Receiving a sign on bonus when you sign your first physician contract feels awesome. There’s no denying it. But it can also feel a little overwhelming in a sense. 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 tons of delayed gratification (or is it just me…). And 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? Am I making a mistake? 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 for doctors to use their sign on bonuses.
And actually, these “best uses” really go for anytime a physician receives a bonus or a lump sum of money at all…it doesn’t just 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!
Wait…what physician sign on bonus?
Actually, before we get into the best uses, let’s quickly 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 for one. And here are 9 other steps to help negotiate the best doctor contract.
Based on personalized contract information that I received from Compensation RX courtesy of Contrast Diagnostics, I know that the average sign on bonus for my specialty in my area is $25,000. And that is what I received…
A few important caveats…
It is important to remember that this bonus is income. And 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. Or else you will be in for a surprise come tax time…
And lastly, the sign on bonus usually comes with a stipulation. And that stipulation stipulates (forgive me) that 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 that it is a loan they give you and then forgive 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…
Best uses for a physician sign on bonus
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.
And your written financial plan will have a prioritized list of financial goals. Like this list in my financial plan (which can be found in its complete form here):
Pay down high interest loans/debt (>8%)Done! (as of 10/2020)Establish emergency fund (3-6 month’s expenses)Done! (as of 12/2020)- Maximize Voluntary Defined Contribution (VDC) retirement account
- Pay down medium interest loans (6-8%)
- Invest in vetted real estate (cash flowing rentals w/ cash-on-cash ratio >10%)
- Contribute to 529 college savings account
- Maximize 457(b) retirement account
- Pay extra to mortgage
- Pay down low interest loans (<3%)
- Contribute to back door/spousal Roth IRA (every January if contributing – 2 steps)
- Contribute to retirement taxable account
- Donate to charity with equity dividends
Once you have a personalized financial priority list like this, the decision of what to do with any monetary windfall like a sign on bonus becomes easy.
You just 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…
These priorities will be different for everyone. This underscores the importance of actually creating your very own written financial plan (again you can use mine as a template right here!).
However, some common priorities for most physicians will be:
- Pay off credit card debt or other high interest debt
- Create an emergency fund (we all need one!)
- Pay down student loans
- Invest in a Roth IRA (especially if you are still a trainee which means you are under the income limit to still contribute and are in the lowest tax bracket you will ever be in your life! More here…)
- Invest in a taxable investment account
These are all great wealth-building and financial freedom-accelerating uses for a bonus!
And this is all good and dandy. But 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 just used our physician sign on bonus solely to accelerate our path to financial freedom and living/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, some other ideas typically come to mind. Let’s look at some of these more closely.
Moving expenses
I lead off with this quickly 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. Also remember that these are now taxable as well however.
A down payment on a house
Whether to buy a home right out of training or to rent a home is a very nuanced discussion.
I’ve discussed this exact topic in depth here. However, the 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 transferrable financial commitment.
However, 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 light of your financial goals 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 potentially acceptable alternative use for a physician sign on bonus.
Buying a car
This may be another acceptable use for a sign on bonus. But I am much more willing to be dogmatic about if and when it is a good use here compared to above!
First, 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.
Second, 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 I still drive today. Why? Because I’m not a car person. And it didn’t make sense to spend the $1,000/month that I initially budgeted to lease a luxury car. Now I just use that extra $1,000/month to buy other thing 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 that is truly yours before you retire. Use it and enjoy it.
Spend time with your loved ones on a vacation. Obviously do so intentionally again. But this is investing in yourself and your sanity. It’s ok to celebrate a bit!
As always the right answer is a somewhere in the middle
It’s rare and probably not advisable that someone uses the entirety of their sign on bonus for one thing.
And everyone’s situation will be unique and tailored to their circumstances.
So 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 long lasting joy nor helps you advance on the path to financial freedom.
But there is no singular right way.
In fact, I really like the advice from Jimmy Turner of the Physician Philosopher. He is a proponent of the 10% rule. He says to take 10% of your windfall and spend it guilt free. Then save, invest, or pay of debt with the rest.
Can’t go wrong with that advice!
How did I use my physician sign on bonus?
My wife and I used my sign on bonus to:
- Pay off some of our credit card debt
- Put towards a down payment on our first cash flowing investment rental property
We benefitted 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 out financial plan and allowed us to still reach out other financial goals.
These moves significantly helped us increase our net worth by 6 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!
What do you think? Did you receive a sign on bonus? How did you use it? How should other physicians use it? Let me know in the comments below!
