It’s hard not to turn on the TV today and find the latest “hot stock” it’s even more common to hear about the next “crisis” that’s going to occur in the market. What’s tougher to find is the boring, yet sound financial advice. It’s not sexy to hear about the common mistakes or key things that impact nearly every individual’s financial well-being. The simple advice is sometimes the most overlooked advice, for that reason, below are five pieces to the financial puzzle that need to be taken into consideration for the sake of your financial future.
1. Net Worth Statement
This is the basic starting point for a well-built financial foundation. Before you know where you’re going, you have to understand where you’re at. A Net Worth Statement (NWS from now on) will clearly show you where you are, and will give you a tracking mechanism over time. Quite simply, this is a list of all assets that you have accumulated (checking/savings accounts, retirement accounts, home value, insurance assets, etc.) subtracted by all of your debts (student loans, credit cards, mortgage, etc.). Note that it’s not uncommon for young physicians to have a negative net worth, don’t let this discourage you or even worse prevent you from creating NWS. Creating and tracking a NWS is especially important for physicians who are allocating dollars towards debts like student loans. Our society forces us to compare our current financial situation by what’s in the bank. If you direct money towards loans/debt you might not be saving much money, but that doesn’t mean you aren’t making leaps and bounds with your financial situation. Everyone should review their NWS annually to review their progress.
2. Proper “Emergency Reserve” Account Balances
Most of us know that we need to have some money squirreled away in a “rainy day” fund or if you’re more pessimistic like me, an Emergency Reserve account. Very simply, this is money that is in a checking or savings account. Financial Preparation 101 says to keep 3-6 months of fixed expenses saved somewhere that is liquid and easily accessible. Don’t overthink this concept, as the title of this article indicates this is simple. Don’t stress about the interest rate you’re getting on this money, it’s truly meant to be there for an emergency and ease of access trumps a tiny boost of growth in my humble opinion. Whoever you do your regular banking through should suffice for this type of account. Simply add up what you need on a monthly basis to pay the bills and multiply that by at least three (up to six if you’re more conservative by nature). That’s the minimum amount you need to have in that account at all times. Most people have a floating balance in a checking account, and use their savings account as the “Emergency Reserve” account.
3. Tracking your Credit Score
It seems like no matter what I’m watching on TV a commercial for some kind of credit reporting website comes on at some point. There’s a reason for this, people have credit issues. This article doesn’t go into detail on how your credit score is created, instead focus on simply tracking your score. This should be done annually and there are a number of ways to do this in less than 10 minutes. Keep an eye on this as physicians have access to numerous favorable lending options (including mortgage options and student loan repayment strategies) but need solid credit to do so.
4. Identity Theft Protection
In general, as a physician you are exposed to more risk than the “regular” person. Your name is easy to find, and for that reason you can become an easy target. Getting some kind of identity protection service is well worth the small financial commitment. Like tracking your credit score there are a number of easy to use websites to help you with this. This might not improve your financial situation today, but it sure could prevent something negative from happening tomorrow.
5. Maxing out Qualified Retirement Plans
High income earners like physicians understand that taxes are an immediate financial issue to consider. It doesn’t take an MBA in finance to determine that putting money in your 401k or 403b is a good way to save for retirement, but let’s face it that’s money that you probably won’t touch until retirement. Delayed gratification can be tough to swallow, however don’t overlook the immediate benefit of lowering your taxable income today. Every dollar you put into these qualified plans now will be a dollar you don’t pay any taxes on today. In 2015 you can put up to $18,000 into these accounts. So, if you make $300,000 and put $18,000 into your 401k or 403b you will be taxed like you only made $282,000. Uncle Sam will certainly still be a factor and he will get his, but this simple concept cannot be overstated.
Compliments of Wes Sharp, Financial Advisor.