Top 10 Financial Mistakes Doctors Make With Their Money
Introduction:
David L. Blain, CFA, CEO of BlueSky Wealth Advisors, and author of "Invest In Your Life, Not Just Your Portfolio," addresses the top ten financial mistakes
- Hiring the wrong advisor
- Ramping up your lifestyle too early
- Not saving enough money
- Waiting to fund retirement accounts until later in life
- Speculating the market with individual stocks
- Hiring somebody to speculate the market with individual stocks
- Not having enough appropriate insurance
- Buying big cash-value insurance policies sold as an investment
- Buying complex private illiquid investments
- Being overconfident in your financial abilities
Transcript of: Top 10 Mistakes Doctors Make With Their Money
(00:00) - The Top 10 Mistakes Doctors Make with their Money
Hi, I'm David Blain, founder, CEO, and Senior Wealth Advisor at BlueSkyWealth Advisors. And one of the most common questions I get from doctors is, what are some big mistakes that you see people making early in their career that I can avoid? And today, in today's video, I'm going to answer those questions. I've got the top 10 biggest mistakes doctors make with their money. And so we'll go through these. We'll spend about a minute or two on each one. And if you need more information, obviously contact us. We'll list the 10 bullet points in the description of the video. But let's just kind of jump right in.
(00:39) - Hiring the Wrong Advisor
Number one is hiring the wrong advisor. I'm actually going to do a whole separate video on this topic. But it's really important if you do decide to use an advisor, making sure you understand the differences between brokers, investment advisors, and so forth. Understand what a fiduciary is. Understand the difference between fee only, fee based, and commission based. It can really hurt your financial future if you make the wrong decision, but hiring a great advisor, just like hiring a great doctor, can make all the difference in the world. Of course, I'm a little bit biased, but certainly it is one big mistake that I see people make.
(01:19) - Ramping Up Your Lifestyle Too Early
Number two is what I call ramping up your lifestyle too early. You went to school, you went to medical school, went to residency, maybe a fellowship. You probably weren't earning a tremendous amount of money. Maybe some of you were, but most residents aren't what we would consider overpaid. And then they get their first job, and all of a sudden they're making 2, 3, 4, 5, $800,000 a year, and their lifestyle immediately spikes up. Huge mistake. They go out, they buy their fancy car for themselves and their wife. Giant houses is a big, big mistake I see. Let's keep that resident mentality for a few years and gradually increase that lifestyle, and it will pay dividends throughout your life rather than wanting to make up for those lost years all at once.
(02:11) - Not Saving Enough Money for a Secure Financial Future
Kind of a corollary to this, number three is not saving enough money. If you ever plan to retire someday, and you're used to making as a senior surgeon or physician 3, 4, 5, $600,000, even a million dollars if you're a good orthopedic surgeon and you want to retire someday on a portion of that, couple hundred thousand dollars a year, it takes a tremendous amount of savings to support a 3, 4, $500,000 lifestyle in retirement. And so you've got to save a lot of money. I mean, at a minimum, you should be saving at least 15% to 20% of your income. I like to see, especially if you're single, closer to 50% of your income. That's what I did when I was a young single starting out in my career.
(03:01) - Waiting to Fund Retirement Accounts
Number four, along with that savings, waiting to fund the retirement accounts until later in life. Take advantage of the workplace 401ks. If you own your own business, set up your own 401k. But these can provide really valuable benefits, tax savings. Especially if you're in a high tax bracket, if you want to take the tax deduction. Even if you're not in the highest tax bracket, the Roth savings vehicles are a tremendous advantage as they provide tax-free income in retirement. The decision between Roth and tax deduction today is somewhat complicated, but both of them provide huge advantages. So don't wait to fund those retirement accounts.
(03:46) - Speculating the Market with Individual Stocks
The next one that I see, a big mistake is speculating the market with individual stocks. It used to be 50, 60 years ago that you may be able to gain some advantage by investing in individual stocks, doing your research, pouring over annual reports like Warren Buffett, and being able to pick Pfizer or Merck versus Coke or Pepsi or Apple or Google, and picking these individual stocks. But the reality is the data on... We follow an evidence-based investing style, kind of stole that from the medical industry, evidence-based medicine. But we look at the data. What is actually working out there? And the reality is most people, especially individuals that are trying to pick their own stock do far worse than if they were to just buy what we call an index fund that replicates the entire market. So stay away from those individual stocks.
