Last Updated on August 8, 2022 by Laura Turner
Popular culture promotes—and most people accept—the notion that physicians make a lot of money. When it comes to national average salaries, data supports that conclusion, as well. But not all of us are average: medical professionals make all kinds of career choices that influence how much they earn by practicing. Your passion may lead you to become a psychiatric nurse practitioner, a physical therapist, or a board-certified physician in pediatrics. You may decide to work within the public health system, helping to ensure that all people, regardless of their economic status, have access to the health care they deserve. If bringing home a fat paycheck is your foremost concern, a career in anesthesiology may be just right for you.
But no matter which field of medicine you choose, the amount of income that shows up on your W-2 form doesn’t represent your only opportunity to build wealth. What you do with the money you earn can have a profound effect on your net worth over time. Not spending your entire paycheck each month is the first step toward accumulating wealth, of course. But how you use your savings is just as important as saving itself.
Let’s look at some of your options and hear from some medical professionals on how they’re approaching—or intend to approach—building wealth as they practice.
Rule of Thumb: Never Leave Money on the Table
It doesn’t matter whether you’re a surgeon employed by a major health system or an entry-level worker on a factory floor, let your employer help you build your savings. If your employer offers a company-sponsored 401K or other retirement savings plan, participate in it to the max. Many employers will match each contribution you make to your retirement fund: for every dollar that you stash in your 401K, they’ll match a certain portion of it. Percentages vary, but the median value of employer contributions is about 4% of an employee’s annual salary, up to the maximum allowed by law. But all 401Ks are different. Some companies require that employees be “vested” for some years before they’ll begin matching retirement plan contributions. That means sticking with the company for long enough that it views you as worth keeping and investing in. Some companies adhere to a step-up vesting schedule: the longer you stay, the more of your contributions they will match.
As common as they may be, 401K plans are still a competitive differentiator for companies—one way they attract and retain talent like you. Whenever you’re considering taking a new position, it’s a good idea to sit down with the company’s benefits manager and to get the details on their retirement plan straight. The amount of money you can earn during your career by participating in a 401K plan is considerable. Comparing plans offered by different employers may be an important criterion that drives which job offer you decide to accept.
How Much of a Difference Can 401K Matching Contributions Make?
The short answer is a lot. Let’s look at one example. Let’s say you earn $100,000 per year. You contribute the maximum allowed by the federal government to your 401K, which is 10% of your earnings, or $10,000. Your employer (or employers over the years) match your contributions by fifty cents on the dollar up to a maximum of 6% of your salary, or $6,000. Then let’s assume you contribute to your 401Ks for 35 years and the investments made on your behalf yield a modest 7% return. (The market typically performs better than that long-term, but you may decide to make conservative investments, which can decrease the return on your ROI.)
Under these circumstances, your total retirement fund balance including employer matching contributions will grow to $1,875,185.00. Yes, you read that right: 1.8 million dollars. Subtract the employer contributions and you’ll still do well: your balance will reach $1,444,913. But think about how much more fun your retirement could be if you bank an extra $400,000—without putting in even one extra hour of work.
Bear in mind, too, that when you invest in a qualified retirement plan, you’ll enjoy a better federal tax position. You won’t pay income tax on your contributions until you begin to withdraw them, which will presumably be when you retire and are in a lower tax bracket. That’s true when you set up an individual IRA, too.
Are You Ready to Try Independent Investing?
The funds you contribute to your retirement will be invested on your behalf by your employer and managed by a 401K provider. Fidelity, Vanguard, and Charles Schwab are among the better-known retirement plan companies, but there are hundreds of them out there. You do have some control over how you invest your 401K contributions. You can divide your investments up into conservative and riskier investment vehicles. You can choose to invest in the company that employs you if it’s publicly traded. Nowadays, you can even limit your investments to companies that meet high standards of social responsibility. Most employees leave the day-to-day management of their 401Ks to their fund managers. That’s ideal for employees who don’t know and don’t care to learn about the stock market. But if you want more control of your investments, you may want to consider investing on your own, in addition to contributing to your 401K.
