No Stupid Questions, Plenty of Dumb Mistakes
If you think all doctors are rich – ask one. They aren’t. Most physicians have no more financial training than a Uber driver. Far too many doctors make avoidable mistakes that cost them money. Whether it’s personal finance or practice management, doctors are learning by experience. And not in a good way.
Most doctors make decent money, but a good salary can make it easier to make mistakes. During medical school and residency, most of them are living on Ramen noodles. There isn’t much money and depending on your specialty, no money for up to thirteen years. Once they get into practice with a real salary, it’s not surprising they feel like billionaires.
FYI – you’re not. You’re not even millionaires. Depending on how well you manage your money, you may never be. Here’s a list of 11 bad financial decisions, with a better suggestion
Financial Mistakes Doctors Don’t Have to Make
The list below includes mistakes in personal and professional finances. If you own your practice, you’ll want to dodge these bullets. The more money you lose, the less money you have to get back where you started.
1. Beware Private Equity Investment
Private equity investors target medical practices. They look for physicians who are doing okay but lack the money to grow. When docs are approached with an offer of capital, the VCs sound like saviors. Not so much.
We’re financial guys, they say. We can handle the business, you take care of the patients. Almost too good to be true, right? YES! These are not passive investors, when you let them in – they’re your new partners. Partners whose only purpose is the bottom line. You’re not handling the business anymore, so they need to cut your salary. Oh, and you need to up the number of patients you can see in a day.
They’re building up the practice profitability to boost the sale price. Because they intend to sell it.
Solution: Unless you’re looking to retire and close the practice, this may cost you in the long run. Work on getting the business a loan if you want to maintain control over your life.
2. Bear Market Panic
If you are investing in the stock market, it goes up and down. Sometimes it drops like a rock. Example in point: On March 11, 2020, the Dow closed at 23,553.22. On March 11, 2020, the Dow closed at 32,485.59 according to the Wall Street Journal, which keeps a historical list.
If you panicked in 2020 and sold your holdings, you screwed yourself. Mind you, this panic isn’t limited to physicians. The stock market produces long-term gains. They only accrue if you don’t dump your stocks when the market tumbles.
Solution: Take a breath and ride it out. Keep your portfolio diversified and balanced.
3. Stock Tips are for Dummies
When you don’t know much about investing, you’ll take stock tips from anyone. That includes other doctors who probably don’t know more than you do. There’s that guy on TV who shrieks about hot stocks. Your wife’s cousin who manages a front-loaded mutual fund with a 12% annual fee. The kid at the coffee shop who is always trying to get you to buy shares in Bitcoin.
If you don’t know what you’re doing, why do you think they do?
Solution: Stop being a dummy. Take an accredited course on investing – here’s a list from Coursera. Forget front load – bone up on no-load funds.
4. Big House = HUGE Expense
How much house did you actually need versus how much house did you actually buy? Life as a resident meant a cramped apartment in a not-so-great building. Is it any wonder the huge houses in that gated community look so good? You’re a doctor now – you deserve one. If you say so.
You just committed yourself to 15 or 30 years of some serious mortgage payments. The spacious 5600 square foot house with elevated ceilings guzzles electricity. Unless you plan to take care of the pool and keep up with the landscaping, plan to hire someone. And given that it’s just you and your spouse – do you need 6 bedrooms and 4 baths?
Solution: You don’t live your life in Architectural Digest. Find a good neighborhood and look for houses, not mansions. If you shop smart, you’ll be happy in a house that isn’t bleeding you dry.
5. No Timeshares
This should be self-explanatory. You pay ridiculous fees on a building you use once or twice a year. No one can get the two weeks they want because everyone wants the same two weeks. A whole industry’s sprung up just to help people get rid of them.
Solution: Don’t get suckered into attending one of their “presentations.” No timeshares. Period.
6. Where’s the Billing
Heads up, a medical practice is a business. A business stays afloat because people pay for its services. No good businessperson just hands over control of their cash flow and never looks back. Whether you do your billing in-house or outsource it, someone needs to review the books.
If no one is paying attention, don’t be surprised how easy things can get screwed up. There’s human error which ideally you can catch before it blows up. Some people steal, some sell private data, and some commit fraud with illicit partners. Your practice, your name – your problem.
Solution: It’s your money. Pay attention. Know what to look for in reports and statements. Also, avoid any startup billing companies. If they go under or start selling your client’s data – you’re in big trouble.
