Personal financial hygiene for junior doctorsBMJ 1997; 314 doi: https://doi.org/10.1136/bmj.314.7088.2 (Published 19 April 1997) Cite this as: BMJ 1997;314:S2-7088
Keeping personal finances in order takes time-time that most doctors in training don't have
Leeds juniors Catherine and Jeremy Hayden outline a workable approach
Graduates from medical school must cope with a queue of individuals eager to obtain a warm slice of their freshly baked income. Moving from penniless student to potentially wealthy professional attracts a swarm of financial advisers, income protection organisations, medical defence societies, and bank managers, all keen to offer their allegedly essential services. And if the reaction of most medics to the arrival of their first pay slip is typical-to spend, spend, and spend-then their interest is justified. Once the novelty of receiving payment for working a substantial number of hours has worn off, serious consideration should be given to financial planning, in anticipation of the professional and personal responsibilities which accompany the start of a career. Although a thorough knowledge of financial wizardry is not essential, sound foundations can ease the day to day running of fiscal affairs and build a firm and secure future.
Day to day business
There is one factor which is crucial to trouble free day to day money management and that is the choice of current account. The big four banks tend to have a monopoly over graduates having enticed them to join as first year students using a minimal cash gift as bait. However, the field of personal banking has advanced considerably and building societies now offer excellent and highly competitive facilities. Savings can be made by shopping around for an account which does not assault you with an extortionate monthly fee for drifting into debt by a few pounds for one or two days into an agreed authorised borrowing zone. At least one building society will double the interest rate on a current account after a year as a loyalty incentive.
Substantial time and effort can be saved by managing fixed monthly expenses in a separate current account, particularly if these costs are shared with another person. Setting up a series of monthly direct debits eliminates the tedious task of paying bills and greatly facilitates budgeting the remaining income. But take care: certain payments, such as insurance premiums, incur interest when they are spread out over the year.
Getting organised early is the key to reducing hassle later on. An efficient filing system should contain bank statements, bills, wage slips and records of untaxed income from other sources. Minutes spent now could save hours at a later date in retrieving information vital for such purposes as completing a tax return form.
Retirement may appear to be a remote prospect to newly qualified doctors, but it warrants their serious attention. It is now considered sound advice not to opt out of the NHS superannuation scheme. Few doctors will work a sufficient number of years to retire on a full pension and are therefore recommended to make up the shortfall with additional voluntary contributions to a private pension scheme. Relatively small amounts are needed, particularly if started early, and some may even opt to retire early if sufficient funds have accumulated.
Income is a valuable asset and requires protection. In the event of any illness, the NHS provides sick pay for a limited period which is dependent on the number of years of service. Ensuring a maintained standard of living through a long term illness should be made a high priority. Although income protection is an insurance policy, certain companies offer a bonus in the absence of a claim on maturation or retirement.
Key steps to personal financial hygiene
Get organised in running day to day affairs
Think ahead now and top up your pension
Fill in a tax return
Plan and regularly review financial issues, preferably with an independent financial advise
Start saving a proportion of your income
Obtain as much tax relief as possible with a mortgage, TESSAs, and PEP
Don't die intestate: make a will
Getting financial advice
To the novice, selecting the most appropriate institutions to perform these basic functions is daunting-enter the financial adviser. This ubiquitous breed is frequently found in the doctors' mess of the local hospital, offering services amidst a cloud of take away pizzas, and overhead projector acetates. An adviser recommended by a friend is a good start, but failing this a member of the Independent Financial Advisers' (IFA) Network Limited regulated by the Personal Investment Authority is essential. This ensures that the products recommended are the best for you and not for him or her. It should be made clear how the adviser makes his or her money. A truly independent one will either charge a fee (proportional to the sum invested) or take the commission offered by the company, depending on the client's choice. These figures are approximately equivalent. Ideally, the adviser should arrange a baseline meeting to establish the current financial situation and assess future plans.
