sometimes they feel they can be the financial guru and try to invest on their own without advice. This causes physicians to purchase investments generally without enough research and end up with not enough diversification.”

GETTING OUT OF DEBT

Debt levels for newer physicians continue to rise. According to the Association of Faculties of Medicine of Canada, the median debt for medical school graduates is $80,000, with 32% of grads with debt reporting owing $120,000 or more. And that doesn’t include undergraduate debt.

Add in the years of the financial confines of residency, the pressures to buy a home—and skyrocketing costs of such ownership—and it can be easy to get well into six-figure debt.

Cambridge, Ont., Dr. John Crosby wrote in a recent blog: “We graduate from medical school with enormous debt and have delayed gratification so long that we and our loved ones have a huge built up pressure to buy a house and lots of stuff to go in it, to buy better cars, and to take more and better trips.

Don’t do it, says Dr. Soth.

“After medical school, the fastest way to get out of debt is to continue living like a resident, even when your income rises as an attending. Put the extra money to pay down your debt,” he said. “It will pay off significantly later in life."

Aquilina wholeheartedly agrees, but acknowledges it’s easier said than done.

“There’s a lot of FOMO (fear of missing out),” he said. “To get out of debt, you need discipline and to not follow other physicians or give into FOMO,” he said. “A perfect example is when physicians start working, they have more funds and they start to spend more immediately, like on a new luxury car. We advise them to wait a bit until they have a bit of a buffer before making large purchases. Just because they are making more money doesn’t mean they have to take on more debt.”

There is also the issue of taxes, experts point out. At the beginning of their careers, young physicians sometimes don’t put enough aside for taxes, then get more into debt to pay the tax bill when it’s due.

INVESTMENT BLUNDERS

Time flies when you’re a busy physician, and taking time to address your current financial state and meeting with your financial advisor can fall by the wayside.

“I think it’s a big mistake not to meet with your financial advisor on a regular basis,” said Ottawa-based Alan Acton, vice-president and portfolio manager at Polaris Wealth, and a financial planner who has many physician clients.

“I know that sometimes people want to put things off, but if you have a good relationship with an advisor and set up a strategic plan, a financial plan, an investment plan, an insurance plan— you’ve got this solid roadmap to guide you."

But it may need adjusting along the way.

“Three, four or five years go by and your life has completely changed. Maybe your financial objectives have changed,” said Acton. “Maybe you’ve had cash sitting in your investment account or your bank account, like your corporate bank account. Some physicians accumulate hundreds of thousands of dollars in their corporate bank accounts. If you just let it sit there and not invest it because you haven’t talked with your advisor, they don’t know what’s going on (and can’t help you better invest).”

Buying or selling a house, adjusting insurance, unexpected expenses, getting an inheritance, etc., can create problems or opportunities that a planner can weigh in on.

Aquilina agrees, suggesting doctors meet with their advisor twice a year. He also believes physicians need to empower themselves through informal education. “Always make time for selflearning or to attend investing seminars. You don’t have to spend hours on it. Also read the business section daily, even five minutes, to get an idea of what’s going on in the investment world."

INCORPORATING—OR NOT

Incorporation can sound great, said Acton, and many will tell young doctors it’s the way to go. But he believes it can be overrated, and not for everyone.

Why? Because the costs of maintaining the corporation (such as accounting fees, insurance) will often exceed any benefit. He advises examining all the benefits and the drawbacks before taking the plunge.

“Incorporating is not what it used to be,” he said. “The more you pay in accounting and legal fees, the less money there is for corporate tax-deferred investments,” he said, adding that there can be insurance and other costs. “There needs to be an analysis. You need to see numbers before you jump into this because it’s complex.”

Dr. Soth believes incorporation can be useful in three main situations: “You have a spouse who legitimately works more than 20 hours a week for the corporation so you can income split (rare). Second, you expect to have wildly fluctuating income each year. Third, you have maxed out your RRSP and TFSA and are saving a decent amount to invest each year on top of that,” he said. “This third reason is the one that applies the most to physicians, but it may take them a few years to get to that point because they have a bunch of debt, delayed gratification, and registered account space to deal with first.”

Everyone is different and should consult an accountant before incorporating, said Dr. Soth, “but should also be aware of these basics before having that talk."

Acton also noted that incorporating carries a risk because legislation can change, as it did in 2017 and 2018 making it possibly less advantageous.

“With RSPs and tax-free saving accounts, you can accomplish your goals (without being incorporated). “Long story short, you need a business case for incorporation,” said Acton. “Don’t do it because it sounds sexy.”

GET INSURANCE RIGHT

When setting up a practice, various forms of insurance are needed.

According to Acton, in addition to medical liability protection provided by the Canadian Medical Protective Association, physicians need overhead coverage, office insurance (for fire, theft, loss), life insurance and disability.

“If you work with a partner, you might want to also get insurance on the partner, in case something happens to the partner,” said Acton. “If you’re both doing equal work and bringing in equal revenue, well, if one partner dies, what are you going to do? You could lose half your revenue. So having a life insurance policy wouldn’t be a bad idea, depending on how easy they would be to replace."

More importantly, says Acton, younger physicians should think about their disability insurance and their future insurability option on the insurance. “While they’re in residency, physicians are only making whatever, $50,000 or $60,000. But you can get $20,000 a month in future insurability options as a rider on the policy, you just need to show proof of income. I find many younger physicians don’t update this regularly. So they’ll go five or 10 years and they’ll still only have $2,500 disability insurance coverage per month. So that’s a big mistake that can be a disaster. They may need it later and they haven’t updated it, because you have to do it regularly— every year.”

‘MARIE KONDO’ YOUR FINANCES

In the rush and complexity of daily life, it can be as easy to lose track of expenses as household items. Author and decluttering guru Marie Kondo told the world that getting rid of outdated, unneeded, unloved “stuff ” leads to a calmer, more organized and efficient life. Could decluttering your finances do the same?

“There are big opportunities to save,” said Aquilina, referring to both physical purchases and online subscriptions. “Start with Apple/Android subscriptions. Check Visa statements every single month for any pattern of expenses, and purchases you don’t recall and weren’t necessary (in retrospect). Do cell phone price plan reviews, cable/TV subscription reviews, internet price reviews.”

And always think of expenses in terms of the before-tax income that it is costing you.

“Generally, we always tell physicians that whatever they’re spending money on, double that figure,”he said. So if they’re spending $100 on a cell phone plan, double that to think about how much it is really costing.

“Although time is limited for physicians,” said Aquilina, “keep a budget and net worth spreadsheet and update it every month. Spend five to 10 minutes to keep track. If expenses seem to be high, review the cash flow and see what’s going on. Can some expenses be eliminated? Are you spending too much on your children when they can pay for some things themselves? Do you really need that timeshare?”