WFP’s Recommended Reads: October 2016

WFP’s Recommended Reads: October 2016

At the end of each month, we provide a list of finance-related articles to help keep you informed about the hot topics in finance. Here are some of the best articles we read in the month of October.

The Biggest Money Mistakes We Make – Decade by Decade (Wall Street Journal)
Understand the most common financial mistakes we make at each life stage, and take the appropriate steps to avoid them.

What do financial markets think of the 2016 election? (Justin Wolfers and Eric Zitzewitz)
Interesting analysis on how the financial markets have reacted to election news.

Investment Management vs Financial Advice (A Wealth of Common Sense)
“A large majority of what the financial industry calls financial advice is really just glorified product sales.” Teach yourself how to understand the difference with these useful considerations.

Thrown For a Loss (CBS News)
60 minutes tackled the story about a group of NFL players who lost over $43 million at the hands of their league-approved financial advisor.

Merrill Lynch to End Commission-Based Options for Retirement Savers – (Wall Street Journal)
Expect to see a lot more of this between now and the DoL rule going into effect on April 20th.

The Dying Business of Picking Stocks (Wall Street Journal)
“Over the decade ended June 30, between 71% and 93% of active U.S. stock mutual funds, depending on the type, have either closed or underperformed the index funds they are trying to beat, according to Morningstar.”

How Your Money Habits Compare to Other People in Their 20s and 30s – (The Washington Post)
See how you stack up against your peers in this study conducted by Navient and Ipsos.

American Funds Files for New Share Class to Cut Fund Expense Ratios (Investment News)
Another byproduct of the DoL Fiduciary Rule. Popular investment company, American Funds, to trim expenses by about .37% on new F3 shares.

Janet Yellen Says Labor and Inflation Complicate Fed’s Plans to Raise Rates (NY Times)
Low interest rates will continue for at least another quarter, as the Fed tries to make sense of the “behavior of the labor market and the weakness of inflation”.

Wells Fargo got busted for opening over 2 million unauthorized accounts for its customers. Here is an account from former employees about the “toxic” sales culture within the world’s largest bank. (NPR) — 2 weeks ago, I wrote about the scandal and how incentives influence behavior. Check it out here.

Please share any interesting articles you’ve come across recently and we may add them to next month’s post!

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

3 Ways Doctors Can Increase Their Savings Rate Without Cutting Expenses

3 Ways Doctors Can Increase Their Savings Rate Without Cutting Expenses

Building wealth is simple: make more than you spend and invest the difference.

There are two ways to increase your savings rate: spend less or make more. There are also two ways to earn more income: work more hours or earn more per hour. Many of you already spend enough time working, so let’s start by talking about how you might go about increasing your hourly rate.

What’s Your Hourly Rate?

No matter how you’re compensated, everybody has an hourly rate. Knowing this rate can help you make better financial and professional decisions. Take your total pre-tax compensation (income before anything is taken out) and divide it by the number of hours you typically work. The resulting dollar value is your hourly rate for the period. Here’s a quick example:

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Negotiate More Income Per Hour

Build your case before asking for a pay increase. Start by learning about the market pay rates. Find out how much your colleagues are paid. Check salary studies for your area and specialty. Learn the going rate for locums in your area.

Once you’ve built a compelling case, meet with the decision maker and confidently share what you’ve found. And make the ask. If they say no, ask them what you can do for the practice to make it happen.

Also, be cautious with new job responsibilities. Your employer may agree to your request in exchange for you taking on more job responsibility. That’s not what you were asking for initially, so take some time before saying yes.

This doesn’t have to be purely tied to your primary job. Maybe you’re an emergency room physician who works extra shifts from time to time, and in your market research you determine your employer pays locums far more per hour than your typical overtime shift rate. Knowing this, you now have the opportunity to begin asking for a higher rate on overtime shifts – especially those that are last minute.

Change Your Hours

Look at the hours you’re working. Identify what your hourly rate is for the different hours/tasks you’re performing. Work on cutting the low rate work and increasing the high rate work. For example, you might give up your management role that pays a lesser amount, and instead moonlight more for a higher rate.

Or maybe you can negotiate for less contracted shifts and agree to working more overtime shifts, since you now know those pay rates can be higher.

Outsource Jobs And Work More

Take some time to make a list of all the unpaid work you do, and estimate the time you spend on each task. Next, find out how much it would cost someone else to perform these services. What is the opportunity cost of doing this work yourself vs. working more in your profession and outsourcing the unpaid work?

Consider, for example, yard work – many of us are faced with this time-consuming chore. Let’s say you take 5 hours each month to mow, trim & fertilize your yard – plus the cost of equipment (let’s say $50). On the other hand, your hourly rate as a physician is $200. Doing this yourself essentially costs you $1,050 per month ($200 per hour x 5 hours + $50).

On the other hand, your research shows you can hire the best lawn care company in the area for $300 per month. This saves you $750 per month when you compare it to the opportunity cost of your potential earnings. On top of that, they do a better job than you. And you enjoy your work more than mowing. It’s really a win-win situation.

Then the final (and most important) step is to make sure you actually save the increased cash flow. Set up an automatic savings program so you don’t get used to having the extra money in your bank account. And as always, we would love to hear how our tips worked for you, and how your hourly rate negotiations worked! Please share your experiences!

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

The Most Important Money Habits To Teach Your Children

The Most Important Money Habits To Teach Your Children

Kids are like sponges. They’re ready to soak up whatever we’re willing to teach. Now is the time to be teaching our children about money.

