Investing vs. Saving
DECEMBER 20, 2016
Heidi Moawad, MD
The end of the year is often a time of reckoning when it comes to financial planning. As a doctor, you may face dramatic changes in your salary throughout your long medical career – and not just because of the usual and expected jump in salary when transitioning from resident to attending status. Doctors can also deal with dramatic income variations as a result of systemic issues in the healthcare world that can impact a physician's workflow and bottom line.
Saving is an important part of any financial plan, especially when you do not know what to expect. And saving does not always have to be boring; it can mean receiving investment returns, and sometimes, saving can even mean spending your money on something that you enjoy.
Putting a portion of your money into straightforward savings accounts is a safe way to protect a portion of your earnings so that you can spend it later. How much do you need to save? It depends on how much money you anticipate that you will need at some time in the near future and how much money you earn in excess of your spending. Generally, financial advisors recommended that you put aside money in non-investment funds so that you can access those savings at a relatively near time in the future when you need it to pay for something. Many doctors, planning for costs such as a down payment on a house, aggressively save in order to maximize down payment, which can result in a better mortgage interest rate. Some doctors also anticipate taking time off to stay home with a baby, reserving some earnings to cover a few months, or even a year, of not working.
Aside from saving enough for anticipated expenses, most financial advisors recommend allotting your excess funds to investments that can grow over time to combat the impact of inflation.
Investment is a type of savings that can potentially grow, but may also wither away. There are different types of investments with varied risks. Index funds and bond funds, which are generally relatively hands off and incur low management costs, are usually relatively safe, and, on average, typically protect your earnings from the depreciative effects of inflation.
Investments with higher growth potential, such as stocks, are riskier and might incur higher management fees. Physicians who are interested in the financial markets might opt for stock investments that require more attention, while physicians who prefer a more hands off approach gravitate towards managed funds. Neither option is completely safe, but if you earn a substantial amount of money beyond your spending, it is wise to invest a portion of it. You are ultimately in charge of how much risk/ growth potential vs. safety that you want to take, and diversification of assets is usually a smart move.
Real Estate ‘Savings’
Real estate is a much more hands on and risky investment than most investments. A good real estate buy does require research into the location, the comparable properties, and the prospects of appreciation, as well as continued attention to the local market. Real estate investments also require constant maintenance and upkeep, as well as either personally being available to tenants or hiring a responsible management company to address the concerns of tenants. Real estate also always carries with it the possibly of a negative market turn. However, many doctors look at real estate purchases as a fun way to enjoy a second or third home while putting money into something that can be sold for a profit later.
Should Residents Build a Savings?
In general, most residents do not have excess money to put aside for savings. Often, residents live in big cities and need to pay a high cost for housing, transportation, and sometimes childcare. Most residents prefer to pay down educational loans to save money on interest, rather than putting money aside or funding costly investments. And many physician residents feel that, given the low resident salary, pinching pennies can take a great deal of effort which only reaps a small sum in the long run.
It is difficult to know the right answer when it comes to medical residents and savings, because each person’s situation is different. But, practicing physicians face unpredictable futures, which makes it crucial to build know-how about the ins and outs of savings and investments.