Doctors' 5 Worst Financial Mistakes

Introduction

You're probably not a crack accountant or a financial whiz. There's no shame in admitting that. How to handle money isn't something that's taught in medical school, but in many respects what you do with your money is as important as the skills it takes to make it.

In all of the day-to-day tasks that consume a busy doctor's life, it's easy to lose sight of the things that can put a serious dent in your finances. Here are 5 that are easy to miss and what you can do to avoid them.

1. Investing in a colleague's "great" idea

At a glance...
Introduction
1. Investing in a colleague's "great" idea
2. Not having enough insurance

Watch Taxes and Staff Members
3. Focusing too much on tax-deferred savings
4. Being too trustful of employees who handle money

Thorny Property Issues
5. Failing to protect real estate from creditors
If you've been tempted to invest in a medical start-up company, you're not alone. Plenty of doctors over the years have known bright, motivated colleagues with good ideas for "can't-miss" products or devices. The problem is that very few physicians realize that cashing in on one of these ideas is a long shot. A real long shot.

"We've seen only a few ground-floor investments that have paid off in the long run, and sometimes not until as many as 20 years later," says Karen C. Altfest, a principal advisor with Altfest Personal Wealth Management, in New York City. She's seen her share of physician clients who have come in licking their wounds after having been warned not to sink money into a particular venture. "We had a surgeon -- a truly brilliant man -- lose $400,000 in a colleague's business after we advised strongly against it."

Why the low success rate? Aren't doctors in the trenches in the best position to spot something that might help them take better care of their patients? "On its face, investing in what you know and understand isn't a bad approach," Altfest says. "But too many doctors fail to do any due diligence, like researching the company's finances and examining the competition. They only look at the product -- or the proposed product -- and then consider what they know and who they know."

2. Not having enough insurance

Malpractice insurance is probably the first thing that comes to mind, and rightly so, given the fear and anxiety that a claim can generate. Although the temptation to "go bare" might be great given the high costs of premiums, you'd be risking your life savings if you were ever found liable in a multimillion-dollar lawsuit against you. For this reason, bite the bullet and pay for the best policy you can afford. "Occurrence" coverage is more comprehensive than a "claims-made" policy, but that blanket protection costs a lot more.

Having sufficient insurance extends to disability coverage as well, which can pay your bills even if you can't. Ask for "own-occupation" coverage, which will pay you if you can't perform the "material and substantial" duties of your specialty. This differs from a plain-vanilla group disability policy that may require you to handle other work you're capable of doing -- for instance, seeing patients or reviewing cases for a malpractice insurer if you can't perform surgery -- before any benefits are paid to you.

And don't forget about your auto, life, and homeowners policies as well; they need to be airtight in that they provide enough coverage for you and your loved ones in case something truly awful happens. An additional "umbrella" policy, worth $1 million or more, can cover claims beyond the limits of your auto and homeowners policies.

3. Focusing too much on tax-deferred savings

It's smart to stuff your retirement savings plans with as much money as you comfortably can, but don't forget to set aside some money in a taxable investment account, one that you fund with after-tax dollars. Yes, this could serve as a rainy-day fund that you can tap into quickly without worrying about early-withdrawal penalties, but the bigger, longer-range issue here is taxes. In retirement, a combination of withdrawals from a tax-deferred plan, such as your 401(k) or 403(b), and those taken from a taxable account can lower your overall tax bill.

Let's say that you'll need to tap your tax-deferred investment accounts for $100,000 a year in retirement. At current tax rates, if you're married and filing jointly, you and your spouse will pay $9500 plus 25% on every dollar between $69,000 and $100,000.

But if you stay under $69,000 in tax-deferred dollars and pull the difference, $31,000, from taxable accounts in which you've made money, the gains will be taxed at 15%.* This "blended" return will take cash out of Uncle Sam's pocket and put it into yours by keeping you in a lower tax bracket.

First you may need to re-examine your investment strategy. "We find that too many doctors devote all of their investment dollars to college savings accounts or tax-deferred retirement plans and are very slow to contribute to taxable accounts," says Larissa Grantham, a financial planner with Stepp & Rothwell in Overland Park, Kansas. "But it makes sense to invest some post-tax dollars now to get a potentially big benefit later on. I always tell people, 'You can borrow to pay for college, but you can't borrow to save for retirement.'"

*This strategy assumes that you meet the IRS requirement of holding the investments for at least a year, which categorizes them as "long-term" gains.

4. Being too trustful of employees who handle money

Embezzlement is one of the dirty secrets of many medical practices -- a secret that you're not likely to be let in on until it's too late. The mistake many practices make, especially small ones where there may only be 1 or 2 people handing money, is to let the same person collect payments from patients and insurers and post them to your accounting software. It's too easy, especially where cash is involved, for your "trusted" front-desk person to accept $100 and post only $60. Multiply that over hundreds of transactions and pretty soon Lois is driving off in a new BMW while you're still wringing more miles out of that old minivan.

What to do? First, always assign 2 people to handle payments: one to accept them and the other to post them. Or, if you're in solo practice with only a few employees, hire an outside billing service. This will effectively serve as a system of checks and balances. And consider asking your accountant to do spot checks. Also, put your employees on guard by letting them know that the books will be checked at random.

In addition, run credit checks on everyone who works for you. (Someone with a lot of debt or a past bankruptcy filing may find it hard to resist keeping their hands off your cash.) Another, pricier option would be to look into "bonding" your employees: essentially purchasing insurance that will cover you for fraudulent or dishonest acts, such as embezzlement, forgery, and misappropriation.

5. Failing to protect real estate from creditors

Like many people, you may be tempted to take advantage of historically low mortgage rates by purchasing a rental or commercial property. Depending on when and where you buy, it could wind up being one of the best investments you'll ever make. But it could take only 1 slipup -- and not one of your own -- to wipe out your profits.

Here's why: Let's say that you rent the place and someone is injured after falling on an icy walkway that you failed to maintain. If you're sued and the injury is severe, your personal assets may be at risk in a judgment against you. To avoid this possibility, always own any rental real estate within a limited-liability company (LLC).

"Like a corporation, an LLC insulates the owners of the company from liabilities arising out of the company's business," explains Lawrence B. Keller, a financial planner with Physician Financial Services in Woodbury, New York. "If you currently own a rental property that's not protected by an LLC, it's not too late to establish one and transfer the title to it."

Another way to protect real estate from creditors is available to married couples who have purchased a home together, at the same time and through a single title. Called a "tenancy by the entirety," this is a form of joint tenancy that prevents the home from having to be sold to satisfy a large judgment against one of the spouses.

Although there are clear advantages to a tenancy by the entirety, it's not bullet-proof: The protection disappears if the spouse who's being sued dies, or if the claim is filed against both husband and wife. You could also jeopardize some important estate-planning strategies, such as the ability to sell or give away one spouse's stake in the home. Not all states allow tenancy by the entirety, Keller says, so check with your attorney.

Remember that avoiding costly financial mistakes is as much about following your gut as it is about following your head. If something sounds too good to be true -- be it an investment proposition or a cheap insurance policy -- pass on it until you've done your homework. You (and your bank account) might be glad you did.

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