Excess money mixed with lack of money maturity can ruin lives. At its extreme, money can be the difference between life and death. On the other hand, money can be a wonderful tool – controlling it can provide opportunity, security and flexibility. It allows us to do what’s most important in our lives.

So where do we start with the little guys and gals we love?

It’s All About Cash Flow

Controlling your money starts with managing cash flow. These critical cash flow habits start at an early age. Most young people never receive any education on this subject and tend to default to spending what they make. You can see these habits start to show up in the college years when people begin managing any amount of income and outflows.

Why not have an impact on how your children view cash flow from the get-go? It’s never too early to begin teaching. Start by figuring out what your children have to work with as far as money. Maybe you provide an allowance or maybe you provide payment for chores provided above and beyond a baseline household requirement. Or maybe your children receive cash gifts at holidays or birthdays. It doesn’t have to be a lot of money. The key is determining what they might have to work with as far as income.

Next, talk with your child about the responsibility of managing where their money goes. This conversation would obviously vary based upon ages. Either way, discuss the major categories of where people can choose to direct their income. The main categories are taxes, savings, giving and spending.

Taxes

Share with your children how taxes work. Tell them they must set aside a certain percentage for taxes, maybe 20%, for this future potential obligation. Odds are they won’t really owe any tax on their income, but if that’s the case, maybe it gets transferred over to their savings for the time being. Nonetheless, it’s about becoming familiar with the concept & developing the discipline.

Saving

Next comes savings. Discuss how important it is for people to set aside a certain percentage for short and long term savings. Talk about the benefits that come with this. For certain personalities and ages, it might help to share how their balance can grow if they start early. Maybe you suggest they set aside 20% for savings. Help them set up a system for directing this 20% into a separate account. As their savings grows, you could begin talking to them about investing. Encourage them to do it themselves with your guidance so they can acquire valuable experience. Establish goals and targets for short and long term savings to make it more exciting.

Giving

Next, talk about giving. Talk about your values and share your experiences with giving to others. Talk about a good percentage to target – maybe you agree to set aside 10% toward giving. So every dollar they have come in, 10 cents gets directed to an account which will ultimately be given away. As their “giving” account builds, have conversations about choosing where to give. Talk about what’s important to them and get them involved with choosing where to give. Since it’s their money, they’ll be more likely to buy into the cause if they have input.

Spending

At this point, 20% has been deposited into the tax savings, 10% into the giving account, and 20% has gone into short and long term savings. The key is to prioritize in this order: tax, savings, and giving first. And then you can spend the remainder. This leaves 50% to spend on whatever they’d like.

If you’re feeling ambitious, you could also throw “debts” into the mix. Every young person will eventually be forced to learn about how debt works – why not teach them your philosophy at a young age? You could tell them they are able to spend more than 50% of what’s leftover, however, it will require they take out a debt from you. Explain the basics of how debt works. Set an interest rate on the debt, like 10% to keep the math easy. If they want to take out debt, keep track of it and set up repayment plans. Maybe you direct the 10% interest you charge to their 529 or savings. Or if you’re really hard core, keep it. Hold them to repaying the debt.

Takeaways

The key is creating an environment for them to learn real life lessons. This will prove to be extremely valuable as the stakes increase for them. Money failures and mistakes are great learning experiences and will inevitably occur – why not let them figure it out while it’s easy to fix? Put your children in position to fail forward at a young age under your oversight and at much lower dollar amounts.

Also, as any parent knows, your children are always watching. As you introduce these concepts, be prepared for questions on how you manage these things yourself. Use this as motivation to lead by example and practice what you preach. If you’re struggling with managing cash flow yourself, work on improving your habits to help lead your children in the right direction & help them put their best foot forward.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

3 Personal Finance Habits of Highly Successful Young Physicians

3 Personal Finance Habits of Highly Successful Young Physicians

Do you ever wonder what personal finance habits separate the most successful young physicians from everyone else?

In my experience helping hundreds of young physicians with their finances, I’ve observed three main habits that are almost always present in the most financially successful. The good news is that each one of them is simple. You could even begin implementing them today! The bad news is that while they’re each simple in concept, they may not be easy in practice. Each requires discipline, but the trade-off is worth it.

Solid personal finance habits bring huge rewards. Life changing differences. Things like having an additional 15 years of the flexibility to live anywhere and do anything anytime you want. Not being reliant upon your job to live. Having the ability to develop & maintain great relationships with your spouse, children and friends because you’re not restricted by work. Being able to give to causes you value. Traveling anywhere on earth. Playing golf all day.

These simple habits can set you on a course to accomplish your goals and then some:

1) Keep Score of Finances

High cholesterol doesn’t have any symptoms, at least early on. Many people are just walking around unaware of any issues. They don’t go in for a checkup until the symptoms start, and by this point, there’s not always an easy solution. If they had caught it early on, though, it would have likely been a simpler fix. Tracking your finances is like doing your own financial checkup.

Over time, this habit becomes like your financial journal. You can always go back and take a peek to see how things were “back then.” As you begin to visually see the ups and downs you go through in your financial life, it brings a new level of financial awareness and maturity. Your experiences become a powerful teaching tool for yourself and others.

