Dealing with your finances
As a newly qualified doctor or dentist, you’ll no doubt be extremely excited for when your first monthly pay package enters your bank account. It's now time to reap the benefits of all your hard work, right?
Whilst you will be more financially secure and it may be tempting to splash the cash, it’s essential to spend your money wisely.
In this blog we share advice on understanding your payslips, pensions and financial benefits as well as how to deal with affordability.
Earning money is an exciting prospect but there are a couple of financial pitfalls you should be aware of.
- Financial liabilities - a luxury purchase such as an expensive car is unfortunately a liability, so ensure you can afford extras before handing over cash and signing up to contracts that require monthly direct debits.
- Increasing your outgoings - there is a big earning gap between being a student and entering the profession, so whilst it is tempting to increase your outgoings in line with your income this won’t ensure long term financial fitness. It also won’t leave any surplus towards an emergency fund should something untoward take place, and you might have to take out unnecessary loans as a result.
- Managing your own accounts – establishing a relationship with a professional financial adviser will reduce the risk of costly mistakes and will enable you to maximise your free time. It’s also a good idea to have three separate bank accounts: one for savings, one for bills/rent and one for everyday spending, as this can help you organise your funds.
- Failing to take out insurance
- Junior doctors should take out income protection, as although the NHS provide sick pay benefits, this is only a short-term solution. Doctors will also need professional indemnity provided by MDU or MPS to begin practising.
- Newly qualified dentists going into a practice should take out locum insurance to cover the cost of sourcing a locum if they fall ill. Whilst this is another outgoing, it’s important to make sure you are covered. Income protection and professional indemnity is essential, and dentists should consider insuring expensive equipment such as loupes.
- Delaying saving/setting up a pension scheme – you may want to use your salary now, but the state pension alone is not enough to survive on. The NHS pension scheme has a generous employer contribution, so opting out means missing out on 20.6 % of pensionable pay for both the 1995-2008 and the 2015 Schemes for the period 1 April 2019 to 31 March 2023.
Understanding payslips, pension schemes and benefits
Your transition from student to medical or dental professional comes with a wage and with it being your first, it may seem a bit confusing.
You’ll be paid an entry level salary as a new doctor or dentist, with the following deductions:
- National Insurance (Class 1)and Income Tax
- NHS pension contribution
- Student loan repayments
The remaining amount is your net pay and will be paid into your bank account on a monthly basis.
Remember that payslips are a legal requirement that must be either physically given to you or accessible online. You should also retain them for your own records and as evidence of earnings, as you’ll need them if you’re applying for things like mortgages and loans.
It might seem premature to think about pensions when you’re starting your career but it’s essential to think about them sooner rather than later.
You will be automatically enrolled into the NHS pension scheme and unlike most private sector pensions, it is currently a defined benefit scheme that guarantees a fixed sum when you retire. The NHS pension also includes other benefits, including a lump sum death benefit, which is paid to the legal spouse, registered civil partner or nominated qualifying partner of a member who dies before retiring or within five years of their retirement.
It’s worth noting you can opt out of an NHS pension if you wish, but you might want to discuss things with a financial adviser first for expert advice.
For dentists, your pensionable earnings will be lower if you do less NHS work and more private work, so it may be beneficial for you to set up a private pension if you’re actively conducting private work. A private pension could also enable you to retire sooner if you wish, so it’s worth bearing in mind.
Additionally, everyone has access to the new State Pension of £168.60 per week if they have paid enough National Insurance contributions throughout their working life. Currently, the earliest you can get the new State Pension is when you reach State Pension age, which depends on your year of birth and gender.
Dealing with affordability
When you begin earning a wage, it’s tempting to spend it on everything you’ve been holding off on during your studies.
A useful method for dealing with living expenses is the 1/3 rule:
- Spend 1/3 of your wages on ‘essential spending’ – housing costs, insurance, council tax, utilities etc.
- Spend 1/3 of your wages on ‘everyday spending’ – food, cleaning, commuting and ‘non-essential spending’ – clothing, eating out, holidays.
- Save 1/3.
It’s a good idea to have three to six months’ worth of average expenditure in savings that you can easily access in case of unexpected expenses like car repairs or broken household appliances, to prevent any unpleasant financial surprises later down the line.
Also, dentists working privately will need to put some money away each month to pay their income tax and NIC at the end of the tax year.
We’re sharing some useful vlogs from newly qualified doctors and dentists which share their experiences of life after university. You can view them here. In addition, we’re sharing more tips and advice on managing your finances during and after university in our latest articles.