I wrote this for Dr. Jones, a new physician who recently joined our small ER group.  Writing it was one of the reasons that I finally decided to start Business is the Best Medicine so that I could share it with anyone interested.  Thanks for unknowingly pushing me, Dr. Jones!    

     Transitioning from a resident to an attending physician is a challenging process.  The good news is that you can now make your own patient care decisions.  The bad news is that you must now make your own patient care decisions!  You will be stressed dealing with this newfound responsibility.  I promise you it is different than residency, no matter how well-trained you are.  Next, there are a whole host of other issues to deal with.  You likely have moved to a new area.  You must learn new rules, the new local standard of care, a new medical system, new patients, new colleagues, and a new EMR.  Finally, you have to deal with making some real money . . . finally!  However, your new high salary comes with challenges most doctors are woefully unprepared to handle.  While an excellent problem to have, it is still a problem.  Here, I will outline 12 steps to take as you finish your residency and start your career and 1 you shouldn’t.  You’ve done a lot of hard work and learning over the last 7+ years.  You’re in the home stretch, but keep learning, or it could cost you millions!

  1. Buy Disability Insurance 
    • If you don’t have it already, you should buy own-occupation disability insurance.  Own-occupation insurance protects you from a disability that prevents you from working as the type of doctor you just trained to be.  You don’t want to be forced to return to residency to retrain because you can no longer work in your chosen field.  Your earning potential is the most valuable financial asset that you possess right now.  Insure it.  Buy the maximum possible.  Pay for this out of your personal account, regardless of your Legal Entity Status (LLC, MDPA, PLLC, etc.).  You will not receive a tax deduction for the premiums; however, if you need the insurance, you will not pay taxes on the payouts, which is ultimately more important.  
  1. Create an Emergency Fund
    • At this point in your career, you want to have approximately 3 months of your expenses in a separate savings account to act as an Emergency Fund.  This money is for financial emergencies only and, if used, should be replenished as fast as possible.  Keep your expenses low, and your emergency fund will also be low.  You can fund this through your signing bonus (if you get one), previous savings, or build it up with the investable portion of your first few paychecks.  Additionally, you will need to know your monthly expenses in order to calculate how much to save.
  1. Hire an Accountant 
    • You are about to be beyond the point of doing your taxes with Turbo Tax.  You are now running a small business.  This is the time to find an accountant to help you with more than just taxes.  They can advise you as you set up your financial life to help simplify things.  
  1. Form a Legal Entity
    • As a physician, a legal entity can help protect you from lawsuits and offer some minor tax savings.  
    • In Texas, where I live and practice, physicians generally choose to set up either (1) a PA, which is a Professional Association, or (2) a PLLC, which is a Professional Limited Liability Company.
      • If you create a legal entity, the entity will contract with and be paid by your employer.  You will be paid a salary from the legal entity.  
      • PAs tend to be more costly to create, more difficult to maintain and may offer less legal protection.  They are still commonly used, but a PLLC may make more sense in 2023.
      • A legal entity must file a tax return for the entity separate from your personal tax return each year. 
    • You are creating a business.  You now must think of yourself as the owner/operator of a small business.   
    • You do not have to create a separate legal entity.  You can practice under your own name, which is more straightforward but may lead you to increased risk and to pay slightly more taxes.  
    • Please consult a lawyer to form your legal entity and discuss the specific legal protections and tax advantages afforded to each entity type in your state.  
  1. Open Bank Accounts 
    • You will need to set up several bank accounts.  I prefer to do this at one bank to facilitate transfers from one account to another.
      • You will need a personal checking account.
      • If you have a legal entity, you will need a separate business account for this entity.  
      • You will need a separate tax account if you are an Independent Contractor.  

  1. Set up Your Retirement Account
    • If you are an Independent Contractor, you are considered self-employed and can set up a self-employment pension or SEP.  There are IRA and 401k versions of the SEP.  I recommend the 401k version.  You can contribute up to 25% of your net self-employment compensation, with a maximum of $66,000 in 2023.  Therefore, you can max out this retirement plan if your net income is at least $264,000.  The $66,000 limit is for combined employer/employee, but you can contribute both parts if you are an IC.  