How To Keep Score

For starters, we suggest tracking two areas of your personal finances monthly:

1) Net Worth
2) Cash Flow

Part 1 – Net Worth Tracking

Net worth = Assets (what you own) – Liabilities (what you owe). It’s a snapshot in time of your overall financial profile. When you have many months recorded, it provides insight into how your wealth is changing over time.

One of my favorite bloggers, J. Money from Budgets are $exy, has been publicly tracking his net worth for over 8 years now. Check out how his net worth has changed over time below. You can see full details on his journey by clicking here.

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Updating your net worth each month only takes a few minutes if you have a solid system in place.

As an example, here’s the system I use:

1) Start by setting up a tool to aggregate your online accounts (like mint.com).
2) Use this aggregator to link up as many online asset and liability accounts as you can (the KEY with these online aggregators is to use them for what they are – a tool to bring all your stuff into one system – and NOT to count on them to solve your personal finance problems).
3) Create a spreadsheet for tracking your net worth (or save yourself hours of time and simply use ours – here is a link to it – you can see a snapshot of it below).
4) Every single month (put it on the calendar!) open your aggregator & spreadsheet and update all your balances.
5) If you don’t have certain numbers handy, estimate and move on (highlight estimates in case you want to correct in the future)

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The key is getting started today and working to develop the habit. You can fine tune your process over time. Don’t get hung up on the details. This should not take more than 30 minutes per month.

Part 2 – Cash Flow Tracking

Cash flow involves tracking the following: Cash at beginning of the period + Total cash inflows – Total cash outflows = Cash at the end of the period

Simple, right? People always get hung up on outflows or how much is spent. It’s easy to become overwhelmed by the details associated with tracking spending. To clarify, this system does not include tracking your categories of spending every month. It does involve backing into your total spending for the month. The key to our system is to not get caught in the weeds, especially early on when you’re developing the habit. Think big picture spending.

The cool thing about tracking cash flow is it allows you to see how much income you are spending, and how your cash balances change over time. And it doesn’t take much time. Most systems start with tracking every little expense each month, which is going to take hours, and some never even get around to the “big picture” of your cash flow. I prefer to start with the big picture and drill down only if necessary.

Here is a link to our spreadsheet we use for tracking cash flow. Once you get the hang of it, it should only take 15 minutes each month.

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As you begin tracking your net worth and cash flow, focus on developing the habit of updating your numbers first. There are tons of cool things you can do with these tools once you’ve developed the habit and have good data on your situation. Not to mention the fact that it’s going to help you become financially independent sooner. Let that motivate you to get over the hump of getting started.

2) Prioritize Saving Over Spending

Income – Spending = Savings

Income – Savings = Spending

Which of these two equations resemble your situation? Do you spend first and save what’s left, or save first and spend the remainder? When you buy a home, how do you make your decision? Do you decide based upon what you can afford, or do you carve out savings first and decide based upon what’s left? Big difference!

This is more of a mindset. And it doesn’t make you a “scrooge” if you think about saving first. It’s about understanding the “why” behind saving and using your vision of tomorrow to motivate your actions today. People who prioritize saving over spending are able to think beyond one day at a time.

If you haven’t taken a minute to envision your ideal future, that’s your starting point. Figure out where you want to go and when you want to get there. Once that’s clear, determine how you’re going to get there. If you’re not on track, it’s going to require decisions and change. If you’re overspending, don’t just tell yourself you can’t cut anything out of your budget and stop there. That’s one of those mind games we like to play with ourselves. Go find someone who is living in poverty and ask them if they think you can cut anything.

You have two choices here: either make necessary adjustments now or change your long term vision.

3) Follow Simple Investment Plans

This is challenging in a different way than the other two habits. The first two habits required you to choose to do something regularly. This habit requires you to choose to do nothing (most of the time). There’s SO much noise in the world of investing. And young physicians face an especially high volume. Everybody wants to sell you the next “unique investment opportunity”.

Creating a great investment plan is a great start! But the hardest part of this habit is to stick to the plan long term. This requires intense discipline to NOT change.

But even if you get the whole “investing is a long term deal” idea, there’s still a ton more to it – especially for young physicians.

Here are a few points to consider when investing:

  • Have plenty of cash reserves first
  • You’re not going to get rich quick
  • Invest in yourself (you are your most important asset!)
  • Don’t invest with your college buddy
  • Be aware that many investment plans are more of a gamble than an investment – understand the difference
  • Your stock trading buddy is only telling you about his winners – people don’t talk about the losers they picked
  • Don’t buy from people selling “investment opportunities” – if it was that good, it would sell itself
  • Understand if your investments are set to try to beat the market or match it (active vs passive)
  • Always take tax minimization into consideration, but “don’t let the tax tail wag the investment dog” – taxes should be secondary to your investment plan
  • Keep in mind that it’s extremely difficult for people (even the “experts”) to beat a very basic passive low cost investment (or “the market”)
  • Understand what the absolute worst case scenario looks like on any investment – if you’re not okay with it, don’t invest

So there you have it. The three habits of highly successful young physicians:

1) Keeping Score of Finances
2) Prioritize Saving Over Spending
3) Follow Simple Investment Plans

If you’re not doing any of these, I encourage you to commit to starting at least one today. Good luck!

If you’re ready to start planning out your future, check out our young physician’s complete guide to financial planning. It’s filled with all kinds of time and money saving systems and strategies that will take your personal finances to the next level. You can download it by clicking below.