(04:48) - Falling for the Stock Speculation Trap
Similar to that, professionals, myself included, generally don't have some secret sauce where they can pick individual stocks either. So don't fall into the trap of hiring others to do that speculating for you. Either brokers that are picking individual stocks or active mutual funds. There are some very talented managers out there, and there are some people that get lucky from time to time, but if you want to play the percentages and the averages, don't speculate, either you directly or hire someone to speculate with individual stocks.
(05:27) - Not Having Enough Adequate Insurance Coverage
Okay, the next couple items that I see, big mistakes, number one is not enough appropriate insurance. Insurance is a great invention. It spreads the risk of catastrophic events amongst a lot of people. Insurance is also one of the most abused things ever created by mankind. And so making sure you have enough appropriate insurance can sometimes be challenging, but don't shy away from it. You need plenty of disability insurance, certainly as a doctor. We have plenty of cases, individuals that we've worked with where it became extremely important for their family's security to have that disability insurance. The same thing with life insurance. Especially if you didn't take my advice early on, number two, and you ramped up that lifestyle early and you leave a spouse and some children with a huge lifestyle and no income to support it. So make sure you get plenty of disability, plenty of life insurance. Those are the two big ones. Number three is liability insurance, a good umbrella policy, plenty of liability insurance on your auto and homeowner's policy as well.
(06:41) - Getting Trapped by Complex Life Insurance Policies
Next big mistake I see is stay away from those big cash value policies that are sold as an investment. Whole life, variable life, guaranteed life. All these things, while they may have a purpose in some limited instances, the people that are selling them are generally... You have to be very worried. They're trying to sell life insurance policies, annuities, and those type of things. And most doctors, especially if you're just starting out, you don't need to pull up hundreds of thousands of dollars into a cash value life insurance policy. As I said, there are some limited instances when some of those products may be appropriate, but in general, you're going to want to stay away from them unless you really know what you're doing or the advisor that has no financial incentive in the policy, such as a fee only advisor like us, if we told you to get a cash value policy and we're not selling it to you, maybe it's appropriate. But be very careful. Huge mistake I see a lot of doctors make.
(07:47) - Buying Complex Private Illiquid Investments
Next one is buying complex private illiquid investments. There are some exceptions to this. For example, real estate can be a valuable addition to your portfolio if you're working with somebody that knows what they're doing. But don't get talked into buying Puerto Rican bonds that are paying 15%. They're not. It's a scam for the most part. Don't get talked into investing in a Brazilian cherry hardwood forest that your brother-in-law's cousin is selling. A lot of these exotic complex illiquid investments, if they're not an outright scam, they just can't deliver on the promises that they offer. And I would put cash value life insurance policies in that. If the prospectus for the thing is five inches thick and you don't understand it, then you need to be very careful. In fact, Einstein once said, and I'm going to maybe mess this up a little bit, but something to effect is, if you can't explain it to a six-year-old, then you don't understand it. And that was Einstein that said that.
(08:55) - Being Overconfident in Their Financial Abilities
The last, number 10 biggest mistakes that I see doctors make with their money is being overconfident in their financial abilities. I'm the same. I'm really good at what I do. I'm very good at investing, tax, estate planning, all these financial topics. And sometimes as it bleeds over into other areas, I think I'm really good at that too because I can learn it. Well, it's fine if you think you're really good at fixing a faucet and you don't do a great job and it still leaks, not a big deal. But overconfidence in financial matters can lead to some massive mistakes that cost a lot of money, and sometimes can really ruin someone's financial future.
(09:37) - Top 10 Mistakes Overview
So those are the 10 biggest mistakes that I see doctors making with their money. Number one, hiring the wrong advisor. Number two, ramping that lifestyle up too early. Number three, not saving enough. Four is waiting to fund the retirement accounts until too late. Number five and six are either you speculate in the market with individual stocks or hiring someone else to do it for you. The next one, not enough appropriate insurance. Number eight is buying cash value life insurance. Number nine is stay away from those complex private illiquid investments, with the one exception being some real estate. And number 10 is just be realistic about your capabilities and your financial abilities. If you stay away from those 10 biggest mistakes, you'll do just fine. So thanks for listening today. I hope you learned something here. And if you have any further questions, feel free to reach out and contact the center office.