Once upon a time, investing in the stock market was largely the domain of the market-savvy. Successful day-trading—buying and selling stocks on your own—demands a high level of market knowledge, not to mention a significant investment of time. Many individual investors relied on brokerage companies to trade for them. But that was cost-prohibitive for some, due to the investment management fees brokerage companies charged and the commissions they took on each trade. In addition, many brokers simply wouldn’t want to do business with you unless you had a large amount of money to invest.
But the internet has a way of democratizing everything, including managing your finances. Today, there are a variety of online tools you can use to start building an independent stock portfolio. Some provide investment advice and routine services like periodic re-balancing of your portfolio. Keep in mind that anytime you do business online, you open yourself up to certain security risks, including identity theft. Always take precautions, just as keeping your passwords secure. You may also want to purchase separate identity theft protection services.
Online Stock Trading Platforms Open a Wide Door
Online stock trading platforms give you access to investments like stocks, bonds, ETFs, and mutual funds so you can build an investment portfolio that meets your financial goals. Typically, you don’t have to meet a minimum investment threshold to work with them. Many offer commission-free trading of some or all types of assets. And they permit individual investors to be as hands-on or as hands-off with their investment choices. For medical professionals who are just beginning their careers and don’t have a lot of ready cash to devote to market investing, these companies offer a simple, cost-effective solution. If you’re only comfortable investing ten dollars a week, that’s okay. You can be a tadpole and still enjoy the same services that the big fish do.
Bot What? Robo-Advisors Mine Investment Data for You
With the dawn of artificial intelligence, investing in the market has become more of a science and less of an art. For some years, traditional investment advisors used both their experience and intuition and data-driven market analysis to make savvy investment recommendations to their clients. Today, they’re locked in fierce competition with Robo-advisors—online applications that offer automated financial guidance to investors. In addition to tracking market activity, robo-advisors use sophisticated algorithms comprised of demographic and psychographic data to create a personal profile for each client. Using machine learning, robo-advisors automatically create a personalized portfolio based on such factors as your investment goals and risk tolerance. The first robo-advisor was introduced about 10 years ago and now there are hundreds of such services to choose from. By all means, search the online financial press and read reviews of the best robo-advisors before deciding whether to engage one.
All of these tools and strategies can be part of a well-considered financial plan. Let’s have a look at how some medical professionals—both new and seasoned—view and manage their personal finances.
Emily is a graduate student at Indiana University’s Bloomington campus. In May of 2022, she will graduate and become a Certified Speech-Language Pathologist. Currently, Emily is working in the neonatal intensive care unit at Toledo Hospital, a facility owned by ProMedica, the region’s largest health care system.
Growing up, Emily was fortunate to have parents who openly discussed financial matters with her and encouraged her to learn to manage her own finances. “My dad is a financial advisor. That was one advantage I had while learning about money. In high school, I took a financial literacy course. That was very helpful, too,” she told us during a recent interview.
Emily was ambitious. She held her first job at age 15 and worked three jobs while pursuing her undergraduate degree. As soon as she began working, she learned to manage her own bank account. Her parents encouraged her to budget carefully and taught her to use Excel spreadsheets to track her income and expenses.
Emily independently secured student loans for graduate school. “I found the application process a little intimidating. It was my first real encounter with credit and the first time I ever knew my credit score,” she told us. Taking out a student loan was another opportunity to learn about budgeting.
Emily has never worked for an employer that offered 401K benefits. While in grad school, one of her classes touched on the value of such benefits in the context of a full compensation package. Emily is currently entertaining a couple of job offers and will take savings, investment, and retirement opportunities into account before deciding which position to take. Best of luck, Emily! Entering the professional world with better-than-average financial literacy, you’re off to a terrific start.
Lydia is a retired registered nurse. She holds a Bachelor of Science in Nursing and a Masters in Education. She worked for many years in inner-city public schools. “School nursing was a great fit when I was raising kids,” she told us. “Working school hours and having summers off was ideal at that time. I stuck with it because I love working with kids. Plus, I felt I was making an important contribution to the community because I worked with an underserved population.”
Lydia’s parents introduced her to some financial basics, though she notes that her parents invested more in her brother’s education than in hers. They paid for a private college for him, while she attended a public university. That’s not an uncommon occurrence for women who were born in the 1960s.