WFP Physician’s Guide

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

7 Financial Planning Tips for Resident Physicians Transitioning Into Practice

7 Financial Planning Tips for Resident Physicians Transitioning Into Practice

Today we’re covering 7 financial planning tips for resident physicians transitioning into practice. By utilizing these tips early in your career, you’ll be setting yourself up for long term success.

1) Plan Your Financial Journey

Financial planning is a journey: it begins with identifying your destination and charting your path, and then you must follow it. It’s easy to get lost when you don’t have a map, especially if this is a new path for you. Let your financial plan be your guide. Creating your plan is the most important step in your journey.

Creating your financial plan begins with clarifying your ideal future. Take a minute and put on your long-term thinking hat. Fast forward 1, 5 & 20+ years from now. Think about the following questions:

  • What will your life look like?
  • What has to have happened for you to be excited about your progress?
  • Are you financially independent or is work still required?
  • What does financial independence look like for you?
  • How willing are you to pass on current lifestyle increases in exchange for future financial independence and security?
  • What about money is most important to you and why?

Next, map out what’s required to get there and decide if you’re willing to do what it takes today. If not, adjust your destination and tweak your map until you feel good about your future. This will require balancing spending today versus tomorrow. Weigh these options now while you still have the choice.

The Simple Dollar defines financial independence as the point when you have enough money to survive without further income.

To give you an example of how this might look, let’s say your goal is to reach financial independence by age 50 – figure out what you must save today to reach this goal. Are you willing to make the lifestyle sacrifice to make this happen?

Or maybe funding your children’s college education is important. Run the numbers on what this might look like and determine what it will take in terms of lifestyle sacrifice today. You have two options; either make the sacrifice or change your goal. The sooner you do one or the other, the better.

Maybe really big vacations every few years are important to you. Or maybe you have a big home remodel that’s a priority. It’s all about today’s lifestyle versus tomorrow’s goals. Take the initiative to make your decision on how you balance the two.

When you’re sailing across the ocean, you either have a map to keep you on course, or you don’t and you’re lost at sea. Having a financial plan is a great start, but it doesn’t ensure success. Execution is required and that begins with managing cash flow.

2) Control Your Cash Flow

You’re about to sail across the ocean to an island called “your ideal financial life.” If your financial plan is the map, cash flow is the sail for your boat.

Some of you come fully prepared, raise the sail and immediately catch the wind. As you cruise toward your destination, only minor tweaks are necessary to stay the course. And then some of you haven’t prepared as well and just assume you’ll get there okay. You’ve been on boats before – surely you can figure it out. But as soon as you hit the water, you quickly realize that sailing isn’t as easy as you once thought. You bumble around the port zig-zagging and eventually get to sailing half steam. You’re moving along, but it’s not pretty, and you’re behind on your journey. And finally, some of you don’t prepare at all. When everyone else leaves the port, you float around aimlessly in the harbor with your sail flapping in the wind.

As you approach your transition into practice, it’s the perfect time to plan all this out. It will be tempting to start knocking out lifestyle decisions before you map out cash flow. Resist the temptation! Major decisions like the home you purchase and the car you drive can eat up all your cash flow in no time.

Great cash flow plans require a basic understanding of things like taxes, student loans, and expenses. If you don’t already have a basic understanding, some reading will be necessary to get caught up to speed. Or if you don’t feel extremely confident completing these tasks yourself, talk with a cash flow focused financial planner. If you planned on hiring a financial planner eventually anyway, now is a great time to do this.

Your specific cash flow should be based upon your financial plan. Let your future destination direct today’s decisions. This will be the most impactful action you take when executing on your financial plan.

Keep in mind, though, that managing cash flow is different than a budgeting. Budgeting involves setting spending targets and tracking actual results. Although important, it’s secondary to cash flow. Cash flow includes all sources of income and outflows and takes into consideration short and long term planning. Cash flow helps you see the bigger picture. Every dollar of income should be dedicated to either taxes, giving, lifestyle (including debt) or savings. And this categorization should be based upon your financial plan.

Your cash flow plan will consist of the following components:

  • Income
  • Taxes
  • Giving
  • Saving
  • Spending (and debt)

Income is simple. It’s the total money you expect to earn from all sources (before taxes and benefits come out).

Taxes come next. Federal taxes will vary based on income. Depending on where you live, it’s likely you’ll also pay state and local income taxes so add these to your total. Don’t forget Social Security and Medicare taxes “FICA”. And if you’re planning to be an independent contractor, don’t forget you’ll pay 2x FICA tax because you pay the employer share and the employee share. Add federal, state, local and FICA to figure your total tax. When in doubt, error on conservative estimates. For example, a conservative estimate for the typical employee physician might be 30-40% for everything.

Giving should come next if that’s important to you.

Then savings. Total up your ideal savings for short term and long term. For short term, consider things like building cash reserves or major purchases. For long term, think investing for retirement, college funding and charitable desires.

And finally, spending comes last. Start by determining your major existing obligations. Everyone should include their minimum lifestyle This might be your current residency lifestyle. Add to this other necessary obligations like student loan payments.

Take total income and subtract tax, giving, savings, and necessary spending. If there is nothing leftover, you should prepare to continue living like a resident after you transition into practice (at least until your loans are paid off).

If you’re fortunate enough to have excess remaining, use it for additional debt payments, savings, or lifestyle increases. For lifestyle adjustments, it’s good to keep a priority list and use the excess to begin checking those off. This is how you decide on how much home to buy. If you’re left with $20,000, that’s the maximum you can spend on home costs. Remember, to consider all-in costs of home ownership and not just principal and interest on a mortgage.

