29 years old graduating doctor - help!

[abacus]

I just happened across this forum and it seems like a good place to get some help. I should probably talk to a financial advisor but we'll see when that happens =P.

I'm looking for general financial advice. I'm 29 and my money situation is about to change dramatically - I'm an emergency doctor (resident) whose 11 years of education are about to pay off (I'm totally finished and independent in August!). I want to know what you think are some important things I should know about money. Money is not why I chose this profession, but I know full well it is important. All the numbers I mention are honest and certain.

Debt:

$200K Line of Credit (no excuse)
$40K Student Loans

Assets:

$7K Vehicle
.... that's it.
(I rent)

I work as a resident now ($60K before tax annually) which works out to less than minimum wage if you count the hours. I'm of the mindset that I didn't work this hard to work this hard, and I'm glad that I chose emergency medicine because it is a culture of reasonable workload (unlike surgery, where you're looking at 80-90 hours per work even when you're finished). No thank you.

Where I will be working, emergency doctors are paid an hourly rate of about $300. Overhead works out to about $20K per year and includes licensing, malpractice insurance, membership fees, continuing education etc. Full time in my occupation (which involves unusual hours and a lot of stress) is 12-15 8 hour shifts per month, though I could probably push myself well above this while I'm still young. I'm estimating I'll be paying ~30-40% of my income in taxes (working and living in Alberta). My compensation will go up by ~2-5% per year.

My fiance is also a professional and will make ~90K annually (before taxes) once she finishes in September. Our plan is to work for a year (starting in September) to save up and pay off some debt and then take a year off (Sept/2012 to Sept/2013) to travel before returning to work. I've worked it all out, it is definitely possible if not inadvisable. I'm talking about places like Egypt, Laos, Thailand where one can be a full on tourist for <$50 CDN per day. We won't be buying a house for at least a couple years, though my fiance half-owns a house (which is income neutral) with her sister.

I realize that losing a year of income / savings during my early money making years is a costly plan, but this is the light at the end of my tunnel. And my fiance is on board, so the time is now =).

I'm thinking of "incorporating" so that I can protect my money from income from taxation and pay myself a (lower) salary that just continues that whole year I'm not working. This reduces the amount that I'm taxed in the highest bracket, and spreads the income across two years.

When I come back, I'm going to have to think about what makes sense in terms of a mortgage, retirement savings etc (no pension as I'll be self employed). I plan to work hard the year I come back should be debt-free in a couple years. One benefit to emergency medicine is you have no overhead (unlike almost every other specialty) and although the hours are challenging (I'll have to cover midnight to 0800 a number of times per month) the workload expectation (12-15 8 hour shifts per month) is reduced accordingly. Of course some people work every day of the month (and take home a before-tax monthly income of >60K). Of course Alberta is a bit of an anomaly.

I would love to hear the opinions of people who have really thought about money, and I will admit I'm pretty terrible with it. I want to know what you would do in my position, so at least I know what my options are. I'm totally non-negotiable on the travel =). I'm not willing to work so hard that I seem rushed or burnt out, and I chose the one hospital in the city where I'm paid hourly (rather than per-patient) so as to take away the financial incentive to rush. Someday all of medicine will be that way, and everyone will be better off for it.

Thanks for your help!

Cheers,

Devon

[MoneyGal]

I wouldn't "incorporate," I'd actually incorporate. :)

Alberta allows professionals to set up professional corporations - this is a powerful tax-deferral and income-splitting tool, especially in years of lower income, and if and when you have children or your spouse wants to take an earnings break.

A lot of generic financial advice won't apply to you, because you are an outlier in terms of what you can earn and how you can structure your financial affairs. Your current plan sounds workable and your commitment to your profession AND the long-delayed reward for 11 years of schooling is admirable.

In your shoes, I'd be looking for an accountant who specializes in professional corporations. That's probably your first step - actually investing is a second step IMO.

The other thing I'd focus on in your shoes is preserving the value of your human capital, which is absolutely enormous and almost totally unmonetized right now. So in addition to finding ways to protect and nurture your health and well-being (you will be around sick people all the time! plus a challenging schedule!), I'd look into disability insurance.

