The Money Meets Medicine Podcast

Emergency Funds For High-Income Earners

By Jimmy Turner, MD
Host of Money Meets Medicine

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Imagine landing your dream job, with a paycheck that seems like it’s got more zeros than a phone number. You’d think you’re set for life, right? But here’s the twist: even high-income earners, including those in white coats and corner offices, aren’t immune to financial emergencies.

Embarking on this journey, we’ll explore the undeniable necessity of emergency reserves for all, regardless of one’s hefty paycheck. From debunking myths about financial invincibility to offering concrete steps on how much to stash away and where; we’ve got you covered.

So sit tight as we unpack surprising stats about doctors’ debts and financial needs, and reveal practical tips for safeguarding your financial future against unforeseen events. By the end of this journey, you’ll not only understand the need for an emergency fund but also how to tailor one that fits your high-earning lifestyle perfectly.

Table Of Contents:

The Necessity of Emergency Funds for High-Income Earners

The Misconception of Financial Immunity

Sixty-one percent of Americans live paycheck to paycheck. Yet, many high-income earners, including doctors, often believe they’re immune to financial downturns thanks to their hefty paychecks. But this couldn’t be further from the truth. No matter how fat your salary is, life has a way of throwing curveballs that can dent even the most well-padded paychecks.

A study highlighted by CNBC shows that a significant number of Americans living paycheck to paycheck include those with $100,000 incomes. This reveals an alarming trend: not having enough saved up for emergencies can put anyone in a pinch, regardless of their income bracket.

This continues into even higher income brackets…

Credit Card Debt Among Physicians

Maybe you considered the $100,000 income mentioned above and thought, “Right. But a physician’s salary is substantially higher than $100,000.” What if I told you that a shocking number of physicians are swimming in high-interest debt from plastic money? In fact, twenty-five percent of physicians carry revolving credit card debt.

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Why? Because even though doctors earn more, they also spend more—often without a safety net. And credit card companies are all too willing to provide large lines of credit to physicians who they see as having a very secure income.

Physicians are the best kind of debtors for a credit card company.

This isn’t just pocket change we’re talking about; many doctors carry balances that could buy a pretty nice new car. It’s like having a financial black hole in your wallet—one swipe and money disappears faster than free samples at a medical conference.

The reasons behind this phenomenon are complex, ranging from unexpected healthcare costs (yes, even for them) to the allure of keeping up with the Joneses. Evidently, there’s a pressing demand for enhanced fiscal education and strategic planning among affluent earners to sidestep these financial traps.

Impact of Unexpected Events

Sudden events like illness or job loss don’t discriminate based on how much you earn. Neither did a pandemic, which wiped out the earning capacity for any physician in an “eat what you kill” business model. When these unexpected events happen, having an emergency fund can mean the difference between weathering the storm and getting capsized financially.

As we will discuss below, emergencies may consist of the typical car repair, AC unit blow-up, or a medical emergency. Yet, there are also physician-specific events that must be considered when it comes to financial emergencies.

 

Understanding the Role of an Emergency Fund

Safety Net Against Financial Stress

An emergency fund isn’t just a pool of money; it’s your financial stress absorber. Picture this: unexpected medical bills hit, and instead of spiraling into panic mode, you’ve got a stash to tackle it head-on. It’s like having a financial guardian angel that lets you sleep soundly at night.

For medical professionals navigating the unpredictable waters of their careers, this safety net is indispensable in buffering against sudden shifts in earnings. With the right emergency fund in place, the rollercoaster ride becomes less daunting because you know there’s always something to fall back on. And there are physician-specific events that call for an emergency fund as well.

Bridging the Gap During Insurance Waiting Periods

For doctors, this is the juncture where the emergency fund narrative becomes interesting. I often argue that long-term own-occupation disability insurance is the #1 financial task for doctors, because – without an income – no matter how much you learn about investing or paying off debt; without an income, none of that matters. There is no income to invest, if it is lost, and you do not have physician-specific own-occupation long-term disability insurance.

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That said, despite the importance of long-term disability insurance, it usually carries something called the “elimination period.” The elimination period is how long you must wait before you start getting paid for your disability. This period is typically 60-180 days (most often 90 days).  This alone gives doctors a good barometer of how large their emergency fund should be – at least 3 months of living expenses as we will discuss below.

During this wait, if illness or injury keeps you from working, your bills don’t magically pause. An emergency fund steps up here, filling that gap so life expenses are covered while your insurance gears up to kick in. It ensures stability when everything else might seem uncertain.

Note: If you are looking to obtain own-occupation disability insurance from a source you can trust, Money Meets Medicine Disability Insurance will do what is best from you. It is a disability process created by Dr. Jimmy Turner. For doctors, by a doctor.

How Much Should Doctors Save in Their Emergency Fund?

Factors Influencing Emergency Fund Size

Common recommendations on the size of an emergency fund include having three to six months of living expenses. For the reasons above, we recommend having at least three months to cover your long-term disability insurance elimination period.

