The professional ability of doctors may not always translate into financial acumen. Here are some of the common money mistakes committed by them:
Multiple loans: Though most doctors have high and steady income, their expenses are high as well. This is because they have multiple loans that need to be serviced every month. Often, doctors have home loan, clinic loan, car loan, medical equipment loan, etc. Every month, a significant portion of their income is used to repay these loans. Servicing debt, maintenance and other expenses frequently may lead to liquidity crisis even for doctors with a flourishing practice.
More focus in real estate: a majority of doctors invest significant amount of savings in real estate alone. In spite of advantages of depreciation and interest expenses as deduction from their earnings, they end up having a higher exposure to real estate. Generally, doctors believe that real estate is insulated from market vagaries and gives good returns with tax benefits. So, they even borrow to invest in real estate. This can prove dangerous in times of real estate meltdown as it is not a liquid investment.
Insufficient insurance: Most doctors buy life insurance as an investment. Often, these investments are done in a hasty and rudimental fashion. There is no proper assessment of the actual financial risk their family will face in case of an eventuality. Similarly, most doctors have insignificant or no professional liability cover, negligible disability cover and income protection. Adequate coverage needs to be made for lifestyle maintenance, wealth creation and wealth protection.
Unplanned investment: As doctors are usually very busy, they end up taking decisions based on the advice of their colleagues, banks, real estate agents, family members, insurance agents and even patients. A typical doctor?s portfolio consists of two-thirds in real estate investment, a third in provident funds, insurance policies, bonds and post office savings and one-third in cash in the form of savings or fixed deposits and literally no exposure to equity and commodities.
Focus on tax avoidance: Doctors generally believe that the objective of tax planning is to minimise taxes and end up doing things that are not in their best professional interest. They take multiple loans, invest heavily in real estate and insurance in an unplanned manner so that they end up with a weak balance sheet. The objective is, of course, tax avoidance, but it needs to be planned in a manner that is aligned with their profession.
Most doctors think that financial planning is a complex and time-consuming process. Any decision about money impacts your overall financial position. Deciding not to invest or not to plan is also a decision. The irony is that most doctors do financial planning unknowingly and in an unstructured manner, whether it is investing in real estate or taking a loan or buying insurance policies. These decisions are generally taken independentally, without considering their impact on other decisions.
The writer is an associate professor in finance and
accounting at IIM Shillong