Today I answer 4 listener questions. Remember, if you have a question keeping you up at night and would like to be featured on the podcast, record your most important financial question today.
Q. How do you balance paying off your medical student loans, saving for retirement as a slightly older physician and rewarding yourself and your family?
A. First, establish a plan for your debt. If you are going for Public Service Loan Forgiveness (PSLF) then you will want to maximize the amount of debt to be forgiven while minimizing the monthly payments. If you are not going to PSLF, then you will need to decide on a balance between paying down debt aggressively or investing in your future.
First, I would look at maximizing your employer-sponsored retirement plans and fully funding your IRA contributions. Next, you will need to decide how much to let your lifestyle inflate vs how aggressively to pay down loans or save.
Being a resident, this is the perfect time to figure these things out because you haven’t seen the big paychecks yet and you don’t have any bad tendencies. I would even go as far as making a list of the luxuries that you know you would like – a new car, traveling with family, etc. Rank them by what would make you happiest to help prioritize what is most important to you and your family.
Q. How did you decide how much of your income to save each month? Did you both agree on the number right away or was there some compromise?
A. While the amount saved is important, the most important thing is to set up a good foundation of financial habits. Sit down and talk openly and honestly about what is really important to you, how you want to live your lives and what would make you happy.
PS: There are always compromises.
Q. I have a friend that gives good financial advice. He is a fiduciary but I don’t pay him anything for his advice. Should I trust his advice or should I go find an actual fee-only financial planner?
A. It’s great to have a friend that is a financial planner. The idea of not paying him for advice means that he probably doesn’t know all of your financial details and more than likely he doesn’t know what your goals or ideal life would look like. He is a great resource, but take his advice as general advice that may or may not apply 100% to you and your situation. Hopefully, he is telling you to be looking for highly diversified low expense ratio funds that invest passively in the entire market vs trying to time the market by buying high expense ratio actively managed funds.
You can do this by yourself, but there is value in getting second opinions on what you are doing or how you are approaching things, especially if there are big changes (having a child, buying a home or car, etc).
I’m also assuming that your friend is a good person, knowledgeable and isn’t trying to sell you some insurance product. If you value his opinion but don’t want to share everything with him, then I would really recommend reaching out to a fee-only planner that you feel comfortable with and could trust. Otherwise, read up, study up, pay attention to your finances and just ask him general questions and expect general answers back.
Q. We are looking for a financial planner but we are confused on the differences between fee only and fee-based financial planning. Which should we choose and why?
A. Check out my episode with Tim Baker on finding a financial planner that you can trust. Fee-only planners make up around 3% of financial planners. Fee-based planners could charge for financial planning directly or they could offer it for free and get paid by another source such as selling you insurance products you probably don’t need.
There are grey areas that can be confusing but the easiest rule is… If your advisor can sell you insurance, they are fee-based. Selling insurance means they have a conflict of interest because they are making commissions off the plans you purchase. If they are recommending universal life or whole life, they most likely aren’t worried about your best interest or acting as a fiduciary to you. They are chasing the commissions that they are getting paid by the insurance companies. Also, fee-based planners can receive referral fees for places they refer you to – such as estate planning attorneys, CPA, or other businesses.
Fee-only planners have the least amount of conflicts of interests. They cannot receive commissions and they cannot receive referral fees for referring you to another provider. They usually either charge a large up-front fee for one-time planning or monthly fees for ongoing planning. They also tend to charge AUM fees on assets managed.
The main difference is that fee-only planners try to reduce the conflicts of interest as much as possible by aligning their compensation with the client’s best interest. Imagine if doctors were only paid by drug companies, would you feel comfortable with that model? I wouldn’t and that’s the equivalent of being fee-based in the finance industry. So if you are wanting to work with a financial planner, look for a fee-only planning firm that works exclusively with physicians.