Wealth For The Masters Of Health - I : Financial Health Checklist
Doctors and any other professionals working in or associated with the field of medicine and healthcare have always been looked upon with utmost respect by society at large. After all, the services they offer are among the most essential and noble services known to mankind. And their services would retain relevance as long as mankind remains in existence. Most doctors and healthcare professionals today are therefore able to earn fairly significant incomes. This automatically gives them a certain degree of financial stability and security.
But in their noble endeavour to heal mankind, these masters of health often do not get enough time to manage the money that they earn and turn it into long lasting wealth. And given the unique needs and peculiarities that such professionals face both in their personal and professional lives, money management and financial planning is not something that they can afford to ignore. So over the next two weeks I am going to share financial guidelines for doctors, right from financial planning tips pertaining to every major area of personal finance to pointers for setting up an investment portfolio. Today I will focus on the broader areas of personal finance for doctors, before focusing on building investment portfolios next week.
The specifics of any individual's financial plan are always dictated by the unique peculiarities that their individual financial situations entail. The biggest peculiarity in the case of doctors is that most of them start earning a little later compared to others around them. Today most doctors in India prefer to do a postgraduate course (most commonly an MD) after clearing their MBBS, with MBBS courses lasting 5.5 years on average. Post graduation courses such as an MD usually involve 3 years for a degree program and 2 years for a diploma program.
Given that such is the case, most doctors would be anywhere between their late 20s and early 30s by the time they start earning a stable income. Also, another peculiarity in case of doctors is that they have a choice to either be employed with hospitals or set up their own practice as independent professionals. Being employed would see doctors have the financial needs of any other salaried individual. Setting up their own practice would mean that doctors would have similar financial needs to that of an entrepreneur. This choice would naturally have a significant bearing on the approach that is followed to create a financial plan prepared for each individual doctor.
Any sound financial plan begins with putting a savings plan in place and setting up an emergency fund. In the initial years of their careers doctors may not be able to generate enough income to be able to save significant amounts of money. This is likely to be true irrespective of whether they are employed or setting up their own practice. As an employee, salaries in the early years are likely to only be enough to cover mandatory expenses and other financial responsibilities. Those setting up their own practice would have to plough the majority of the income earned back into the business to ensure that the practice survives during the early years.
So the important thing for doctors to remember about savings is that while having a long term savings target as a percentage of income (say 20% of income) is important, the goal in the early years must be to save as much as possible without fixating on the savings target. Savings can gradually be increased over time in parallel with growth in income, as and when it materialises. When the targeted savings percentage is reached, it may be maintained or revised upwards as deemed necessary. It is also important for doctors to keep discretionary and recreational spending as low as possible, especially during the early years of their careers.
The ideal size of a doctor’s emergency fund would depend upon whether they are salaried or working on their own. Those working as salaried professionals should look to maintain 6-12 months worth of essential living expenses in cash or other liquid assets such as savings deposits and liquid mutual funds as an emergency fund. Those setting up their own practice would have to maintain 12-24 months worth of living expenses in such assets. The size of the emergency fund for a self employed doctor is greater than that of a salaried doctor. This is because they may be exposed to financial emergencies both in their households and at their place of work.
The next stage of any financial plan prepared for doctors would involve assessing and meeting their insurance needs. As with any other individual doctors would need to invest in adequate life and health insurance for themselves and their families. Purchasing a separate term insurance policy for each income earner in the family, to the tune of 15-20 times of annual take home income would be the best way to meet life insurance needs. Health insurance needs can be met through a combination of comprehensive individual and family floater health insurance policies.
In addition to this, doctors who are looking to set up their own practice must also consider purchasing professional indemnity insurance for themselves. As professionals, self employed doctors would be exposed to risks such as litigations from patients and third parties, loss of vital documents, defamation in the form of slander or libel and so on. Professional indemnity insurance covers all self employed professionals against these risks as shown in the graphic that follows.
The procedure to purchase a Doctors Profesional Indemnity Insurance policy online is laid out in the graphic that follows.
Doctors may sometimes have funded their education through loans, especially in case of overseas education. If such is the case, doctors must first focus on paying off their educational loans as soon as possible. For those doctors who wish to set up their own practice, it would be ideal to pay off their loans before they begin the process of setting up their practice. This would ensure that their business is immune to the overhang of debt right from the beginning. If the need arises to take out loans to fund the doctor's professional set up, it must be done responsibly. In other words, the current and future ability of the doctor to generate revenue from the practice should be kept in mind.
This would ensure that too much debt is not taken on and any debt taken on can be paid off comfortably and quickly. The major pillars of a doctor’s financial plan have been discussed above. The way in which these pillars come together and interact with each other would be decided by the specifics of each doctor's financial situation and life circumstances. Working with a financial planner would help doctors design an ideal plan for all of these elements to come together.
Once the broad financial plan is in place it would be time to create investment portfolios for each financial goals that a doctor may have. The asset mix of the portfolio for each goal would vary based on a number of factors. And I shall discuss these aspects in detail next week.