A Quick Review of 12 Toddler Steps to Financial Freedom
Kayse Kress, the latest addition to my fee-only financial planning firm, Physician Wealth Services, and I discuss 12 powerful steps that encourage financial freedom for physicians. This is the plot of a great article written by Dr. Breathe Easy Finance (drbreatheeasyfinance.com) called the 12 Toddler Steps to Financial Freedom. I thought it had such great information, Kayse and I had to go through each step one-by-one to motivate our listeners to perk up, gear up, and move toward financial freedom themselves.
Without further delay, here’s a quick overview of our discussion.
What You Will Learn
- 1 A Quick Review of 12 Toddler Steps to Financial Freedom
- 2 Building Wealth Doesn’t Have to Be a Catch 22
- 3 12 Toddler Steps to Financial Freedom
- 3.1 1. Pay off all credit cards
- 3.2 2. Have a minimum emergency fund of $1,000
- 3.3 3. Refinance your loans
- 3.4 4. Paying off debt with an interest rate above 5%
- 3.5 5. Utilize employer 401K up to the match
- 3.6 6. Pay off rest of your debts
- 3.7 7. Maxing out your retirement savings
- 3.8 8. Emergency Savings Fund
- 3.9 9. Invest in your children’s education
- 3.10 10. Build wealth: strive to save 1/3 of your income
- 3.11 11. Giving
- 3.12 12. Optional pay off mortgage
- 4 You Can’t Out-Earn Foolishness
Building Wealth Doesn’t Have to Be a Catch 22
Do you have a plan to build wealth? This is a question Dr. Breathe Easy Finance posed when addressing Dave Ramsey’s, “You can’t outearn foolishness” phrase.
When talking with Kayse, she told a story that exemplifies this quote. She explained that as you delay life to get your physician’s training and education, it’s easy to think you can live off the income you will be getting in the future.
Living off future income is a trap which will set you up for an expensive lifestyle you’re not ready for. We are advocating a future which includes financial freedom for physicians. Instead, we want to help you plan a proactive budget in which you minimize debt and plan for future wealth. We want to prevent you from getting mired in debt. If you start overextending your finances now—you will build a lifestyle that is hard to maintain in the future.
But you have the power to avoid lifestyle inflation.
We typically see residents with $10,000-$15,000 in credit card debt. My wife and I have been through that. I understand and can be sympathetic after going through a residency of three years, and then a fellowship of three years. Then there are residents that live for “right now” with the mindset of paying debt off “later”. They may come out with $80,000-$120,000 in credit card debt or personal loans in addition to their student debt.
How much of your spending is adding needlessly to your debt load? Kayse and I agree that it is better to keep your debt load minimal. Instead of climbing out of debt, it is better to plan for building wealth and financial freedom for physicians.
12 Toddler Steps to Financial Freedom
1. Pay off all credit cards
- Ask yourself if you want to tackle consumer debt along with student loan debt?
- Avoiding the habit of using a credit card to pay for things will help keep you on track. Avoid using your credit cards while paying them down to eliminate debt.
- If you have credit card debt and it can’t be transferred to a 0% interest card, you might refinance through Best Egg, Lending Club or Prosper (depending on your credit score). This is still high credit debt, but you will save some money when you refinance from a 20% interest rate down to 8%-9% rate. Hopefully, you can allocate more money to bringing this debt down increasing financial freedom for physicians.
2. Have a minimum emergency fund of $1,000
- Build your emergency fund slowly—not at the expense of paying down debt.
- I think $1,000 is too little. That might be a good place to start. It is important to have some type of emergency fund so that your credit card is not your emergency fund. Dave Ramsey’s demographic is not physicians. He gave one of his physician listeners some bad advice.
- Instead of using the credit card, use the envelope system, the tool Wynap. There is a company called Stratus that is doing some good stuff.
3. Refinance your loans
- If you are not eligible for public service loan forgiveness, consider refinancing to cut down on the interest over the term of the loan. This will help you get out from under the loan as quick as possible.
- My wife’s weighted average was 6.8%. That is still high. Our country has a huge problem coming. Refinancing could mean your high-interest credit card debt or your student loan. I would not consider refinancing an auto loan which is usually has a lower interest rate.
- Kayse explains the snowball method is paying off the debt with the smallest balance first so that you get some momentum going. Once that is paid off, you take the payment that you were paying and apply it to the next credit card with the second highest balance and this continues until your bills are all paid off. However, I agree with Dr. Breathe Easy. He stated that he knew he was smart, and he understands mathematics. Instead of using the snowball method, he recommends the debt avalanche which takes out the debt with the highest interest rate first. When the debt with the highest interest rate is paid off you would move to the debt with the next highest interest rate. By eliminating the debt which will cost you the most in the long run…you are speeding up financial freedom for physicians.
4. Paying off debt with an interest rate above 5%
- I think we’ve covered this one while discussing refinancing and paying off loans.
5. Utilize employer 401K up to the match
- Do you know what your options are? Do you understand how a 401K and Roth IRA work? Do you understand backdoor strategies?
