One of the challenges of being in a high-earning profession like healthcare is making smart financial decisions. You might feel more stressed now than ever as the country continues to combat inflation, furloughs, and high-interest rates, to name a few. But even during uncertain times, there are steps you can take to improve your financial situation and plan for the future — namely, creating a financial planning pyramid of priorities.
Your financial plan, much like a pyramid, must be built from the ground up, with the most important goals forming the foundation of your plan and then working up.
If you try to build a financial pyramid with only half a base, ultimately, it will crumble.
We believe that to build a solid financial future, you should start with an emergency fund before working toward paying off your credit card debt and student loans.
While building your financial foundation, it’s also important to protect your assets by purchasing disability income insurance, life insurance, and auto and homeowners insurance. These foundational pieces will keep you protected while you address your short-term goals and pay off any debts.
Once you determine how you will cope with an emergency situation with liquid assets and insurance, as well as a plan in place for paying down debt, only then should you move to the next level in your pyramid. The next level is for longer-term planning including college savings and retirement savings.
The last piece of your pyramid of financial priorities, which may include legacy planning, a vacation home, or any other goals you might have for your future, should be addressed only when the other areas are taken care of.
The first step to creating a solid financial plan is identifying your short-term and long-term goals. You may have some dreams or ideas in your head, but laying them out will help you visualize them and turn them into an actionable plan.
To do this, you’ll need to gather some information to begin evaluating possible strategies. While there are myriad data points that can be relevant, there are two key pieces of information — discussed below — that are vital to creating a plan.
The first data point your need for your financial plan needs is a net worth statement or balance sheet. A net worth statement shows in one consolidated place two of the remaining financial decisions you’ve made. In a balance sheet, we can see everything that you own and everything that you owe.
What you own includes everything in your checking and savings accounts, the value in your house and car, retirement accounts, and Roth IRAs. When you subtract all of your debts, the result is called your net worth.
Often at this stage, the amount you’ve borrowed may be more than what you’ve saved or accumulated — in which case you’ll have a negative net worth. This isn’t ideal if you’re working toward retirement, but it’s very common while in residency.
The key is to have a plan to build your net worth.
The second key piece of information is a budget, which is sometimes called a cash flow statement.
There are two categories of expenses that show up on a budget or cash flow statement: fixed and variable. Fixed expenses are the same every month, while variable expenses change from month to month. Because they fluctuate, variable expenses are the hardest to plan for.
The word budget may send shivers down your spine, but creating one is essential to understanding your complete financial picture. In just one document, you can see information related to three of the six types of money decisions:
Keep in mind that there is an important difference between a cash flow statement and a budget. A cash flow statement is a report showing historical information about where you have spent money in the past. But a budget is a forward-looking document that shows where you plan to spend money in the future.
When you look at a bank statement or your accounts online, you only get to react to where the money went. By creating a budget, you get to tell your dollars where you want them to go in advance.
You may be thinking, “I don’t make enough to budget — I’ll wait until I have more money.”
But did you know that it’s actually easier to learn to track what money comes in or what goes out when you have less? That way, when you have a few more zeros in your paycheck, you already know how to track income and expenditures.
Spaugh Dameron Tenny, we routinely begin working with physicians later in their careers in planning for retirement. You’d be amazed at how difficult it is for them to save what they need to be saving — and it’s not because they don’t make a good income.
It’s because they’ve spent 20 years developing the habit of directing their money to other lifestyle choices. And we all know that the hardest thing to change with our money is our behavior.
We recently sat down with Dr. Sarah and Caleb Smith, who are beginning to think about financial planning to eventually buy a house. Sarah, who’s in residency, and Caleb came to us with the following questions:
The pair identified their most important goal for the next 12 months as minimizing credit card debt. They felt that if they couldn’t do that, then they shouldn’t be thinking about buying a house at all. With that said, let’s take a look at their balance sheet and their budget.
Here’s their balance sheet, which outlines all of Sarah and Caleb’s assets and liabilities.
Usually, people don’t omit things on a balance sheet as easily as they would on a budget. But, since a balance sheet only shows values at a specific point in time, it’s very important to know how these figures are changing.
For example, what was the balance in their checking account six months ago? Was it higher, and they’ve been slowly using up their surplus? Or was it lower, and they’ve slowly been building some cash reserves?
Now that we have these figures in mind, let’s take a look at their budget, which will give us a more complete picture of their expenses.
Take a look at Sarah and Caleb’s expenses. What observations do you have? Are there any expenses they might be forgetting but should plan for?
They haven’t yet accounted for things like vacations, gifts, or even haircuts. Remember that even though these are variable expenses and often lower on the spending priority — unless you plan to completely cut them out — you need to account for them in your budget.
Now, we’ll need to adjust some of the other items to accommodate these expenses.
Subtracting their total expenditures from their total net income results in their surplus or shortage.
After adjusting their budget to include their additional variable expenses, Dr. Sarah and Caleb's surplus is around $100. This surplus is what we’ll use to help them build their net worth.
Looking at Dr. Sarah and Caleb’s balance sheet and budget, we were able to help them create an action plan to achieve their goals.
The couple’s primary short-term goal is to pay off their credit card each month. Looking at the information above, they have $1,500 in credit card debt and about $100 surplus of discretionary funds leftover each month. They also have a Roth IRA with $1,000 in it.
Using this information, here are three possible strategies to help the couple pay off their credit card:
Each option has pros and cons, so Dr. Sarah and Caleb had to carefully weigh them against each other to decide the best plan of action.
Once they saw their chosen strategy working toward paying off their credit card debt, they were able to make more confident decisions about what the best repayment strategy would be for their student loans (based on discretionary income). They were then able to begin transition planning and work toward buying a house.
Download our free financial planning checklist to help you organize your finances and reach your goals.
John Dameron has been a financial planner and partner with Spaugh Dameron Tenny since 2002. With the help of the SDT team, John created a lecture series called Physicians Financial Focus, authored a book entitled The Residents and Fellows Financial Survival Guide, and has coached hundreds of physicians from residency/fellowship into practice. His expertise has also been featured on KevinMD.
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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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