As the COVID-19 crisis pandemic continues, many physicians are not only battling the medical challenges it has wrought but they’re also dealing with its financial ramifications at home.
“Some of our physician clients have seen their income decrease by as much as 50%,” says Joel Greenwald, MD, CEO of Greenwald Wealth Management in St. Louis Park, Minnesota. “Many physicians had previously figured that whatever financial obligations they had wouldn’t be a problem because whatever amount they were making would continue, and if there were a decline it would be gradual.” However, assumption is now creating financial strain for many doctors.
Vikram Tarugu, MD, a gastroenterologist and CEO of Detox of South Florida, Okeechobee, Florida, says he has watched his budget for years, but has become even more careful with his spending in the past few months.
“It has helped me a lot to adjust to the new normal when it comes to the financial side of things,” Tarugu says. “Patients aren’t coming in as much as they used to, so my income has really been affected.”
Primary care physicians have seen a 55% decrease in revenue and a 20% to 30% decrease in patient volume as a result of COVID-19. The impact has been even more severe for specialists. Even for physicians whose practices remain busy and whose family members haven’t lost their jobs or income, broader concerns about the economy may be reason enough for physicians to adopt cost-cutting measures.
In Medscape’s Physician Compensation Report 2020, we asked physicians to share their best cost-cutting tips. Many illustrate the lengths to which physicians are going to conserve money.
Here’s a look at some of the advice they shared, along with guidance from experts on how to make it work for you:
Physicians said their most important piece of advice is: “Use a formal budget to track progress,” “write out a budget,” “plan intermittent/large expenses in advance,” “Make sure all expenses are paid before you spend on leisure.”
Nearly 7 in 10 physicians say they have a budget for personal expenses, yet only one quarter of those who do have a formal, written budget. Writing out a spending plan is key to being intentional about your spending, making sure that you’re living within your means, and identifying areas where you may be able to cut back.
“Financial planning is all about cash flow, and everybody should know the amount of money coming in, how much is going out, and the difference between the two,” says Amy Guerich, a partner with Stepp & Rothwell Inc, a Kansas City-based financial planning firm. “That’s important in good times, but it’s even more important now when we see physicians taking pay cuts.”
Many physicians have found that budget apps or software programs are easier to work with than anticipated; some even walk you through the process of creating a budget. To get the most out of the apps, you’ll need to check them regularly and make changes based on their data.
“Sometimes there’s this false belief that just by signing up, you are automatically going to be better at budgeting,” says Scott Snider, CFP, a certified financial planner and partner with Mellen Money Management, Ponte Vedra Beach, Florida. “Basically, these apps are a great way to identify problem areas of spending. We have a tendency as humans to underestimate how much we spend on things like Starbucks, dining out, and Amazon shopping.”
One of the doctors’ tips that requires most willpower is to “pay all expenses before spending on leisure.” That’s because we live in an instant-gratification world, and want everything right away, Guerich says.
“I also think there’s an element of ‘keeping up with the Joneses’ and pressure associated with this profession,” she says. “The stereotype is that physicians are high-income earners so ‘we should be able to do that’ or ‘mom and dad are doctors, so they can afford it.’ “
Creating and then revisiting your budget progress on a monthly or quarterly basis can give you a feeling of accomplishment and keep you motivated to stay with it.
Keep in mind that budgeting is a continual process rather than a singular event, and you’ll likely adjust it over time as your income and goals change.
Respondents to our Physician Compensation Report said: “Pay yourself first,” “I put half of my bonus into an investment account no matter how much it is,” “I allocate extra money and put it into a savings account.”
Greenwald says, “I have a rule that every client needs to be saving 20% of their gross income toward retirement, including whatever the employer is putting in.”
Putting a portion of every paycheck into savings is key to making progress toward financial goals. Start by building an emergency fund with at least 3 to 6 months’ worth of expenses in it and making sure you’re saving at least enough for retirement to get any potential employer match.
Snider suggests increasing the percentage you save every time you get a raise.
“The thought behind that strategy is that when a doctor receives a pay raise — even if it’s just a cost-of-living raise of 3% — an extra 1% saved doesn’t reduce their take-home pay year-over-year,” he says. “In fact, they still take home more money, and they save more money. Win-win.”
Physicians told us how they were working to pay down debt: “Accelerate debt reduction,” “I make additional principal payment to our home mortgage,” “We are aggressively attacking our remaining student loans.”
Reducing or eliminating debt is key to increasing cash flow, which can make it easier to meet all of your other financial goals. One quarter of physicians have credit card debt, which typically carries interest rates higher than other types of debt, making it far more expensive. Focus on paying off such high-interest debt first, before moving on to other types of debt such as auto loans, student loans, or a mortgage.
“Credit card debt and any unsecured debt should be paid before anything else,” Snider says. “Getting rid of those high interest rates should be a priority. And that type of debt has less flexible terms than student debt.”
Physicians said that to save money, they are: “Consolidating student debt into our mortgage,” “Accelerating payments of the principle on our mortgage,” “Making sure we have an affordable mortgage.”
With interest rates at an all-time low, even those who’ve recently refinanced might see significant savings by refinancing again. Given the associated fees, it typically makes sense to refinance if you can reduce your mortgage rate by at least a point, and you’re planning to stay in the home for at least 5 years.
