How to Spend Your Physician Sign-On Bonus

Receiving a sign-on bonus when you sign your first physician contract feels awesome. But it can also feel a little overwhelming. At least, I felt that way.

Here we are, finishing medical training with tons of debt, few to no investments, and little to non-existent financial education, and potentially a sense of delayed gratification. Then we are handed a huge lump sum of money.

What are we supposed to do with this money? Are we using it wisely? Should we use it at all? All of these questions swirled around in my head when I received my physician sign-on bonus.

So, it makes sense to examine the best ways to use a sign-on bonus.

In fact, these “best uses” apply anytime a physician receives a bonus or a lump sum of money — it doesn’t have to be the first sign-on bonus. But really, that first bonus is the most shocking and usually the one that we are least prepared for and educated about!

Some of you may be thinking, wait…what physician sign-on bonus? Before we get into the best uses, let’s talk about the sign-on bonus itself. While not a part of every contract, a lump sum sign-on bonus is typical of the majority of physician contracts. If you receive an offer letter (more about how to handle those here) or contract without such a bonus, I highly recommend negotiating.

A Few Important Caveats

It is important to remember that this bonus is income. Therefore it is subject to income taxes. So, some amount will generally be withheld by your (future) employer. If not, you should self-withhold some of the bonus. Otherwise you will be in for a surprise come tax time.

Also, the sign-on bonus usually comes with a stipulation — you only keep the bonus if you work with the employer for a certain amount of time. Usually that term is 1 year. If you leave early, you need to pay it back. I’ve even seen some employers call this sign-on bonus a “forgivable loan,” meaning it is a loan that is forgiven once you work a certain time period. I think that is odd.

With this understood, let’s move on to the best uses for these bonuses. Let’s break this up into two realities…

In an Ideal World

Remember, the formula to build wealth and reach financial freedom is to create and grow your margin. And your margin is the difference between what you make and what you spend. While your budget and philosophy of intentional spending help you create the margin, your written financial plan will guide you in growing your margin.

Your written financial plan will have a prioritized list of financial goals. For example, here is my financial plan:

1. Pay down high-interest loans/debt (>8%) — Done! (as of 10/2020)
2. Establish emergency fund (3-6 month’s expenses) — Done! (as of 12/2020)
3. Maximize Voluntary Defined Contribution (VDC) retirement account
4. Pay down medium interest loans (6-8%)
5. Invest in vetted real estate (cash-flowing rentals with cash-on-cash ratio >10%)
6. Contribute to 529 college savings account
7. Maximize 457(b) retirement account
8. Pay extra to mortgage
9. Pay down low-interest loans (<3%)
10. Contribute to back-door/spousal Roth IRA
11. Contribute to retirement taxable account
12. Donate to charity with equity dividends

Once you have your personalized financial priority list, the decision of what to do with any monetary windfall becomes easy. Simply put the money towards your top priority until that priority is fulfilled. Then move on to the next priority, and so on until the bonus runs out.

Unfortunately, we do not live in an ideal world. So, let’s examine our other, more accurate reality…

In Our Non-Ideal World

It would be great if all of us were completely rational, and we all used our bonus solely to accelerate our path to financial freedom, and living and working on our own terms. But that is not reality. And I think this is a good thing. So, especially when you are finishing your training and about to start your first job, other ideas typically come to mind. Let’s look at these more closely.

Moving Expenses

I lead off with this because you should not have to use your sign-on bonus to cover moving expenses. Your employer should cover these separately. That is what is typical. If moving expenses aren’t included in your contract, negotiate them. Remember, however, these are now taxable as well.

A Down Payment on a House

Whether to buy a home right out of training or to rent is a very nuanced discussion. However, my more generalizable advice is to initially rent coming out of training. This gives you time to evaluate your new job and potentially new city before making a significant and not easily transferable financial commitment.

But in certain circumstances, buying a home out of training can make sense. For instance, that is what I did. In this case, your physician sign on bonus can be used as a down payment. Actually, you can often avoid needing a down payment using a physician home loan.

Again, you need to evaluate your own unique financial situation in determining (A) if you should buy a home out of training, (B) if you should use a physician home loan or not, and (C) if and how much a down payment to use. But this is a common and potential use for a physician sign on bonus.

Buying a Car

This may be another good use for a sign on bonus. However, do not use it for a down payment on a car loan! If you cannot buy the car you want in cash, then you can’t afford it. Simple as that.

But if you are buying a car in cash using your bonus, make sure you are doing so intentionally!

I bought a used Toyota for $4,000 after training — the car I still drive today. Why? Because I’m not a car person, so instead, I just use that extra money to buy other things that bring me joy or to accelerate my path to financial freedom.

Vacation

I fully support this as a non-wealth building expense for your physician sign on bonus. The time after training but before you start your first job is the last time that is truly yours before you retire. Use it and enjoy it. Consider it an investment in yourself and your sanity.

How Did I Use My Physician Sign-On Bonus?

It’s impossible to proscribe that there is a “right” way to use your physician sign on bonus. There is certainly a wrong way — wasting it on a thing or things that neither bring you joy nor help you advance on the path to financial freedom. But there is no singular right way. In fact, I like the 10% rule: take 10% of your windfall and spend it guilt-free; then save, invest, or pay off debt with the rest.

As for me, my wife and I used my sign-on bonus to:

We benefited from the fact that we used a physician mortgage on our primary home that did not require any down payment. We did this because the monthly mortgage payments still fit very well within our financial plan and allowed us to reach our other financial goals.

These moves significantly helped us increase our net worth by six figures in 1 year and advance our financial freedom. But in retrospect, taking 10% and putting it towards a vacation would have been great as well!

Disclaimer: The author is not an attorney, accountant, or financial advisor. His expertise is in the field of medicine. Any information in this op-ed and its links should not be considered personalized financial advice.

Jordan Frey, MD, is a plastic surgeon at Erie County Medical Center in Buffalo, New York, and founder of The Prudent Plastic Surgeon.