Financial Planning For Resident Physicians, Item #4 Prepare For The Flood
This is the fifth article in a series dedicated to helping the resident physician take steps to put their house (financial and otherwise) in order. My previous articles on the subject may be found here.
Many of us are familiar with the story of Noah’s ark. The world having become violent and wicked, God decided to send a flood to destroy its inhabitants. But Noah, being a righteous man, was preserved. God instructed him to build an ark that would weather the storm.
Each of us will weather our own share of “floods” in life. The question is, are we going to prepare for them?
Financially speaking, our first line of defense against the “floods” of life is to build an emergency fund.
Emergency fund defined
An emergency fund is three to six months of expenses kept in a highly liquid, and easily accessible location. Such as a savings account.
If you’re the sole-provider for your family you should strongly consider leaning towards the higher end of that spectrum.
An emergency fund is used for emergencies, not for the “emergency” anniversary gift that you forgot to purchase until the last minute. You may consider holding more cash to take advantage of opportunities that come your way. However, this “opportunity” reserve should be separate from your emergency reserve.
What is an emergency fund for? It helps you stay out of debt when the “flood” comes.
Liquidity is important
Three of my four kids are at an age where it’s actually fun to play board and card games with them. Our Five-year-old is an avid Monopoly Deal fan, and has legitimately beaten us even though he doesn’t know how to read all of the cards. For those not familiar with Monopoly Deal, it’s a card version of the game that allows for entire play in 20-30 minutes.
One of the interesting teaching opportunities that has come from Monopoly Deal is the importance of liquidity. When my children play property cards without first laying down a cash reserve, I warn them about the dangers of a lack of liquidity. Sometimes they heed my advice, and sometimes they don’t. Sometimes they sneak by without any problem and sometimes they end up losing their property.
And this is an important lesson to learn. My reading of the 2008 financial crisis leads me to the conclusion that one of the reasons for the failure of large financial institutions was due to a lack of liquidity. Your emergency fund will need to provide a liquidity buffer to keep you from losing your property or going into debt.
Don’t brush this off as a trifle
If some of our largest corporations failed because they didn’t have enough reserve, we shouldn’t think that we’ll be any better off if we don’t prepare. Bad things will happen to us. We may sneak by a couple rounds, like in Monopoly Deal, but eventually, life throws all of us some unexpected curveballs.
An emergency fund is foundational for residents. Don’t skip this step because you’re excited to invest or pay down your loans quickly. In doing so, you’ll only be one bad life event away from ending up in a worse-off spot. Sickness, accident, injury, and even tragedy can strike at any moment. And in life, they will strike us all eventually. There are very real monetary costs associated with these unexpected and unpredictable life events.
An emergency fund helps you manage these experiences with greater peace, fortitude, and strength.
Don’t skip out on saving for an emergency fund first. There’s power in focused effort, so stop doing everything else and direct your available funds to a savings account until your emergency fund is completely built up. Consider setting up a monthly electronic transfer from your checking account to your savings account so that this process becomes automatic. You’ll have your emergency fund set up in a short amount of time and will be more prepared for the “floods” of life.
These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for information purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.