As an academician specializing in physician personal finance, I frequently address doctors at hospitals, universities, private practices, and conferences. The most common topic I’m asked to address is, “Top Financial Mistakes Doctors Make.” Invariably, after completing my talk several attendees sidle up to me and sheepishly admit they’ve made every error on my list.
We’ll address those errors throughout this book, but it’s important to establish that a common factor underlying the mistakes is lack of planning. Like most consumers, doctors make financial decisions in ad hoc or arbitrary fashion. Consider a typical scenario: A young resident learns from a colleague that disability insurance coverage is important. She engages in some hasty research and settles on a policy. A year later that same resident scrambles to secure life insurance. A year after that she goes through a similar rush to open a 529 College Savings plan for her child. Each decision is made in a vacuum. Our fatigued resident fights random financial brush fires instead of following a comprehensive plan. One outcome is that she’s constantly under stress, wondering when the next financial need will suddenly arise, straining her meager income and depriving her of much needed sleep. Another outcome is that she may spend too much money on one financial product and not have enough left for other needs.
The obvious solution is to equip that resident (and ourselves) with a comprehensive understanding of personal finance.
We don’t need expertise in personal finance, we just need enough knowledge to understand the bigger picture and get our proverbial arms around it. Exposure to a comprehensive curriculum means we no longer stress over which financial need may surprise us in future because we already know what’s on that comprehensive list.
Understanding that bigger picture also helps us navigate unavoidable tradeoffs. If we buy too much disability insurance early on, we may not have enough money to purchase proper life insurance coverage. Under the ad hoc approach we don’t even realize that other, potentially competing, needs will arise in future. Uninformed decisions deprive us of options down the road. In an uncertain world having options is very helpful. It follows that losing options works against us.
Financial advisors and brokers want us to think that financial planning is highly complex and confusing. Positioning themselves as “illuminators” justifies the fees they charge us for their services. But financial planning is not rocket science; it is a well-documented process any high-school student can follow. That process is summarized in a financial plan.
In this chapter we’ll cover the fundamental elements of a financial plan, along with several imperatives and axioms to which you should adhere at all times.