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The number one financial mistake newly qualified medicos make, and how to avoid it

Posted by Sean O'Kane on 5 October 2016
The number one financial mistake newly qualified medicos make, and how to avoid it

Upon finishing their years of training, many medical specialists make hasty financial decisions that they live to regret (and that get in the way of their long-term financial success).

In our white paper, "Are you planning your journey to financial independence?" we identified key financial challenges faced by medical specialists. Chief among these is that practitioners are either complacent that they're now earning good money so don't need to plan financially, or they're eager to finally enjoy the rewards of all their hard work and want to spend money now!

I have a good friend who is very successful in his career and has come up with the phrase 'toy fever' to describe the urgent desire to make lifestyle purchases. While it can apply to the nice-to-have things in life, I believe it can equally be applied to the purchase of houses and cars so I've recoined the term 'purchasing fever'.

One of the doctors we interviewed for our white paper commented: "It's very tempting when you are surrounded by people on good incomes, driving around in new sports cars and living in multi-million dollar properties. I find I am trying to keep it real within my own capabilities and trying not to get caught up in what others are doing." 

Keep in mind that as a doctor you're in training for almost half your working life more than most other professions and this puts you well behind many others on your journey towards building wealth and gaining financial independence.

Committing to new cars and an expensive house too soon after finishing your training can often add pressure while, at the same time, you are trying to establish yourself as a specialist or GP. Increasingly, we are seeing doctors completing their training and going into private practice due to the lack of public appointments, which in the medium term can be very financially rewarding, but in the short term can mean some uncertainty around cash flow.

In this blog I address the reasons why it can be beneficial to wait a while upon finishing training and delay important financial decisions and investments, especially if you're going into private practice.

Let's start by looking at a couple of real stories:

  • I had a client commit to a property that needed extensive renovation that would require increasing their income to repay. They subsequently decided private practice was not for them, and decided to sell and buy somewhere less expensive that was already finished.
  • On other side, another client purchased a property while building up private practice only to find after 12 to18 months their income had risen to the point where they wanted to move to a more expensive property expensive to sell and rebuy, not to mention the stress of moving.

These two stories are opposite sides of the coin, but the end result is the same a costly exercise to change the situation.

Issues can also arise as the result of a car purchase:

  • I met a new client who was referred to us they'd not long started as specialist and wanted to purchase a property. They had limited savings, so needed to look at a high loan-to-value-ratio loan. But the issue was they had bought two very expensive cars that seriously reduced their servicing capacity for the home loan they wanted.

Our advice

If you're not careful, you can easily go from a situation where you're tight for money because you're in training to a situation where you're tight for money because of the financial decisions you've made.

However, if you delay these important financial decisions to understand your pattern of income especially if you're setting up in private practice then you will be in a position to make those decisions with more confidence, removing the stress caused by over-commitment and strengthening your ability to achieve financial independence. Waiting could also put you in a stronger position so that you build up your equity, making it easier to find a loan arrangement with better rates.

Setting up in practice as a specialist or GP can take time and an upfront financial investment. In addition to any upfront payments, it will take time to build referral sources. Any delayed payments can affect cash flow keep in mind that health funds can take up to three months to process payments. What we see is that it usually takes a year or so to build a good idea of how things look financially and what you can reasonably expect your income to look like.

With this in mind, in order to help you enhance your financial future for the long term, our team of financial planners advise you to:

  1. Delay making any big financial decisions until you have established yourself as a specialist/in private practice.
  2. Understand what your goals are and what they will cost.
  3. Model different financial scenarios with realistic returns to see the bigger picture and assist with decision-making.
  4. Develop a financial strategy to get you where you want to be over time.

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Image: istock.com.
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For specialist financial planning, accounting and tax advice for medical professionals, please get in touch with our team.

Author: Sean O'Kane Connect via: LinkedIn
Tags: Wealth Creation Planning Financial independence

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The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

The financial planning services are provided by Medical Financial Pty Ltd trading as Medical Financial Planning (AFSL 506557)