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What should doctors know about emergency funds and what should they look like?
Emergency funds are often doctors’ last priority when it comes to setting themselves up for financial success. Many doctors think they will likely never need them and that there is little benefit to having money sitting on the “sidelines.” However, having a little “rainy day” cash can be beneficial to the health of your finances.
Have Enough in Your Emergency Fund to Reduce Financial Stress
As we all know, cash is king. Or as I like to say, cash is king, queen, and jester of the courts. It is everything.
Cash is king because it prevents you from relying on credit cards or cashing out your investments. An emergency fund is essentially cash set aside for unexpected expenses that will happen, and they do happen. Having one reduces financial stress.
The traditional recommendation to save three to six months of living expenses is a great goal. This is particularly true for doctors. For example, imagine that you got into a car accident and became disabled and were unable to perform as a surgeon, or do rounds. How would you keep paying for your current expenses until your disability insurance payment kicks in?
A three to six month emergency fund allows you to bridge the gap before your long-term disability starts paying a monthly benefit. Without it, you may experience a delay between your disability and your first payment (90 days is a typical waiting period for many disability policies).
The thought of not having to worry about that waiting period reduces your financial stress, doesn’t it? Not to mention the unexpected broken air conditioner or dishwasher. These unexpected financial expenses are paid for by your emergency fund, and may include health care costs, car repairs, or the aforementioned home appliance catastrophes.
Keep Your Emergency Funds Separate
Human beings are not spreadsheets or robots. We are psycho-social beings. To think otherwise is foolish. This is why the two main goals in creating your emergency fund include the emergency fund being separate, yet accessible.
For this reason, it is necessary to place your emergency fund into a separate savings account so that it requires some friction prior to dipping into the account.
This may mean creating a separate savings account at your primary bank, or even at a completely separate bank.
Either way, your emergency fund should not be your regular checking account from which you pay your everyday living expenses. Your emergency fund should be separate. This money should not be touched unless you need it. Consider the effort required to break a piggy bank. That’s what should be required to access your emergency funds.
Emergency Funds Should Be Readily Available
Following the piggy bank analogy, though it takes effort to break it open, that piggy bank is right on the shelf. Your emergency funds should be that accessible, too. In addition to being separate, your emergency fund must also be readily available.
I use a regular savings account. While I may not earn a lot of money utilizing this method due to inflation and low returns, the purpose of this fund is to prevent going into debt due to unforeseen circumstances. Not to make money from interest gained.
Other options include high-yield savings accounts or even a regular money market account, but brokerage accounts, Roth IRAs, CDs, or I-bonds are not ideal. Why? Because these types of accounts do not accomplish the second goal of an emergency fund: to be easily accessible.
They either require you to make potentially ill-timed withdrawals from investments (e.g., brokerage accounts) or you may not be able to access the money at all without financial consequence (e.g., CDs and I-bonds). If accessing your emergency fund can only be done during certain times, or by incurring penalties, it isn’t serving its purpose.
To recap: Emergency funds are a necessary financial item, even for doctors. They should include three to six months of living expenses, and be separate yet readily available. Don’t get stuck in the weeds on the type of account you use. Instead, focus on getting an emergency fund set up, and hope you don’t have to use it (but know that you will).
The Medical Business column features questions from the Doximity community answered by physicians versed in finance. Post your question in the comment section below.
Animation by Jennifer Bogartz