$/Financial Basics Phil Elbaum and Louis La Luna
more you save now, the greater the chance of you saving enough for your retirement and relying less on market returns. Your parents have probably told you that a penny saved is a penny earned. However, with higher tax brackets, a penny saved is like a penny and a half earned. A Chinese proverb says:
Whether you are just starting off as a practicing physician or have been practicing for years, there are a few important financial steps we should all be following. Learn the financial basics. No one is asking you to be your own financial advisor, but no one will care more about your money or financial wellbeing more than you. It is important to learn the basics to protect yourself and not be taken advantage of. This can be accomplished by going to a bookstore or library (hahaha) or online. Remember that many times, advice is coming from someone trying to sell you something, so be careful. Unfortunately, you cannot control market returns, real estate prices, tax rates, etc. You can, however, control your savings rate. A great goal to strive for is to save about 15-20% of your post-tax income (including the money you put in retirement accounts). If you can make it 30-40% that’s even better! The earlier and
“ The best time to plant a tree was 20 years ago. The second-best time is now.” We can’t discuss saving without bringing up spending. The two go hand in hand. It will be near impossible to save enough for retirement or hit that 20% mark if your spending is out of control. No one is telling you not to buy the $4 coffee, but do you need the $100,000 car? The $1,000,000 house? Just because the bank says you can afford it, does not mean you truly can. Now if you have a large enough salary to afford those things and still save 20-30% of your salary then great. However, for most of us, this won’t be the case. Keep in mind, the less you spend annually means the less you will need to save for retirement. If you can live off of $100,000/year vs $500,000/year, your goal savings for retirement will be vastly different. Physicians, in general, earn a lot more than the general public but often get caught up in trying to keep up with the Kennedy’s (or Kardashian’s) and not the Jones’. Don’t confuse high earner with high net worth. It’s not how much you make; it’s how much you keep.
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Along with saving and spending, we need to discuss your assets and liabilities. It is very important to keep a record of your assets (cash, investments, savings, house, car, business, etc.) and liabilities (mortgage, car loans, student loans, credit cards etc.) Why is this important? It gives you a true idea about where you stand with your financial health. You should try your best to make your assets worth two times your liabilities as a start, with the hope of eventually being much more than that down the road. Now, for those starting off as a physician with student debt, mortgage, etc., this may take a few years. Okay, so once you have your spending under control and you are saving money and following your assets/liabilities ratio, what do you do with your savings? First, make sure you have an emergency fund saved up for 6-12 months of living expenses for those unforeseen circumstances. Next, you need to get rid of bad debt. Bad debts are things like credit card debt, student loan debt, and high interest car debt. Good debt? Things like business loans (like the loan on an ambulatory procedure center), for which the interest may be tax deductible or low interest rate mortgages, as you might be better off investing the money than paying off that 2-3% mortgage rate. If your mortgage rate isn’t that low, you should perhaps look into refinancing now! So, once the bad debt is paid down, max out those retirement accounts with the money you are saving. Your practice/health system should have a retirement account like 401k or 403B and this should be maxed out due to the tax advantages it offers for high income professionals. You are most likely