Your cash flow plan might look like this:
Total Gross Income: $200,000
Minus Taxes: $60,000
Minus Giving: $20,000
Minus Savings: $50,000
Minus Spending: $40,000
This leaves $30,000 for increased home costs and maybe private school for the kids.

The key with cash flow is prioritizing lifestyle increases AFTER taxes, giving, saving, and obligations are addressed! Without a plan, lifestyle defaults to first priority. And nothing is leftover.

Student loans will inevitably be part of most young physicians’ cash flow plans. They have also become quite complex. Check out this student loan flowchart we put together to help you start putting together your student loan plan:

Cash flow is not a one and done deal either. You must monitor over time to keep yourself in check otherwise lifestyle creep occurs! Get in the habit of using a regular system to track your progress. At the conclusion of every month, document total cash balances at the start of the month, total income, total expenses and total cash balances at the end of the month. If you consistently see total expenses are greater than target expenses, it’s time to dig deeper. Add this financial review session as a monthly recurring appointment on your schedule. Don’t skip it!

Click here for (free) access to our cash flow tracking system we use with our clients to help them take control over their money. It’s complete with all the tools and systems you need to monitor where your money goes without spending hours every month counting pennies.

Cash flow planning gives your finances propulsion and will keep you on track toward living your great life. In summary here are the steps to creating your rock solid cash flow plan:

  • Review your financial planning goals
  • Calculate your target cash flow to hit goals
  • Identify specific changes and give every dollar a purpose
  • Setup systems for monitoring
  • Track progress and make tweaks

3) Build Cash Reserves

Cash serves many purposes for the young physician. It’s there when things don’t go as planned. Or when a unique opportunity presents itself. Cash keeps you afloat. It provides security and flexibility to make solid financial decisions.

If anything has a direct correlation to reduced financial stress, it’s cash reserves.

People with extremely low cash reserves constantly worry about being able to pay bills. They regularly make transfers between accounts to get by, never really building anything. They worry about managing life’s uncertainties and feel paralyzed when they consider life’s opportunities. Saving and investing for the long term is a battle. At best, they have automatic investment plans they occasionally tap into when emergencies occur. Although they know they aren’t saving enough, increasing their investment contributions seems absurd. Sometimes they do it anyway and go into credit card debt.

People with plenty of cash reserves don’t worry about paying bills. They always pay on time and take advantage of early payment discounts. Uncertainty never disappears totally, but it’s certainly less of a concern. This person enjoys work because they aren’t a slave to it. If they stop enjoying work, they have flexibility to pivot into something different. Automatic investment plans are a given, and occasionally this person will dump in more into investments or opportunities that make good sense for them.

Life is always predictable right? Not quite! Most people intuitively know this yet fail to build cash reserves.

Cash reserves are directly related to cash flow. If you’re not setting aside cash regularly, you’ll never build reserves. Having low cash reserves is one of the first symptoms of poor cash flow planning. Make sure you dedicate a certain portion of cash flow to building cash reserves.

If this seems difficult at first, that’s normal. We find many people struggle with this more than they do investing and saving for long term. Cash is so accessible and can cause temptation. So you must be on your game!

To begin making your customized plan for cash flow, start out with “why.” Think about why you should hold cash and prioritize your reasons. Most people end up with three main purposes for cash (organized by priority).

1) Normal Lifestyle Spending
2) Unexpected Emergency Spending
3) Expected Major Purchases

Think of these like buckets to hold cash. Once the first bucket is full, it overflows into the next.

Once you have separated and prioritized purposes for holding cash, determine exactly how much cash each account should hold. And come up with an operations plan for each. Establish ground rules and consider worst and best case scenarios. Remember to keep it simple – it’s easy to end up with 3 checking accounts and 3 savings accounts for unproductive reasons. And it’s a bear to keep up with.

Start with the #1 priority, normal lifestyle spending. Your plan might be to establish one joint checking account where all income and normal household expenses flow through. And you set a target balance of $5,000, at its low point. This will allow wiggle room and eliminate the need to make random transfers from other accounts.

Next priority is #2 emergency spending. This account is off limits unless it’s an emergency expense. Vacations are not emergency expenses! Let’s say you decide a balance equivalent to 4 months of baseline expenses would be ideal for emergency cash. This plus your checking account would allow you to operate for up to 5 months with no income. And based upon your profession and life circumstances, you feel good about this target.

Last priority is #3 major purchases. You decide it will provide better clarity and accountability if you separate out emergency savings and major purchase savings by having two separate savings accounts. This account will be for any big spending that’s not an emergency. You won’t fill this bucket until #1 and #2 are full. As this bucket fills up, you’ll create a priority list of major purchases and knock them out as you have the money.

Let’s review. Create your cash flow plan using the following steps:

  • Identify your purposes for holding cash
  • Establish and prioritize accounts for each purpose
  • Come up with specific targets balances for each account
  • Establish ground rules for each account

4) Address Life’s Risks

Life is unpredictable. Bad things sometimes happen to good people. Good planning involves anticipating potential risks and making a plan for them. The biggest financial risk young physicians face is losing their ability to earn income. This can be caused by permanent disability and death. Either scenario can cause financial catastrophe for you and your family. Fortunately, there are insurance plans that allow you to offset this risk to an insurance company.

