Whether a saver or a spender, it is important to develop sound financial habits in order to better manage your monthly cash flow. Larson Financial Group believes that no matter the financial phase, every physician should practice these four financial habits.
Financial Habits for Cash Flow Management:
- Habit #1: Maintain Emergency/Opportunity Reserves
- Habit #2: Categorize Your Life—Build a Budget
- Habit #3: Give to Causes Greater than Yourself
- Habit #4: Begin on the Final Page
Habit #1: Maintain Emergency/Opportunity Reserves
Life changes quickly, and the unexpected frequently occurs. Financial planning textbooks often suggest that you should set aside cash equal to six months worth of your income.(1) The reality is that many doctors and dentists do not keep that much in reserves. Rather, most of our physicians maintain about two to three months worth of monthly living expenses in a checking account or money market fund. For additional emergency reserves, they rely on a home equity line of credit, four-day access to their investment funds, and/or an unsecured line of credit.
Habit #2: Categorize Your Life – Build a Budget
In addition to building adequate emergency reserves, we also recommend doctors separate their financial responsibilities into five main categories in order to help build a basic budget for their financial lives:
Each category should be assigned a percentage of the total income. Provided that the percentages are properly balanced, this can make life much easier.
Doctors and dentists often wonder how they should go about establishing the above percentages. Every situation is different, but we offer the reader some basic guidelines in Habit #3 and Habit #4.
Habit #3: Give to Causes Greater than Yourself
As first we were surprised when our clients asked us about how much money they should be giving away. We had not expected to be involved in such a personal decision. It turns out that many physicians have questions about giving money to charity or tithing to their place of worship. This is exciting. It tells us that we are involved with a generous portion of society that believes financial success is not something to be taken for granted.
On the surface this issue is personal, but we believe the question arises as many people share a worldview that this life is about more than just ourselves.
Many of us approach life from different religious beliefs, and this influences the way we manage the financial resources that have been entrusted to each of us. The world’s major religious faiths share three fundamental financial principles as it relates to giving, that are paramount to this discussion:
- Those of us who have resources also have a responsibility to help provide for those who do not.
- Giving to those less fortunate should involve a measure of personal sacrifice or we are not doing our part.
- Giving should be done at all phases of life. (We are fooling ourselves by thinking that we will give later when we have more resources.)
Money is a temporary tool for a temporary life. At the end of the day, we know of no man or woman who hopes his or her gravestone says, “Here lies a really rich doctor.” Instead, our hope is that we can help our clients achieve enough peace of mind regarding their own financial lives that it frees them to devote more of their time, effort, and energy to building a meaningful legacy.
If your primary question is, “How much should we give?” perhaps a paradigm shift in your thinking is appropriate. A better question might be, “How much can we give?” In their book Why Good Things Happen to Good People, Stephen Post, Ph.D. and Jill Neimark, document consistent studies that show those who are generous with their time and wealth are happier, healthier, less stressed, live longer, and feel more spiritually fulfilled.(2) Therefore, when it comes to cash flow management, we believe one of the most important habits to establish early on is a consistent method of giving away a portion of your resources to passions greater than yourself.
Dr. Ryan Vickery, a successful anesthesiologist, summed up these principles well for us in a personal interview. He found that perspective is vital in understanding why it makes so much sense to give away time or resources
“For years,” he said, “I focused the actions of each day on the short term. It was as if the only important part of life was the next 3-5 days.” He then added, “When we actually sat down on different occasions to give it some real thought, it connected for my wife, Becky, and me that life is really about something much bigger than what we were previously focused on.” (3)
When we look at life in terms of the “big picture,” as shown above, everything else will change. If we focus on the long-term, the way we interact with our spouses will change, the way we parent our children will change, and most important, as it relates to this article, the way we manage our financial lives must change.
Dr. Ben Carson, director of the pediatric neurosurgery division at Johns Hopkins says the following in his book, The Big Picture: Getting Perspective on What’s Really Important in Life: (4)
The reason we need to consider our priorities carefully–and the principles on which we base them–is that they impact every important choice we make in life. Those choices further determine both the ultimate direction of our lives and the unique set of opportunities that will come our way.