That would be my money advice for you: 1. put the structures in place, at least in an embryonic form, that will allow you over time to make very powerful tax deferral and income splitting moves; and 2. take steps NOW to protect the value of your unmonetized human capital.

[Four Pillars]

Congratulations!

We've had other doctors post on these forums before - not sure how easy it is to search for those threads, but there was some good advice given.

My general financial advice is to:

1) Look into incorporating. I don't know the details, but I suspect it would be beneficial for you.

2) Keep it simple. Just because you make a lot of dough doesn't mean you have to invest in "special" opportunities or do anything fancy.

In your case, paying off your debt will take you a few years so that's a good goal. Saving up for a house down payment is another goal and saving for retirement will be another goal.

[atrp2biz]

We just set up Articles of Incorporation for my wife in Alberta. We're moving to Calgary in a couple of weeks. If you want to see an example of the Articles we've written up (5 classes of common shares, 3 classes of prefs), give me a PM.

The CPSA are real sticklers and are slow. You should move quickly if you want to incorporate before August (and if you want to earn any locum money through the corp).

[atrp2biz]

Another reason for incorporating:

Emerg is a high burnout specialty. There are a lot of re-entries from emerg into other programs. Incorporating will give you the flexibility to defer your income IF you choose to re-enter down the road.

[Charlie]

congrats on everything.

In my experience, Doctors are about the worst financial custodians of their money....so my advice to you:

1) Don't take investment advice from other doctors! Especially regarding tax shelters, complex investments or individual stocks. A sure fire way to see if an investment was a dud was to look at the investor list: if it was full of doctors, you knew the only ones making money were the promoters! You'll make a good income -- you don't need a home run on your investments. And it's always better to pay 40% tax then lose 100% capital. It's great you've a mindset of 30-40% tax. That's the going rate. The payments will be hard to stomach -- but that's what most high earners pay. IF you want the high risk/complex stuff, do so when you've built your capital and are prepared for the risk.

2) If you make more then you'll spend, incorporation likely makes sense. Most doctors are incorporated for that reason.

3) Temper your spending. I've seen too many doctors go from living on a residents salary to $100K cars and $1m mortgages. You may progress there -- but if you jump right in you'll be struggling a lot longer then you have to. (and with a high stress job, and money stress -- they often add spousal and child support to the mix....). Your budget travel idea and deferring a house buy plan suggests you may not be tempted into this trap! Understand what you spend. Spend less then you make, and manage your debt.

4) Do meet with an accountant and map out your plans. If your goal over the next 3-5 yrs is one yr off, debt repayment and prep for a house buy, there are a few avenues to get there. Over the 3-5yr term you'll likely draw all your earnings but there may be opportunities to smooth the income. Or it may make sense to keep it simple, pay the tax and incorp when you're ready for that. That will be partly math, and partly mindset and preference.

Again -- congrats.

[Charlie]

It's a slower day so I did a bit of back of the envelope number crunching for you to consider...

(usual caveats apply! And you should talk to an accountant anyways. You'll need one for your 2011 taxes whether you incorp or not. And she or he can give you specific advice)...

Your income, assuming $60K resident/$300K net doctor inc:

2011: ($40k Res; $100K doc -- 4 mos) $140K
2012: ($200K doc -- 8 mos) -- $200K
2013 ($100K doc -- 4 mos) -- $100K

So your income is fairly even already, none of the 'lower' rates are lost and only about $70K in 2012 is subject to the highest rate. Possibly you can jiggle a bit with RRSP's in 2012 -- some of which can be drawn down through the HBP later? and save the hassle/cost of incorporating until 2014? Food for thought. NOT advice! Figure out your own cash flow and how it ties to your debt repayment objectives.

Cheers.

[abacus]

Wow thank you everyone for your suggestions. I didn't expect such a response.

MoneyGal:

Thank you. I think you are right, I do need an accountant. And whether or not I incorporate now I think that the accountant (if I am to stick with them) needs to be very familiar with "incorporations" =). I'm certain it is something I will be wanting to do at some point, be it before or after the travel. As for preserving my human capital - I nearly lost that completely in a bad skiing accident 2 months ago. I'll be OK, but your words are very well heard. Getting disability insurance is definitely going to be more complicated now.