There are plenty of other risks in life such as lawsuits, job loss or losing your home to fire. Good planning involves considering all of these kinds of risks and having a plan for each.

For example, your disability plan might look like this… If you become disabled, you would use emergency cash reserves. If the disability lasted for more than 6 months (when emergency cash would run out), your long term disability insurance would kick in for 80% income replacement.

When you’re finishing up residency, net worth may be negative but your earning potential is massive. Because you have no wealth, insurance is important. As you become financially independent, you can take on more risks yourself and decrease reliance on insurance. This is why your risk management plan should be revisited every year or two as your circumstances change.

5) Manage Advisors and Salespeople

A quality advisor can act as your expert sailing guide. You hire them to teach you how to sail, help you create the map for your journey, and ride along to help keep you on course. Although they certainly have advice on what kind of boat to buy, they don’t have any financial incentive to sell it. They work for you.

The professional salesperson is like the boat sales rep. They make the buying process extremely efficient and enjoyable. They drink their boat manufacturer’s Kool-Aid and freely share it with others. It’s obvious they know more about the boats they sell than anyone around. They are an extension of the product distribution process and ultimately work for the product manufacturer, not you.

Keep this rule in mind as you navigate working with salespeople and advisors. Use advisors for advice and salespeople to buy products. Don’t take advice from sales people. And don’t buy products from advisors. It may sound like common sense, but people screw this one up all the time. It doesn’t help that sales people tend to try giving advice and advisors sometimes choose to sell products. Do your best to figure out where someone stands before you deal with them. Are they an advisor, salesperson or combo of both?

It gets especially tricky when salespeople start acting like and calling themselves advisors. Financial services firms are especially notorious for graying the lines between salesperson and advisor. There’s an army of “financial advisors” out there that are hungry for your business. Proceed with caution. Peel back the layers and you’ll find most are generally salespeople posing as “trusted advisors.” These sales advisors work for their firms – not you. Mixing product sales AND advice creates massive conflicts of interest you should at minimum be aware of.

How can you figure out who you’re dealing with? Find out how they make money. If they earn commissions and fees (sometimes called fee-based), they sell products AND give advice. If they only earn fees (fee-only), they are strictly advisors. And if they only earn commissions (commission-only), they are strictly product salespeople.

It’s totally ok to demand awareness and transparency when working with advisors and salespeople. If they’re one of the good guys, they’ll appreciate it as much as you. Greater transparency naturally breeds trust and confidence, which are the building blocks of productive relationships.

Physician Specialist

If I was looking for the best surgeon to perform a major surgery on me, expertise and experience would be very high on my list of qualifications. If it’s their first time cutting, I’m out. My goal would be to find someone in their prime who had done my specific surgery more than anyone else. I would want the best of the best.

When you’re considering hiring others to help you navigate life and money, take consideration of their specialization, experience and expertise. Although your life isn’t at stake (most of the time), the experienced expert certainly increases your chances of positive results.

Most advisors and salespeople don’t turn away business, even when it’s not in their sweet spot. In some cases, it works out just fine for both parties. But the risk of bad advice increases exponentially the further you get from their wheelhouse. Student loans are a good example. In recent years, planning around them has become extremely complex. Very few advisors take the time to keep up with it. Bad advice is tossed around all over the place. And it’s delivered wrapped in confidence and ignorance.

Finding An Advisor

If you’re looking for advice-only financial advisors (aka fee-only) that always operate as fiduciaries, you can find many of them in NAPFA’s find an advisor search. Or if you’re looking for the same type of advisor, but specifically those who serve Gen X & Y clients, try XYPN’s find an advisor search. XYPN’s search also helps you narrow down advisors by specialization. Or if you want an hourly fee-only planner, check out the Garrett Planning Network. The White Coat Investor has a great list of physician-focused advisors and salespeople listed on his website as well. His blog is also a great resource for young physicians looking to learn more about personal finance and investing.

As you work with salespeople and advisors, keep these points in mind:

  • Use advisors strictly for advice (not to buy products)
  • Use salespeople strictly to buy products (not for advice)
  • Find advisors and salespeople that specialize in working with people like you
How To Find Your Financial Advisor

6) Build In Margin

I’m not talking about investing margin (borrowing money to invest more). I’m referring to margin of error, which is the statistic expressing random sampling error. Life has all kinds of random sampling error, yet we fail to account for this in our financial planning. Perfection in personal finance is a mirage. Planning with exactness can actually get people into trouble, especially when planning for long periods of time. In reality, life is uncertain and constantly changing.

As part of my job, I have the ability to see people’s finances all day, every day. It’s rare that we see people naturally building in margin of error. Take expenses for example. Let’s say you’re pretty confident that your normal monthly expenses are $5,000 and you bring home $6,500/mo. That leaves $1,500/mo to save for retirement and education (or overpay debts). And that’s what you do. As a result, your checking account fluctuates between $5,500 and $500 depending on the time of the month. But then life happens and you get a random $5,000 bill for a pet emergency room visit (I had a client have this happen recently).

Because you have zero margin, you’re forced to go into credit card debt. And it’s incredibly tough to dig out from the credit debt because you already have everything accounted for. Before you get it paid off, another big expense pops up and you’re in even worse shape.

People who operate without any margin of error are in and out of credit card debt, take early withdrawals from investment accounts, and remove home equity to catch up. They also tend to stress about day to day finances. And wonder why. They feel they have a good handle on expenses, and they do. They are saving, investing and making pretty good decisions. They’re not living a self-proclaimed “lavish” lifestyle. They can’t seem to figure it out, though. So what’s the problem?

