We make thousands of decisions every day. From what you want to eat for lunch to the words you type in the text your mom. Our daily choices also include critical decisions with our money.
Should you make coffee at home or pay for the $6 latte at Starbucks? This is a simple decision you might ponder, but all of the micro financial decisions we make can add up and impact your big picture plan. That seemingly trivial choice you make about your coffee fits into the 6 categories of money decisions.
We are here to break down the important money decisions you face in life to help you understand what financial planning really is. Separating your financial decisions from all of the other decisions you make each day can be especially helpful so you can develop good financial habits.
One thing physicians often will come to us and say is “I think I have a financial planner, because my practice consultant says they do some planning,” or “I have a guy at the bank who set up a Roth IRA for me” or “somebody in residency helped me get some disability insurance and their business cards says financial planner.”
If you are unsure about financial guidance you’ve been given, it's vital that you are able to discern whether the advice you are receiving is being provided from a siloed or a singular point of view, or if it is advice that's being given from a comprehensive viewpoint.
In order to understand if you're receiving advice or counsel from a holistic or comprehensive viewpoint, it's helpful to understand the financial decisions you have to make.
You can watch the video or read on to learn more.
Your goals may vary, but we’d like to introduce is the Pyramid of priorities that applies to everyone. The first four priorities are vital for financial success and make up the foundation, which can only be built if you decide to take the leap and focus on your big picture plan.
As all pyramids do, the pyramid of priorities shows the foundation of a financial plan should be comprised of these 4 key areas:
See the full financial pyramid of priorities in the image above.
Let’s take it further to explain the significance of building your financial foundation first.
It's exciting and motivating as a doctor when you get your first true-up, paycheck, or bonus and you might say you want to go start an investment portfolio. Singularly, this sounds like a great idea and “grown-up” move to grow your money. But if you haven’t built your emergency fund, paid off high-interest debt, or protected your income, your pyramid could come crumbling down if you chose to invest your cash for college or retirement before you have a solid foundation.
On the other hand, what if you immediately put your bonus towards paying off your student loans because you hate that pesky student debt? That decision of paying down the student loans may not have been a bad one, but it wasn't aligned with your real goal of building a safety net or emergency fund or portfolio. This is where understanding the six money decisions can give you guidance when you are unsure if you should save, invest, or pay off student debt.
One of the most practical ways that we define financial planning is a disciplined process of making smart decisions about your money to align your behavior with your goals. Let’s break down the 6 money decisions.®
The first money decision involves how we earn money. This might sound kind of elementary or obvious, but as your career grows, you face more and more decisions about how your money is earned. You don’t earn money just through your salary. If you're a practice or business owner, there are decisions over how your salary and compensation are structured through your business. If you own real estate or rental property, there are decisions about those sources of income as well. You could also take on side-gigs or moonlighting, which may come through a 1099 or K1 tax forms that impact your earning decision.
The second decision is how you spend your money, whether you are spending in the near term versus the long-term. Either way, you also should be aware of how you balance your fixed expenses with your variable expenses. There are methods of tracking those expenses – like a budget or cash flow statement. If you don’t have a tracking method in place, no worries! Now is the time to set one up.
Questions you should ask yourself to determine how you spend your money include: What’s important to spend money on? What’s not important? This is where the Starbucks coffee decision comes into play. Do you value seeing your favorite barista and starting your day with a delicious cup of joe?
This leads us to the third money decision. When it comes to your coffee choice, you might prefer to save that money for a certain goal and make your own at home. At times, like a global pandemic, it might be a necessity to make your coffee at home. This decision category applies to general saving or investing. It also includes decisions about how much to keep in an emergency fund, how much of your paycheck you choose to put into a retirement plan through work. There are also more saving options like taking advantage of Roth IRAs or other tax-favored investment vehicles. These saving and investing mechanisms are crucial for long-term success and deciding how much and when to use them depends on your big picture plan.
The fourth area of money decisions is about how you borrow money. Certainly, one example that's very near and dear to the hearts and lives of many physicians and dentists alike is student loan repayment. Will you pay back your student loans quickly or over a prolonged period? What sort of repayment plan will you sign up for? If you have cash on hand to pay for a car, should you borrow money to pay for the car or use all your cash?
You also borrow money when you take out a practice loan or a mortgage. What type of mortgage makes the most sense for you, and are the physician-specific mortgage programs an attractive option? It’s important to know how much to put down in cash versus how much to borrow. Additionally, you’ll need to decide how rapidly to pay off debt and if/when you should refinance your student loans, mortgage, or other debt.
The fifth decision can be broken down into two categories and one might surprise you. How your money is given involves both voluntary giving to church or charity or family and involuntary giving to the government through taxes understanding the implications on the ramifications of giving in both areas are vital to be aware of.
What will happen to you, your family, and your lifestyle in the case of an accident, sickness, death, or lawsuit? How will you prepare for unforeseeable events? Financial planning involves looking at all of the above decisions and their impact on each other – both positively and negatively. That is why the sixth money decision that we all need to face is how we protect our money. We can protect our money in a couple of different ways, but most notably, we make decisions about insurance where we choose to transfer the risk and protect our income. We also protect our wealth with legal actions like corporate structure or trusts.
As you can see – saving, borrowing, and protecting are the three decisions that make up the foundation of your financial plan.
Understanding the 6 money decisions® is vital for financial success. Decisions you make in one area of your finances can affect all the other areas of your financial situation – they are all interconnected. Financial planning isn’t simply setting up an IRA, having your taxes done, or buying insurance.
These are all prudent financial decisions, but individually they do not create a financial plan. If you are making millions of decisions per year, it is understandable that you might not have adequate time to put towards your finances. As your family and career grow, your financial situation will only become more complex. If you catch yourself wondering if you are on track to reach your goals or live a happy retirement and you want to make a difference in your life, you might need help from a professional.
A good rule of thumb to help you decide if you do need help from a financial advisor is to think about when your responsibilities go up and your free time goes down. If you are in residency, working 80 hours per work, how much free time do you have to handle your finances? Rushing to make decisions during limited free time or avoiding your finances all together can both lead to costly mistakes.
Our SDT clients often say they wish they would have started their financial plan sooner. So, what are you waiting for? We offer a complimentary discovery call to any doctor and family member who has financial questions.
Do you know the state of your financial health? Download the "How to Use a Net Worth Statement" Guide to find out your net worth!
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Shane Tenny is the managing partner of Spaugh Dameron Tenny. Along with hosting the Prosperous Doc® podcast, Shane has a true passion for behavioral finance, helping clients and audiences understand how to develop successful strategies based on their unique temperaments. An accomplished and highly engaging speaker, Shane is regularly interviewed for television and podcasts, is actively involved in the Financial Planning Association®, and contributes to industry advisory boards.