What if you are a dual-income earning physician? Dual-income dynamics add another layer of complexity or simplicity depending on how you look at it. If both partners bring home the bacon (or tofu for our plant-based friends), you might not need as large of a cushion because there’s more financial stability.

The crux of it? There’s no one-size-fits-all answer here but leaning towards saving three to six months worth of living expenses is wise advice most financial experts agree on according to Investopedia. Yet given the high variability in doctors’ lifestyles and liabilities—aiming closer to six months could be your safest bet.

Optimal Locations for Stashing Your Emergency Fund

There are three main features of an emergency fund that help someone determine the best location. Emergency funds need to be:

  • Separate – this is important so that you are not tempted to dive into your emergency fund for non-emergent reasons. Even a small amount of friction to gain access will provide a moment of pause before plundering your emergency fund.
  • Easily Accessible – the money needs to be liquid enough that the emergency fund can tap into it at a moment’s notice.
  • Matches Inflation – while it is not necessary, it is ideal for a high-income earner’s emergency fund to keep up with inflation. In high-interest rate environments, this is easier to accomplish.

If emergency funds need to be separate, easily accessible, and (ideally) keep up with inflation, this begs the questions, “Where is the best location for a high-income earner’s emergency fund?”

High-Yield Savings Accounts

When it comes to keeping your emergency fund accessible yet separate, a common location for many includes high-yield savings accounts. High-yield accounts offer higher interest rates compared to traditional savings accounts, making your money work harder for you. Plus, the convenience of instant access means you can get your hands on the cash when disaster strikes without delay.

The real kicker? These accounts usually come with no monthly fees or minimum balance requirements. Stashing your emergency cash in these accounts ensures it remains intact, free from the erosion of pesky fees or concealed expenses.

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If you’re curious about where to find these high-interest havens, online banks often boast some of the best rates in town. Websites like Bankrate compare current offerings, helping you pick a winner based on your financial needs and goals.

Treasury Bills and CDs

Moving beyond conventional choices brings us to Treasury Bills (T-Bills) and Certificates of Deposit (CDs). Both options promise low-risk growth but differ slightly in their approach. T-Bills are short-term government securities that essentially say “IOU” from Uncle Sam; they’re perfect if stability is what keeps you up at night.

On the flip side, CDs lock in your deposit for a fixed term with a guaranteed return rate—higher than most savings accounts but less liquid because early withdrawal typically incurs penalties. The upside? You’ll know exactly how much growth to expect by the end date.

Secondary Emergency Funds

The traditional high-yield savings account and T-Bill concepts are not the only locations to consider holding your emergency fund. While the following may not be a primary source of an emergency fund, they may serve as a layer to it that serves as a backup emergency fund. In other words, the primary location would be tapped into first. Then your secondary emergency fund would only be accessed once a primary emergency fund is depleted.

One secondary emergency fund location for high-income earners includes a Home Equity Line of Credit. This shouldn’t be your primary source because you will pay interest on any money that is pulled from a HELOC. Additionally, you must obtain a HELOC before an emergency takes place.  Why? Obtaining a HELOC requires documented income and a good debt-to-income ratio. You must also have 15-20% equity in your home.

Let’s say, though, that someone does not own a home, or doesn’t have 15-20% equity in their home. Another secondary emergency fund location that might be considered is a taxable brokerage account.  Personally, this is where my secondary emergency fund is kept. I keep one month’s worth of living expenses inside of a regular savings account, and my secondary emergency fund is invested in a money market fund in my brokerage account.

Consulting a Financial Advisor for Personalized Advice

Tailoring Your Emergency Fund Strategy

Finding the perfect fit for your emergency fund is like customizing a suit. If a regular suit will do, then you likely won’t need help. However, if someone’s needs extend beyond what is mentioned above, or they find what is mentioned to be overwhelming, they may need professional help from a trusted physician-specific financial advisor.

Financial advisors are adept at navigating the intricate maze of your economic landscape, tailoring a contingency savings plan that snugly aligns with your needs.

A one-size-fits-all approach doesn’t work for some because everyone’s life, career, and expenses differ. For example, doctors might face different financial challenges than tech professionals or entrepreneurs. An advisor can take into account factors such as variable income streams, practice overheads, and personal goals to recommend how much you should save and where you should stash it.

Moreover, they can offer insights on making your money work harder while it sits in your emergency fund—be it through high-yield savings accounts or short-term investments like Treasury Bills or setting up a strategy with certificates of deposit (CDs). Tailored guidance guarantees your emergency stash is not just safe but also has room to flourish.

Conclusion

So, you’ve walked through the why, how, and where of Emergency Funds for High-Income Earners. You now know even top earners need a safety net.

Key takeaways? First, don’t fall for the myth that big paychecks make you financially invincible. Second, unexpected events spare no one; your emergency fund is your financial shield.

Start saving smartly—knowing how much to save and where to stash it can turn potential crises into mere inconveniences.

To cap it off: Financial stability isn’t just about earning more but also preparing better. An emergency fund tailored for high-income lifestyles isn’t optional; it’s essential. That’s power in your hands—use it wisely.

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