Four Pillars:

Thanks! I'll see if I can find those other posts. Your point of keeping it simple was echoed by Charlie and is well taken, especially given my track record of managing my money =)!! I'll find an accountant who specializes in professional corps. I have a question for you about that which I'll put at the bottom.

Atrp2biz:

You can expect a PM in your inbox shortly =). Thank you for the offer. As for ER burnout I think the situation has changed somewhat since that became dogma. 10 years ago ER docs used to work 25 shifts per month for way less money!! That said - it is certainly possible I may want to re-specialize (5 more years at ~$60K/yr), work overseas or do medical computer stuff someday, and I hadn't thought about how incorporating could buffer the lost income. That gives me something to think about. I will definitely need to incorporate at some point.

And I'm having a h*ll of a time with the CPSA - she keeps wanting me to complete this form she never sent me for my license, and somehow ignores the emails I send back asking for the form. Good lord!

Charlie:

Your calculations are interesting and make me wonder whether I had ought to just wait until we get back from travelling to deal with incorporating. I do have ~$250K to pay off as well which is going to eat up all of my spare money. And as MoneyGal mentioned, I don't think I'll be doing much investing until I pay that down a bit. I'm paying ~$500 interest on it every month!!

Doctors ARE bad with their money. Many residents don't even find out how much they are going to be paid before they accept a job! I know a guy who burned through a $250K line of credit in the first **two years** of med school (sports car, everything) only to get kicked out in his third year because he was sketchy. Went through bankruptcy and everything. Of course he is an exception (and sketchy at that). Most of the doctors I know are just bad with money in the sense that they get sucked into foreign partial property ownership investments (perhaps they aren't as sketchy as they sound) or find other questionable things to throw their money at. Just because they are smart in medicine (if that) it doesn't mean they're smart with money (or people, or computers, or ...) and many are in the unfortunate position of believing otherwise.

Thank you all for all your responses. I definitely have some more to think about and I should talk to someone about it all. I'm in no rush to have a million dollar mortgage and I can hold off on buying nice car for a few years. I can focus myself to be relatively frugal when the goal of travelling is so close and so possible. When I get my first big paycheque I will probably put it all on my line of credit and then go buy some toys (and a nice office setup for once) but nothing in the sports car price range. We plan to rent for the year that we're working, and probably buy something when we get back from travelling. My goal right now is accomplishing that, and then see where I'm at when we get back. If I could defer setting up a corporation until then it would really be nice - I have enough to worry about right now.

The options I see for that right now are the MD Management people (part of National Bank) who have been sponsoring lunches as long as I've been in medicine, or Royal Bank's professional people (I deal with them for my LOC), or a friend of a friend's husband (his wife is a resident and he does incorporation for a lot of MD clients), or someone else...? I'm not sure exactly what I need from them in terms of certifications, training etc. I could mention some 3 letter certifications but will spare showing my ignorance by trying to list them =). What's the difference between an accountant, advisor, and the various certifications? Or a shorter question - which one do I need?

Cheers,

Devon

[Cal]

Most of us were not brave enough to take a year off and enjoy such as you are planning. Enjoy it.

Yes pay off your debt, as fast, or as best, as you can. It will make your trip more enjoyable.

Yes, call and accoutant for a consultation. It will be worth the time and effort. Some can be a wealth of knowledge.

Once you resume work after your time away, personally, I would rent for a bit again, and take my time to buy. Agian, pay off some more debt, and save up for a downpayment.

All the best.

[Four Pillars]

I think initially you should be looking for an accountant - CPA is the designation that my accountant has.

Ideally, if you can find someone who has worked with doctors and their incorporations - that would be ideal. Or even someone who has worked with small incorporated businesses.

It appears that for the first little while, you will be paying down debt so investing can probably sit on the back burner.

Once you start savings some dough, a financial advisor can help you figure out an investing plan.

