Today, Indian doctors are revered throughout the world as being amongst the very best. With a lot of focus being given to the patient care side of the business, most doctors end up neglecting their professional as well as personal finances. While it might seem like it’s the more intricate aspects of financial coaching that get overlooked, it’s actually the very basic concepts that get ignored. And this negligence can have detrimental effects on the doctors’ finances. The most common money mistakes that doctors routinely commit are:
An abundance of loans
Over concentration in real estate
Inadequate insurance against risks like death, disability, professional liability and loss of income
An ad-hoc approach to investments
- More than 60% invested in real estate
- 10-20% in debt such as PPF, insurance policies, bonds and post office
- 15-20% in cash like savings account and FDs
- Negligible gold and equity investments
Absence of a written plan
Lack of planning and vision to build a business
Myopic view of tax planning
Doctors don’t have the most stable income; their income depends upon the number of patients who come in for treatment. Despite this, their expenses are rather high. One of the major contributors to this large expenditure is the amount of loans doctors purchase. While the kind of loan purchased might vary from one doctor to another, doctors generally are holders of home loans, practice property loans, equipment loans, car and personal property loans. Higher the number of loans, higher the expenditure towards EMIs to pay off those loans.
Insurance premiums, practice expenses and EMIs are major contributors to a depleting income. Add to that, spending money on buying real estate instead of leasing it and paying for swanky, new interiors, and you have a close to exhausted income. Since these are considered to be the big-ticket items for the doctor’s practice, servicing debt and maintaining other expenses could result in a liquidity crunch. This holds true even for the doctors who have built up a reputable practice for themselves.
Many doctors act blindly on the advice of their accountants and purchase loans in lieu of tax planning. The primary reason for this is harnessing the advantages of depreciation and interest deduction. Very often though, this is done without accounting for the doctor’s liquidity and personal needs and causes severe cash flow problems for the doctor.
It’s no secret that doctors hoard real estate. A big reason for this is that large chunks of their income can easily be cushioned in real estate investments. Doctors not only believe that the real estate sector is insulated from market downturns, but also that it provides huge returns and tax benefits. Eyeing all these perceived advantages, doctors borrow money to make real estate investments and end up taking on debt. This strategy tough can be extremely dangerous, especially during market downturns because real estate isn’t a liquid investment.
Most doctors view life insurance as an investment and pump in a lot of money into it. Given that doctor’s lead extremely busy lives, there is not much thought put into whether the policy purchased adds any value. The first agent who makes the pitch gets the sale.
Due to high incomes, the premiums a doctor pays are sizeable, but the cover received in return is very low and most doctors remain underinsured. There is no forethought or assessment of the family condition to deal with the premature passing away of the breadwinner. Most liabilities aren’t covered, there is negligible disability cover, no income protection and no security benefits. It is imperative to appropriately look into this area to ensure lifestyle maintenance, wealth creating and wealth protection.
On an average, a doctor’s portfolio follows the following pattern:
Most doctors do not have the time to thoughtfully build their portfolio and, so they make decisions based on the advice of their CAs, colleagues, banks, family, friends, patients, etc. The result is a portfolio that is neither balanced, nor sophisticated. Instead, it’s a haphazard mix of investments that accumulate over time.
Concepts such as financial goal setting, cash flow and debt management, insurance planning, asset allocation, retirement and estate planning are alien to most doctors for the simple reason that there is no formal education in personal finance or financial coaching. And it is this lack of knowledge that ends up costing them. They realize the importance of having a written plan in place only once something happens that damages their finances.
Often, a lot of money gets spent on superficial things such as doing over the interiors of the clinic in a bid to attract more patients. Investing in essential equipment is good and even necessary but it is better to defer expenses that will neither generate revenue, nor improve the patient’s experience. Also, doctors spend a lot of money to attend conferences where they could upgrade their skill set. But, these same doctors hesitate when it comes to spending on marketing and building their brand.
Tax planning is viewed as an instrument to minimize tax and following this philosophy, many doctors end up doing things that aren’t in their best interest. They take several loans and purchase real estate and life insurance in an unplanned manner. They also indulge in tactics such as showing a limited income or a weak balance sheet with the objective of not paying tax. However, the right goal of tax planning is to maximize post tax income and that is the goal to work towards.
Understanding these typical money mistakes is the first step towards rectifying them. The key is to learn from them and make better choices in the future. This will ensure that you will enjoy the real value of money.