The Physician Philosopher Podcast

TPP #73: The Importance of Cash Flow in Physician Personal Finances

Editor’s Note:  If you haven’t already joined the waitlist for Medical Degree Financial University (MDFU) – click here to learn more about MDFU!  MDFU will consist of weekly live-content in addition to pre-created courses to help you practice medicine because you want to and not because you have to!

Physician Disability Insurance

Some people say that cashflow is king, but I think this doesn’t go far enough. When it comes to personal finance, cashflow is king, queen, and jester of the courts.  It is literally everything.  When it comes to personal finance, very few (almost no one) ever trips, stumbles, or falls into financial independence – the point at which you can generate enough cashflow so that you no longer need a paycheck in medicine if you are a physician.  

Yes, some people inherit money or win a lottery ticket.  But this should not be your financial plan.  Financial success requires very intentional financial planning. And it requires a very specific focus on cashflow.

In this post, we are going to discuss ways to intentionally focus on creating and protecting your cashflow.  Specifically, we are going to discuss why cashflow is paramount to your financial success, how physicians are uniquely suited to have trouble with cash flow, and some of the most important things you can do with your cashflow. 

Creating Cash Flow

The reason that cash flow is king, queen, and jester of the courts is that without cash flow nothing else you learn about personal finance matters.  You can attend one of my lectures where I teach you about the importance of The Hybrid Financial Independence Model.  

We can talk about why it is important to invest money for tomorrow so that you eventually have enough money saved up through a passively-managed index fund portfolio.  We can talk about how becoming an entrepreneur has the potential to speed up your journey to financial freedom.  We could even dive into the specific ways to figure out the best plan for paying down your debt… 

… but none of that matters if you have not created cash flow.  If you do not spend less than you earn, then there is no money to do any of that stuff we just talked about.  You cannot build a real estate empire without creating the cash flow you need to save up money to buy your first syndication or short term rental.  If you do not create cash flow, then there is no money to invest in that passively managed index fund strategy.

This is why it is so important to create cash flow, which can only be done by spending less than you earn.  Simple lesson, huh?  Easy enough.  Just spend less than you earn.

Well, it turns out this is actually really challenging for physicians because of something called the Diderot Effect.  

The Sudden Contamination of Wealth

In the personal finance space, we see this in the Diderot Effect.  For those not familiar, a struggling philosopher and author named Denis Diderot.  After a Russian Empress took to liking his writings, she purchased all of his encyclopedias and also gifted him a very fine red robe.

He didn’t know it at the time, but this scarlet robe would lead to his ruin.  Diderot would later write about this in his essay called Regrets on My Old Dressing Gown.

The reason he is bemoaning not having his old gown is because the new scarlet robe led him to believe that a person in such a fine gown deserved other finer things, too. Like the new desk and the ornate clock he buys. 

In the end, he ends up buying many other things that lead him into debt and financial ruin.  All because the gown made him believe that he needed more.  And more. And more.

This is why Diderot warns “Beware of the contamination of sudden wealth. The poor man may take his ease without thinking of appearances, but the rich man is always under a strain”

Maybe this is why the Notorious BIG warned us that the more money he comes across, the more problems he sees?

This is the exact same phenomenon that occurs when a physician suddenly earns a ton of money when they become an attending physician.  Or when a PA goes from making nothing to six figures after PA school.  

This is when doctors typically buy their first attending home. Then they need the kind of car that goes in a doctor’s house. And private school for the kids.  Designer clothes. And all of the other finer things that an attending physician should have.  

The 10% Rule

Yet, there are better ways for us to use the cashflow that we create when we experience that sudden contamination of wealth that plagued Diderot.  

First, we can recognize that we are human and that living a little is important. We are not wholly rational beings.  Physicians – like all human beings – are emotional, relationship, and often irrational entities.

This is why I teach doctors to employ what I call The 10% Rule when they have a sudden accumulation of wealth whether that be when they graduate from residency, receive a bonus as an attending physician, or inherit wealth.  Take 10% of the post-tax difference you receive (each month if it is an ongoing amount of cashflow) and spend it on whatever your heart desires.

Then, use the other 90% of that cashflow to create wealth.  What exactly can you use this 90% on?  Well, let’s talk about it.