I would suggest trying to find a fee-only advisor, but if you really want to outsource all the work, then maybe MD Management. I'm familiar with them (through conversations with other doctors) and they seem pretty decent. They offer financial planning services and their funds are much cheaper (around 1.3% MER average last time I looked) than most retail mutual funds. You can do cheaper on your own, but then you won't get the advice.

[atrp2biz]

I can't stress the following enough, even if you don't incorporate right away.

Buy a copy of QuickBooks (or similar software).

You can set up QB to look like Part 5 of the schedule below.

http://www.cra-arc.gc.ca/E/pbg/tf/t2125/t2125-10e.pdf

This will make things super easy come tax time.

[kcowan]

I can't stress the following enough, even if you don't incorporate right away.

Buy a copy of QuickBooks (or similar software).

You can set up QB to look like Part 5 of the schedule below.

http://www.cra-arc.gc.ca/E/pbg/tf/t2125/t2125-10e.pdf

This will make things super easy come tax time.I would vote to reinforce this. Doing QB entries daily will give you financial control right from the start of your career. And understanding your finances is the key to getting rich.

The next thing is to create a strawman 5 year financial plan. This will give you a sense of what alternatives you should pursue.

Enjoy your vacation. You will never regret it.

[marina628]

I use QB to run my business and i never have to worry at tax time ,every year end our accountant comes over and we can do all our final journal entries in a day.I have employees lots of accounts receivable and payable ,being organized is the key !

[Henry]

Four Pillars and OP:

CPA (Certified Public Accountant) is a US designation. Most Canadian accountants have CA (Chartered Accountant). I do know a person who files taxes with CGA (Certified General Accountant). I think the key is to find a person who is familiar with professional corporations.

CFP (Certified Financial Planner) is the designation for financial planning. CFA (Chartered Financial Analyst) designation is the designation for investment analysis. Some advisors with CFA designation can design and manage a discrete portfolio instead of using mutual funds or pooled funds. Since you are a doctor with a higher long term income, I would seek a financial adviser that has a CFA designation if you want one.

[marina628]

My best friend is a Plastic Surgeon in Ontario and He was earning take home $35,000 a month back in 1997 .He was horrible with his money because he felt he had to put out a big image ,wearing $40 socks and $4000 suits every day to work.He was broke all the time from trying to keep up with all the other surgeons he looked up to. he went in arrears a few times on various fees and memberships and i remember one time I had to go and pay a fee for him with MY CREDIT card because he was running off to a convention in Beverly Hills. Like i said he was my best friend then and still to this day , he went through two divorces and both times it old him he was going to get screwed over.His response was he did not care about the money ,he rented a condo down town for $1900 a month for a girl after one month of dating .It was a one year lease and last 9 months he had no contact with her but still let her live there , expensive booty call lol.
Now it is a joke for him to find a girl friend he tells me to find one for him , one that my husband and i will like because he works so much he wont have to deal with her too much.He was not even opening his mail or paying his bills until about two years ago he got nailed with some collections stuff and he asked me to help him out. Now I have access to his online bank and I pay all his bills , i feel much like his mother at times LOL.
I use to hold Doctor's to a higher standard until I got exposed to the private lives of many high profile Doctors over the years.Don't fall trap to all the games you will find once you get staff privileges and are working full time .Don't have conversations about what you drive ,where you shop ,where you live or how much you are earning .

[cato]

Mmmm! You will be earning more in two months than you have earned in 1 year, and you have worked your butt off for many years. After depriving yourself for so many years, there is going to be a pent up desire to blow money, and it is probably best to get it out of your system - take the time off, enjoy yourself and you will be a better person for it.

By all means incorporate and find an accountant who specializes in physicians - ask other physicians - they will be able to direct you to somebody. Your new accountant will be able to set up the incorporating process (you need a lawyer). The benefit of incorporation only kicks in if you leave a significant amount of money in the corporation - if you are going to spend it all, don't incorporate.

You are also going to make up your mind as to whether you will be paying yourself in dividends or a salary - salary will allow you to build up some RRSP room to hide the USA shares and bonds in. Try and only invest in Canadian shares in the corporation - it is all about the taxation.

And try to keep a healthy balance in your life and remember - life is a marathon and not a sprint, pace yourself and you will last.

Good luck.

