Although being a doctor is thought of as a stable and safe job, things can always go wrong. From family emergencies to global pandemics, it’s an extremely good idea to have an emergency fund. Listen as Tommy and Ed discuss five reasons why even doctors need an Emergency fund!
We all know that patients who are physiologically fit have a much better capacity to recover from the unexpected shock of sudden illness or injury. But how fit are your finances? What is your financial fitness and capacity to deal with unexpected financial shocks? If you get sick how would you pay your bills?
You have worked extremely hard to become a doctor and that is an asset you need to protect. We don’t insure anything we can afford to replace. We don’t insure our phones, our washing machines Tommy doesn’t insure his beloved surfboards or bikes. But we do insure ours and our family’s future and unless you could afford your current lifestyle without your income you need to consider insurance. This article discusses the difference between income protection and critical illness insurance.
Financial fitness
Unlike physiological fitness, which generally worsens as our patients get older, your financial fitness usually gets better as you get older and build up reserves. So, like many things in finance, starting to build up your financial fitness whilst you are young is especially important.
As doctors we spend our working lives surrounded by patients with life changing diagnoses, yet in spite of this it amazes us how many doctors have no insurance in place at all. Perhaps we think it won’t happen to us?
Perhaps we think the NHS sick pay will take care of us? Do you even know how much sick NHS sick pay you are entitled to? Are you in one of the groups of doctors such as some locums and self-employed doctors who may not be entitled to any sick pay at all?
Before talking about the various insurances available to protect your income, there is one very basic, but essential step you need to take and that is to build up an emergency fund.
Did you know?
Behavioural economics considers precisely this! There have been studies, particularly in the wake of the pandemic, that investigate if individuals thought themselves to be at lower risk than their peers of infection. It is related to a self-evaluation bias that we have in relation to ourselves. In this case, we may be likely to underestimate the chances of needing an emergency fund, as doctors.
Perhaps we think the NHS sick pay will take care of us? Do you even know how much sick NHS sick pay you are entitled to? Are you in one of the groups of doctors such as some locums and self-employed doctors who may not be entitled to any sick pay at all?
Before talking about the various insurances available to protect your income, there is one very basic, but essential step you need to take and that is to build up an emergency fund.
Even doctors need an emergency fund.
Defining an emergency fund
We appreciate many of you will know what it is already, but for those of you who don’t: an emergency fund is an instantly accessible cash reserve sufficient to cover your living expenses for a defined period. The number of months your emergency fund will cover depends on your personal circumstances: if you are employed by the NHS on a permanent contract you may choose to have 3 months; if you are a locum doctor or self-employed, with a young family or other dependants, you may choose to have 6- 9 months in reserve. Low interest rates and inflation mean cash is effectively losing value over time. It may be worth considering an offset mortgage in an to attempt to mitigate this, however, it’s also worth remembering that the function of the emergency fund is not to act as an investment making you money, it’s to protect you and your family investments from financial shocks.
“What medical school didn’t teach us about money” will give doctors a step by step plan to transforming your financial future. Enter your details to download your copy nowWhat medical school didn’t teach us about money
Five reasons why doctors need an emergency fund
As we mentioned earlier, we often see that doctors seem to think they don’t need an emergency fund. They might say something like, “But I’m a doctor, I will never be unemployed, get ill or fall on hard times.”
Here’s five reasons even doctors need an emergency fund
Even doctors can be unemployed.
During the COVID-19 pandemic some doctors and dentists couldn’t find work. Most elective private work stopped and the demand for locum GPs declined massively. Those doctors never anticipated being out of work and those without an emergency fund likely felt the financial stress. Unexpected things happen, even to doctors!
“I can use my credit card if I get in trouble”
As well-paid professionals, we have access to large amounts of credit if needed. So why not just use your credit card as an emergency fund instead? Taking out extremely high interest, bad debt at the very moment your income – and therefore ability to repay this debt – has stopped is a recipe for getting in a lot of financial trouble. The only use high earning professionals should have for credit cards is to collect cashback and the other perks of using a credit card and you must pay the balance off in full each month.
Having an emergency fund can make insurance cheaper
As we discuss below, if you can extend the deferment period of any insurance policy, it may make the premiums cheaper. A deferment period refers to the length of time after your income stops that the insurance policy will pay out. If the deferment period was one month, for example, then one month after your income stopped you would receive a pay-out. If your emergency fund can increase this time to six months, then it increases your capacity to survive without income and may make insurance cheaper.
Avoid fire sales
Starting to invest without a suitable emergency fund in place is a terrible idea. If you have a financial shock and all your money is tied up in investments, you may be forced to make an unplanned sale to release cash. Having a fire sale of your investments like this may result in you having to sell an asset at below market value. Good for whoever is buying the asset from you, admittedly, but terrible for you.If you don’t have an emergency fund, do it now! Use the technique of ‘pay yourself first’ that we’ve talked about before, to build up a fund. If you already have investments, dependents or high non-discretionary spending, such as a large mortgage and no emergency fund, your financial fitness is severely compromised, and you must act now.
If an emergency fund is like the moat of a castle, capable of defending your position for a few months, but not a long-term solution. If the worst was to happen and you got sick and couldn’t work, unless you could maintain your current lifestyle without you are going to need insurance.
Thanks for reading all! Here’s a quick summary for those doctors who are short of time:
- An emergency fund is designed to cover your expenses such as bills in the short term in the event that you are unable to work.
- The number of months that it covers (around three to nine months) will depend on your personal circumstances (salaried GP, locum, having a family).
- Even doctors need emergency funds.
- It’s a bad idea to start investing all your wealth without an emergency fund.
“What medical school didn’t teach us about money” will give doctors a step by step plan to transforming your financial future. Enter your details to download your copy nowWhat medical school didn’t teach us about money
