A profession in the medical field is lucrative, but doctors aren’t exempt from financial stumbling blocks when it comes to converting healthy cash flow to steady growing wealth. MJA Careers has approached financial advisers specialising within the industry to determine the causes that lead many medical practitioners to experience financial struggles later in their career. Learn how you can avoid them by understanding the five common mistakes doctors make and ways you can overcome them:
1. Getting too comfortable with your cash flow
While being comfortable may not necessarily be a bad thing, it can be damaging when it comes to your wealth. Some doctors focus heavily on the patient aspect of their practice that they forget to monitor the condition of their finances. According to financial advisers, complacency is the root cause that prohibits doctors from better leveraging their income. With a large income source, it is easy to oversee opportunities to grow your wealth especially when you have a perceived sense of security for the future.
Paul Cooke, a financial planner with Centric Wealth Advisers, believes that the disparity between most doctors pre and post-tax income only makes the matter worse. This is usually the case for specialist practitioners, who receive a sizeable gross revenue in their account regularly and as a result, they have a relatively expensive cost of living. Be sure to consider your after-tax position so that these costs don’t deplete your income with little to no money set aside for savings.
It is also important to be mindful of your existing debt. It can be tempting to take on more loans when it’s so accessible, especially when you’re first starting out. Darren Johns, a financial adviser with Align Financial, says that lending companies are confident loaning to doctors as they have high earning power and a stable income. With doctors that over borrow, they might find themselves biting off more than they can chew and have difficulties keeping up with repayments.
2. Going overboard on property assets
Investment is a smart way of diversifying your wealth. However, what you invest in matters. Many doctors invest a huge sum on personal assets only to realise their mistake once they retire, says Cooke. They have an impressive balance sheet with assets in the millions, but only a small percentage in financial assets.
Financial assets like shares, investment properties, and Super become a form of income after you retire. If you put all your eggs in a holiday home or a yacht, these often don’t generate money unless you sell. You will need to be wise when balancing between lifestyle assets and financial assets and be sure not to go overboard with one or the other.
If you want to invest in property, a tip would be to purchase it inside your Super fund. According to James Gerrard from PSK Financial Services, taking a loan of up to 80% from your Super means you won’t need to fork out cash, and you won’t be taxed on rental income and capital gains when you want to sell the property.
3. Insufficient insurance cover
Most doctors are the primary breadwinner in their family, but some are underinsured and aren’t aware of it. Income protection, for example, provides a monthly benefit in the event you are unable to work. Important as it is, most doctors do not have an income policy in place.
Gerrard gives an example of his client who suffered from depression and was unable to work for twelve months. Had he not been adequately insured, he would’ve had to sell his property to make ends meet.
If you currently have life insurance, be sure it is appropriate to your circumstance. Doctors with high net assets tend to downplay the importance of life cover as they feel what they have is enough to secure their family should the worst happen. Instead, their family would be left to cover all loan repayments which will heavily affect the funds leftover.
4. Super late on Superannuation
Doctors typically enjoy an above-average lifestyle, but to maintain it after retirement, it is important that you invest in Super early. As most doctors are self-employed, it isn’t obligatory to put money into Super. It is not only until they reach middle-age that some doctors begin to think about their retirement plan. With the changes in contribution regulations, it is vital you start investing young and not wait until the last minute. This will affect how you retire and if you live comfortably after.
An idea of the “right” time to start purposeful contributions is when doctors are earning between the $200,000 to $250,000 income bracket. To retire on $100,000 a year, you’ll need approximately $2 million set aside in your Super fund. This won’t be feasible if you have plans to retire in your late 50s but only start to save in your early 50s.
According to Cooke’s observation, doctors tend to deprioritise making Super contributions until after they’ve paid off their monthly fees, bills, and leases. However, as Super is tax-effective, it should take the same level of importance as these other costs.
5. Getting involved in risky schemes
As doctors fall in the high-level tax bracket, big upfront deductions are very tempting. Many schemes promise this, and those who are quick to bite the bait often find themselves issuing a cheque for a large sum without first considering the consequences.
Rather than chasing tax deductions over capital preservation, Cooke strongly advises doctors to focus on blue chip investments which will reap a more solid income in the long run. While these tax deduction schemes have become less favourable post-GFC, doctors should be ready to decline if offered and consider the risk before signing anything.
FutureNow Finance can provide specialist advice on the finance options available to Medical Practitioners. Give us a call on 1300 013 730 or email us at hello@futurenowfinance.com.au today.