Developing A Winning Financial Strategy
When my wife and I were engaged, we spent a few weeks one summer travelling from various states to meet family before our wedding day. One of these visits took us to San Diego, CA. How could we visit San Diego and not spend some time on the beach?
After spreading out the towels, my then fiance kicked back in the sand to relax after some long days of travel. It was peaceful. It was nice.
At least it was for about 30 seconds before a seagull came and pooped in her eye.
I’ll spare you the rest of the details that followed, but trust me, it wasn’t a happy moment for my young bride.
Perhaps you’ve had similar life experiences. There are moments when everything seems to be in harmony and life is going along smoothly. Unfortunately the peace of these moments can be shattered by things a lot worse than bird poop in uncomfortable places.
A winning strategy begins with defensive measures
If you’re a new resident just out of medical school, or a new attending just out of residency, or anyone else that has decided it’s time to get your personal finances on track, it can be disorienting when you think about everything that needs to get done. This article serves as a reminder that when it comes to creating a winning financial strategy, you should begin by setting up defensive measures.
Here are a few ideas that you should implement early on in your journey:
Build an emergency fund - It’s almost hard to write this recommendation because of how deceptively simple it is. Unfortunately, many of us still don’t have an adequate emergency fund. It’s generally accepted that your emergency fund should be somewhere between three to six months of expenses. If you’re the sole income provider for your family, you should plan on an amount that is on the higher end of the three to six month range. For me personally, I’m shooting for an emergency fund closer to a year (that certainly doesn’t mean that you need to though). I’ll share the reasons why in another article.
Eliminate high interest debt - I’m a firm believer in being completely debt free eventually. The best place to start when tackling your debt situation is to crush high interest debt—like credit card debt. Once the high interest rate stuff is paid off, I like to see the car loans, student loans, and all other debt completely eliminated—including the mortgage.
Get some affordable disability insurance - Don’t pass up on quality disability insurance. You probably have something through work, but is it adequate? Does the definition of disability actually serve you well? Especially if you’re a physician, you must make sure that your policy will protect you in the way that you want it to. If you’re financially independent and could quit your job and still accomplish your financial goals, you can go ahead and take a pass on the disability coverage. Until then, you need it.
Get some affordable life insurance - I’m not a believer in whole life insurance for most people. That’s a topic I’ll write about another day. But you absolutely should get yourself some solid term insurance coverage that will cover your family’s financial goals if you die before earning enough money to cover them on your own. There are a lot of ways to calculate how much insurance coverage to get. I’ll review some of the most common ways and tell you how I make the calculation in another article.
Learn to live within your means - If you’re in a transition stage, this is the perfect time to switch gears if you haven’t been living within your means in the past. If you’re not in transition, you’re going to need to fight hard to create the changes necessary to live within your means. Learn to live on a budget in the early years when money is tight. If you think it’s going to get easier over time, think again. Many of you already know this, but for those who don’t, it’s going to be shocking how fast marriage and kids come (kids are cute and I highly recommend them for the cute factor and life fulfillment, but they are also not cheap). A lot of really important things will start to demand your time, attention, and money. Americans in general aren’t natural savers. Let’s change this unfortunate characteristic.
Don’t forget about estate planning - I hate to break it to you, but you are going to die at some point. You might even become incapacitated prior to death. Hopefully both of those events are a long way off, but in case they aren’t, make sure that things are clearly spelled out for your family. This will help reduce stress on loved ones who will be at their breaking points emotionally. Here are just some of the questions you should seek to answer with a competent estate planning attorney who can help you create the legal mechanisms to fulfill your wishes:
Who will be able to act on your behalf for medical and financial decisions in the event you are incapacitated?
What are your wishes under various health care treatment scenarios?
What is going to happen to your kids if both you and your wife go at the same time? Who do you want to take care of them?
On this question, if you have life insurance (which you should), when will your kids receive it? In my state, if my wife and I die at the same time, our kids will receive the insurance proceeds when they turn 18. To avoid that catastrophe, we set up a trust. I don’t want my kids receiving large sums of money before they are ready to manage it. I love them too much for that.
*Note: Make sure that your estate planning documents agree. If your will says that your wife gets the life insurance money, but the beneficiary on the policy is uncle Jimbo, uncle Jimbo is going to get it.
As I mentioned earlier, times of transition are often good ones to commence or conclude certain behaviors or activities. Match day is coming up soon for those of you who will begin medical residency. This summer many resident physicians will complete their training and begin careers as attendings. Or perhaps you just got married, or recently had a child. Alternatively, maybe you woke up this morning and decided that it was time something changed.
Here’s the thing: While we hope it doesn’t happen to us, at some point we are all going to be that person relaxing on the beach and enjoying the day when a bird comes and poops on us. Sometimes it’ll be right in the eye.
Because life is like that, you need to develop a winning financial strategy. That strategy should begin with defensive financial planning. By doing this you’ll be better positioned to weather financial storms.
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.