Leverage Your Income Carefully Today for Wealth Tomorrow

For physicians, particularly younger ones, the path to laying a strong financial foundation to build future wealth is anything but intuitive. When earnings begin to rise to substantial levels after many years of limited income while undergoing advanced medical training, hazardous temptations arise. Pent-up demand for costly assets like a nice home and new high-end car, can lead to neglecting savings and purchases that are far more vital in the long run.

But the same self-discipline and effort that got you into, through and beyond medical school, must be applied to getting the building blocks of financial security in place before acquiring such things. You can do this.

The first step is to recognize the crucial difference between gross and after-tax income. When you “graduate” into the ranks of people whose earnings are well into the six-digit range, you are also joining the high tax bracket crowd. (It’s a mixed blessing.)

Whereas during your residency federal and state income taxes might have only diminished your net earnings to about 80% of your gross, you’ll probably discover that you’ll only be keeping little more than two-thirds of what you earn—if even that—when you hit the big time.

Depending upon how you are paid (and particularly if you are operating a private practice), the day of reckoning on taxes might not be apparent to you until late in the year. Getting a sneak preview of your anticipated tax liability sooner than later will help you avoid a nasty surprise and liquidity crisis.

There are many things you can do to lower that tax bite, but they require planning. And there are lots of additional basic steps to take, outside the realm of tax planning, with the benefit of expert guidance, to build your net worth. In the weeks and months ahead, we will be delving into all of them to set you on the right path.

Building Blocks

Here are a few pointers to introduce you to the building blocks we will be discussing in greater deal in the future:

Pay yourself first: Setting aside 10% of your gross income before you think about any other spending you might be considering, if you start at a relatively early age, it perhaps the most important thing you can do. If those savings are invested in a balanced fashion, you can count on retiring wealthy.

Manage income risk: Safeguarding yourself against a loss of your ability to earn a living in your profession is essential. Disability income insurance protects the substantial investment you have made in your education and training. The sooner you line up coverage, the lower the premium rates. And if you wait too long, you run the risk of becoming uninsurable.

Protect your assets: The way you “title” your big-ticket assets, including real estate, can shield them from legal claims that can suddenly appear out of nowhere, through no fault of your own.

Negotiate effectively: Just as professional athletes and entertainers leverage the skills of business agents, you too can get support when negotiating compensation agreements and real estate prices (a service available to Beacon clients). Undervaluing your services, or overpaying on a major purchase, can set you back for years.

Donor-advised funds: Never heard of them? Don’t feel bad. They’re an example of a strategy that charitably minded physicians (or anyone else, for that matter) can maintain a multi-year financial commitment to organizations you want to support, but smooth out variations in your income to get the maximum tax benefit. If, for example, you have a spike in your income this year that amounts to five times your annual charitable giving budget, you could donate the entire amount of that windfall to a donor-advised fund, get a charitable deduction for the entire amount of the gift, but at your direction have the funds distribute over several years.