Currently, residents are in the twilight zone. They probably have a great employment offer in front of them and they are ecstatic about starting to practise their medical specialty simultaneously.
Many financial planners often state that it’s never too late to initiate savings for your broad requirements. How can you build a habit of savings in the face of complicated financial planning, day-to-day expenses, and med school debt? When you’re early in your training and career. It is worthy to invest money & time despite the hurdles. Many physicians sometimes put off financial planning for years and live to regret it.
I never paid attention to successful financial planning and wasn’t aware of its significance until I started figuring out finances. The catch-up was indeed very painful, however, I’m on the right track now. More than ½ of new physicians thought they are not spending sufficient assets on financial planning, according to a study by the AMA.
If I state my experience. When I started practising my specialty that was overwhelming & I realized that I have to repay a huge amount of student loan debt. I also need to relocate and I was wondering if a new home is a good option for my young family. At that time, there were many questions in my head that just stressed me out.
But as I took steps in my career, I started to understand things in a way that I never imagined before. In this article, I have presented a roadmap that will help new doctors to walk through a tested & tried personal finance plan.
Plan Your Financial Journey
Financial planning starts once you chart your path and identify your destination. It is a journey that often feels like you are getting lost when you do not have a plan in case it’s entirely a new way for you. But, when you have an appropriate plan, this planning will guide you.
Financial planning has a huge significance as it is an important step in your journey. Once you clarify your ideal future, the creation of your plan finally starts. Forward fast one, five, twenty years from now. Put forward your long-term thinking hat. The following questions will help you;
- Are you still required to work or you are financially independent?
- What does need to excite you about your progress and what has to have happened for you?
- What about reimbursement is most significant for you & why?
- In exchange for future security and financial independence, how willing are you to pass on your present lifestyle?
- How do you comprehend financial independence?
After this, see the ways what it takes today to lead you there. What are you required to decide if you are willing to make efforts to reach your future goals? Tweak your map and adjust your destination, if not now until you feel positive about your future. You will see the benefit of balancing present spendings vs. tomorrow. While you still have some options weigh these choices accordingly.
To provide you with an example of how this will look, by the age of 50 you want to reach financial independence. Are you prepared to make this happen? Willing to sacrifice your lifestyle? Identify what you save now to fulfil this objective? Run the numbers on what this might look like. You have two choices, first, change your goal, and second, make a sacrifice. The better results you will get the sooner you do one or the other.
Every passing year is significant to you i.e, possibly really big vacations. Or as a priority, you might own a big house. It revolves between tomorrow’s goals and your present lifestyle aims. Make your decision and take an initiative on how to balance them both. When you sail in an ocean, either you lose without a plan or you stay on course knowing the map.
Financial planning is good to go but it doesn’t assure success though it is a great start. Therefore, the necessary element is perfect ‘’Execution’’, which starts with handling the cash flows.
Building Cash Reserves
Young physicians can take good initiative with cash reserves. It gives various benefits to residents. When things go in the wrong direction, this helps you keep in a flow and grab unique opportunities. It helps you make solid decisions and provides complete flexibility.
Young physicians often get worried about paying their bills due to extremely low cash reserves. While considering life opportunities I felt paralyzed due to uncertainties in my life. I found escape when I started to invest & save for long-term survival. When emergencies occur I utilize digital investment strategies.
Currently, residents know they are increasing their investments contributions, not saving enough. That’s the reason they are facing a huge debt of credit cards. But, they don’t have to stress about repaying credits once they have plenty of cash reserves.
New physicians will always get the benefit in the form of discounts when they pay on time. This makes good sense and they will dump more into opportunities and investments with the help of automatic investment plans. Cash flow emerges from cash reserves. You will never build good reserves if you don’t set aside cash regularly.
This will seem difficult on the first day but when you adopt this strategy, you become habitual to devote a specific share of your cash to build reserves. At this point, I will tell you how, make your customized plan to reserve cash, initiate it with ‘’questioning’’.
Prioritize your reasons, why do you want to hold cash? I followed the three major purposes that I organized according to my priorities, which are given below;
- Daily lifestyle spending.
- Emergency spending.
- My exact major purchases.
Next, after identifying and rearranging what are your priorities? Establish ground rules in an operation plan that prioritized purposes ‘’holding for cash’’. Now consider both good and bad scenarios. Keep it simplistic. Remember, for some productive reasons it is okay to finish up with three saving accounts and three checking accounts. As I started with,
Initiate with priority #1; Daily lifestyle spending
I choose to form joint checking accounts where household expenses and all income flow. At a low point, suppose if you set five thousand dollars. It will help you eradicate the necessity of making unplanned transfers from various accounts.
Priority #2; Spending in emergencies
Till it is an emergency expense this account has no limits. Holidays don’t include this expense. For ideal emergency cash, suppose you choose a balance equal to four months of basic expense. This will enable you without income to function for greater than five months. Your confidence enhances to achieve your targets in accordance with your life events and business.
Priority #3; Major purchases(Exceptional purchases)
When you have two major accounts- major purchase savings and emergency savings, it will provide greater transparency and liability. Any significant expense that will not count in an emergency event can fit in this account. After filing the above buckets, the young physicians now have cash. They will be able to knock the influential purchases that are at their top list of preferences.
I have created my cash flow planning with 4 steps- residents can also take benefit from these;
- My purpose of holding cash.
- My way to prioritize & build accounts for every purpose.
- My realistic target balance for every account.
- Ground rules establishments for every account.
Addressing Risks Of Life
As it is truly said that life nowadays is unpredictable. Good people often have to face bad things. That’s why being the best physician you must have good planning that anticipates potential risks. Residents lose their capability to earn income. That’s the biggest financial risk they face.
Your family and you may have to face financial catastrophe and causes are there in the form of death or permanent disability. Luckily, you can offset your risk to payers as there are insurance plans. Other risks include losing home/job, lawsuits, etc. In these circumstances, efficient financial planning allows you to tackle every issue having planning for each.
For instance, in the case of a disability plan, you can use cash from emergency reserves if you become disabled. In case, disability doesn’t last long, then the disability insurance for the long-term takes in for eighty per cent revenue replacement. While if the disability lasts for less than six months you can use cash reserves in an emergency.
Your potential for earning would be huge though you may have a negative net worth after your residency is finished. Insurance plays a significant role when you don’t have money. You can reduce reliance on insurance and get into additional risks when you will be financially independent.
Taking professional support from trusted medical billing companies assist you with robust analytics that will serve as a good option for perfect financial planning.
Moreover, as your circumstance changes, revisit your planning for risk management on a yearly basis. Remember, it has huge importance. Every busy resident would be foolish to ignore the following few important financial chores. For your convenience, I have aligned them;
- Financial Education.
- Disability Insurance.
- Life Insurance.
- Medical Billing/Coding Education.
- Roth IRA.
- A Student Loan Plan.
What do you think about this? Besides learning medicines, what else should residents be focusing on as they transition into practice? Comment below!