If you’re a new doctor who has just been offered your first sign on bonus, you’re probably over the moon. Chances are, you’ve put in eight years of school, then another three to seven years of residency and fellowships, all while making do on a low salary. Now, your hard work is finally paying off financially.
The average doctor bonus for physicians who just landed their first full-time job reached nearly $30,000 in 2017, which is a record high. The size of bonuses has increased substantially since 2011, when the average was around $20,000 . The largest recorded bonus paid in 2017 was a whopping $200,000 .
The size of bonuses is especially impressive compared to what you’ve likely earned up until this point. The average medical resident makes only $59,300 a year. Given how frugally you’ve been living, you may not know what to do with this large chunk of change. Here are some tips on how to make the most of your bonus, and some words of caution about how not to spend that newfound cash.
What Not to Do with Your Doctor Sign On Bonus
Since you’re not used to having a large amount of extra cash, you may be tempted to use your bonus on a fun splurge. Or, you may simply not know what to do, having focused more on your medical textbooks than financial know-how. Here are some things to avoid doing with your bonus:
• Don’t blow it on things that won’t last. After years of penny-pinching, it’s understandable that you’d want to treat yourself to some costly retail therapy, or on expensive meals and trips. There’s nothing wrong with spending on high-quality goods or a life-changing experience but be conscientious about each purchase.
• Don’t let your money linger. Putting your bonus into a checking or savings account, can seem like the easiest thing to do and a way to protect your money. But, the interest rates you earn likely won’t even be enough to keep up with inflation. That means your money could decrease in value while in these accounts.
• Don’t slide into debt. Having a large sum of cash can make you feel richer than are. You may be tempted to take on ongoing expenses, such as a house or car, that you can’t really afford once the bonus runs out. If your regular cashflow can’t sustain these expenses, you run the risk of going into credit card debt.
How Much is a Sign On Bonus Taxed?
Your bonus will be considered supplemental income and be subject to federal taxes, as well as state and local taxes depending on where you live. In 2018 , the IRS taxed supplemental wages at a rate of 22%.
If you receive the bonus as a check, rather than as part of your paycheck, it will be up to you to make sure you pay taxes on it. Get clear on how much you owe before you spend the check, and set money aside for taxes—otherwise, you might spend more than you actually have and come up empty when tax time rolls around.
Smart Options for Spending Your Physician Sign on Bonus
If you’re looking for ways to use your physician sign on bonus to wisely plan for the future, there are a lot of options that can be beneficial for your finances. Depending on your personal situation, you’ll be able to determine which option will best set you up to try and hit your financial goals.
Make a Dent in your Debt
Since you’ve been living on a pretty low salary, you may have racked up some credit card debt as well. Particularly if your debt comes with high interest rates, it could be a smart move to use your bonus to pay some of it off. This is particularly true for credit card debt, which usually has high interest rates.
With student loans, your bonus could go even further if you refinance. Refinancing student loans involves taking out a single new loan, which comes with a new term and interest rate, to pay off your existing loans. Now that you have a stable job and a higher salary, refinancing may get you a lower interest rate, which may reduce how much you pay over the life of your loan.
Use a student loan calculator to figure out how much you could save, and how putting some of your bonus toward the loan could reduce what you owe over the life of the loan.
Build an Emergency Fund
Many financial professionals advise that everyone have an emergency fund equivalent to about six months of living expenses. This fund is meant to pay for unexpected and urgent costs, such as medical bills, car repairs, or a layoff.
The money should be kept in cash equivalents, so you can access it as soon as you need to. The fund is meant to help prevent you from going into credit card debt or worse if an emergency comes up. If you don’t already have an emergency fund, it makes sense to use your bonus, or part of it, to create one.
Save for Retirement
A frequently cited rule of thumb is to have the equivalent of one year of your salary saved for retirement by the age of 30. But, you might be behind on building your nest egg, since you’ve been in school or in low-paying residencies and fellowships. If you already have an emergency fund, you can use your sign on bonus to increase your 401(k) contribution (the maximum is $18,500 per year).
After you’ve done this, you can also put up to $5,500 into either a traditional or Roth IRA. These are accounts you can open on your own, regardless of what your employer offers, and allow you to invest in a variety of stocks, bonds and other assets.
The traditional and Roth IRA offer different tax benefits, and you must make below a certain income limit to qualify for a Roth IRA. If you’re not sure whether you’re on track in saving for retirement, an online retirement calculator may help you figure out where you stand.
Invest through a Wealth Account
Opening an individual investment account, such as a SoFi Invest account, is a great way to help your bonus benefit you in the long term. You can put in as much money as you want—the minimum is $100—and withdraw it anytime. Your funds will be invested in five to seven Exchange Traded Funds (ETFs), which consist of a diverse mix of stocks and bonds.
Diversification can help reduce risk, while investing in passively managed ETFs is a good lower fee approach. Plus, there are no management fees no matter the size of your portfolio. SoFi rebalances portfolios at least quarterly to maintain an investment mix and risk level you’re comfortable with. With a SoFi Invest® account, you can benefit from the low costs of automated investing, as well as the clarity that comes with human advisors.
The earlier in life you invest, the more value you can potentially create down the line. Of course, this isn’t guaranteed, since you can’t predict how the market will perform in any given time period. But the earlier you invest, and the longer you leave your money in the market, the more of a chance your money has to grow.
Suddenly having thousands, or even tens of thousands of dollars on your hands can be confusing for anyone. It can be especially overwhelming for a new physician used to getting by on student loans or a low resident’s salary.
Don’t make the mistake of thinking short-term or letting your doctor bonus sit idle.Whether you pay off debt, prepare for emergencies, save for retirement, or invest, you can rest assured that your money will be put to good use. By thinking long term, you can use this windfall at the beginning of your career to help set yourself up for a successful well planned financial future.
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This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
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