By Catherine Lightfoot, CPA, CHBC, Director of Healthcare at EEPB
Believe it or not, financial independence is not just for the super-wealthy or the inherited rich. By focusing on four key areas, practiced consistently, everyone can achieve a measure of wealth and financial security. Wherever you are in your career, making a few modest changes will improve your net worth. In this article, I share the common practices of those I witnessed to have accumulated great wealth, with the hope that it will encourage you to update your financial habits.
The four categories of wealth accumulation
1. Spending
They spend less than they earn. This looks different as one’s career progresses. The new graduate might set up a ROTH account and have a small emergency fund. Later in their career, that turns into steady increases to an investment portfolio. The amounts and the strategies may differ, but the outcome is the same. One method is to determine the amount you will save every month and set it aside into a savings account. Some call this “paying yourself first.” There is no need for a formal budget, just a “non-negotiable” promise that you will spend less than you earn.
2. Investments
They have simple investment rules. First, always invest in yourself. As your education, specialty, and knowledge continue to build throughout your career, it follows that earning potential naturally increases. Next, do not take big risks with your investments; rather, seek professional investment advice and steer clear of “one-hit wonders.” Finally, ensure these investments are diversified and financially sound. Over time, the diversification will lower your overall effective tax rate, saving you thousands of dollars by being in an effective lower bracket. For example, if all of your income is ordinary taxable income, then you are going to be in the highest bracket, currently 37%. However, if you have accumulated investments that are yielding capital gains, currently taxed at a much lower rate of 20%, then that blended with the 37% on your ordinary income lowers your effective rate. Taxes saved and wealth accumulation go hand in hand. You simply cannot accomplish this if all of your income is taxed at the highest rate.
3. Debt is done!
They understand the only good debt is one that generates income. Think about the MRI that is in your practice. Be very careful with other types of debt you accumulate. Pay off education loans systematically and early in your career. Purchase automobiles with cash. Mortgages are a much deeper conversation. The amount of mortgage you take on should be carefully considered. Even then, the “code of honor” more often than not, is to pay mortgage debt as soon as possible.
4. Losses are Protected
They know it is pointless to build wealth and not protect it. You have to protect yourself and your family from the unknown that could destroy your nest egg, as well as the legacy intended for your heirs. That means:
· You need a will. It sounds so easy and yet the vast majority do not have one. Actually, you do. The state of Texas has one for you, you just may not like the way it is going to go. You need a will that cares for your family according to your wishes, especially if you have a blended family. A bit of legal advice now could save your loved one’s countless legal bills later.
· You need life and disability protection. This market is typically oversold to the physician group. Unfortunately, it is not always a one-and-done program that is the best fit. Give yourself an insurance audit. Go through your life and disability policies and make sure you are adequately covered with what you need. This changes over time—what you needed when you began your career could be vastly different than what you need later in life. For example, a young physician plans for life insurance to cover debt payments, college funding, weddings for children, and income loss replacement. An older physician, who has worked through all of that and has accumulated assets, has a whole other set of insurance needs.
Conclusion
How does your financial scorecard look? Do you have all of the categories nailed? Do you just need to make a few adjustments? Any improvement in these four categories is going to give your wealth accumulation a boost. Putting it all together is going to make you financially sound. It’s that easy.