They’re failing to consider margin of error. It’s not just expenses. This failure can cause problems with taxes, saving, investment projections, and pretty much every other area of personal finance. Do yourself a favor and build in some wiggle room. When you’re planning ahead and think you’ve come up with everything you can possibly think of, add more wiggle room. When you estimate taxes, be conservative and overestimate instead of trying to nail the exact number. When you plan for retirement, don’t use the online calculator that assumes everything is perfectly linear and rate of return is 12%. Be conservative and set yourself up to hit your goals in an imperfect life.

One of the benefits of adding in some margin is that you begin setting more attainable goals. Reaching your goals will provide further motivation and momentum for the future. Although margin comes in handy for all stages of life, it’s especially important early in the game when you’re figuring all this out!

7) Make Logical Values Based Decisions

Up to this point, we’ve focused on the logical numbers side of personal finance and planning. And this would be the end of the list if humans were perfectly logical and unemotional. But that’s far from true. Humans make irrational and emotional decisions most of the time, but then convince themselves they are being logical and unemotional.

First, you must learn to make more logical decisions. When people approach decisions, they like to talk about the logical, measurable things you would think of. They use words like budgets, planning, and calculated return. They create spreadsheets and cost/benefit analysis. But when it comes down to decision making time, the vast majority throw out all the spreadsheets and resort to pure emotion. They go with the gut. And then after the fact, no matter how it turns out, they convince themselves it was a smart move. Most people don’t even realize it’s happening. And that’s the danger – lack of awareness.

The first step to avoiding these irrational decisions is awareness. Like I said, most people don’t even know it’s happening. You’ll be ahead of the curve if you’re aware. Then, you must accept that it’s going to happen to you. People, especially smart people, seem to struggle with acceptance – they are aware it happens but they believe they aren’t susceptible.

If you’re thinking, “I’m good here, on to the next point” – stop! I’m probably talking to you.
I’m sure you’re smart, logical, have good self-awareness and know this stuff. But thinking you’re better than this is ignorant. There’s actually a word for it. Overconfidence. This may take a little time to get over, especially for the most intelligent, logical and proud thinkers. But be open minded. I’m sure you know that guy who knows everything (or thinks he does). That’s what overconfidence develops into. You don’t want to be that guy. It can spill over into all areas of your life if you’re not careful. If you don’t want to take my word for it, read up on behavioral finance. A great starting point is “Thinking, Fast And Slow” by Daniel Kahneman.

Kahneman - Thinking Fast Slow

Once you have gotten past awareness and acceptance, it’s about developing strategy to avoid illogical decisions. Here are some example strategies:

  • Intentionally slow down life instead of running on autopilot
  • Forbid making quick decisions, especially big ones
  • With big decisions, think about how your logical and unemotional self would handle it
  • Run decisions by others that are knowledgeable and not emotionally connected

The second part about making decisions is learning to incorporate your values into them. Most people agree this makes sense, but fail to execute. How can you avoid this? It starts with Tip #1 – identifying where you’re going and why. You can’t incorporate your values into decisions until you’re clear on what they actually are. Once you have clear values, this it’s all about making intentional effort to keep values at the forefront. Before you make decisions, make an intentional effort to think about if it aligns with your values. When you’re reviewing expenses, view them from the lens of what’s most important to you. This will give purpose to your decision making. It’s more exciting to do something because it’s aligned with your life’s purpose.

Let’s summarize the finance tips for young physicians:

    1) Plan Your Financial Journey
    2) Control Your Cash Flow
    3) Build Cash Reserves
    4) Address Life’s Risks
    5) Manage Advisors And Salespeople
    6) Learn To Use Margin
    7) Make Logical Values Based Decisions

The trick is mixing all this together to create your ideal financial life. It’s not going to be perfect, especially the first few years you’re figuring this all out. But it’s all about making the effort.

If you’re ready to start planning out your future, check out our young physician’s complete guide to financial planning. It’s filled with all kinds of time and money saving systems and strategy that’ll take your personal finances to the next level. You can download it by clicking below.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

The Right Way To Navigate Car Buying Decisions

The Right Way To Navigate Car Buying Decisions

Question: “I’m thinking about buying a car. Mine is getting pretty old (or boring). What should I be thinking about as I approach this decision?“

This is a question we get from clients all the time. And for good reason. People tend to throw money away on cars. I’ll share the following points to help answer this question:

– Start With “Why?”
– Determine the True Cost To Own
– Set Your Budget
– Beware of The Mind Tricks

Start With “Why?”

It’s important to clarify what a car means to you. How important are cars to you? How do they rank on your life’s priority list? How do they jive with your values?

I drive a 2003 Avalon. For me, cars are a method of transportation to get from point A to point B. I’m not much into cars. There are plenty of other ways I’d rather spend money. But that’s just me. And I’ll admit that I occasionally get the itch to spend some money on a nicer car… but then all I have to do is take a peek at the numbers and the thought passes fairly quickly.

As you might expect, a car buying decision for me is 90% about the numbers and 10% about the experience. I’m probably going to make the decision based upon total lifetime costs and efficiency. There may be a speck of experience based decisions but it’s not going to drive the boat.

When you’re looking at cars, how do you value the material aspect versus the financial aspect? Clarifying your “why” behind buying a car will help you make much better decisions.