At this stage any long standing debts incurred from years spent as a student may be better managed. Credit cards are the most expensive way to borrow money. Large debts should be transferred to a loan from another source and the credit card should be destroyed or retained for emergencies only. Occasionally credit card companies offer a financial incentive (such a preferentially lower interest rate) to transfer debts over to their card-while this may seem an attractive suggestion and may save a few pounds initially, it is not a solution to the problem.
Good financial discipline and ultimately security entails saving on a regular basis. A proportion of income, however small, should be set aside for a rainy day even when debts are ongoing.
Initially, the best place for this is in a high interest instant access account which is usually a postal one. A personal financial adviser or consumer magazine such as Which? will periodically provide an up to date top ten.
This annual burden is a necessity for all doctors. requiring us by law to declare any untaxed income such as that obtained from form filling. We are also entitled to claim tax relief on expenses related to our profession such as subscriptions to societies and journals, examinations and other sundries including books. The Inland Revenue are entitled to demand receipts, and may exclude items at their discretion. The tax return form is self explanatory and most doctors should be able to submit one without resorting to an accountant. Courage and determination may well be rewarded with a refund from the taxman: bailing out with an accountant could be a costly gamble.
Planning the future
The future should be planned in consultation with a personal independent financial adviser. This relationship should be a long term one with regular appraisal every six months to take account of changing circumstances and alterations in the market place.
For many doctors, buying a house is the largest single expense in life and despite fluctuations in the market in recent years, still remains a sound personal investment. A financial adviser is invaluable in recommending the most suitable mortgage. Estate agents are often tied to building societies and life assurance companies and are unable to offer impartial advice. There are pros and cons associated with the two main types of mortgage. A repayment mortgage offers the lowest risk and guarantees complete repayment of the debt at the end of the term. In an endowment mortgage, money is paid into an investment based life insurance policy which matures (usually after 25 years) to cover the cost of the loan. While excess profit is paid as a lump sum after this time, any shortfall must be made up by other means.
Once student debts have become a memory and credit cards have been shredded, surplus income may be targeted at more long term projects. There are two main ways of saving in a tax efficient manner. Tax exempt special savings accounts (TESSAs) are effectively long term deposit accounts where the interest earned is not taxed provided the capital (a maximum of £9000) is invested for five years. The money can be accessed in the interim at the expense of the tax free status.
Personal equity plans (PEPs) are a way of investing in shares, unit trusts, investment trusts, and corporate bonds without paying tax on any dividends or capital gains earned. As with a TESSA, a PEP can be funded on a monthly basis with a maximum annual investment of £6000. The fund is managed by an investment company, although the client decides where the money is invested. Like all stock market investments, there are different levels of risk ranging from relatively stable British blue chip companies to companies subject to more volatile foreign economies. Clearly, the safer end of the spectrum should be explored initially.
Taking a career break-usually a challenge faced by the female doctor-can be a costly decision. The earlier the break is taken, the more it will ultimately cost. It is estimated that a five year break entails saving between 15 and 30% more each month for the rest of the duration of the career to make up the difference. Most female doctors would not be out of work completely for this length of time but lost income and pension contributions must be anticipated. PEPs are a useful way to save flexibly as generally there are no penalties for stopping and starting contributions or cashing in the plan altogether.
Making a will
It is advisable to make a will as soon as possible. Dying intestate can make life difficult for those left to sort out the affairs of the deceased and leave the intended beneficiaries with potential legal wrangles and unnecessary inheritance tax. Professional advice should be sought because a poorly written will may be worse than none at all. A will may be revised at any time to take account of changing circumstances. The temptation to appoint a solicitor or banker as the sole executor should be resisted as the beneficiaries will have no control over the proceedings which follow and limited rights of redress should there be cause for complaint.
The principles outlined here should enable a busy junior doctor to work hard and play hard without the burden of financial insecurity. A relatively small amount of time must be wisely invested to avoid the indelible stains which are often left by fiscal carelessness. Good personal financial hygiene makes perfect sense.
BMA Junior Doctors Handbook 1997. Which? January 1997 Best buys in savings accounts, April 1997. Best buys in national savings and notice accounts.