Getting Your Head In The Game: Building A Unique Financial Plan
What does building a financial plan and visiting Australia have in common?
If you’ve been reading the blog, you probably have a good idea. But I’ll say it anyway, a great financial plan incorporates life planning (“The Great Barrier Reef is on my bucket list”) and cash flow planning (“I’m putting cash into my Australia fund”).
My wife, Taylor and I are currently experiencing the beauty of Australia, and for eighteen months we planned ahead for the trip. However, what started the whole process was knowing what was important for us to experience in life.
That’s what I wanted to write about today.
How important is life planning to a great financial plan?
The last thing anyone wants to do is slave away at a job and stash the money away only to be forgotten until their will is read. You’ve probably got some hopes, dreams, and goals.
Here are two questions that you can ask yourself:
- What do you want to do?
- How can I have my money work for me?
Behavioral finance is something I find fascinating.
I’ve written before about how our early experiences influence our relationship with money. Most people don’t understand how our behaviors really influence the way we manage money.
When I work with clients, the first two meetings are all about discovering “you” and finding out what your goals are. We use a framework and ask George Kinder’s three very detailed and thought-provoking questions.
The answers give a lot of insight into your values!
Cash Flow Planning
It’s time to take control of your money.
The first step is to track every penny. This is a lesson in cash flow in and cash flow out. You’ll be able to see where your money is really going. My clients are often surprised to find that their money isn’t going where they thought.
Am I suggesting that you track your spending this closely for the rest of your life? No, but in the beginning, it’s an exercise in getting in touch with your money and spending habits.
My wife, Taylor used to think cash flow planning was limiting (that’s during the times I track spending and grill her about purchases). She now admits that having money set aside for specific things takes the stress out of paying for them.
You can relax even further if you have a high savings rate!
In fact, the amount of time that you have to spend on your cash flow planning decreases rapidly if you have a high savings rate!
How you structure your accounts is very important.
I’m in favor of one joint checking account where all your money flows in and then each goal or category has its own separate savings account.
Our dogs even have their own savings account. It’s come in handy when we’ve had to pay their vet bills for allergies.
I would also have a sunk cost savings account for bills that come in semi-annually or quarterly. That way you’re saving a portion of the money every month into a separate savings account, the bill comes, and you pay the bill.
Automation is critical.
It’s the step after you’ve figured out your savings rate and how money flows. Automation makes life so much easier since it takes care of saving (and paying bills) so that you don’t have to think about it.
It takes the sting out of watching your money flow out!
How do you protect your income so you can afford the fun things in life?
I’m talking about Long Term Disability Insurance (term insurance). I’ve written blogs about this topic–and there are several more planned to cover specific topics in-depth.
If there is one thing I’d like you to understand about insurance is to find an agent who is independent.
I’m not talking about a financial advisor who also sells insurance, that would be a conflict of interest and you run the risk of buying some crap policies.
I’m also not talking about an agent who works with one institution, such as Guardian. They have some great policies. However, they can only run quotes through their own insurance company.
Why is that important?
An independent broker who can run it through dozens of companies and return with the best options for you to choose from.
When you’re buying long-term disability, make sure you have a true own-occupation insurance policy. Northwestern Mutual’s own-occupation insurance doesn’t count.
Do you think you’re safe because you have a long-term disability policy from your workplace? You’ll need significantly more coverage than what your employer provides. They’ll usually provide anywhere from 50 to 70% of your base pay.
Let me give you an example:
If you make $10,000 a month base pay (not including bonuses) and your employer covers 60%. That means you’ll get a $6,000 benefit.
The question is would you be able to live off $6000, instead of $10,000? Keep in mind that you’ll be taxed on the $6,000, which will whittle it down even more. What you need is a policy that will go on top of your work policy.
You’ll want your income to be as close to normal as possible!
Let’s say you needed $3 million of coverage.
You don’t just go buy $3 million for a long period, like 30 years. If you were to buy for such a long period, you’d be overpaying for 30 years on that premium.
Instead, the beneficial thing to do is something called laddering.
Let’s say that you bought a one million dollar policy at 15 years, a one million dollar policy at 20 years and a one million dollar policy for 25.
For the first 15 years, you have that full three million of coverage.
But you have 15 years of earning potential and savings and investments and growth in those investments, so you might not need a full $3 million dollars of coverage.
That first million rolls off and now you have two million of coverage for the remaining five years on one policy and 10 years for the next. Then you have five more years of growth and income and savings. You will likely need less insurance, so it naturally will roll-off.
It’s logical that it rolls off as your investments and savings grow. You’ve also saved the cost of the premium, which adds up.
If you need term coverage–remember laddering.
If you have term coverage and you’re overpaying, you can get new coverage and cancel what you have. An important point is to make sure that when you get new coverage that you cancel the old ones, that’s after the new policies are in effect!
What about people who can’t get disability insurance or term insurance?
There are some individuals who don’t qualify for disability or term life insurance policies. That’s when you’ll need to modify your financial plan. It will require more planning ahead and making sure you have extra cash and reserves.
Protection For Home And Auto
How much coverage do you have?
As a medical student or resident, your goal is to pay as the lowest possible cost for auto coverage. I’m betting you have the bare minimum on your limits and have a low deductible.
I understand how tight money is during this time, but umbrella coverage is very important. Yes, it will force your car limits to go up higher.
There’s a lot of people who will disagree with me about umbrella insurance.
We’ll just have to agree to disagree because I’ve known dozens of people who needed umbrella after serious accidents.
It’s cheap and absolutely critical if you are a new attending.
529 College Savings Account
Are you thinking about saving for your children’s degree?
Investing in a 529 for your children’s college education is not investing in your future. It isn’t increasing your net worth.
You know what they tell you when you’re on the airplane, about to take off? They’ll say to put on your oxygen mask first and then put one on your child. Don’t fund the 529 if you’re not maxing out your IRAs, 403b or your 401k every year.
There’s a lot of differences between governmental and non-governmental. You’ve still had to make sure that you’re maxing out those retirement accounts.
What if your work has a good plan and they put money in or they match money?
You’ll want to get the match, but you’ll still need to save more money for retirement. It could be $50 or $100 bucks a week. It will eventually grow and compound.
For this piece of the financial plan, you’ve got to put yourself first.
The earlier you start the better!
We’ve written a book, which is coming out in April. It’s for those who like to “DIY”. It details how to build your own custom financial plan and build your wealth.
Are you combining life planning into your financial plan? Find the Physician Finance FB Community to share! See ya there!