A client and I were meeting recently and were going over her plans for a radical change in her work habits. She’s a fairly new attending (less than 5 years out) and plans to cut back by 50% in 10 years and then retire when her youngest starts college. And she wants the same for her husband, who is not a physician and makes about 1/3 of her salary. As we put together a plan to make this happen, she made a comment that struck me:“You know, I hang around with a lot of other docs who should be able to do this, but they don’t seem to even consider it, like it’s not possible. I don’t know why they don’t.”
Of course, there are many physicians who discuss their FI plans online, but I, too, wonder how many doctors who are not so plugged in assume that early FI is not a possibility. How about you? I realize early retirement is not a goal for every physician, and that’s ok, but I’ve never had a client say, “You know, financial independence is just not that high on my priority list.” You may want to perform surgeries until you leave the OR with a sheet over your face, but that has nothing to do with FI.
If you really want to avoid burnout as a physician, you need to be in a position to work simply because you want to, not because you have to. As a financial planner and CPA for physicians, I have come to the conclusion that you will make the most progress if you focus on the two following areas.
FIRST, monitor your spending The purpose of financial planning is to help you become financially independent. The core of financial planning is not investing, but cash flow. Physicians have a tremendous advantage that is often squandered. By viewing a hefty salary as a cushion to make financial mistakes, it’s easy to become oblivious to the accumulation of “lost” dollars. You have little incentive to change until you get a serious “wake-up call” such as a health crisis or losing your job.
It’s not what you make, it’s what you spend that will determine your financial destiny. Your high income is the ticket to free you from having to earn a paycheck. Your spending habits should not become a noose tying you to your career. There are many areas you have little control over: the size of your contract, how much you can put into your retirement plan, or the rate of inflation. But you have complete control over your spending.
The earlier, the better Every conscious effort to control spending moves you that much closer toward FI. Just because you make more does not mean you should spend more. Not only will you be wasting less and saving more for the future, you’ll be adopting a lower-spending mentality that will make FI arrive even faster. The earlier in your career you recognize this, the more flexibility you will have when making choices affecting your FI.
So what if you’re 10 years into your career? That’s better than waiting 15 years, isn’t it? Get started – things are usually not as bad as our imagination tells us.
The B word I believe one of the most important and simplest tools that every physician family needs to use is a budget. If the thought of following a budget feels stifling, try thinking about the big picture – say in 5- and 10-year increments. If you can spend $25k – $50k less per year over 5 or 10 years and use the money saved wisely, you can get to FI maybe 2 – 5 years earlier.
On the other hand, the extra dollars you spend today are pushing FI farther into the future. If you are making a conscious decision to work those extra years in exchange for spending more today, that’s ok. If you are pushing off FI simply because you’re too lazy (or scared) to monitor your spending, you should be smarter.
And, if the B word is a non-starter, call it something else. Financial Wellness DVM likes “Spending Plan” :).
How to begin Take a look at your last six months of spending – it’s important that you know where your money is going. Then build the budget that you think you should be following and cut back on money that is going into a “black hole”. Your budget won’t be perfect, so be flexible and adjust once or twice a year.
Of course, when you review your spending, you may be mortified. It can be tough to look in the mirror. That’s ok – you’re being truthful with yourself, which is the first step toward improving habits. Acknowledge that everybody has made financial mistakes, put it behind you, and, most importantly, put a stake in the ground and quit beating yourself up.
If a full overhaul is too much to contemplate, try budgeting in stages. Once you’ve cut back on eating out and Amazon, for example, work on another spending category.
Get on the same page If one spouse is gunning for FI in 10 years and the other spouse’s goal is to live in the moment without regard to the future, you’re headed for choppy waters. How do you resolve your differences? See this month’s vlog with Ben Nanney to find out our tips to help couples work as a team on finances.
SECOND, stick to a financial plan If you’ve figured out how much you can and should realistically spend each month, a plan will prioritize what you should do with the money you didn’t spend.
While, on paper (or the internet), a plan sounds like a straightforward and logical process, every decision is not based on the highest return you’ll earn. While I believe that emotions and money are a volatile combination, I’ve learned that emotions must be considered.
For example, having debt is a huge burden to some people, no matter what the interest rate. This may be due to culture, personal experience, or simply a personal belief. In this situation, the gratification of paying off debt early may be far superior to building a taxable account. You should always consider the overall context of your plan and whether a specific decision will negatively impact it, but you should not worry about areas that will make little difference in your future net worth.
Prepare for the unexpected I always like to ask “What is the worst that could happen?” and then solve it before it happens. This is where life and disability insurance come in, along with an emergency fund, and an estate plan. What would you do if you lost your job? If the HVAC goes out? If you’d have to raid your retirement accounts, obviously, you need an appropriately- sized emergency fund. If your family has the capability and willingness to float you a 5- or 6-figure loan, the e-fund is not so important. What is important is that you consider potential problems and how you will solve them before you experience a crisis.
How do you make a plan? This may sound contrary to my interests, but I think WCI’s course, Fire Your Financial Advisor! is a great educational tool and will help anyone who is starting from scratch. I don’t think it completes the circle of comprehensive planning because you also need a system to aggregate the data and your goals, along with an automated plan that will update as your circumstances change.
Another good resource is Carl Richards’ book, The One Page Financial Plan. It is a great educational tool and would be beneficial to read before engaging a financial planner. This book is not directed specifically toward physicians and does not go as deep as FYFA – but it’s also only $13.99 on Kindle.
Finally, a fee-only financial planner who understands the needs of physicians and the problems they face can be a great investment. Find a professional who focuses on planning, not investing. Investments should be considered only a tool to accomplish the goals in the plan. A few places to search for fee-only financial advisors are NAPFA, XYPN, and Garrett Planning Network.
Managing your spending is, I believe, the first and most important step you can take to start your journey to FI. Incorporating your spending into a comprehensive plan is the next. Developing a plan will take away your focus from current financial pains and give you clarity about the big picture and where you are headed. Seeing future possibilities is highly motivating.
Designing and following a comprehensive plan is complicated, but you will be handsomely rewarded while gaining a sense of control over your destiny. If you’d like to connect the dots and make decisions with confidence, please schedule a free initial consult. There is absolutely no obligation and we’ll do our best to answer all of your questions.