Financial Planning For Doctors In 7 Steps
“What happens if Washington votes to raise our taxes?”
“Do you think all the stimulus money is going to cause inflation to rise?”
Questions like these commonly appear in my inbox from Passive Investors Circle members and honestly I can’t answer them (I don’t have a crystal ball).
The government’s tax policy and the future of inflation is a bit beyond my control as I’m NOT a prophet.
As with anything in life you have two choices:
- focus on what you have NO control over
- focus on what you CAN control
It’s up to you which one to choose.
Speaking of control, when it comes to finances, everything falls into one of three categories…
3 Categories of Financial Control
Do you have control over your finances? Unfortunately, most doctors don’t which leads to stress later in life when retirement is on the horizon.
Stress is the last thing we need more of, right?
Here’s 3 categories we can break our financial control into:
#1 Things you have NO control over
One of the main issues high-income earners stress about are tax implications.
Related article: 5 Outstanding Tax Strategies For High Income Earners
We can’t control what our politicians vote on when it comes to raising our taxes or developing monetary policies. Unfortunately too many people spend way too much time watching the news (or worse social media) which causes them to fret even more if it’s something that doesn’t align with their wants.
Think about these types of situations as they arise in your life. They’re out of your control.
Another example is the stock market. One day you can turn on the news and it’s going through the roof and a week later it’s down 1000 points. Again, out of our control.
#2 Things you have SOME control over
I’m currently reading “Can’t Hurt Me” by former Navy Seal David Goggins. It’s an incredibly inspiring story about how someone can overcome the odds of a terrible and abusive childhood, set bigger than life goals and eventually accomplish them.
Some of the things he went through in order to get into the Navy he had some control over included:
- what time he woke up each day to train
- how hard he worked each day to loose over 100 lbs in 3 months
Doctors have choices they face each day that they also have some control over such as:
- how hard and smart to work
- what to eat on a daily basis
- how much sleep to get
- how much exercise to do
- getting annual medical checkups
#3 Things you have FULL control over
When it comes to financial decisions and planning for doctors, it’s really not that difficult to accomplish yet we’re told by our financial advisor or financial planner that it is.
Most advisors try to connect with us when we’re green and fresh out of training. It’s like a credit card, when we get one, it’s hard to get rid of!
There are actually several monetary matters over which you have total control over such as:
a. Lifestyle choices
One of the biggest issues that can have a negative effect on wealth building is buying too much house especially right out of training. Physicians that have delayed gratification during school and racked up mounds of debt will not think twice about buying the “doctor house.”
Other lifestyle choices you have control over are:
- the car you drive
- where you travel
These discretionary spending choices ultimately determine how much you’ll spend each month which can affect our next category….
b. Savings habits
I see too many medical practitioners not getting control over their savings habits as they spend too much money each month and have little to save afterwards.
Instead, they should focus on saving FIRST, then spending the leftovers.
c. Investment discipline
No one can make you put money in a retirement account (i.e. 401k). If you do, it’s because you choose to. In the same way, no one is going to force you to invest in assets that provide passive income now while you’re working to help speed up financial independence. (i.e. syndications).
How often you invest money is under your full control and is one of the best signs to building wealth.
7 Steps – Financial Planning For Doctors
If you want a plan for wealth management then you must develop a blueprint first. Going to work each day treating patients and making money isn’t going to get you there unless you have a roadmap.
Let’s help create a financial plan for you….
#1 Develop financial goals
Financial goals are the steering wheel that guides your financial plan. It’s important to make them as specific as possible but realizing you’ll continue to make changes and update them as the years go by.
a. I want to save $75,000 for a home down payment by (insert date).
b. I’d like to have $5,000 a month in passive income by (insert date).
c. I want $3 million saved for retirement by (insert date).
Remember, any goal is better than no goal.
#2 Start an emergency fund
Starting an emergency fund is one of the most important financial goals to start with because it can protect you from the unexpected.
Studies show that over 40% of Americans can’t cover a $400 emergency.
No wonder our nation has such a high amount of debt. They can’t make it without credit cards!
If you follow Dave Ramsey’s 7 Baby Steps, he recommends saving at least $1,000 for an emergency. Even though this is on the low side, at least it’s a start.
Plan on eventually saving at least 6-12 months of living expenses to provide a better cushion.
#3 Determine cash flow
In order to create an accurate financial plan, you must have a sense of your monthly cash flow (what’s coming in and out).
Another important step is to list all assets and liabilities.
This will help reveal ways to either save more or pay down debt.
#4 Attack debt
I recommend you use Dave Ramsey’s Debt Snowball to get rid of all consumer debt including medical school debt. It’s hard to have much of a financial future carrying a tremendous debt load.
The Debt Snowball involves listing your current debts from smallest from largest. Next, determine how much extra money you can put toward your smallest debt then attack it aggressively until it’s paid off.
Once that one is out of the way, take the money you were paying towards Debt #1 and add it to the next one on your list.
Continue this process until you’re consumer debt free as it’s a great feeling to have.
We started with our smallest student loan debt (private loan) and then were debt free 6.5 years later.
#5 Create an investing plan
Developing an investment strategy will help ensure your wealth building goals are met.
Most of us are familiar with what most financial planning services recommend, the accumulation method.
This involves contributing to employer-sponsored retirement plans such as a 401(k) on a yearly basis to allow it to grow via compound interest.
Typically people approach investing as a long-term activity and depending on your financial goals, this may or may not be the case.
If you don’t mind working for 35+ years in the same career then investing in a 401(k) can be a good fit.
But if you’re like most readers of this blog and want to reach financial independence within 5-7 years, then investing for CASH FLOW would be the better option.
No matter which option you choose, make sure you have a plan.
#6 Insure against the future
As much as I don’t like to pay insurance premiums, I understand how important it is to protect our family’s financial well-being. As doctors, we work too hard to have an unplanned situation financially wipe us out.
In order to protect the assets you’re building, make sure you have adequate insurance coverage.
- Life insurance
- Health insurance
- Disability insurance
- Business Overhead
- Workman’s Comp
Another thing to consider in this category is getting help with estate planning. This can greatly decrease taxes whenever you pass which leads us to our final step…
#7 Create a plan for taxes
Possibly the most overlooked area when it comes to financial planning for doctors involves taxes.
It’s amazing how many of us don’t seek tax advice from tax professionals for something that’s going to be our highest expense during our careers.
When I initially started practicing I didn’t plan for taxes. This caused me to take a big hit the end of that first year which put a major damper on the practice’s cash flow.
If you fail to create a plan for taxes then expect continued cash flow issues until one is put into place.
Finding a knowledgeable accountant to work with that understand your unique situation is one of the most important advisors you can hire.
If you decide on going the FIRE route with real estate investments, then finding a good real estate CPA can help reduce your tax burden even more.
Related article: Depreciation: The #1 Tax Break For Doctors
Do You Have a Plan?
If you’re one of the many young doctors out there without a plan and need guidance, join the Passive Investors Circle today.Join the Passive Investors Circle