Income volatility is a common challenge faced by physicians, particularly as their careers evolve. Early on, physicians may experience relatively low income during residency or as a new attending physician. However, once they complete their training and establish a practice, their income can increase significantly.
Despite this, fluctuations in income remain a concern — whether due to ups and downs in patient volume, fluctuating insurance reimbursements, or changing practice locations. This can make financial planning difficult, particularly when it comes to saving for retirement and budgeting day-to-day expenses. In this article, we’ll explore key strategies physicians can use to manage income volatility and ensure their financial security.
Budgeting for Irregular Income
Managing income volatility requires a multifaceted approach. By leveraging various strategies and smart expense management, physicians can build financial stability and resilience despite fluctuating earnings.
1. Build an Emergency Fund
One of the most important steps in managing income volatility is building an emergency fund. Experts recommend physicians save a portion of their income during peak earning years to create a financial buffer for lower income periods. An emergency fund also helps reduce anxiety and stress during low-income periods.
The amount you should have saved in an emergency fund depends on your unique circumstances. A widely used benchmark is three to six months of living expenses. Emergency funds should be kept in a low-risk and highly accessible account such as a savings account or money market account. Some physicians include liquid investments in a brokerage account in their emergency fund but long-term growth investments such as stocks are not well-suited for an emergency fund — their value could drop at the same time you need to access them.
2. Diversify Income Sources and Income Planning
Another key strategy is diversifying income streams. While many physicians rely on their clinical practice, opportunities like telemedicine, consulting, and speaking engagements can supplement earnings and reduce reliance on a single revenue source.
Furthermore, real estate and other asset types can provide income or appreciate in value over time. Diversification spreads risk and ensures consistent financial growth, which is especially important when income levels are unpredictable.
3. Build an Investment Portfolio
Maximizing contributions to retirement accounts like 401(k)s or IRAs is an effective way to grow tax-advantaged wealth. These accounts provide compound growth, helping offset income fluctuations and providing a cushion for reduced income later in life. Physicians should also consider making lump-sum contributions to capitalize on tax-deferred growth.
In addition to retirement accounts, permanent life insurance policies offer a dual benefit: protection for the family and tax-sheltered asset growth. By borrowing against the cash value of the policy during lower-income years, physicians can avoid the financial strain of drawing from their savings.
Finally, incorporating alternative investments — such as index funds, ETFs, dividend stocks, and private equity — can further diversify a portfolio and contribute to long-term financial resilience.
4. Invest in Tax-Sheltered Accounts
For high-earning physicians, taxes can significantly erode investment returns. Therefore, selecting the right tax-sheltered accounts is important. By contributing the maximum allowable amount to 401(k)s, IRAs, and other retirement plans, physicians can lower their taxable income and grow their investments tax-free or tax-deferred until withdrawal.
Exploring additional options like defined benefit plans or cash balance plans can provide even greater tax deferral benefits. These plans allow larger contributions than traditional retirement accounts and can significantly reduce tax burdens.
Building a Financial Safety Net
If you’re a physician, income volatility can be a significant challenge. The good news is it doesn’t have to control your future.
With the right steps in place — building an emergency fund, smart savings strategies, and working with experienced financial advisors — you can unlock your full wealth potential and safeguard against life’s uncertainties. Take charge of your financial future today!