First things first… Your ROADMAP to financial healthJan 17, 2021
As you have probably realized, growing wealth is not just about investing. If you are striving to increase your net worth, it is imperative to have certain protective systems in place prior to embarking on your investing journey and to take advantage of key strategies that help compound your investment growth. The earlier you arm yourself with this knowledge, the better and I wish I knew 10 years ago what I know now, but it is never too late to check your progress and realign yourself. This is a bird’s – eye view of what should be included in your financial blueprint…
PROTECT your INCOME & ASSETS:
- A big part of protecting your nest egg is INSURANCE. Apart from the mandatory Home/ Auto and Malpractice insurance, in my opinion there are 3 other insurances that you should consider padding yourself with in the below order:
- Long Term Disability Insurance: Most physicians who don’t have children prior to completing fellowship will probably end up getting a personal Long Term Disability Insurance plan prior to starting their first job as premiums are lower when you are younger and in a lower income bracket. Without going into much detail, it’s good form to get an OWN OCCUPATION policy and pay attention to contractual language with reference to Return to work, Residual disability, Cost of Living Adjustments riders. More on this later.
- Life Insurance: Most people start thinking of Life insurance once kids are in the picture and it is always smart to have your own Life insurance policy that you will carry with you even if you change employers, again the earlier the better as premiums begin to increase with age. With a myriad of options out there – Whole life, Term Life with ROP (Return of Premium), Term life without ROP – it can get very confusing very fast. In my opinion you are best served getting a Term Life Insurance policy for 20 – 30 years (depending on how young your children are), a tiered plan is a great strategy and invest the savings in annual premiums. More on this later…
- Umbrella Insurance: Considering the relatively low cost of an umbrella insurance policy, it’s always a good idea to carry some coverage, more so if you have multiple rental properties that are in your personal name.
- LAST WILL AND TESTAMENT, TRUST AND LIVING WILL: Once you have assets, it is never too early to create a Last Will and Testament, but it is important to remember that having a Will still does not prevent your Estate from going to probate, a time and money consuming process that you do not want to put your loved ones through, which is why you ideally want a Revocable or Living Trust with a Pour over Will to capture assets that have not been transferred to the Trust. It is also best practice to have Beneficiaries (POD or payable on Death) named on your bank and retirement accounts. A Living Will is a legal document outlining your end of life medical treatment choices.
- Tax efficient investments: It is prudent to fund your tax deferred investments before funding your investments with post tax dollars. During residency, one of the most important things you can do to speed toward your financial goals is to contribute to Roth IRAs (contributions made with post tax dollars for tax free growth) for yourself and your spouse and a 401(k) plan if offered by your employer (bonus points if there is an employer match). After training, it is best practice to max out 401(k) or 403(b) plans offered by employers that are tax deferred (Solo 401(k) or SEP IRA if you are self employed – most often a Solo 401(k) is a better option if you do not have additional employees beyond your spouse), following which you should contribute to Backdoor Roth IRAs (a way for high-income earners to fund a Roth) for both yourself and your spouse. If you have access to a Health Savings Account (HSA) this is an additional way to invest tax deferred money that can be withdrawn after age 65 to pay for any expense without penalty.
- DECREASE LIABILITIES AND SPENDING: Remember ” a dollar saved is more than a dollar earned…” because of the taxes we pay on earned income. Reading RICH DAD POOR DAD was eye opening because a new home or fancy car are actually Liabilities since they take money out of your pocket and the best way to build wealth is to save and buy Assets that put money into our pocket.
- DEBT: Paying down debt and/or refinancing to a lower interest rate on credit card/ Home mortgage and student loans is something you should have on your radar.
INVEST AND GROW: I will be listing the most common investment vehicles here and discussing them in future posts. With investing it is key to have a written IPS- INVESTMENT POLICY STATEMENT based on your goals, priorities and risk appetite. Your IPS will serve as a roadmap and help you re balance your portfolio allocation periodically to stay aligned with your goals and not get swayed by market ups and downs.
- Stocks and Bonds: Please refer to my post on creating your Investment Policy Statement for recommended asset allocations; allocation will depend on your risk appetite, investment goals and timeline. I want to stress that low cost INDEX INVESTING is my preferred recommendation for a passive investor as opposed to individual stocks.
- Real Estate: My go-to for building generational wealth… I prefer direct ownership over passive real estate investing as it gives you more control and tax savings, but it does require more active participation. Check out this post…
- Cryptocurrency: with it’s performance in 2020, it has definitely earned a mention, although I consider this risky.
- Savings account and CDs: With current interest rates, hoarding money in your savings account will likely not even beat inflation, thereby devaluing your money over time. Therefore once you have a comfortable buffer, usually 6 months worth of expenses (your emergency fund), it makes sense to invest your money in other baskets.
- Saving for kids: Most people contribute to a 529 College savings plan which in some states is tax deductible and front loading this contribution helps compound growth significantly. If you have a small business then a more tax effective strategy would be income shifting by employing your children through the business, and contributing to a Roth IRA in your child’s name – contributions can be pulled out to pay for college, earnings may be used for qualified education expenses without a penalty.
As I mentioned before, the first step is to sit down with your significant other, ensure your protection strategies are in place and write down your Investment Policy Statement IPS, because as simple as this may seem, knowing what your goals are and having a defined strategy are the most important steps in your journey.
A journey of a thousand miles begins with a single step…
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