Doctors are often considered high earners in society due to their specialized skills and knowledge. However, for some physicians having a high income does not necessarily guarantee financial security or success. In this article, we’ll explore the paradox of why some doctors go broke, despite their seemingly lucrative careers, including factors such as student loan debt, lifestyle inflation, and inadequate financial planning or investment strategies.
Diagnosing common problems
While becoming a doctor is rewarding, it comes at a high cost — nearly a decade of schooling and training, and hundreds of thousands of dollars in debt. Moreover, doctors start earning their high salaries only after completing their residency, which is 7 to 12 years later than their counterparts in other professions.
During that time, doctors must navigate tricky financial waters just to stay afloat. But what are some factors that lead to their financial difficulties? Here are seven reasons why some doctors are broke, despite their high income.
- Student Loans. Doctors often graduate with six-figure debt from medical school, which can take decades to pay off. If they do not match or complete their residency or fellowship, they may have difficulty finding a high-paying job that allows them to repay their debt. Research by the Education Data Initiative revealed that the average medical school debt in 2023 was $250,995, while the average resident salary was $63,400. If medical school debt continues at the present rate, the average student debt will exceed $300,000 by 2024.
- Using leverage or borrowing money for risky investments. Leverage is the use of borrowed money to increase the potential return on an investment. However, leverage also magnifies the risk of losing money if an investment decreases in value. For example, if a doctor borrows $800,000 to buy a $1 million property, and the property drops 25% in value, that doctor’s investment would be “Underwater” (the property is worth less than the balance of the loan) yet the doctor would have to either continue paying the loan payments or default on the loan.
- Getting divorced. The average cost of a divorce in the U.S. runs between $15,000 and $20,000 but for doctors who typically have higher incomes and more assets than the average person, divorce costs can be much higher. Depending on the state laws and the terms of the settlement, a doctor may have to split their retirement accounts, medical practice equity, real estate, and other assets with their ex-spouse, as well as pay alimony and child support.
- Failed practice. Running a medical practice can be challenging and costly, especially in the face of declining reimbursements, increasing regulations, and rising overhead. Some doctors may find themselves unable to cover their expenses, pay their staff, or maintain their quality of care. However, they find it hard to walk away because they don’t want to abandon their patients or quit their dream. Unfortunately, if they wait too long to close or sell their practice, they may end up losing money and damaging their reputation.
- Living Beyond Their Means. Lifestyle inflation is when people increase their spending as their income increases or in anticipation of a salary increase. Doctors may fall victim to lifestyle creep by buying expensive cars, houses, vacations and other luxuries, without saving or investing for the future. Lifestyle inflation and other debt can prevent doctors from achieving financial independence, paying off debt or preparing for emergencies.
- Making bad investments. Doctors may be tempted to invest in risky or fraudulent schemes that promise high returns. They may also lack the financial knowledge or time to do proper due diligence on their investments and therefore may rely on bad advice from unqualified or unprofessional financial advisors.
- Failing to optimize their tax situation. Doctors face a steep tax burden due to their high income and complex tax situation. However, they may miss opportunities to reduce their taxable income, such as contributing to retirement accounts, health savings accounts, or donor-advised funds, or taking advantage of deductions, credits, and strategies, such as charitable giving, business expenses or tax-loss harvesting.
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The prescribed solution
Doctors earn some of the highest incomes in the world. In fact, it’s one of the only professions where, if you complete your training and apply yourself, you can expect to make an average of low-to-mid six figures. But is this enough to justify the financial costs of becoming a doctor?
In short, yes! Becoming a doctor is a reliable and prestigious path, but if you are an aspiring physician worried about why some doctors are broke, take the time to advance your financial education. Blankinship & Foster are fiduciary financial advisors with the expertise needed to help doctors make smart financial and investment decisions. Whether you need financial planning for physicians or are looking to retire, we’re here to support you as you navigate significant life events. Contact us today to schedule a free consultation and learn how we can help you achieve financial peace of mind.
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