One of the very first steps that physicians need to take in their foray into personal finance is to establish an emergency fund. This will ensure that you can weather unexpected expenses or employment without having to get personal loans or take on debt. No matter how much money you have invested, which may be a lot as a doctor, it’s important to keep some money liquid (typically 3-6 months worth) so that you don’t have to sell assets at an inopportune time. We’ll cover more details about the emergency fund, how to calculate how much you need to keep in the emergency fund, and where to keep it, such as a high yield savings account or other short term investment.
Note: This article is part of our resources for graduating residents and fellows and transition to practice series. We’ve compiled a list of other relevant resources below. If you are not a part of our transition to practice series and would like to sign up, you can find the sign-up link at the top of our transition to practice guide.
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What is an emergency fund, and do physicians need one?
Unfortunately, it is not uncommon that we see physicians on our physician communities urgently posting about a need for cash. This may be because of an unexpected expense such as a home repair, a car replacement, a medical issue, a large tax bill, or otherwise, or unexpected loss of income like the loss of a job or other revenue stream. The fact is that the best laid plans can still be disrupted, and the budget that you thought you had planned appropriately for may not be enough.
Enter the emergency fund, your financial safety net.
It’s always a good idea to have a financial buffer for unexpected expenses so that you don’t have to scramble for money, liquidate assets, or take out high interest debt such as credit card debt or personal loans if there is a larger than normal unanticipated expense.
As a physician (unless you’re in training), you probably have the benefit of significant monthly cashflow that can cover most unexpected expenses, but even then, if there’s a major expense above what you normally have in discretionary income every month or if you lose your job, you need to be prepared.
How much money do I need in my emergency fund?
The rule of thumb you’ll often see floated in our communities and content (such as our personal finance primer for physicians) is 3-6 months. We would say that 3 months is a minimum, although we recognize that during residency or fellowship training that may be hard to do. When you become an attending physician though, this should be relatively easy to set aside and should be one of your first financial priorities.
If you are headed into a period of financial instability or uncertainty, you should plan ahead as much as possible and try to beef up that emergency fund. Examples may be heading into parental leave, an HVAC that is on the fritz or other suggestion that a home renovation or repair may be on the horizon, hearing about layoffs or hiring freezes at your job, if you are a partner in a private practice and overhead is going up or revenue is going down to the point where you may not be able to take the same distributions as you normally would (we saw this happen to many physicians on the community at the beginning of the pandemic), or you have a side gig where your quarterly or annual taxes can fluctuate quite a bit. In all of these cases, getting closer to the six month mark would be advised.
If you don’t know what 3-6 months worth of expenses looks like for you, it’s probably because you don’t have a budget. Yes, even physicians need budgets. Look back over your spending over the past year and see what the average expenses are. If there were big one time expenses that you could easily cut out if you needed to, you can exclude those from your calculations, but make sure you include all insurances, property taxes, mortgages, student loans, and other debt payments, childcare and school expenses, and all the other things you know you need on a monthly basis such as gas, food, and clothing. Look at our budgeting for physicians page for all the things that fall into this category of non-discretionary expenses for things you may have forgotten to think about.
It may take you a few months to build up your emergency fund, depending on how much excess cash you have on a monthly basis, but once it’s been established, it won’t need much maintenance. Just make a plan to set aside a steady amount each month to build it as you launch your career. If you get a signing bonus or other bonus, or other financial windfall, this is a great way to establish your emergency fund quickly.
Where should I keep the money in my emergency fund?
While there are several options, the main thing is that this money needs to be LIQUID - i.e. you can access it at any time without issues. You should not have to sell stock to get it, take a HELOC against your house for it, or otherwise. Even if you technically can take distributions from your retirement accounts or other long term investments, you do not want to risk the tax consequences of realizing gains, losing your tax advantaged money, or realizing losses.
There are several short term investment options available for emergency funds, and there’s always the option of just holding money in cash. Ideally, though, as this is a large amount of money that you hope you’re not going to touch, you’d like it working for you in the background to generate some returns, even though they may not be as good as you’d get in other investment options physicians often use. Also, cash can be stolen or lost, and in general is a depreciating asset as it loses value to inflation, so it’s not a great option. Traditional checking and savings accounts don’t give much in the way of interest, so while they’re easy and convenient, it’s worth making the (minimal) effort to put the money in a high yield account or money market fund for a better return.
Lately, the high yield savings or high yield cash accounts have actually been giving quite a good return, so many people have been opting for these or a money market fund.
Learn more about the best uses and options for HYSAs, and more about the details of each of these options on our short term investment options for physicians page. The key differences:
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Some people will also use certificates of deposit (CDs) as those also give a higher percentage return than regular checking and savings accounts, but remember, these aren’t actually completely liquid. If you need to withdraw money the money before their term is up, you’ll pay a penalty.
Conclusion
Establishing a 3-6 month emergency fund is one of the first steps in basic personal finance for physicians. It may be hard to build at first, but once you’ve got it in place, it should be easy to maintain. If you know you’re coming into a time period of financial uncertainty, beef up the emergency fund in advance to reflect that. High yield savings accounts and money market funds are a very popular place to put emergency funds at the moment due to their current high interest rates.
Once you’ve done this, go ahead and march forward with the next steps of your financial plan! If you’re not sure what’s next, review our personal finance primer for physicians.
Additional Resources for Residents and Fellows
If you’re a resident or fellow, make sure you watch the recordings of the transition to practice series events on our communities, which answer a lot of other FAQs we see during this time period, as well as other events tailored towards residents and fellows
Checklist of things to do as a Graduating Resident or Fellow
Securing your life and disability insurance
Contract negotiations and Job Search
Personal Finance
Student Loan Refinancing
Side Gigs for Residents and Fellows
Figuring out what to do with retirement accounts
Housing for physicians
Moving discounts for physicians under our Resources, discounts and perks for physicians