    • If you are a W2 Employee, enroll in your employer-sponsored 401k plan and learn the plan details, including any employer match, the vesting schedule, fees, and investment options.  The maximum contribution from the employee in 2023 is $22,500, while the employer can match/contribute on top of this.  
    • A Roth IRA is an excellent retirement account.  However, as an attending physician, you will almost certainly make too much money to contribute.  The contribution limit for a single person in 2023 is $153,000, and for married filing jointly is $228,000.  There is a possibility that you could contribute to your Roth during the year you transition from a resident to an attending.  You will need to consult your accountant to see if you will qualify.  The contribution limits are low ($6,500 single/$13,000 married), so even if you qualify for one year, you will still need another plan as outlined above.  
money growth
  1. Open a Brokerage Account
    • Your goal should be to max out your retirement account contributions each year and start investing in a brokerage account (sometimes called a “post-tax account”).  This is a personal account and not a retirement account.  You can invest in this account to save additional money for retirement, but this account has no tax advantage.  It is where you put your “extra” money.  You can do this at online brokers like E-Trade or traditional brokers like Vanguard, Fidelity, or Charles Schwab.  I suggest investing any money in your brokerage account in low-cost, broad-based index funds.  
  1. Hire a Payroll Company 
    • If you form a professional entity, you will need a payroll company to process your payroll. 
    • You will be the employee of your legal entity.  For example, John Williams MDPA will contract with the Hospital, and John Williams MD will be the sole employee of John Williams MDPA.  
    • Your payroll company will process any money received into the business (MDPA) and pay income and payroll taxes for you.  
  1. Calculate your Net Worth
    • Your net worth is simply the amount of money you would have left over if you sold all your stuff, liquidated your accounts, and paid off all your debts.  You should calculate it as you finish your residency.  It is most likely going to be negative, but that is okay!  You want to be able to track your progress yearly, so you need to know your starting point.  Besides having a reference point, the process of calculating net worth is itself important, as it makes you quantify what assets you have and face what debts you owe.  This process will help your decision-making throughout the year as you build assets and minimize liabilities.  
    • You calculate Net Worth by subtracting all your liabilities (debts) from all your assets.  
      • Net Worth=Assets -Liabilities
    • Your debts may include credit card balances, personal loans, car loans, mortgages, and student loans.  Your assets may include the equity in your house, savings account balances, retirement account balances, investment account balances, and your car’s current value.
  1. Choose Your Savings Rate
    • Most people do this backward.  They get a paycheck, pay their bills, spend whatever money they want, and save whatever is left (if anything is left).  You are not like most people.  You want to be proactive as you start your new career, as the habits you form now will last.  
    • Early in your career, nothing is as important in your wealth-building process as your savings rate.  It is more important than your income or your debt.  There are broke neurosurgeons and wealthy pediatricians.  It is not how much you earn but how much you save/invest.  
    • I recommend that all physicians save and invest 25-50% of their gross pay.  If you make $30,000 a month, you should save/invest $7,500 – $15,000 per month.  25% is the minimum.  Think of it this way: 15-20% is the suggested savings rate for the average American, while the median American worker makes $54,132 a year.  You are not average.  With your income, you must do better.
    • If you are married and combine your finances, include your spouse’s income to create a Total Household Income.  You will base your saving/investing rate on this total. 
    • If you have significant debt, including student loans and credit card balances, you should aim for a 50% savings rate.  The reason is that I include debt paydown in your monthly savings number.  The more debt you have, the more you pay to debt servicing and the less you invest.  
    • You will work backward from the % you wish to save to determine how much money you can spend each month.  Only then can you figure out a monthly budget!
    • Use the following method:
      • Take your total monthly income and multiply it by the % you wish to save.  For example, if you make $24,000 per month and want to save 40% of your income, you will need to save/invest $9,600 per month.  
    • Choose your savings rate wisely.  The more you choose to save at the beginning of your career, the faster you will build wealth and reach financial independence through the power of compound interest.  A dollar saved today is not the same as a dollar saved 5 or 10 years from now.
