Do you ever get distracted?
No this isn’t a trick question because we all get distracted at times.
When it comes to your finances, it can be easy to get distracted by all the shiny things that come along like a vacation home, boat, or something even as small as a BarkBox for your dog. The more money you make, the more “opportunities” there are for you to spend your money.
Depending on your situation, the distractions listed may sound more frivolous, but even buying your first home can be a distraction from your financial goals. That’s why we wanted to talk about financial priorities and the pyramid of financial priorities.
Watch the video about the financial pyramid of priorities or keep reading:
You see, one of the things that we have found over decades of working with clients is that often, the biggest obstacle towards making the progress that you want to make toward your financial goals is the distractions all around us, or even just knowing the right timing of when to pursue different things.
For example, one of the most basic questions people often ask is, how should I find the balance between paying off student loans versus saving and planning for the future? Is it good to do both at the same time, or is it better to do one at the exclusion of the other and follow these in sequence?
Another question that clients ask is: should I be maxing out my 401k or putting more into college funding?
Doctors often come to us wondering if they should invest in a surgery center or when is it okay to pursue buying a second home based on where interest rates are.
All of these questions have given rise to what we call the pyramid of financial priorities. This pyramid helps us align our clients’ goals when we begin the 6 step process of creating a financial plan.
This financial pyramid of priorities is a way of looking at the types of decisions that need to be made and when it's best to take those actions to lay a solid foundation for your future.
Let’s walk through the different pyramid sections to help you understand this concept further.
When you begin to create a financial plan, most people know financial planners encourage clients to do is build an appropriate emergency fund.
This is pretty common territory but often overlooked. I want to point out and highlight what's not in this beginning tier or this initial layer of the pyramid is putting money in your 401K and accelerating the repayment of student loans. (Yes, this is intentional.)
Planning for the future or even buying a house is not included in the first layer because building a cash foundation is really one of the most important priorities to start with.
Here's an example. Let’s say you budgeted for a trip to Barbados. You accidentally miss your flight and must pay a couple of hundred dollars to make it to your destination. Then after your vacation, another surprise expense arises when your car breaks down on the way to work. When these expenses pile up, you might be in trouble and never be able to catch up, unless you have an emergency fund to cover these types of “emergency expenses.”
Bonus: Until you have an appropriate emergency fund, most other financial objectives should be placed on hold.
Once you've got start an emergency fund appropriate for your situation, then we begin to look at things like tackling high-interest debt you owe. Usually for physicians, this type of debt comes in the form of credit card debt and student loan debt.
It's prudent to have the right strategy for managing these types of debt. Typically, if it’s credit card debt, the strategy is to try to get paid off as quickly as possible.
If it's student loan debt, you’ll want to make sure you have the right student loan repayment plan in place. Whether you are considering PSLF, refinancing or another option, there are many nuances you must be aware of when making decisions about your student loans. The wrong student loan decision can cost you thousands of dollars.
Beyond your emergency fund and paying off debt, playing defense and protecting your assets should be your next step. It is critical for you to protect your biggest asset, which is YOU! This can be done by having the right disability income insurance and life insurance that aligns with your debts, goals, and income projections to protect you and your family.
In addition to disability and life insurance, the foundational layer also includes home, auto, and other personal liability insurance to protect where you are.
The first four pieces are important to the pyramid puzzle because they protect you in the present or from what could happen to you tomorrow. An emergency fund and asset protection lay a solid foundation that can give you the ability to look into the future with confidence.
Now that you are prepared for emergencies, you have extra cushion to consider things like college savings and retirement savings. By creating a savings plan, you will be able to make a better financial plan to meet those goals.
Once you build your financial foundation with the second layer of your priority pyramid, you are at a place where it often makes sense to consider alternative investments like a practice buy-in, surgery center buy-in, medicine, or buying a second home.
Alternative investments or more “fun” purchases like a vacation home are very intriguing, which is why they can be a distraction or obstacle from your financial goals if you haven’t laid a solid foundation. These types of purchases or investments often come with higher risks that can be dangerous without a thoughtful financial plan in place.
I’m not saying you shouldn’t purchase these types of things, but they might need to be put on hold until some of the core foundational layers are addressed.
Building a financial plan can be tricky to get started on your own. That's why we created the "5 Steps to Organize Your Finances" Checklist to help you get started! It all starts with a plan and getting organized, so take the first step with this free download:
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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