When I meet with potential financial planning clients, there's a checklist that helps me understand where their financial plan is on track — and where it isn't. Whether you work with an advisor or are handling your own finances, this brief primer outlines key financial areas that you should stay on top of now and throughout your career.
There are no secrets here, just 10 realistic, practical tips on managing your money.
1. Create Positive Cash Flow
Positive cash flow drives the rest of your financial plan. Here are the key things to consider if you're in the black or in the red.
Are you in the black? It's clearly good news when you're earning more than you're spending. If so, what should you do with the extra money each month?
Let me share some important goals and strategies:
Ensure that you have 3-6 months of household spending saved in an emergency fund.
Refinance or pay down higher-interest debt faster than required.
Fully fund your employer's retirement plan.
Fund a backdoor Roth IRA each year for you and your spouse.
Open an investment account and set up automatic monthly contributions
Start or increase your monthly 529 college savings contributions.
Are you in the red? If you have no extra cash at the end of each month, your priority should be making some lifestyle changes. If there isn't an opportunity to earn more, look at places to cut spending to free up some cash. For example, do you need to dine out several times a week? Are you taking too many expensive vacations? How often are you buying a high-end new car? You get the gist — economize where you can.
2. Review Your Asset Allocation
There are some clear signals that you're not paying enough attention to your finances. One is having a number of inactive, "leftover" retirement accounts. Roll these into your current employer's plan. Figure out a sensible asset allocation for your overall portfolio, taking into account your age, when you'll start using money from your retirement portfolio, risk tolerance, and current net worth.
3. Plan for Financial Independence
Do you worry about whether you're on track to retire comfortably at the time you choose? The worst thing is not knowing. When I start working with a new client, I get a quick sense of their financial position based on their age and investment net worth. Are you retiring soon? You should be close to accumulating a sufficient amount. Is your career just starting? You have more time to fund your retirement savings account. Makes sense, right?
So, what's the right amount for an early- to mid-career physician to save? A good rule of thumb is saving 20% of gross income — more if you want to retire sooner rather than later. From a personal perspective, I'd say you should put away enough money while at the same time not sacrificing the things that are most important to you — including spending time with your children while they are still at home.
If you're further along in your career, financial planning software can help you understand your current retirement funding status and whether you need to adjust your annual savings plan to meet your goals.
4. Take Advantage of Employee Benefits
Are you overlooking some of the opportunities your employer offers, maybe because your benefits have changed since you started at your practice? That's not unusual, but it's smart to dig deeper. You might find that your employer offers benefits such as:
The opportunity for you to open a 457 plan deferred compensation retirement plan, in addition to the 403(b) or 401(k)
Allowing you to pay the tax on the premium your employer pays for your disability insurance, so-called imputed income. If you become disabled, your monthly benefit will be paid to you free of taxes rather than counting as income subject to income taxes.
Allowing after-tax contributions to the retirement plan, potentially setting you up to fund a Mega Backdoor Roth IRA.
5. Plan How to Save for College
Once your family has an overall philosophy about how to pay for college, fund your 529 college savings accounts, which offers tax benefits when used to pay for qualified education expenses.
6. Review Your Insurance Coverages
Property/Casualty insurance: Determine whether your home and auto coverages are sufficient, with your insurance broker's advice on things like an umbrella policy, deductibles, and other details to make sure there are no gaps in your coverage. Such a review should be an annual ritual.
Disability insurance: Supplement your group coverage with as much individual coverage as you qualify for. Already have an individual policy? Great. If you're not certain, review to make sure the definition of disability is own occupation, own specialty. (Some policies marketed as such aren't really. You don't want to find that out at the time you make a disability claim.)
Life insurance: Ensure that you have adequate coverage, both in terms of amount and length of term given your career and life stage.
As you take care of the strategies above, keep the following tips to further improve your financial situation.
7. Rely on a Professional for Tax Preparation
As physicians get older and busier with work, children, and activities, they typically benefit from using a tax preparer rather than the DIY approach.
8. Donate Wisely
When contributing to your favorite causes, use tax-efficient techniques such as gifting appreciated assets, a Donor Advised Fund, and Qualified Charitable Donations.
9. Check Your Estate Plan
If you're single with no financial dependents, check that your assets are properly titled and beneficiary designations on life insurance and retirement accounts are in order. If you have children, have a simple will, power of attorney, and healthcare declarations. If you're older and wealthier, it's probably time to consider revocable trusts.
10. Check for Missing Money
The Missing Money system will show if a state is holding any unclaimed assets in your name. While these are usually nominal amounts, in one case we recovered, to our client's delight, over $125,000.
Wondering whether you have all your bases covered?
The items in this brief primer are a great place to start determining the health of your financial plan. No matter if you've been in practice for 5 years or 40, or whether you want to retire to a lakeside cabin or luxury beach house, there's a plan that's right for you. The point is that to reach your goals, don't let your finances get away from you. Instead, understand your finances and make your assets work for you.
The above article is intended for informational purposes only. Please consult a legal or tax professional regarding your situation.
He practiced internal medicine in the Twin Cities for 11 years before making the transition to financial planning for physicians, beginning in 1998.
Joel's wife is a radiation oncologist, making him all too familiar with the stress of medical practice.
Knowing firsthand the challenges of practicing medicine, Joel's passion is making the lives of physicians easier by helping relieve them of financial worries.
Connect with him on LinkedIn or on his website.
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Any views expressed above are the author's own and do not necessarily reflect the views of WebMD or Medscape.
Cite this: Joel S. Greenwald. Are Your Finances a Mess? 10 Tips to Get Back on Track - Medscape - Oct 13, 2021.