(For the Car Guy)

Now, if you’re a car guy, you should probably skip the true cost to own and set your budget first. Depending upon how much you’re into cars, there’s a chance those depreciation and all-in costs might not phase you. It’s better to have a budget set before you do anything that’s going to get you excited about buying a car. On the other hand, if you’re not a car guy (like me), the true cost to own should come first because you’re more likely to be impacted by the massive amount of depreciation and other costs that it reduces your budget.

Determine the True Cost To Own

Start by researching the cars you like on the internet (don’t go in person yet). Most people who buy cars don’t realize the all-in costs. Figure the true cost of ownership for different alternatives. This will help you make the decision on new vs. used. Edmunds has a great tool to help you research this.

For example, let’s say you like the Honda Accord. Take a look at the used car true cost of ownership and compare it to the new car.

Here’s the report on the 2016 Honda Accord…

Capture2

And the 2010 Honda Accord….

Capture2

For me, the depreciation costs (especially for new cars) totally kill my urge to buy. I find myself looking at older and older cars with more tolerable levels of depreciation. And then I compare it to my current car. And this then leads to my decision to keep my old car.

To give you an idea of how massive depreciation is, I’ll share some examples I found from the 5 yr cost calculator.

2016 Hyundai Genesis
Average Price – $55,077
First Year Depreciation – $16,303

2016 Chevy Impala
Average Price – $39,236
First Year Depreciation – $10,005

Although your payment on a new Chevy Impala might only be $600/mo, the depreciation alone costs $834/mo. When depreciation is higher than the amount you’re paying on the loan, you go underwater. When you’re underwater, the loan payoff is higher than the car value. Car dealers even have a product they sell to help you manage being underwater – it’s called Gap Insurance – but they should really call it “spending outside of your means insurance”… because that’s really what it is. But I guess that wouldn’t sell very well.

For fun, here are my projected #’s from my 2003 Avalon. I pull these out whenever I have the itch to buy a nicer car… and quickly realize it’s not worth it (for me).

Capture1

Set Your Budget

It’s important to set your car budget before you get too serious. You’ll be better off buying cars in cash. Set a target for how much you can spend without depleting your emergency reserves. If your emergency cash target is $10K and you have $20K, your budget should be $10K. In most cases financing cars is a bad idea, especially if you tend to have trouble building cash reserves. The reason you’re having trouble building cash is because of past decisions like this. Time to put a stop to it.

If you have plenty of cash reserves and have the ability to buy the car in cash, then you might consider financing vs. using your cash (depending on interest rates, etc).

Beware of The Mind Tricks

Why is it that so many people with empty bank accounts drive nice cars?

Most people realize that they can’t afford the car they like.
But they want it anyway. And it would be even better if they could get it AND convince themselves it was a good financial decision. So they immediately begin working to psychologically justify their poor decision. And financing is the perfect fix.

People typically use financing to justify buying something they cannot afford. They tell themselves… “well, the interest rate was so low – it would be unreasonable to pay in cash (assuming they had it).” After all, they could go invest and earn higher. They convince themselves it’s a smart decision. But it’s really just a sneaky mind trick people play on themselves without realizing it’s happening. As a result, they end up getting a car with a plummeting value and a payment they can’t afford.

And remember, this same person doesn’t have any cash reserves. That means they already spend what they make, and now they’ve added a car payment on top of that. This is moving in the wrong direction.

Financing is not the only justification. Sometimes it’s safety – that’s pretty tricky, too. Here’s how it goes…

“I need the safest car possible for my family. The 2017 Honda Odyssey is the safest car I can find that’s a good fit for us. So I’m going to buy it. Although I live month to month, I’m sure I can make the payments work for whatever reason I use to justify it even further.”

Then I might say something like…

“Well, what about the 2005 Honda Odyssey? It’s safety ratings are the same as the 2017. And you cannot afford the new Odyssey.”

And then they say…

“But I need a safe car for my family. A car that old isn’t reliable, which isn’t safe (stupid me for asking). And I can afford the new car. I just got a raise.”

I see very smart people do this all the time. I find myself doing it from time to time. It’s a mind trick we play on ourselves to justify spending above our means. And it’s dangerous.

Those with plenty of cash approach it differently. Although they aren’t totally immune to the mind tricks, it’s much less likely. They end up buying the car based on the money they have. Maybe they consider financing and compare it to keeping the cash. In most cases, they decide on paying in cash.

So the next time you’re approaching the car buying decision, take these steps to increase your chances of making the best decision possible:

  • Start With “Why”
  • Determine the True Cost To Own
  • Set Your Budget
  • Beware of The Mind Tricks
  • Other Articles And Resources:
    http://www.edmunds.com
    http://www.investopedia.com/financial-edge/1012/cars-that-depreciate
    http://whitecoatinvestor.com/how-to-buy-a-car/
    https://www.autocheatsheet.com/new-car/best-time-buy-car.html


    Source: How Fast Does A New Car Lose Value

    Don’t miss out!

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    Feeling like you don’t have control over your money?

    Let's fix it! Download this guide now and take control in less than 15 minutes.

    What's Next

    Have questions or care to share your experience? Ask/share in the comments!

    Are you interested in having a conversation? We’d love to connect! Click here to request a free consultation. We look forward to hearing from you.

    Looking to create your own financial plan? Click here to download our free guide to getting started.



    © Wrenne Financial Planning | Crafted by Harris & Ward

    Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

    All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.