Building a financial plan is central to your current security and future prosperity. No-one is immune to financial shocks without preventative preparation. You won’t achieve your goals, if you do not clarify what they are and how to get there. Carry this outline of a basic financial plan with you as you explore the rest of the basic curriculum or advanced posts on this site.
Preventative preparation means making a financial plan.
We were reminded of the value of prevention with the recent pandemic. Even physicians. Prior to Covid-19, many physicians felt financially immune to the various shocks that can shake up the world. People need healthcare through recessions, wars, trade embargos, and financial system crises. You would think that we’d have a leg up during a health crisis. However, many physicians suddenly found themselves with rising overhead costs in the face of decreased revenue. This was coupled with higher costs at home for simple things like toilet paper. If you could find it! Just for the record, I called the run on toilet paper years ago.
You must plot your financial course to get to your destination and you must anticipate and be prepared to weather the next unexpected crisis. That may not be a pandemic, but a good supply of toilet paper and a financial plan are never wasted.
Start with the end. It guides the rest.
A financial plan is used to understand your current financial position and plan how to achieve your financial goals. The best place to start is the end. What are you big life financial goals? Some common ones are retirement, educating kids, buying a house, having money and time to travel, or major philanthropy. Goals will change as the world changes and we change. Fortunately, you don’t always need to be precise. The further into the future the goal is, the more you can use hand-grenade instead of sniper rifle precision. Regardless, you need some guidance for how much you need to earn, spend, save, and invest when making your plan. Plus, goals provide motivation to implement it.
Components of a financial plan. Guided by the goals.
How much money do you make?
Money is simply a convenient medium for exchanging time and effort. Knowing the value of your time helps you to make better decisions for spending your time to earn money and vice-versa.
What are your income sources?
You must understand your income sources to spot where your income is vulnerable and where there is potential to grow it. The more you peg your financial well-being to fewer things, the more specific risk you have. This applies to your income as well as your investment portfolio. A variety of income sources helps to mitigate that risk.
Take advantage of the broad range of opportunities clinical medicine offers.
You can specialize your practice which may increase efficiency. However, that also increases risk if there is a change in technology, technique, or political attention. I have seen people build clinics and ORs to take advantage of a fee-sweetspot, then have it blown up overnight by a change from our Ministry of Health.
Not only does a variety of clinical practice and income sources mitigate against that risk, but it also keeps your career interesting. A broader spectrum of practice gives more opportunities to change focus as your situation changes. Even within an area of medicine, there are often different pay-models and locations that you can practice within.
A variety of income streams isn’t limited to clinical work. Or even your profession.
There are plenty of other opportunities for physicians or other professionals to earn money and take on new challenges related to their expertise. Some examples would include course development, administrative or leadership roles, consulting to industry, or even medico-legal work. These are unlikely to pay nearly as well as clinical work does. However, I can tell you that some of my work as a teacher and physician leader has been the most satisfying. I was also pretty grateful for my admin and teaching stipends at times when my clinical billings shriveled in the early stages of the Covid pandemic.
There are also many income streams outside of your professional realm worth considering. Most professionals have a variety of interests and developing some of those outside of medicine is important. Not just for income diversification, but to do more than retire from something someday.
How much do you spend now on basic needs? On discretionary needs/wants? What can you realistically switch off, if you have a financial shock? How much do you want to spend in the future? Big ticket purchases and ongoing lifestyle. These are the most important questions to ask when looking at your spending.
That may mean tracking your budget for a period of time to get a baseline. It can reveal where you spend money and give the opportunity to reflect on how that aligns with what you value most. Even if you don’t like to budget, getting the big pieces right is vital. That can even make an ongoing budget of the “small stuff” less important.
If you spend money that you have not made yet, that is debt. Future-you will have to pay that debt back, plus the interest along the way. You need a plan to do that before future-you finds it harder to earn the money, or you are hit by a financial shock. This is critical for consumer debt.
Debt To Invest
Debt can also be used to invest. Borrowing from future-you to hopefully pay future-you more. That could be fincial debt to build your human capital. You have likely already done this by accruing debt to pay for training that will lead to a higher income. Even when investing in your human capital, you need to weigh the debt taken on against the likely return.
