The Pareto principle states that 20% of your work often produces 80% of the results? I believe in the Pareto principle so much that I subtitled my book “The 20% of Personal Finance Doctors Need to Know to Get 80% of the results.” This begs the all important question, what makes the 20% you need to know, and what doesn’t? Here are the top 5 money lessons for physicians!
And, if you have an upcoming commute to work, here is our most recent Financial Residency podcast on a similar topic! Click below to listen:
1. The Basics
The first money lesson is to learn the basics, which can vary from person to person. Your basics might be different from mine.
In any money discussion, the basics should start with cash flow and budgeting (hopefully backwards budgeting)! You might determine your cashflow by tracking your spending, or by following each dollar to its final destination. Regardless, you need to know where your money is going.
My wife and I aren’t into zero dollar budgeting. In other words, we don’t have a job for every single dollar we earn. In fact, we don’t do any type of tracking at this point, because (non-backwards) budgeting is for rookies.
We don’t have a plan for every dollar, our thing is prioritizing where our money goes and hitting our predetermined goals every month. That means we do have an idea of how much we make and how much spend every month, but after we reach our savings goals, we don’t follow the dollars.
Instead, we use intentional spending habits with what is left however our heart pleases.
In the beginning the best way to start building wealth is to track your spending for three to six months. Otherwise, you won’t know how much your current lifestyle costs if the money stops pouring into your bank account.
Once that fund is in place, it will save you from accruing credit card debt (which is another financial emergency) if you’re in a tight spot.
The 50/25/25 Principle
Let’s say you haven’t really ever thought about your spending. Where should you start?
A popular method of cash flow planning is the 50/25/25 principle, which involves dividing up your take-home pay.
- 50% Fixed expenses
- 25% Variable expenses
- 25% Paying yourself first
The fixed and variable expenses come from the Big 5 Spending Categories that most of us have. Make sure to reign these in thoughtfully so that you can pay yourself first.
Speaking of paying yourself first, unlike the 50/25/25 model, I think that at least 30% of your income should be waging WAR (Wealth Accumulation Rate). It’s the paying yourself first that will be used to create your emergency fund that I wrote about earlier. After the emergency fund, you can start putting this 25-30% towards paying off your student loans and investing.
Because you are planning ahead, and paying for a variable, future expenses. On the other hand, an example of a fixed expense would be your monthly childhood expenses.
2. Interacting with The Financial Industry
The second money lesson involves lerning how to “fight fair” with the financial industry.
In my financial journey, my first major money lesson involved a disability insurance debacle from an insurance salesman who didn’t know what he was doing. And I didn’t know what I needed to know about disability insurance either.
It’s a lesson that I believe should be included in every new attending physician’s financial education. At the very least, physicians should have access to insurance salesman you can trust.
Yet, the interactions with the financial industry don’t stop with insurance products. Many of you may also want financial advice. When seeking this advice, the most important question you can ask is,
“How do you get paid?”
This question is important, because it helps you understand where conflicts of interest might exist. Otherwise, if there is a commission or kickback that you don’t know about, they’ll have the incentive to push products that might not be in your best interest. All just to make a buck.
As a consumer, you need to get advice, for the lowest price, in an atmosphere that has the least conflict of interest. Those ideas will lead you to a fee-only financial planner.
If that’s too much work for you, then simply consult The Physician Philosopher’s recommended financial advisor list where all of the financial advisors meet the gold-standard of financial advising.
As a parting shot on this topic…just remember that a “fee-only” advisor is the “only” kind of advisor you should use.
3. Student Loans
The third money lesson is the most important to the 80% of physicians who graduate with an average of $200,000 in student loan debt. As a new attending physician, student loans can be terrifying.
It’s a huge, and important topic to include in your money lessons. It definitely can have an impact on your ability to achieve financial independence. It’s so important that I wrote two chapters on this subject in my book.
When considering Public Service Loan Forgiveness (PSLF) versus private refinancing ladders, it can be a confusing topic. I also include some ideas on how to figure out which one is best for your situation.
So, where do I start on teaching people how to think through their student loan dilemma? I start with your debt to income ratio (DIR). That is the factor that will help you figure out which is best. Will that be PSLF? Will it be refinancing?
If your DIR is > than 2, you should almost certainly be considering PSLF. If it is < 1, privately refinancing makes a lot more sense most of the time. If you are somewhere in between 1-2, then a conversation and running the numbers will likely be required!
It’s not a one size fits all decision, your individual variables will directly affect which direction you choose.
The number one question that I get on this site and in person involves whether someone should be investing or paying off debt. So, if student loans is one of the five most important money lessons for doctors, then investing easily makes the list, too.
The basics here? Automate your investments each month. Put them into passively managed index funds. And then stay the course by ignoring the market.
Also, keep your portfolio as simple as possible. Remember, when you are starting out, the most important determinant of your success isn’t your asset allocation, rebalancing, or the return on your investments. It is your annual savings rate!
If you save $50,000 dollars a year, it takes 17 years until the compound interest that you’ve earned in the market actually contributes more to your total savings than your savings rate does.
5. Finding the Balance
Like a fine dessert, the best money lesson is saved for last. Are you spending every penny without a thought for tomorrow? Or scrounging every cent banking on the future?
I don’t have to tell the doctors reading this blog that tomororw is not guaranteed. I also don’t have to tell you that most of us don’t do the best job saving for tomorrow.
The biggest money lesson is learning how to find the balance between these two realities.
If you spend all your money on the here and now–you can short change your future. That’s why a balanced view between the two is extremely important.
Which money lessons do you think are most important? Leave a comment below.