Make Your Money Work For You

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Make your money work for you. You certainly work hard for your money, right?

We have tremendous time constraints. Our schedules are packed at work and at home. Our work-life often bleeds into our home-life.

The good news is that physician incomes are at the top of the scale in the United States. Physicians’ incomes rank in the 95th percentile of households.

Our knowledge and skills continue to be in demand. Aging of the population also boosts demand. This means more generous compensation for practicing doctors. 

If we manage our money well we can build a large degree of financial freedom for ourselves.

The Doctor Dilemma

Doctors are not good investors. Excellent investors are as rare as MLB pictures with 100 mile-per-hour fastballs. Chances are that none of us can be the next Warren Buffett. Mr. Buffett concentrates only on money management. Doctors also have limited patience. We get a late start on our careers and our lifetime income. We would like high returns and quick financial growth. But trying to make money fast is a sure way to lose money faster.

Rule Followers

Medical schools attract smart and compliant students. We proved we can do as we are told. Not all doctors begin as passive bookworms or goody two shoes, but many of us end up that way.

Once accepted into medical school the hard work began. We met and exceeded preset standards.

Licensing and board certification exams along the way increase potential career opportunities. They open up jobs, fellowships, or partnerships into established practices. That means more rule-following.

We follow a well-traveled path to a successful medical career. We become comfortable following paths. Then we get a job and the path ends. We are pretty much on our own.

We often feel alone. Especially with “real world” issues like personal finance. Other medical professionals or mentors cannot guide our financial decisions. Our mentors know medicine, but not finance.

Making Money Work Through a Plan

We need a financial plan and we are the only ones who can create it. We have dreams that we must clarify. Then we can write them down as goals. Then we will be on the way to making them become our everyday reality.

Our visions or dreams can help us select our goals. Goals are destinations. We measure the distances in years and dollars. Only we can map the course, but first, we must know where we are going.

“A journey of a thousand miles begins with a single step.”

Lao Tzu

An investment policy statement (IPS) is a draft of an investing roadmap.

We cannot reach our life’s chosen destination without a map to get there. The map can start at the beginning of a journey, where we are now. Figuring our current financial position takes time. We must carve time out of our already busy schedules to do so.

Financial advisors can be helpful, especially upon our first time through this process. Choose a “fee-only” advisor who you pay for hourly time and expertise.

After clarifying our dreams, ditching the debt is often the next step. As long as we are in debt we must work for our money. Drop debt and our money will work for us.

Financial Planning Action Items:

Carve out time from your schedule for each:

• Dream of your life after financial freedom.
• Consider your money mistakes and what lessons they teach.
• Ponder what you would do if given $10 million tomorrow. What would you change? If you would change little, then you are on the right track.
• Schedule one change, one action step, taking less than 15 minutes to complete.
• Consult a CFP if you cannot or will not do it yourself. Consider, research, and interview a “fee-only” certified financial planner (CFP). They can help you clarify your dreams, goals, and plans.
• Discuss your plan with your significant other. Change your plan thereafter.
• Plan to read a financial book. Reserve a copy at your local library or order a hard copy or audiobook online.

Debt

Getting out of debt is a decision, like quitting smoking. A debtor or a smoker must decide how current behavior will affect future security or health. The best way to drop the debt, like quitting smoking, is to avoid getting started in the first place. But for most medical students, there is no alternative financing available.

The average medical student has $200,000 in student loan debt. To start from nothing, we may have to first get back up to nothing. Debt has a cost. Pay off your debts to decimate your monthly payments. You must work for money until you pay off debt. Money is not starting to work for us until all is ours.

Collateralized debt is a loan backed by another asset. Like a mortgaged home. Leverage can boost returns. But debt also accelerates losses when the asset drops by a larger dollar amount. You can end up working for money again. As long as we remain in debt, we are working for our money. Everything gets easier as debt and debt interest payments decline.

Debt Action Items:

• Analyze debt by category (credit card, consumer, signature, collateralized by home, auto or another asset).
• Look up the interest rates on your debt. 
• Calculate the household total monthly interest payments.
• Borrow no more.
• Pay down the debts with the highest interest fastest.

Student Loan Plan

Graduating medical students have an average student loan debt of $200,000. If that debt comes with a 6% interest rate, the monthly payment is about $1,000 per month. Student loan debt is an unwanted friend who lives on our dime. Delaying debt payments grows compounded interest against you.

Student Loan Action Items:

• Refinance loans to a lower interest rate can save hundreds per month. (If not doing PSLF).

• Check out the variable loan and allow for faster repayment.

• Public Service Loan Forgiveness (PSLF)

• • Available if your employer is a nonprofit.

• • Your income affects the terms.

• • 10-year time commitment.

Cash Flow

Money today is worth more than money tomorrow. Fiat currency, (paper money) declines in value as more is printed. There is no limit on the printing. Expansion of the money supply means a decline in the value of money already in circulation.

