Dr. Jane Healey said there are five key mistakes that can create unnecessary roadblocks along the path to financial independence.
Only trade your money for something that brings you value or happiness and avoid the compound interest that piles onto lingering debt.
Dr. Healey said a survey of physicians who tested the FATE Rate (Funds After Taxes and Expenses — income divided by number of hours at work) determined that most were making $50-$75 an hour after taxes and expenses.
At that rate, a physician would have to work four to six hours to pay for a $300 meal, 107-160 hours to cover an $8,000 Caribbean family vacation, and 2,633-3,950 hours (1.25 to two years) to pay for a $197,000 Tesla Model S.
“Our time is our most precious commodity; we really should know how much our time is worth,” Dr. Healey said.
Dr. Healey said while physicians need malpractice insurance, disability insurance because your earning potential is your most important asset, term life insurance if you have dependents, auto and home insurance, whole life insurance is not a sound investment for many.
Whole life insurance is an estate planning tool that locks people into substantial premiums for decades. Because life’s circumstances can change, about 80 per cent of those who have purchased whole life insurance find they are unable to carry the cost for life, Dr. Healey said. They face substantial penalties to get out of the policy. Yet, insurance agents push whole life policies because their commission is about 110 per cent of the first-year premium — $55,000 on a $50,000-a-year policy.
Determine value using the FATE (Funds After Taxes and Expenses) Rate and divide that by the number of hours spent being a physician, including at your practice, accumulating continuing medical education credits, Canadian Physicians and Surgeons of Ontario licensing registrations, bookkeeping, public speaking, committee work and commuting.
Drs. Jane and Paul Healey founded the online Physician Financial Independence group and are criss-crossing Canada to advance financial literacy among doctors.
Dr. Healey said there is a tendency among physicians to seek out advisors to manage their money, because as a profession they see the value in consulting with colleagues as they treat their patients.
“The assumption that the financial industry operates this way puts us at a disadvantage because, unfortunately, it is not fiduciary, and so the financial industry has been taking advantage of hiring professionals like ourselves, for many, many years,” she said.
Financial institutions are paid according to the “MER,” the management-expense ratio or the “AUM,” assets under management, fees investors pay from their portfolio each year regardless of how well the fund performs. As the portfolio grows, these fees can become substantial. A management expense ratio of $1.79 is just $179 a year for $10,000 investment, but grows to almost $90,000 a year for a $5-million portfolio. That’s money that comes out of the portfolio and misses the advantages of compounding.
Don’t panic if the stock market drops. Understand that stock market fluctuations are normal and the correct response is to do nothing. Buy and hold new investments when new money becomes available. You don’t lose anything unless you sell.
“The stock market is a roller coaster, it’s up and down,” Dr. Healey said. “But over time it’s an escalator — it increases.”
She suggests that high-risk investments like Bitcoin be avoided.
“There’s a rich doctor myth out there, where a lot of our family member misinterpret high income as high net worth,” she said. This can mean family members come to physicians looking for investments in their business ideas or seeking loans.
Avoid going into business with family. If you’re helping a family member financially, set the ground rules and expectations going in.
This article is for informational purposes only and should not be considered investment, tax, financial or other professional advice.