7. Coulda Woulda Shoulda Saved
We all look back on our youth and wish we’d known then what we know now. The biggest mistake anyone can make is spending more than saving. The longer you save, the more you earn. If you started a high-interest savings account with just $100 and added $200 a month – in 15 years you’d have $39,803 at a .60 APY. If you started at 20, by 35 you’ve got close to 40K in liquid assets.
The same goes for retirement accounts. Too many younger workers skimp on 401k contributions – retirement isn’t a reality yet. Compound interest can be your lifelong friend.
Solution: Max your 401k from the get-go. Start a saving account. If you have a practice, shop around for a small business 401k plan – consider Roth 401ks – or at minimum set up a Roth IRA.
8. Authorized Users
Let’s talk credit cards. How many do you have and how many people are allowed to use them? Credit card companies love authorized users. Combined with high credit limits, they rank right up there with interest rates. If you have 5 cards, how much could you and your extra users spend?
When you give someone the use of your card, it doesn’t matter who spent the money. It’s your card – you’re paying it back. If you have 5 cards with a credit limit of $15,000 each, your authorized users have $75K of credit at their fingertips. If you’ve given one of your kids a card for “emergencies”, you may soon be in one.
Solution: Check the monthly spending and your limit. Remove any unnecessary authorized users (aka, teenagers, relatives, ex-spouses.) Call the card companies and lower your limit. Beware the lifestyle creep.
9. Portfolio Management
How much are you paying this guy and what are you getting for it? If you have an actively managed brokerage account, you’re spending some serious money. Most people who have these active accounts can afford the fees and want (or need) investment guidance.
Do you know how much your advisor gets in commissions? They will be in addition to the retainer or administration fees you’re paying. It’s somewhere in the prospectus you didn’t read. When your broker recommends a product, is it the best for your portfolio…or theirs? In fairness, most brokers are ethical, but they aren’t required to put your interests ahead of their own. They have to recommend “suitable products”, which is a pretty broad playing field.
Solution: Do you really need an actively managed account? If yes, look for a fiduciary, fee-only advisor. They can’t take commissions and are legally required to act in your best interest. FYI, there are many robo-advisor accounts for passive investments with much lower fees.
10. Obsolete Information Technology
Most doctors aren’t super interested in computer systems. Despite the value of the data their systems hold, very few practices have on-site IT support. A staffer is rarely assigned to establish and enforce system security.
The next problem is that the systems and software themselves are outdated. Using old versions of business applications or billing software makes it harder for staff to do their jobs. Which makes it harder to keep them and turnover is no cheap date. Old software isn’t just slower, it’s years behind in security patches and updates.
Look at how long ago you purchased your EHR. The expectation for electronic records is that they can be shared with other providers. (If you accept Medicare, it’s an essential part of the value-based care payments.) Older systems may have trouble sharing data or be unable to meet current encryption protocols.
As of 2020, the cost of coming back from a breach is $408 per record. How many patients are in your system?
Solution: Invest in your business technology. Pay for premium malware and anti-virus software. Do not allow the use of personal email accounts on business computers. Get a security assessment of older systems for an independent auditor. Train everyone on security policies. Hire a service to provide the IT support needed to protect your practice.
11. Contracts for Colleagues
If you plan to have a group practice, your partners are not your friends. And think twice before you pick your spouse, your old buddy from med school, or your son’s girlfriend. Liking a person socially doesn’t always transition to a business relationship. The wrong mix will mess with your personal and professional life.
Vetting your son’s girlfriend may not go over well. Working with your spouse means you’re together 24/7. Very hard for either of you to take a break from work. Work ethics vary widely, so do standards of professional conduct. People pad resumes, they “embellish” their expertise. They can’t believe their buddy/spouse/dad is asking for resumes and references.
Can you make family members sign a non-compete? If you can’t, they might not be the right fit.
Solution: Get a lawyer to draw up a contract that outlines the specifics of the relationship. Be extremely detailed, especially as relates to probationary periods, profit sharing, and leaving the practice. Encourage everyone to have a lawyer review and sign off.
Everyone Makes Mistakes, Even Doctors
Not knowing how to manage your money is okay. If you want to, you can learn. Until you do, try to keep the mistakes to a minimum
Common financial missteps doctors make:
- Spending more than saving
- Pinching the wrong pennies
- Thinking data will protect itself
- Paying too much for investment managers
- Paying too little for information technology
- Believing VC investors just want to help
- Losing control of your credit cards
- Confusing a money pit with a dream home
- Handing off the billing
- Panicking when the market tumbles
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