Doctors' 5 Worst Financial Mistake

Doctors do their best to manage their money and investments wisely, but a few common mistakes can put a serious dent in their finances. The five things that are easy to miss and what can be done to avoid them are given below.

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

Most of the doctors invest their money in their colleague’s medical start-up company or a particular venture. Even though investing in what you know and understand is not a bad approach, physicians should realize that investing cash in one of these ideas can really be a very big investment. 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. Hence proper research before investing is must.

2. Not having enough insurance

Medical malpractice insurance is a type of professional liability insurance that doctors practicing are required to have. Even though 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, pay for the best policy you can afford. "Occurrence" coverage is more comprehensive compared to "claims-made" policy, but that blanket protection costs a lot more.

Doctors should have sufficient insurance that extends to disability coverage as well, which can pay your bills even if you can't. They should not forget even the other 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.

3. Focusing too much on tax-deferred savings

It's good to save money in retirement savings plans, but don't forget to set aside some money in a taxable investment account, one that you fund with after-tax. In retirement, a combination of withdrawals from a tax-deferred plan, and those taken from a taxable account can lower your overall tax bill.

Doctors should re- examine their investment strategy. It has been found that too many doctors devote all of their investment to college savings accounts or tax-deferred retirement plans and are very slow to contribute to taxable accounts. It makes sense to invest some post-tax money for long-term gain.

4. Being too trustful of employees who handle money

Embezzlement, a kind of financial fraud seen in 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.

What can be done? There should be 2 people to handle payments: one to accept them and the other to post them. If one is indulge in solo practice with few employees, hiring an outside billing service is good option. 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. 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, doctors may 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.

For e.g. - 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 likelihood, always own any rental real estate within a limited-liability company (LLC). LLC insulates the owners of the company from liabilities arising out of the company's business.

It should be remembered that avoid costly financial mistakes. If something sounds too good to be true -- be it an investment proposition or a cheap insurance policy don’t invest before a proper research has been done.

Source- From Medscape Business of Medicine. Dennis G. Murray. Doctors' 5 Worst Financial Mistakes. 04/01/2011.