It keeps us up at night. We pay thousands to hundreds of thousands of dollars a year to protect ourselves from it. Our hospitals or practices have entire departments dedicated to managing it.

It is “Risk.”

Avoiding risk is an inherent part of modern medicine. Every day, we practice CYA documentation, ensure our patients sign informed consent forms, and do everything we can to minimize the risk that someone will sue us for a bad outcome or missed diagnosis.

The difference between medical and financial risk

Contrast our perception of risk to that of the business world. A “bold risk-taker” is seen as a positive, even aspirational identity. It is understood that embracing a certain, rational amount of risk is an inherent and necessary part of the pursuit of an even greater reward. Failure is not seen as humiliating or shameful; entrepreneurs often speak about “failing forward” as a proud and valuable learning opportunity from which to move forward.

In the world of finance, risk is embraced as part of every financial plan. When assessing your own relationship with risk, it helps to separate that relationship into two categories: risk capacity and risk tolerance.

Risk capacity is an objective assessment of your ability to withstand unexpected setbacks without becoming financially insolvent. Are your living expenses and debt so high that going two weeks without a paycheck would be catastrophic? That is a good marker of low risk capacity. If on the other hand, you have sufficient savings and low enough debt to ride out a six-month loss of income with no change in lifestyle, you have much higher risk capacity.

Risk tolerance on the other hand, is a subjective, personal attitude toward risk that can be completely independent of risk capacity. What is your attitude toward the idea of investing in stocks or real estate, starting a side business, or going part-time to combat burnout, endeavors with zero guarantee of success but potentially high long-term rewards? Whether those ideas terrify or thrill you speaks to your level of risk tolerance.

Understanding and optimizing both your risk capacity and risk tolerance are critical aspects of both financial and career planning. Let us look at different combinations of risk capacity and tolerance, and how that might affect a physician’s career or financial planning.

Low risk capacity and low risk tolerance

For example, consider a physician who is making $300,000 but has $400,000 in student loans, a $600,000 mortgage, $5,000 in credit card debt, and is moonlighting to afford daycare for two toddlers.

Potential strategies to consider include:

• Maximize your income at your current job. Negotiate raises, bonuses, and get any incentives available at your current job; this will improve your risk capacity without leaving the security of your current position.
• Eliminate high-interest debt. Set aside a bit of every paycheck to paying down any high-interest debt, such as credit card debt with a 10 percent or higher interest rate. That is the equivalent of investing with a guaranteed 10 percent or higher rate of return.
• Build a reserve fund. Once you have eliminated high-interest debt, set aside that money to build a reserve of money for the sole purpose of ensuring against an unexpected drop or loss of income. A high-yield savings account or market money fund would be a perfect place to save this money. Having three to six months of living expenses set aside is a commonly used benchmark that will dramatically improve your risk capacity.

High risk capacity and low risk tolerance

For example, consider a physician with no debt and $500,000 in a savings account who is too scared to leave a toxic job that is burning him out because the idea of losing a steady paycheck terrifies him.

Potential strategies to consider include:

• Take baby steps with risk. Perhaps you invest only $100 at a time, or you try a two-week unpaid leave of absence without upending your career. Slowly build your comfort level with taking smart financial and professional risks with high potential long-term reward.
• Adjust as you go. As you build up your risk tolerance, backed by your strong risk capacity, you will gradually develop the power to unlock new, life-changing possibilities.

Low risk capacity and high risk tolerance

For example, consider a physician who decides to invest her reserve fund into an investment real estate property. Three months later, unexpected changes at work make her current job untenable, but she now has no choice but to stay.

Potential strategies to consider include:

• Build risk capacity first. Create a scenario where life would be manageable if your investments or business endeavors went south and you simultaneously had an unexpected loss of income. Negotiating raises, bonuses, and incentives, paying down high-interest debt, and building a reserve fund will all improve your risk capacity.
• Prioritize resilience over returns. You may have to temporarily sacrifice long-term gains for the power to survive an unexpected financial setback. While this may be a tough pill for you to swallow, remember that expected returns are not guaranteed. Boosting your risk capacity will increase the probability that those returns eventually become reality.

High risk capacity and high risk tolerance

For example, consider a physician who has debt controlled, a six-month reserve fund, a seven-figure 401(k), and is cutting down to 0.8 FTE to volunteer more at her kids’ school PTA while building a short-term rental business.

Potential strategies to consider include:

• Ensure your risk capacity continues to match your risk tolerance. Make sure you are intentional about protecting your strong financial position so you can continue taking smart risks on investments or endeavors with high potential long-term rewards.
• Pay it forward. Teach the next generation of physicians how to achieve both the risk capacity and tolerance to build meaningful lives and careers they deserve.

Georgia O’Keeffe once said, “I have been absolutely terrified every moment of my life, and I have never let it keep me from doing a single thing I wanted to do.” While being risk-averse in medicine helps keep our patients and professions safe, embracing a healthy amount of risk in our financial lives can help us achieve far more personal and professional wellness.

Stanley Liu is a self-employed cardiologist and a flat-fee-only, 100 percent fiduciary financial planner who has passed the CFP examination. He is the founder of DocEmpowered, LLC, a financial planning firm dedicated to helping physicians gain the financial power to serve their patients, families, and communities on their own terms.

Dr. Liu combines his clinical and financial expertise to help fellow doctors pursue greater wellness, autonomy, and alignment in their personal and professional lives. Clinically, he practices in locum tenens and value-based care settings on his own terms. He also serves as advocacy chair of the Maryland chapter of the American College of Cardiology and is an award-winning medical educator.

Drawing on both personal experience as a physician and professional training in financial planning, Dr. Liu helps other physicians build careers and lives that prioritize health, marriage, family, patients, and community. He shares more at DocEmpowered, LinkedIn, Facebook, and X.