How is a doctor to make this long-term perspective on priorities practical in his or her own financial life? For those physicians who have not yet established their own philosophy for their family’s charitable giving, we offer a suggestion. Our approach is simple. Begin giving away a set percentage of the after-tax paycheck you bring home. To begin, the percentage is irrelevant, just do something to get started. Make it a goal as a family to increase this percentage whenever possible, but at least every year. Even if you only increase by 0.5% per year, you will still be giving more and more, and likely finding your efforts increasingly more fulfilling.
Giving becomes easier once it develops into a regular habit. We have yet to meet a physician who started giving and later regretted it. You need not take our word for this, instead consider the words of Dr. Will Mayo:
By 1894 my brother and I had paid for our homes. Our clinic was on its feet. Patients kept coming. Our theories seemed to be working out. The mortality rate among our cases was satisfyingly low. Money began to pile up. To us it seemed to be more money than any two men had any right to have. We talked it over a lot, that year of 1894 we came to a decision. That year we put aside half of our income. We couldn’t touch a cent of that half for ourselves…
From 1894 onward we have never used more than half of our incomes on ourselves and our families… My brother and I have both put ourselves on salaries now. The salaries are far less than half our incomes. We live within them…
My interest and my brother’s interest is to train men for the service of humanity. What can I do with one pair of hands? But, if I can train 50 or 500 pairs of hands, I have helped hand on the torch.” (5)
Habit #4: Begin on the Final Page
Simply building emergency reserves, categorizing your life, and giving to great causes will not automatically lead to financial success. The remaining key is to spend the right amount less than you earn. In order to determine the right amount to properly set aside for the future, you must first “begin on the final page.” The point is simple: if you don’t know where you’re headed; there is no good way to get there. Instead, when you know what you want to achieve, you can work backward to determine the amount that you need to save today in order to make it happen.
Delayed gratification is a difficult concept for many Americans to grasp. We live in a society that thrives on getting whatever we want whenever we want it. Fortunately, doctors have a much better understanding of delayed gratification than the general public, or they never would have spent so much time in training. No different than setting your sights on becoming a physician, it is crucial to set some reasonable objectives about what you want to achieve in the future as it relates to your financial life.
Doctors and dentists are often pleasantly surprised when they find out that they can still enjoy a great lifestyle today, while at the same time providing for the future. In fact, families tell us it is comforting to know the appropriate amount they need to save, to set aside for the future. By knowing that, they also know how much they can spend and enjoy today.
It is always better to know sooner, rather than later, if your expectations are realistic. When it comes to money, almost everyone hates surprises.Creating a Savings Target
We are often asked: “How much should we be saving for the future?” Because each family’s situation has so many different variables, there are no generic answers to this question. However, the following chart, from the Journal of Financial Planning, provides some general guidelines based on the most common situations we see for younger physicians.(6)
Notice that achieving a comfortable retirement requires a far larger portion of your income to provide for retirement than the typical 10% you may have previously heard. Of course, the earlier you begin saving, the lower the percentage of income required to meet your goals. Note that this issue is a gigantic aspect of what makes your financial life so unique as a physician. If you had 40 years to save for retirement, your required savings rate might drop to as low as 8% of your income. Because physicians typically desire a much shorter time frame to reach financial independence, this dictates their savings rate must be greatly increased.(7)
(1) Altfest, Lewis J. Personal Financial Planning. Boston, MA : MacGraw-Hill Irwin, 2007. (2) Post, Ph.D., Stephen and Neimark, Jill. Why Good Things Happen to Good People. New York, NY : Broadway Books, 2007. (3) Vickery, M.D., Ryan and Vickery, Rebecca. Personal Interview with Dr. Ryan and Mrs. Rebecca Vickery. 2010 30-September. (4) Carson, M.D., Ben and Lewis, Gregg. The Big Picture: Getting Perspective on What’s Really Important in Life. Grand Rapids, MI :Zondervan, 1999. (5) Logan, J.T. The Mayo Clinic. The Free Methodist. 1931 13-February. (6) “Comfortable retirement” seeks to replace 50% of pre-retirement income. This data is provided through a source we believe to be fully reliable but we cannot directly attest to the accuracy of the findings. Data is based on historical findings and does not guarantee future results. (7) Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle. Pfau, Wade D. Washington, DC : Financial Planning Association, May 2011, Journal of Financial Planning.