    • I include all the following as saving/investing:  student loan paydown, contributing to your emergency fund, retirement account savings that you personally contribute (not an employer match), HSA contributions (if you are using it as an investment account), rental property mortgage principal paydown, brokerage account investments, down payments on rental real estate, credit card debt paydown (only if you are paying off the balance, not monthly use), and contributions to high-yield savings accounts.
  2. Estimate then Track Your Monthly Expenses
    • Knowing your monthly expenses is an essential next step.  If you are not tracking them as a resident, write down all your monthly expenses to create a monthly total.  This amount is what you are living off currently.  
    • You should have a projected amount for your monthly spending allowance from 10(g).  You should keep your estimated monthly expenses about 25% lower than this number.  If you came up with $9,600, like the example above, you should aim to keep your expenses at or below $7,200.  The reason for this is that there will always be unexpected things that come up.  You must take into account these known unknowns.  The emergency fund is for unknown unknowns.  
    • If you are moving to a new city for your attending job, you may have to estimate expenses at a new apartment or home.  You must also start paying back your student loans soon, so account for that.  Ensure you budget for non-monthly items, like disability insurance, car insurance, and vacations.  
    • You need to cut costs if your estimated expenses exceed 75% of your projected monthly spending allowance.  Find a cheaper apartment.  Buy a smaller house.  Spend less money on food, etc.  Remember that you’ve already been living off substantially less as a resident.  The goal is to live as close to a resident’s lifestyle as possible for the next 5 years.  Do not inflate your lifestyle prematurely. 
monthly budget
  1. Automate Your Investing Life
    • Set up an automatic transfer from your MDPA/PLLC Account and your Personal Checking Account through your payroll provider.
      • Make sure the payroll provider is withholding and paying 30% for taxes.
    • Set up an automatic monthly, recurring transfer from your MDPA/PLLC Account to your SEP 401k/IRA.  The amount should be 25% of your net self-employment income, divided into 12 monthly payments.  Remember that there is a $66,000/year maximum for 2023, so if you net more than $264,000 a year, you will save $5,500 per month.
      • Ensure that the money is automatically invested into your chosen Index Funds each month.  
    • Set up an automatic transfer from your Personal Checking Account to your Tax Savings Account.  The amount should be 30% of the monthly “distribution”.
    • Set up an automatic transfer from your Personal Checking Account to your Brokerage Account.
      • Ensure that the money is automatically invested into your chosen Index Funds each month. 
    • Any amount left in your Personal Account is yours to spend on your bills, etc.  
    • If this section seems complicated, read “How the Flow of Cash Works as a 1099 Physician with a Legal Entity.” 
  1. Do Not Hire a Financial Advisor* 
    • This is the titular one thing you shouldn’t do at this point in your career.  Many new doctors rightfully feel that they don’t have enough knowledge and experience when it comes to investing, so they immediately turn to a financial advisor.  Generally, they are referred to this advisor by another attending, who doesn’t know any more about finance than they do!  I know this because I did the same thing when I was a new attending, and it cost me a lot of money.  
    • Not all financial advisors are created equal.  The term “financial advisor” is vague, and licensing can vary from state to state.  Many financial advisors are simply salesmen trained to sell you various life insurance products designed to benefit them, not you.
    • With this in mind, you need to learn a few things before considering hiring a financial advisor.  What type of fiduciary are they?  Did you know there is more than one type?  Do you know the difference between a financial advisor and a financial planner?  What kind of education do they have?  How are they paid?  Do you understand the assets-under-management (AOM) model and how this affects your wealth accumulation over time?  What is the difference between fee-based and fee-only?  If you can’t answer all these questions, you shouldn’t mindlessly choose a financial advisor.  
    • You have time.  Your financial life is a marathon, not a sprint.  Yes, getting off to a fast start is important, but at this stage, how much you save/invest is so much more important than the returns you achieve.  

     These twelve steps will put you on a path to financial success.  For the early part of your career, simple is better.  Protect your biggest asset, yourself.  Get your savings rate as high as possible, max out your retirement accounts, and invest the rest in a brokerage account.  Invest in low-cost, broad-based index funds.  Make saving/investing automatic . . . then just live your life.  Keep your expenses low, focus on your career and your family, and you will wake up in 10 years with more money than you ever expected.  Good luck and have fun in your new career!