- This can be a tricky problem. Kayse says you never want to leave free money on the table. Even if you are having trouble meeting the maximum contribution to a retirement plan, you will want to take advantage of any match that the IRS allows.
- Physicians with a significant income will benefit from investing in the traditional portion of a 401K. Kayse agrees with investing in a Roth, but only after you have maxed out your 401K and retirement plan.
- Once you phase out of your ability to contribute to a Roth IRA, you can use a backdoor strategy. This is contributing to a non-deductible IRA and convert it over.
6. Pay off rest of your debts
- I think this is a loaded question in a financial planning sense, with no wrong answer. It will depend on several factors and your personal goals. Kayse agrees, she states this a personal financial planning decision that depends totally on your goals. For example: After your consumer and student debt is paid off, you might start maxing out your 401K instead of paying off a mortgage that has a low-interest rate. If the mortgage had a high-interest rate you might decide to refinance or make other adjustments to your financial plan.
7. Maxing out your retirement savings
- In 2018 you would be reaching $18,500 or $19,000 in 2019. Kayse states this is a must for your long-term financial goal of retiring. She mentions how hard it is to get your retirement fund started right after residency and fellowship. You are just starting to see the payoff for your hard work in your income. You want to start spending that hard-earned cash. However, now is the time to look ahead to the future and decide what will best benefit your goal of financial freedom and wealth. The earlier you start planning, the more likely your success to build wealth and your financial freedom.
8. Emergency Savings Fund
- You’ve got your basic emergency fund started of at least $1,000, now it is time to expand that amount.
- This is about boosting your emergency savings fund up to 3-6 months—or more.
- As a physician, this is very important to your overall plan. Due to your expenses and lifestyle, you don’t want to go backward and pull out the credit card for rainy day things. If you have an automobile emergency, you’ll want the cash to deal with it, without resorting to using a credit card.
- The more you spend the more emergency savings fund money you need. To ensure financial freedom for physicians, I would also suggest if your job is stable three months may be enough. However, if your job is up in the air you need six months of money stashed away. Many residents leave during their first contract, you may need money to cover anything that leaving might affect due to your contract.
- Stock pile cash If you can’t get disability insurance, term insurance, or your financial situation is rocky.
9. Invest in your children’s education
- Financial freedom for physicians means you don’t put your children’s education ahead of your own needs and financial plans.
- There is no such thing as financial aid for your retirement.
- Max out your own retirement before helping your children—they can always borrow!
- I did a show on 529s with Abby Chao founder of College Backer earlier this year if you want to check it out on the best ways to save for your kids college.
- We were looking at in-state tuition for our four-year old’s college cost. It is going to be $400,000. If the government is writing an open-ended check and people are willing to borrow the amount will continue to go up.
10. Build wealth: strive to save 1/3 of your income
- Get started with an emergency savings.
- Strive to save 25% of your income. Don’t panic if you are not saving that amount in the beginning!
- Financial freedom for physicians means establishing your investments so your money starts to work for you.
- Have a plan for charitable giving.
- Time is your most precious resource. Giving your time is charitable.
- Choose the causes that are most important for you and your family.
- Don’t get caught up in donating to so many organizations that your contribution isn’t making an impact.
- Donor-advised funds—donating appreciated stock. This is building wealth and charitable. I think we will do a show about donor-advised funds soon. Check out com if you want to learn more about that.
12. Optional pay off mortgage
- Kayse declares paying off your mortgage as the ultimate debt freedom and that means financial freedom for physicians.
- Have you maxed out your savings goals? Are you investing? Are you building wealth and philanthropic? Do you have money left over?
- Are you at a place where you have met your financial goals and are doing all the things that you want to do? Then you can put more money toward the mortgage and pay it off!
You Can’t Out-Earn Foolishness
Do you have a plan for financial wealth? Do you know what steps to take to achieve financial freedom? Where are you on your financial journey? Are you a resident just getting started on your journey to financial Wealth? Have you experienced some bumps then decided you need a better financial foundation? While I agree with the Dave Ramsey quote, “You can’t outearn foolishness,” I also believe you can learn and grow! Our podcast Financial Residency.com exists because we want all our listeners to experience financial freedom. That is why this podcast exists. We can get there together.
I asked Kayse if she had any last words of advice. She stated “Your plan is truly your plan. Don’t worry about what other people are doing. Focus on what is most important to you; I always say “Live out your ideal life. If you don’t know what that looks like, break out a pen and paper. Go back to the show that Taylor and I did sometime in December 2017, where we discussed the three questions of what was important to us. We revisit it every year. We won’t be doing a show on it this year but go back and listen to that.”
Kayse and I discussed the 12 Toddler Steps to Financial Freedom by Dr. Breathe Easy Finance. She told us some stories that illustrate them and gives us practical insight into what these steps encompass. To get on track for financial freedom and wealth follow the twelve toddler steps.
Check out the full article here and be sure to give Dr. Breathe Easy Finance some love!