Physician Life Cycle Part Five: Do You Really Need an Emergency Fund? Section Three- Mitigating Risk
We’ve gone through several arguments for and against a physician emergency fund. We’ve also touched on several of the risk that unique to medical professionals.
Author: Robert A Felberg MD
Topic: Physician Finance
The first part of this series touched on the common discussions regarding an emergency fund for physicians. In Section Two, I reviewed some real life case series. Now I will try to bring the practical real-world experiences to help complete the argument for an emergency fund.
Editor: There are several good physician finance bloggers out there in the blog-o-sphere. Unfortunately, many are highly technical in a confusing way and this can easily lead to “decision paralysis”. This popular blog series brought to you by NegotiationMD addresses common physician finance quandaries in a more explanatory and theoretical manner. The posts follow a logical order, so starting at the first one and working your way through makes sense. Please sign up for our newsletter to keep up with future installments.
The problem with most blog posts regarding emergency funds is that they approach the concept like you would for a middle class couple with a typical job. A typical family has an income of about $48,000. A surprise $7,500 repair bill could easily “break the bank” for them. They’d have to max out their credit cards, take a HELOC, or tap their retirement funds. An emergency fund for them makes a lot of sense and would probably take a few months to years to fully build.
Now, let’s get real- as a Doctor earning $300,000 annually, a broken water pipe is not going to bankrupt you. You could probably just max a few credit cards and pay it off in the next month or two. If that’s your idea a “financial emergency” then I can understand why you’d think an emergency fund is a poor allocation of funds. But, your concept of a physician’s financial emergency is a significant understatement. When physicians get into trouble, it’s usually something big, expensive, and lengthy. You don’t need an emergency fund to guard against the price of a new transmission… You need a fund to pay your bills for 6 months while you rebuild your career.
Then there’s the so-called “sequence risk” – the time when you need to tap your funds are almost always the same time when your hospital is stressed, your city or region is bottoming out, and a mega-bear market is upon us. Imagine practicing in a town devastated in the 2008 financial crisis. Your practice has no paying customers, your house is worth 50% less overnight- not that anyone is buying, and the market is down 60%. You can’t just say “I’m a doctor and therefore I have a guaranteed income” and take a loan against your underwater house. You’ll also have a high entry fee into any of the other alternatives to emergency funds that are often espoused for physicians. Are you going to sell you hard earned retirement savings at a loss into a bear market?
Having an emergency fund as a physician makes a lot of sense.
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Here’s the big take home message of disasters and emergency savings- Due to the unique nature of the medical profession, small mistakes or events that would have minimal effects on most careers could destroy yours. The consequences of legal trouble, impairment, social media, being labeled a disruptive physician, or moral lapses can be devastating. The financial link to your community, partners, practice, hospital, government regulations, and governmental or third-party payers also add an additional and uncontrollable financial risk. Although uncommon, you may need to come up with 6 to 12 months of expenses in a relatively unexpected manner.
Sure, there are certain circumstances when you may not need an emergency fund. You may be financially independent, have strong divergent streams of income, or have several multiples of annual salary squirreled away so that selling into a bear market is unlikely to derail your long term plans. These are also the same people who no longer need life, disability insurance, or even annual salary. Getting to that financially independent status should be your goal. Until you get there, an emergency fund makes sense. Even when you get there, a “bucket” of 3-5 years of expenses held in “cash” is considered reasonable. Your emergency fund can be converted into your immediate 3-5 years of expenses “cash” bucket.
The emergency fund for debate is an interesting one. I fall strongly on the side of maintaining an emergency fund. My reasons are simple. Doctors are at an increased risk for disastrous financial events, far more than other physician financial bloggers believe. My recommendations are borne out from experience. Often, it’s from clients coming to me hoping to negotiate from a position of weakness following an event like above and they are now struggling to get a job at the 10th percentile of compensation. Usually these episodes are temporary and last 6 months to a year. Rarely they can go beyond 18 months to 2 years. Physicians, being high information and highly compensated individuals also are at a distinct disadvantage when it comes to the legal system or social net. You will garner no sympathy from the legal system or general public.
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Before you decide against an emergency fund, think long and hard about how you and your family would survive an unpredictable but devastating event.
So now, you’ve reviewed the arguments and hopefully have decided to build and maintain an emergency fund. How much do you need? How do you allocate the funds? Is there a way to improve return beyond the checking account? Is there a use for the emergency fund as your career transitions to financial independence? All this and more will be addressed in the next post of this series.
Cajun Bob’s Bonus Round: Much of the issues discussed relate to contract issues. Nearly every contract will have a section discussing cause for termination. It’s up to you to understand what constitutes cause, what provisions exist for cure, and what options you may have if faced with termination. You also need enough of an understanding of contracting to be able to have a meaningful discussion with your legal representation. Contracting for physicians is just one of these topics we cover in our seminars. We also did a recent webinar that was well received- you’ll need to register for free to access it.
So what do you think? Do you have an emergency fund? Have you decided against it? Is the risk to doctors real or is my case overstated? Are you under the believe, probably incorrect, that you can insure against the risks mentioned above? If so, what is your insurance plan? Share your comments below.