Lydia acquired a credit card in her 20s. She joined her hospital’s credit union and learned to use credit responsibly, taking out the occasion small credit union loan and met payment terms religiously. She also was great at saving money. When she received a small inheritance, she immediately invested it. When the hospital system where she worked forced many tenured employees into retirement, she received a settlement. Again she put it to work for her by investing in the stock market. When she became a school nurse, she took advantage of the state’s generous retirement plan, investing 10% of her salary in exchange for a lifetime pension.
Lydia relies on a financial advisor to help her make retirement and other investment decisions. “At this stage of my life—not that I’m retired—I’d say I’m semi-active in managing my stock portfolio.” “I really don’t like dealing with money. Managing my finances always felt like work to me. But now I ask a lot of questions and have learned more about investing in recent years.” Lydia’s interest in medicine influences her investment decisions. She has invested in pharmaceutical and medical equipment companies. She prefers investing in socially responsible companies. “I definitely draw the line at oil companies and cigarettes.” Lydia hasn’t ventured into the cryptocurrency market. Like many more conservative investors, she finds cryptocurrency “too abstract and a little bit scary.” She also consults a tax professional to make sure she’s maximizing her after-tax decisions.
For Lydia, the benefits of having invested her money are both tangible and intangible. Periodic dividend checks help her enjoy an active lifestyle that includes travel and the ability to pursue her passion for live music. “But having a financial safety net allows me to feel I’ll be just fine,” come what may in the future.
Bill graduated from The Medical College of Wisconsin in the 1980s. He’s board-certified in internal medicine and has worked in a wide range of clinical settings. He treats people of all ages, from the pediatric to the geriatric. “Cradle to grave. Very traditional” is how he described his medical career.
As a young doc practicing in rural Oregon, he took advantage of every opportunity available to him. “I worked multiple side jobs while practicing family medicine,” he told us. “I was medical director of several rehab units in hospitals and nursing homes. I covered a dialysis unit.” Bill later moved back east, where he also authored a popular diet and fitness book.
Today he is a hospitalist, although according to Bill, “That term wasn’t even coined in those days.” Bill was diagnosed with MS while in his 40s. “Primary care was too taxing. I’m not a medical entrepreneur—I didn’t own my own practice. So primary care wasn’t that lucrative for me. I’m making more and working less now.”
Bill’s approach to building wealth followed a pattern. “I’d work for six to eight years in a position that offered me a matching 401K, then move on. I’d then roll those funds over into a personal IRA.” He found that the investment choices 401Ks offered were too limiting.
Bill’s parents were both stock brokers. “We didn’t discuss money much when I was young, but my parents did teach me about investing when got older. The stock market is in my blood.” And he found he had a knack for managing investments. “Apple was very good to me. Or you could say I played it well,” he cited as one example.
Bill is the very definition of a hands-on investor. “I never worked with a traditional broker,” he told us.” He manages his investments via an online platform and doesn’t have to pay commissions on his trades. His portfolio has evolved over the year. Today he’s deep into the semi-conductor and commodities sectors. “I’m betting on supply chain issues and record inflation to propel those investments. I am also interested in virtual realities companies. I expect rapid growth in that sector. Bill also holds some blue-chip stocks, which keep the cash flowing by paying regular dividends. In other words, his portfolio is diversified. That’s a strategy financial advisors often recommend as a way of managing risk. He offers another bit of advice, too: “I know a lot of physicians who became wealthy by owning ancillary service companies and investing in rental properties.“
Bill assesses his financial achievements this way. “I finally paid off all my medical education debts—no small feat. I’ve put two kids through college. And I’m prepared for my retirement. And I’ve enjoyed myself along the way.” He expects to continue to invest in the market when he’d finished practicing.
Well done, Bill. You’ve achieved the financial goals many doctors and medical students aspire to and helped thousands of patients stay in the process!
The Bottom Line
No matter how much you earn whether you prefer to take a hands-on or hands-off approach to managing money and whether you’re a risk-taker or more the cautious sort, there are investment strategies and tools that can help you build wealth throughout your career. If taking a little more charge of your finances is one of your ambitions, check out our other articles on financial products and income-increasing tips for medical professionals.
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. Her contribution comes to us via Money.com. Follow Susan on Twitter @branddoktor.