When you are financially secure and experienced enough, you may consider using debt to invest in financial assets. That is commonly called leveraged investing and it comes with greater risks and potential rewards. So, it must be done deliberately and in a discipline way. Ironically, those in the strongest position to handle leveraged investing are often also the people who don’t need to take the added risk. Unless they keep moving the goal posts.
When you spend less than you make, you can use it to help “future-you”.
- Reduce Debt (pay future-you back)
- Save it for a near-term expense
- Build an emergency fund to protect against expenses you aren’t insured for
- Invest it (for a distant-future financial goal)
Investing means that you don’t need the money in the near future. A short-term bet is often speculating, not investing. Investing needs to be done in a deliberate way to succeed, and that requires a plan.
You need some basic financial education to make an investing plan.
The good news is, you just need to hit a few big points for a simple and effective plan and this website can provide it. It can be as simple as assessing your risk tolerance, choosing the corresponding self-rebalancing fund, and buying it in your self-directed Tax-Free-Savings-Account to get started. The plan can grow to include your RRSP or corporation as your money available to invest grows.
If those last two sentences scared you, don’t worry, you will breeze through that after the basic curriculum on this site! There is also some very advanced investing and tax planning information in the dark corners of this blog. Don’t let the advanced stuff scare you away from learning the basics. In fact, I strongly advise that you ignore it until you are ready and wearing a helmet to contain your blown mind.
While some financial professionals will try to wow you with complex plans and products, a simple plan is 90% effective and may be more effective once you account for fees and your ability to stick to it. There can be a role for them, but that is usually 10-15 years into practice and the other good news is that you can add that later – if needed.
A good simple plan that you implement and stick too is better than the perfect one that you don’t.The Loonie Doctor on Investment Plans (Just Now)
One of the key ways we can spend human or financial capital that gives lasting happiness is by giving. You are most likely to reap the benefit of those feelings when you are not dead. So, having a giving plan while you are alive is important. Of course, you also need to do estate planning for when you are dead.
You need enough insurance to protect your financial health from an unexpected disaster. However, insurance is a product. That means that you need to know what you need so that you are not sold more than you need at extra cost. It is also important to re-evaluate what insurance you need as your spending requirements change and as you build more financial resilience that can absorb some unexpected disasters.
While insurance companies will try to sell you insurance as a “tax plan”, there are many other ways to minimize how much tax eats into your earning, investing, spending, and giving. This plan is sprinkled amongst the other aspects of the financial plan. It is only fair that we all pay taxes to maintain our civil society and our progressive tax system does this. However, feel free to ignore this aspect if you feel the government is better at directing where your giving goes than you are and you want to pay extra.
If all goes as planned, hopefully we have either spent down most of our estate or given away excess assets when it is apparent that we will not need them. However, life often doesn’t go as planned and we cannot predict when we will die. So, in addition to insurance to protect us and those we care about along life’s journey, we need an estate plan for when our journey ends. There are two major components to attend to right away.
Make a will. This is vital if you have children. Consider who you want to care for them, discuss that with the potential guardians, decide how you will financially support it. That may mean outlining the set-up and governance of a trust fund to ensure that the money is used appropriately. If you do not have children, all of this could apply to other beneficiaries.
If you have a corporation with considerable assets, you may want to make a secondary will. Depending upon your province, it may be a way to bypass probate.
Consider who will be executor of your will. When you die, there are many tasks to attend to in settling your estate. Many people name a trusted family member or friend or several to take on that workload. If you go that route, you will also likely need alternates. However, you may want to seriously consider hiring a professional or institutional estate planner to be executor. That costs a percentage of your estate, but that can be well worth the benefit of removing this burden from those already trying to cope with your death. Plus, families are complicated and a neutral third party often helps.
Putting A Financial Plan Together
We will cover the basics of all of these financial planning components in some detail through this basic financial wellness curriculum. To make financial goals, you need to understand how money works and how it can be used as tool. You can forge that tool into the ultimate weapon – Financial Independence. To do that, you need to develop your key skills of earning, spending, saving, and investing. You may need help with that. Some you must do yourself. Other parts, you may choose to pay to delegate (not abdicate) to someone else. Either way, you must lead your financial team and that requires a basic financial education. I am here to help with that.