Financial Health. It's something we all agree we want, but many of us may not know how to define it. It can be compared to seeing the beauty in a work of art. A piece of art may evoke happiness in one person while making another sad.
Financial goals are also subjective. We all come from different backgrounds with varied perceptions of money and how we want to save and spend it. One couple might want to save for their children’s education and may give up the idea of a fancy car they once dreamed of owning. On the other hand, another couple might want their child to pay for their own education, which would free up cash for another goal, like a boat or that fancy car. Neither financial path is right or wrong, but there are some tried and true habits that will help achieve whatever goals you have.
It’s also common for spouses to disagree on where they want to spend their money. It can often take time for a couple to work through a money disagreement to come to a point where they can align their goals. Whatever those goals are, good financial habits can help you reach them, and putting a solid financial plan in place will allow you to develop healthy spending and saving habits. Just like you encourage your patients to eat healthily and take their medication when prescribed, your financial health can be maintained with consistent monitoring, effort, and accountability.
As a financial planner for physicians and dentists, we have found there are four general financial habits we advise our clients to develop. Whether you want to save for your dream vacation home or fund your grandchild’s education, these 4 habits will set you up for financial success. You can watch the video or read on to find out what they are.
The first financial habit to work towards is creating and consistently maintaining an emergency fund. This may be of no surprise to you, however, an emergency fund can sometimes be an elusive and challenging concept when life comes at you fast. Recently, we have seen a growing need to have a cash buffer. Due to the global COVID-19 pandemic, people have been affected by layoffs nationwide , jobs under pressure, salaries being reduced, and entrepreneurs or private practice owners temporarily out of business.
Most financial advisors recommend saving enough in an emergency fund to cover three to six months of household expenses.
If you don’t have an emergency fund, there is never a better time to improve your financial health than now. When facing a stack of pressing bills and loan repayments, an emergency fund may seem like a luxury. Emergencies happen to everyone and building up that fund can prevent future financial struggles. Even if you can only afford to set aside $50 a month, that is enough. You can even set up an automated draft each month to get started.
Kudos to you if you already have an emergency fund! Make sure you are consistently and routinely adding money to it until you have a cash buffer that meets your goals and your family's needs. When an emergency does arise, use this money to take care of it. Don’t forget – prioritize replenishing your emergency fund if the time comes to use it. Another thing to note is an emergency fund should not be used for vacations, semi-annual insurance premiums, gifts, and clothing. These types of expenses should be anticipated, therefore they are not considered an emergency. Unfortunately, even a last-minute trip to Cancun does not qualify. If you don’t have enough cash outside of your emergency fund for this hypothetical trip, you probably can’t afford it. This leads us to our next financial habit.
The second key habit of financial health is living within your means. This is where the often feared word “budget” comes into play. A budget or a cash flow statement can make you aware of what you can afford. When you subtract your monthly expenses from your monthly income, you will find if there is a surplus or deficit. We all know the importance of a budget, but the key here is adjusting the budget when your financial situation changes. If your income were to decrease, can you afford all of the expenses you were committed to? Contrarily, if you get a raise, you might have a higher surplus, allowing you to save more or use that extra money at your discretion.
Pro tip: Factor in an amount you feel comfortable saving every month into the expenses section of your budget. This can go towards your emergency fund or another financial goal.
Whether your income or expenses change, you must approach your budget with care and be thoughtful. Go through with a red pen (or your mouse if you’re using excel) and delete the things that aren't going to happen. It’s okay if some things need to be put on hold. It might be disappointing when you discover you need more time to save for that dream car, but it is much better to realize that before you dip into your savings. You may find it much harder to realize you are upside down in a car loan. If an emergency were to happen down the road, along with a high car payment, this perfect storm could take away your ability to pay critical items like your child’s tuition or the mortgage on your home. Facing the truth ahead of time can help you prepare and confidently make a purchase when you’re ready.
You may need to adjust your budget if the expenses you normally incur are too high or routine savings need to be suspended. Either way, ensure that your outflows match your inflows. This is also true when your income increases. As we move through the balance of this year, account for bonuses or when your income returns to normal. Make sure to account for that rise in income. Otherwise, it will just wash down the spending drain. Identify what expenses, such as trips or items you’ve put on hold first, then decide how and what portion of any growth in your income can and should be saved.
You know the spending stream we just mentioned. It’s incredibly real and can also be called the savings snowball. This is why the third valuable habit for your financial health is automating your savings. The most common example of automated savings you may not even think of is your contribution to your employer 401K or retirement account. After you decide how much of your paycheck you want to allocate to this retirement account, your money is automatically taken out of your paycheck. You don’t have to think about this action, and eventually, you won’t even notice that it’s gone from your paycheck.
We often don't set up the same structure around building our other saving accounts and investments. You can use this same tactic to deposit money into your emergency fund, automate the contributions to college savings, or add to your investment portfolio. This routine investment strategy can be beneficial as the market fluctuates up and down because you can take advantage of dollar-cost averaging. Furthermore, it's the best way to reflect on your finances at the end of the year when looking at your statement. If you automate your savings you will be pleasantly surprised that your money grew consistently, without having to think about it.
Let’s discuss a real-life example to reiterate why automating more than your 401k savings can benefit you. Imagine you have a car payment of $500 a month, but good news, you will finally pay it off this month. How exciting! Well, this accomplishment of paying off your car only positively impacts your long-term financial future if you can capture that $500 a month toward your savings. To capture the money you were allocating towards your car payment, you should increase your automatic monthly savings by $500. Otherwise, what happens to this $500 a month most often is that it gets washed down the spending drain. If this happens, not only will you not save this money, but it can also lead to lifestyle creep. The next time you need to finance a car, it will be more difficult to find that extra $500 a month to put towards the payment because you've gotten accustomed to a new lifestyle. Another example of when the savings snowball can be implemented is when you receive a raise at work. Perfect time to increase the monthly savings goal!
Now that you have a budget in place and an emergency fund built, you have a far greater understanding of what your financial state is. We hate to bring up the disappointment again, but that dream car you have to wait for is a perfect example of this last financial habit. Saying No! If you aren’t into fancy cars, other goals you may have to put off could be purchasing a new home to keep your old home as a rental property or buying season tickets for your favorite professional football team. Holding onto your money versus saying no to your child’s latest toy craze might be tough without understanding the opportunity cost of spending. It is important to realize:
Every time you say yes to something with your money, you’re saying no to something else.
When we say yes to taking a big trip, we're saying no to being able to use those same dollars to remodel the house. And when you say yes to adding money to your investment account, you’re saying no to the ability to use that money for the college fund. When you look at the big picture of your financial plan, it’s easier to see how saying no can be beneficial to you and your long-term financial success.
Taking time to write out who/what is most important to you and how you want to be present in those relationships gives you clarity around who you want to spend time with most. Armed with this information, you will find it easier to say no to opportunities, engagements, dinners, and other commitments that will steal time from the relationships that are most important to you. These commitments cost money and fear of missing out can make it even harder to say no, but in the long run, your relationships and your financial well-being will thank you.
Because there are so many things calling for your attention, and endless gadgets available through social media to purchase with ease, it can be challenging to determine what financial purchases are most important and staying committed to using your money for them. Saving takes discipline, and it's easier to build that discipline if you have automatic savings mechanisms. Being aware of your priorities can provide clarity, allowing you to live within your means, and make sure your money is going where you truly want to spend it. Once you reach your goal of a sufficient emergency fund, continue automating your savings for other short-term and long-term goals. By making a list of your goals and sticking to them, you will be well on your way to financial prosperity and wellness.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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