Protecting Your Cashflow

If you haven’t already taken care of this during training (which let me stop and mention that you should absolutely, 100% take care of this during training if you are listening to this) then you need to protect your future cash flow. 

This means protecting any threats to your current cashflow, which specifically includes death and disability.

One of the most, if not the most, important financial tasks for any medical professional is to get true own-occupation, specialty specific disability insurance.  This protects the one thing that matters more than anything else in personal finance… your cash flow.  You want to make sure you are getting the right product as there are a lot of people out there who want to sell you inferior products.  

If you have someone who is dependent on your income, please get TERM life insurance.  Don’t let some financial advisor talk you into whole-life insurance products that you don’t need and are not best for you.  But please do get term life insurance if you have someone who is dependent on your income.

When it comes to this territory, people often have a hard time choosing who they can trust to help them get what they need.  While some sites have a long list of potential agents you can use, my site operates the same way it would if you asked me in person who I’d recommend you talk to… the one person that I trust enough to speak to my medical students at Wake.

If you need either of these products, but are rightfully concerned about the conflicts of interest that exist in the insurance space, I’d recommend that you reach out to Larry Keller at Physician Financial Services.  You can do this by visiting thephysicianphilosopher.com/PFS (as-in physician financial services).

If you are a physician and do not have own-occupation, specialty specific disability insurance… do not pass go. Do not collect more money.  Pause this podcast and then go and get that first.  It is THAT important.

Use Your Cash Flow to Invest and Pay Down Debt

Once you have created and protected your cash flow, now it is time to invest and pay down debt in a physician specific order.  I call this the Cash Flow Waterfall.  

And I think there is an order for physicians that makes a lot of sense.  I won’t go into all of the gory details about this as this is something better suited for a lecture, like those we will be giving inside of MDFU.  

Suffice it to say that I am not a snowball method proponent like Dave Ramsey.  I don’t like leaving high-interest debt hanging around just to get the psychological win of paying down the debt with the lowest premium first.  I also don’t like the avalanche method that pays down high interest debt first and sequentially pays down lower interest debt til it is all gone.  This ignores the facts that we are humans with hearts, emotions, and a lot of psychology.

Instead, I am a proponent of what I call the Snow Plow Method (we had to keep the snow analogies going after all) which mixes the Snow Ball and Avalanche methods in a physician specific order.  Specifically, physicians often care about one debt more than just about any other, which is student loan debt.

So, making a plan to attack that provides a psychological benefit even when the math doesn’t make a lot of sense. After all, I’ve never met a single person who said to me, “You know, Jimmy, I really regretted paying off my student loans.”  

Create More Cashflow

Assuming that you have already protected your cashflow by purchasing term life insurance and own-occ, specialty specific disability insurance, you may be asking where to put your money next.  Well, while working through the cash flow waterfall in an order that makes sense, you may also be wondering… hey, what would happen if I could create more cash flow to pour into that waterfall?  Good question.  

Well, the next goal would be to create more cashflow, which can only be done in two ways – creating more income or paying down your debt.  

To create income, this can be done in as many ways as you can imagine.  The most simplistic way is to invest money in the best wealth-building machine in human history, the market.  Alternatively, you can pay down debt and with each debt you pay off you will create more cash flow for your financial goals.

Another way to create cash flow is through entrepreneurship.  For many, this means investing in real estate.  For others, this might mean creating an online business, performing medical malpractice work, chart reviews, surveys, or consulting for big pharma or biotech companies.  

Entrepreneurship is not for everyone.  In fact, I often tell people that entrepreneurship is like general surgery.  If you can do anything else in life and be happy, do that.  Also like general surgery, however, if you feel called to entrepreneurship, you can ignore it for as long as you want… but you will eventually gravitate back to it.

Either way, one of the best things you can do with your cash flow is create more cash flow. This is how the “rich get richer” and how you can speed up your journey to financial freedom.

Cash Flow Summary

Cash flow truly is king, queen, and jester of the courts.  When it comes into your life, however, you must be aware of the sudden contamination of wealth.  Put some guard rails up to maintain your psychology.

Then, wield that cash flow like a weapon to get to your goals.  After you create and protect your cash flow, if you want to speed up your journey, don’t forget that you can create more cash flow, too.  While not for everyone, this is certainly a powerful way to get to practicing medicine because you want to and not because you have to faster.

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