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Last week we started a conversation about the must-do financial checklist for doctors.  We covered asset protection and student loan plans.  This week we are going to dive into a few more items that you must add to your financial checklist. 

Think of your finances like a business.  Whether you are a resident or attending physician, your finances should be written down and reviewed.  We understand that having a family and living off a single income at a resident’s salary is really tough.  We know that there isn’t much opportunity for saving at that point, but it doesn’t mean you don’t spend time with your finances.  That starts us off on our first checklist item, budgeting, and cash flow plans.

Budgeting and Cash Flow Plans

Residency is about surviving, but also about creating good habits so you don’t get stuck later.  There are some that think there is nothing you can do about your finances in residency that will make an impact on your future.  While you can’t make a ton of gains investing and watching your money skyrocket, you can make catastrophic mistakes because you didn’t spend the time to learn this stuff!  What you can do now is get your plans situated, have them ready, and put it on auto pilot so all you need to concentrate on is being the best doctor you can be.  If you are an attending physician who is instructing, add this in for your residents!

The type of budget you will use is based on your need.  If you like to see everything in full detail, you will need more categories and break it down to every penny.  But keep in mind if you go too crazy with 17 categories under food, you will burn out because it is too much to maintain!  Once you have your budgets set up and perfected, it should take you no more than 5 minutes a day to maintain them.  See here why I hate budgeting and would rather use a cash flow plan.

We have clients who make 7 figures, and we have them run through this exercise. It looks very different though because it all goes into one category, “spending.”  Everything else is going for savings or investing.  This is more of a cash flow plan.  Find out here why cash flow is king!  Everything goes into the same software and to the same category, so no more combing through credit card statements.  This is where you start to be more conscious of your spending decisions and find out where your money is going.  Is 4.3% of your money going to Amazon like most people?  If so, Amazon will have its own category.  

Having a cash flow plan allows you to sit down, see where your money is going, and decide if it is going where it makes you the happiest. It gets you to think “What am I spending money on that I don’t care about?”  If you want to cut your spending at Amazon to 3% instead of 4.3%, you can allocate that 1.3% to somewhere you want it to go.  If you don’t have a plan, you won’t do that.  Even if you make 7 figures, you need a cash flow plan!  What’s important is being intentional about the process and your finances.  Know where your money is going and decide where you want it to go.  Part of your cash flow plan is an emergency fund.  Keep reading and we will talk about why you need one.

Emergency Fund

 Before you start your emergency fund, look at your credit card interest rates.  If you are paying more than 8% interest on any of them, that is your priority.  Take care of that first!  How much should be in your emergency fund?  This all depends on you.  Some feel $1000 is plenty, others feel $5000 is enough, while others want $20,000 or more to feel secure.  The first question I want you to ask yourself is “How much does it cost for a physician to change jobs?”  This is where you will start.  

Before Covid most doctors didn’t even consider an emergency fund.  Now, a lot of clients are going to the extreme with their emergency fund because they are worried.  The amount decided on will be specific to each person and their situation, and it needs to be discussed before adding it to the cash flow plan.  The most important thing with an emergency fund is to remember it is not for a vacation or a new car unless yours is broken!  For more information on how and when to use an emergency fund, click here.

Investment Policy Statement (IPS)

The next must-do financial checklist item is an investment policy statement.  You have a cash flow plan to know where your money is going, and an IPS is put in place to be intentional about where your investments are going.  It is a mini financial plan that governs your investments because when times are really good or really bad you need something to keep your focus.  

In this statement you will cover the goals you have, the age you want to reach them by, how you are going to get there, and where the money needs to go to reach that goal.  Setting up rules for your IPS is a big part of it.  Rules such as when you can change it, how often you rebalance your portfolio, and how long you need to wait to decide on a change.  This will be different for everybody because everybody has different asset allocations and risk level preferences.  Don’t forget to add in the time to wait before making any changes so that you don’t do anything rash.  

The IPS is there to protect your money from you and helps you understand your portfolio and why you are investing where you are.  The majority of you will not do this!  This will be detrimental to your success.  You can put it all together yourself and it literally protects you from doing something disastrous!  Here is a more in-depth look at an IPS.  Next, let’s talk about your estate planning.

Estate Planning

Did you know that only about 2% of people have an estate plan?  An estate plan includes a will, power of attorney, health care power of attorney, and a trust.  Everyone should have this!  It is not only for the wealthy.  As a resident you don’t need a trust, but you should have the rest set up and set up a trust as soon as you become an attending physician.

When setting up your estate plan, do not go to Legal Zoom or download it offline!  Go to an attorney and get the peace of mind you get knowing you and your loved ones are covered.  Want more details about how to get your estate plan going?  Click here!

Start by Starting

It isn’t fun setting up your financial checklist, but you need to start by starting!  Just do it.  Get your feet in the pool, dive in, and get the stuff done because it is so important!  Make a checklist of 7 items.  It will include asset protection (life and disability insurance), IPS, emergency fund, estate planning, budget/cash flow plan, and a student loan plan.  The lion’s share of the work for these will be up front, and not as much to maintain them.  The budget/cash flow plan will be the one that will require the most ongoing maintenance.  A lot of clients come back 5 years later because they had issues because they didn’t set aside time to just do it!  Don’t make the mistake of waiting and have a financial catastrophe.