“Depending on how much lower your rate is, refinancing can make a big difference in your monthly payments,” Guerich says. “For physicians who might need an emergency reserve but don’t have cash on hand, a HELOC (Home Equity Line of Credit) is a great way to accomplish that.”
Physician respondents recommended: “Use 0% interest offers on credit cards,” “Only have one card and pay it off every month,” “Never carry over balance.”
Nearly 80% of physicians have three or more credit cards, with 18% reporting that they have seven or more. When used wisely, credit cards can be an important tool for managing finances. Many credit cards come with tools that can help with budgeting, and credit cards rewards and perks can offer real value to users. That said, rewards typically are not valuable enough to offset the cost of interest on balances (or the associated damage to your credit score) that aren’t paid off each month.
“If you’re paying a high rate on credit card balances that carry over every month, regardless of your income, that could be a symptom that you may be spending more than you should,” says Dan Keady, a CFP and chief financial planning strategist at financial services firm TIAA.
Physicians said that they do the following: “Maximize tax-free/deferred savings (401k, HSA, etc.),” “give to charity to reduce tax,” “Use pre-tax dollars for childcare and healthcare.”
Not only does saving in workplace retirement accounts help you build your nest egg, but it also reduces the amount that you have to pay in taxes in a given year. Physicians should also take advantage of other ways to reduce their income for tax purposes, such as saving money in a health savings account or flexible savings account.
The 401(k) or 403(b) contribution limit for this year is $19,500 ($26,000) for those age 50 and older. Self-employed physicians can save even more money via a Simplified Employee Pension (SEP) IRA, says Guerich says. They can save up to 25% of compensation, up to $57,000 in 2020.
Physicians said: “Designate money from your paycheck directly to tax deferred and taxable accounts automatically,” “Use automatic payment for credit card balance monthly,” “Automate your savings.”
You probably already automate your 401(k) contributions, but you can also automate bill payments, emergency savings contributions and other financial tasks. For busy physicians, this can make it easier to stick to your financial plan and achieve your goals.
“The older you get, the busier you get, says Snider says. “Automation can definitely help with that. But make sure you are checking in quarterly to make sure that everything is still in line with your plan. The problem with automation is when you forget about it completely and just let everything sit there.”
Sometimes it’s the big major expenses that can start to derail a budget. Physicians told us their tactics for large purchases: “We buy affordable cars and take budget vacations,” “I buy used cars,” “We save in advance for new cars and only buy cars with cash.”
The decision of which car to purchase or where to go on a family vacation is a personal one, and some physicians take great enjoyment and pride in driving a luxury vehicle or traveling to exotic locales. The key, experts say, is to factor the cost of that car into the rest of your budget, and make sure that it’s not preventing you from achieving other financial goals.
“I don’t like to judge or tell clients how they should spend their money,” says Andrew Musbach, a certified financial planner and cofounder of MD Wealth Management in Chelsea, Mich. “Some people like cars, we have clients that have two planes, others want a second house or like to travel. Each person has their own interest where they may spend more relative to other people, but as long as they are meeting their savings targets, I encourage them to spend their money and enjoy what they enjoy most, guilt-free.”
Snider suggests setting up a separate (from emergency or retirement) savings account to set aside money if you have a goal for a large future purchase, such as a boat or a second home.
“That way, the funds don’t get comingled, and it’s explicitly clear whether or not the doctor is on target,” he says. “It also prevents them from treating their emergency savings account as an ATM machine.”
“We are buying less to save for the kids’ college education,” “We set up direct deposit into college and retirement savings plans,” “We have a 529 account for college savings.”
Helping pay for their children’s college education is an important financial goal for many physicians. The earlier that you start saving, the less you’ll have to save overall, thanks to compound interest. State 529 accounts are often a good place to start, especially if your state offers a tax incentive for doing so.
Snider recommends that physicians start small, with an initial investment of $1000 per month and $100 per month contributions. Assuming a 7% rate of return and 17 years’ worth of savings, this would generate just over $42,000. (Note, current typical rates of return are less than 7%).
“Ideally, as other goals are accomplished and personal debt gets paid off, the doctor is ramping up their savings to have at least 50% of college expenses covered from their 529 college savings,” he says.
Physicians said: “Avoid impulse purchases,” “Avoid impulse shopping, make a list for the store and stick to it,” “Wait to buy things on sale.”
Nothing wrecks a budget like an impulse buy. More than half (54%) of US shoppers have admitted to spending $100 or more on an impulse purchase. And 20% of shoppers have spent at least $1000 on an impulse buy. Avoid buyers’ remorse by waiting a few days to make large purchase decisions, or by limiting your unplanned spending to a certain dollar amount within your budget.
Online shopping may be a particular temptation. Tarugu, the Florida gastroenterologist, has focused on reducing those impulse buys as well, deleting all online shopping apps from his and his family’s phones.
“You won’t notice how much you have ordered online until it arrives at your doorstep,” he says. “It’s really important to keep it at bay.”
Keady, the TIAA chief planning strategist, also recommends this tactic: calculate the number of patients (or hours) you’d need to see in order to earn the cash required to make the purchase.
“Then, in a mindful way, figure out the amount of value derived from the purchase,” he says.
Beth Braverman is a freelance writer and content producer in New York City. She has disclosed no relevant financial relationships.