As we close the book on another year, there are certain goals and ideals we’d all like to shoot for in the next twelve months. This could mean taking on something new or phasing out something bad as a way of growing, changing or resolving to make this year better than the last.
For many, this process starts and ends with financial resolutions. Every physician could benefit from adopting just one of these as a New Year’s resolution, and in doing so will set themselves up for a more responsible and balanced financial year.
Emergency Reserve Funds
It’s been said: “Life changes in the blink of an eye.” Emergencies and catastrophes often have a way of developing when we’re least expecting them, and having adequate resources to deal with these unforeseen circumstances is key to a successful financial life. Some people might call this their “Rainy Day Fund.” Regardless of what you call it, it’s crucial to set aside some money for the unexpected expenses that life throws at you.
Financial planners recommend you have a reserve fund equal to six months of your income. However, most physicians keep enough cash to cover about two or three months worth of monthly living expenses in a checking account or money market fund. They unwisely choose to supplement their emergency reserve by relying on a home equity line of credit, four-day access to their investment funds or some other unsecured line of credit. There’s no telling how much you’ll need or how urgently it will be needed, therefore it’s preferable that your emergency fund consists mostly of cash so you’ll be ready when the unexpected comes your way.
Stick to a Budget
Creating a budget is an often overlooked, yet critical way to get your finances in order. Start by dividing your expenses into five different categories:
- Medical School Debt Reduction
Next, assign each category a percentage that is representative of your total income. In most cases, living expenses will account for at least 50% of your total budget. Besides living expenses, one is encouraged to allocate a percentage of each pay check towards saving money, paying down outstanding debts and charitable giving. As long as the percentages are properly balanced, this simple method can make your life a whole lot easier.
Create a Savings Target
It may sound simple, but spending less than you earn is a key component of the formula for financial success. Setting realistic fiscal goals allows you to determine the degree of sacrifice that is necessary to achieve them. It’s perfectly realistic to save for the future and still enjoy a comfortable lifestyle here and now. Every situation is different, and there is no exact dollar amount that works for everyone so it’s important to consider all the factors and variables at play.
A great deal depends on what type of lifestyle you desire when you reach retirement age. Most financial planners advocate setting aside 10% of your income to provide for retirement. Of course, the earlier you begin saving, the lower the percentage of income that is required to meet your goals. However, physicians by and large have ten less years to reach financial independence, which requires them to save their income at a higher rate.
Legacy of Giving
Financial success is not something to be taken for granted, and giving consistently to those less fortunate is a responsible way to manage your finances. Studies have shown that those who are generous with their time and wealth are happier, less stressed, live longer and feel more spiritually fulfilled.
For those who haven’t yet established their own philosophy for charitable giving, we offer a simple approach. Begin by giving away a set percentage of your after-tax paycheck, and make it a goal to increase that percentage every year if only slightly. Find a cause you are passionate about, but also keep in mind that by donating to certain organizations you could be eligible for a tax deduction in the near future.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.
This article was provided by Forrest Friedow, Regional Director and Senior Financial Advisor of Larson Financial Group. The opinions stated are strictly those of the author and are not to be considered recommendations or advice of Larson Financial Group or Larson Financial Securities.