[cannon_fodder]

I enjoy being a contrarian. I'm surprised no one is suggesting that, in spite of the year of travel being "non-negotiable", the OP defer that until the debt is paid off.

A high level of debt, with likely higher interest rates 1 year from now, no income and the expenses (albeit lower than Canadian standards) of living abroad translate into a big hole to get out of.

I've never had a job nearly as stressful as a ER doctor, but it would make more sense to me that having vacations of at least 2 weeks in length more frequently is better for one's health (both physically and financially) than taking an entire year off. It was only 2 years ago (after 20 years of working) that I had my first 2 week vacation and it was much more enjoyable than taking only 1 week off.

It would be difficult for me, with my money-centric mindset, to enjoy myself abroad knowing every day my debt continues to pile up. Perhaps 3 months is all one really needs to fully recharge the batteries?

[kcowan]

Perhaps 3 months is all one really needs to fully recharge the batteries?3 weeks was good enough for me, all in one place. When I first retired, it grew to 8 weeks in that place and that was plenty.

[cato]

I enjoy being a contrarian. I'm surprised no one is suggesting that, in spite of the year of travel being "non-negotiable", the OP defer that until the debt is paid off.

A high level of debt, with likely higher interest rates 1 year from now, no income and the expenses (albeit lower than Canadian standards) of living abroad translate into a big hole to get out of.

I've never had a job nearly as stressful as a ER doctor, but it would make more sense to me that having vacations of at least 2 weeks in length more frequently is better for one's health (both physically and financially) than taking an entire year off. It was only 2 years ago (after 20 years of working) that I had my first 2 week vacation and it was much more enjoyable than taking only 1 week off.

It would be difficult for me, with my money-centric mindset, to enjoy myself abroad knowing every day my debt continues to pile up. Perhaps 3 months is all one really needs to fully recharge the batteries?

I would look at this longterm - He is about 30yrs old and has been studying and working hard in a very competitive and tough environment for the past 11-12 yrs (pregrad + med school + residency) and he is going to be earning about $300k-360k/yr as an ER doc. With a medical corporation he is going to be paying about ?14% tax in alberta and he can put about $100k in the corporation per yr. That leaves him with about 200k outside the corporation, and after tax about $120k.

It is really going to depend on whether he can keep a tight control on his spending, no new cars and rent until he can afford to put down a decent deposit. I suspect that he will probably spend 3 months in Thailand and then be back - most people who become doctors find it tough to do nothing for an extended period of time. I suspect that when times were tough, the thought of Thailand kept him going.

His lifetime earning are going to dwarf the $240k that he owes. Maybe the reason why I'm not devastated by the thought that he goes off to Thailand is because I knew somebody who halfway through his residency in orthopedic surgery went to the head of the department and asked if they would keep his position for him if he took a year off - they did and it worked for him. YMMV

[Smoothie]

Congrats on finishing your training Doc. Welcome to the club. Work hard and stay safe and primum non nocere...

MD Management is owned by the CMA, you must join CMA to get access. They have financial advisers who will sit down with you and help you. Just understand that they also are in the business of selling Mutual funds, many of which are quite good, but they have the usual high MERs of mutual funds. It's a good way to start investing: monthly contrib of 2K to RRSP, pretty soon you have the beginnings of a nest egg. Then you can break out on your own after accumulating $100,000 or so.

You need an accountant and you need to incorporate quickly. Incorporation is a massive, huge benefit for doctors. Never take a single penny more in "salary" than is required to get your maximum RRSP contribution, and some people will even tell you to forget about RRSPs and CPP and accumulate all your savings in the corp by paying yourself ONLY dividends.

Insure yoursel to the hilt. Get the best gold-plated disability insurance you can obtain, quickly.

There are good books on a lot of this stuff, google Manfred Purtzki and Tim Paziuk.

Consider working abroad for a couple years. You can make a bundle in Dubai, tax-free, and pay off your student loans quickly!

And remember: it ain't about the money, it's about patient care. The money and the security and freedom are huge benefits which make medicine a great career, but in the end, its your love for your job that will keep you going. And start diversifying lots now, cuz it gets harder to get new income streams the further you get into your career.