Preparing for the Unexpected: Emergency Funds for Physicians

Why you need an emergency fund

What is an emergency fund, do you need one, how big should it be and where do you stash it? These are some of the questions that are frequently asked again and again in physician communities. 

Having an emergency fund is an essential part of any financial plan. This should seem rather obvious but any of us can face unexpected situations that end up costing us a lot of money. As healthcare professionals the most obvious one in mind is healthcare costs due to an accident or critical illness. Additionally our cars or houses will face costly repairs at one point or another (e.g. at the end of 2022 I had to spend $5200 to replace the suspension on my ten year old car with 90,000 miles). Also, many of us will wish to help family members or close friends if and when tragedy strikes. Finally, as some physicians unfortunately discovered during the pandemic years, our jobs may not be as secure as we imagined and we may be confronted with a reduced paycheck or even losing our job at any time (even front line professionals like ER doctors weren’t safe). Once those biweekly paychecks stop - it could become challenging to balance your budget. Since most healthcare jobs require 60-90 days to complete an arduous credentialing process, it’s not often seamless to step into a new role and start earning a living. 

Saving is imperative

Way back when I was a resident, an emergency fund wasn’t even on my radar. I remember being in Internal Medicine residency in New York City during 2009-2012 and exactly half of my post tax paycheck would go directly to rent for my fifth floor studio walk up apartment. After maxing out my employer sponsored 403(b), making income based repayments on my student loans, and my discretionary spending of eating out in Manhattan the reality is that I barely had any money left. I certainly didn’t have an emergency fund. Yes, I will admit I did take one international vacation each year (even though I was staying in hostels or cheap 2 star hotels and eating street food). I have no idea how people with children or dependents get by during residency- kudos to you for your sacrifices! Thankfully I didn’t face any catastrophes but looking back I had basically relied on luck and prayer and that is never a good strategy. I also did have family backup; I knew that if I was truly in a terrible situation my parents would not have let me starve or go homeless. Many people have no such family support and that is all the more reason to plan carefully. 

Where should you store your emergency funds

You want your funds to be immediately accessible and not risk the principle. Do not invest your emergency fund money into crypto, real estate, or the stock market - even in low cost index funds. Note the S&P 500 lost around 20% in 2022. If you don’t do a careful analysis and have a plan, then a setback can have long term consequences. Relying on a 0 interest credit card may work for some people if you already have one open, but once the introductory period ends credit card debt can quickly compound. Relying on instruments like a HELOC or a personal loan also is not advisable unless already open, since there is a substantial lag time between the application and approval. Additionally, with a higher interest rate environment, the effects of compound interest can be devastating.

Even when I became an attending I didn’t really establish any sort of separate account for emergencies either, I guess I just kept a bigger buffer in my primary checking account. It was only when I finally got married and had kids that we started a separate high yield savings account account that is FDIC-insured (Federal Deposit Insurance Corporation) and money is held there and not touched unless absolutely necessary. Many such online accounts exist these days at companies like Sofi 3.75% (March 2023), Marcus 3.75%, CapitalOne 3.4%, American Express 3.5% and the list goes on.

How much to save

The exact size of your emergency fund will depend on your individual financial situation. Financial experts generally recommend having enough money set aside to cover three to twelve months of living expenses in case of an emergency. The main problem why many physicians struggle with establishing an emergency fund separate from their primary checking account is because although on average we are high income earners, due to lifestyle inflation some of us may in fact be living paycheck-to-paycheck.

To determine the approximate amount you will need, you should probably consider the following factors:

1. Monthly expenses: Calculate your monthly expenses, including rent/mortgage, health insurance, utilities, groceries, transportation, insurance, and any other bills you have to pay on a monthly basis.

2. Job security: Consider the stability of your job and specialty. For instance - if you work as an independent contractor and are not guaranteed a number of shifts per month, what will you do if the client doesn’t need you anymore?

3. Health: Consider your own health problems and the health of your dependents. If you have any chronic health issues or have recently been diagnosed with a serious illness (autoimmune condition or cancer) it may be prudent to save more.

4. Debt: If you have a lot of debt, you may want to save more to cover your expenses in case of an emergency. Some debt can be deferred with economic hardship - like student loans, while other debt like credit cards is not so easy to defer. 

5. Other factors: Consider any other factors that could affect your finances, such as potential home repairs given the age of your house, car repairs given the age/maintenance history of your cars, or unexpected travel expenses.

6. Do you have partner/spouse/family support? I would factor in  the hypothetical contribution of a partner/spouse. In my own scenario I am married to another physician who could cover our mortgage completely herself if we needed her to - so that takes off some stress from my mind. Some other individuals may be blessed with a wealthy and generous parent or family trust where they have an additional reserve of money. 

Once you have a clear understanding of your monthly expenses and potential financial risks, you can determine the amount of emergency fund that would give you peace of mind. You must plan, then do!