Money
From stethoscopes to savings: Smart financial planning for doctors
Summary
- From managing education debt to optimizing tax benefits, dive into essential financial strategies that every doctor needs to secure a prosperous future
At the turn of the millennium, a seminal study by Ibbotson and Kaplan revealed that asset allocation explained about 90% of the variation in portfolio returns, largely due to substantial exposure to capital markets—a classic case of the tide lifting all boats. Even after adjusting for this, it's undeniable that asset allocation remains central to long-term portfolio performance. While it may not be everything, its significance is immense.
Professionals who meticulously care for others' health often neglect their own financial well-being. As we recently celebrated National Doctor’s Day (1st July), it’s an opportune moment to reflect on why doctors need a financial health check-up, with a focus on asset allocation.
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Why asset allocation for doctors?
Doctors face unique financial challenges that necessitate a robust asset allocation strategy. Establishing a clinic and securing a steady income stream is a long-term endeavour, with significant upfront costs and delayed returns. By the time they enter the profession, usually around the age of 30, many doctors have accrued substantial education debt and missed out on several earning years.
Additionally, unlike salaried professionals, doctors often experience variable and uncertain income. They also tend to invest heavily in real estate—clinics, hospitals, dispensaries—beyond their personal residences. The challenge is to transform these investments into productive assets. Moreover, given the nature of their profession, insurance is of paramount importance.
Four pillars of asset allocation for doctors
1. Insurance: Doctors often operate in high-stress environments. Adequate life insurance—typically 10-15 times their annual income—is essential. Comprehensive health coverage via family floaters ensures medical emergencies don’t become financial burdens. Indemnity insurance is increasingly crucial given the rising instances of vicarious liability.
2. Tax planning: Doctors benefit from accelerated depreciation on equipment and instruments. Their income, classified as business and professional income, allows for optimal use of presumptive taxation provisions under sections 44AD and 44ADA, minimizing the need for exhaustive bookkeeping. Investing in tax-free bonds and PPF can provide tax-free returns.
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3. Real estate management: Owning clinics and dispensaries usually involves substantial business loans. Once these essential real estate investments are made, doctors should avoid accumulating additional property assets. Diversification can be achieved by investing in liquid real estate assets like REITs and considering reverse mortgages to manage cash flow.
4. Stability fund: To counteract income variability, doctors should establish a Stability Fund. Investing around 10% of earnings in an equity-oriented stability fund during the early stages of their career can yield significant benefits over the long term, ensuring financial commitments are met despite fluctuating incomes.
Financial planning 101 for doctors
Given the unique financial landscape for doctors, it’s crucial to focus on two areas: maximizing disposable income and planning for retirement.
Maximizing disposable income: Leveraging tax benefits like Section 44AD can reduce tax liabilities. Ensuring adequate insurance coverage is followed by strategies to consolidate or prepay debt with intermittent cash flows. This approach maximizes disposable income, which should then be strategically allocated to achieve true diversification.
Retirement planning: Creating a retirement corpus through equity funds is vital. While doctors may initially be hesitant, these funds have proven to be robust wealth creators over time. They serve as long-term retirement planning tools and ensure wealth preservation with minimal tax impact.
Also read: A retired professor, 86, shows it's never too late to benefit from mutual funds
By addressing these financial nuances, doctors can ensure their financial health is as robust as their medical expertise, paving the way for a secure and prosperous future.
The article is authored by Nehal Mota, co-founder and CEO, Finnovate.
