Financial Basics

$/Financial Basics Phil Elbaum and Louis La Luna

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 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.

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. 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

offered a high deductible health insurance plan with a health savings account (HSA). This is a stealth way to save money for retirement as it’s the only type of account where the money goes in tax free, grows tax free, and if removed for medical costs, is tax free coming out. I would strongly consider maxing out your HSA and investing that money for the long term (not spending it on medical bills now but letting it compound and grow over time). If eligible to contribute to a Roth IRA, I would recommend maxing this out as well. Maxed out all the retirement accounts? Anything left over can be invested in a brokerage account (taxable account). In addition, if you have children, you should consider opening a TAP529 PLAN where money goes in post-tax but grows tax free if used for education.

This article is not written to insult or judge anyone but rather to stimulate financial awareness. For your individual situation, please discuss with a financial advisor or accountant as we have not taken your individual situation into account. We are not financial advisors and this article is not meant to give personal financial advice.

TAKE HOME POINTS

$ Pay down bad debt • Good vs bad debt (mortgage, business loan good) (CC, school, other- no good)

$ Save 10-20% of you post tax salary (more would be better)

$ Live within means (being able to save 10-20% of salary)

$ Max out your tax advantaged accounts first • 401k/403B/IRA, HSA, 529 accounts

$ Prioritize retirement saving---start as early as possible • Make sure you are saving enough before saving for kids’ school/college. • Can always have kids take out student loans but you only get 1 shot at retirement savings

$ Start Early-If you invested $200/month from age 20 to 29 (9 yrs, $21,600) then stopped putting money in, with average returns, you would have $2.5 million dollars at age 67. If you start at age 30 and put in $200/month until age 67 (37 yrs, $91,200), at age 67 you would have $1.4 million dollars.

$ Keep track of assets/

Liabilities • Want to have this equation positive and not fall deep into debt. Can you afford it?

$ Investing should not be complicated • No “get rich quick” schemes • Slow and steady wins the race • Low cost investments and advice (Be aware of how much people are charging you to manage your money).