When we start practicing, we must start saving. We cannot prepare for all uncertainties, but we can enjoy long-term compound interest.

Savings

Every doctor should have an individual spending/saving plan. Spending plans set a cap on monthly spending. Savings plans set a floor on monthly savings.  Either or both will build the gap between Income and Outgo.

The gap is the profit that we call savings.

Examples of Income:

• Paycheck
• Business or Side Income
• Passive Income
• Portfolio Income

Examples of Outgo:

• Food, Shelter, Clothing
• Debt Interest Paid
• Insurance
• Taxes

Business income minus expense equals profit. A household can also be a profitable venture. Think of saving not as a loss or sacrifice. Think of it as profit for you.

Monthly savings create household profit. That profit increases net worth. Consistent and frequent investments boost returns. Dollar-Cost Averaging (DCA) involves periodic investing. We buy fewer stocks or bonds when prices are high and more when prices are low.

Saving Action Items:

• Consider setting a fixed savings rate. Start where you are. Then increase. Even 1% to 5% of your income is a start. Keep increasing from there. Even 10% to 15% is too low over the course of a career. 20% creates a safety net and a modest retirement following a long career.
• A savings rate of 38% of gross income produces a 50% rate of savings on income net of taxes. That leads to financial independence in 17 years.
• Limit spending to a set amount per month. The rest is profit.
• Automate monthly savings to include max contributions to tax-deferred retirement accounts.

College Savings

Our children are more likely to attend college. We have modeled the value of our higher education. College is costly and our high incomes limit tuition help. For most physicians, the best option is a 529 college savings plan. 529 plans provide tax-free investment growth.

Withdrawals from 529 plans for college expenses are also tax-free. College expenses can be defined to include more than just tuition.

Income

There’s no such thing as bad income, but some income is better than other income. Our paychecks are not examples of good income. High federal and state taxes reduce that paycheck. As do  “social taxes” such as Social Security and Medicare.

Payroll taxes reduce payroll income. Boosting productivity and improving business efficiency can offset some of this loss. As can negotiating higher compensation.  

Passive and portfolio incomes are better forms of income than your W-2.

Expenses

Housing Plan

Everyone needs a place to live; some need more than others. Like food and clothing, shelter is one of our basic survival needs. But needs are different from wants. We can’t avoid all housing expenses. But we can make it manageable.

Most residents and young attendings should rent, not buy. Not buying a large house right out of residency allows a buildup of savings. That saving allows a large down payment on a house. A larger down payment allows for better financing and lowers monthly mortgage payments.

A large down payment on a modest home allows for a smaller mortgage. This means lower interest payments, lower taxes, and reduced maintenance costs.

Housing Action Items:

• Calculate the household ‘cash burn’ rate by tracking housing costs.
• Rent a modest home first.
• Plan to buy a modest home when it is affordable.
• Save monthly for a larger down payment.

We can track our spending by following our monthly bank and credit statements. Mint or Personal Capital also can track our online accounts. Some worry about the risk of allowing third-party access to our information. Still, it may be worth having daily access in a convenient format. Mint will also alert its users to unusual and fraudulent transactions.

Proof That Your Money Works – Net Worth

Savings

Income minus Outgo (expense) equals Savings.

Savings equals Profit

Our extensive medical training does not include finance. Saving money monthly may not have a precedent in your experience. Still, we must save money. Everyone needs to save, no matter how much we make. Our parents may not have modeled this behavior for us, or spoken to us of money management.

Personal finance was not a required course, so this may be new to you. It is never too late to start. Everyone’s saving situation is different, but we all need a spending/savings plan. The gap between earning and spending will be the jet fuel to propel wealth.

Balance Sheet

Assets minus Liabilities equal Net Worth

Net worth is an excellent number to track. It is a metric for financial health. Do not be startled if your net worth is negative. Ignoring that reality will not improve that reality. What we own (assets) minus what we owe (liabilities) equal wealth (net worth). This number – even if checked only once per year – can help guide our financial decisions.

Balance Sheet

Examples of Assets:

• home
• practice
• securities
• investment real estate
• collectibles
• hard assets
• retirement accounts

Examples of Liabilities:

• mortgage
• student loans
• business loans
• investment real estate financing
• securities margin account
• hard assets leverage
• life insurance

Savings fuel the growth of assets which in turn can produce cash flow. Those investments increase through savings, compounding interest, and growth.

Net Worth Action Items:

• Track your net worth by subtracting the value of all your debts from the value of all your assets.
• Calculate the current allocation of your investments.
• Don’t think of a home as an investment. It costs money to maintain it. It will not provide income to you.
• Never turn your financial life over to anyone. No one will care about your money as much as you do.

In summary, you have done a lot of work to get where you are in your career. But that isn’t enough. You have to master some personal finance basics and learn how to make your money work for you.

That will allow you to cut back at work, change your work, or stop working entirely. That is the benefit of reaching Financial Freedom.

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