Recognizing And Safeguarding Against A Fragile Personal Financial Structure

In the past when I had a low checking account balance I would freak out a bit, I’d get that sinking feeling in my stomach. There would be times when I didn’t know what bills were going to come in, there were just too many to keep track of. This feeling of uncertainty made for a fragile financial situation.

The impression among financial advisers is that Americans don’t put enough effort into safeguarding their personal finances. This creates lives which are heavily reliant on everything going well.

Those who build up several layers of protection into their personal finances tend to do well, even when disaster strikes. The simpler your household budget, the less structure you need to build into it. But for those with multiple dependents, debt, volatile investments, fledgling businesses and expensive hobbies, it’s important to safeguard against unforeseen financial stressors.

No matter how shitty your situation might be, it’s important to realize that if you have a plan then you will come out shining. What matters is that you don’t allow for a small unexpected setback to completely derail you.

Too Many Bills To Keep Track Of

It’s common to use our credit or debit cards 5-6x per day. Just look at your bank statement and see how many times in the day your account was debited. It’s not just transactions which you made in person, there are also online purchases, app downloads, automatic debits etc.

Keeping track of so many expenses is damn near impossible. Even though many of us give up on the task, it still drains your subconscious mind.

In order to remedy this, we try to keep the majority of our paycheck in our checking account, making sure we can cover this onslaught of debits.

Unfortunately, we aren’t able to do much else with our paycheck dollars except for covering expenses. Savings, investing, planning… these get pushed way down on the priority list.

The only way to battle this is to budget. By budgeting we can have much more control over expenses. We no longer make our decisions whimsically but with a bit more conviction. The fun won’t get sucked out of spontaneous purchases, we simply build in some room for such expenditures.

Budgeting Makes Decision Making Easier

I used to think that if I were to adopt budgeting as a spending strategy that I would feel constrained. That I would constantly have to make sacrifices and juggle my income and expenses.

The exact opposite happened. Budgeting allowed me to lose that fear of the unknown. I gained confidence over my expenses and developed a novel control over my financial situation.

In the past I could plan maybe a few weeks in advance, sometimes a few months. Through budgeting with YNAB and understanding the concept of budgeting in-depth, I am now able to plan decades into the future.

I’ll admit, there was nothing natural about budgeting. Starting the process wasn’t easy, it felt tedious, I had to keep going through the motions even though I didn’t see a light at the end of the tunnel.

After a few months the methodology started to make sense. Even more importantly, it felt natural. My mind went from “covering my spending with my income” to “planning where my income-dollars would go”. This is incredibly powerful – it’s a feeling of control that I can’t describe. It dissolved the majority of my fears in regards to money.

A Fragile Financial SITUATION

This post is about analyzing your personal financial situation and recognizing the weak links in your system. I want to help you determine whether your financial situation is fragile or solid. Whether you have one main concept that everything is built on or various layers that create enough redundancy.

When your financial life is fragile you can’t absorb disasters too well. Unexpected expenses set you back too far, making you sacrifice your personal savings goals.

For every $1,000 that you fail to save early in your career, you are likely missing out on $4,500 in your savings balance by the time you are ready to retire.

In a fragile budget, you also won’t have much room to spend spontaneously. You won’t be able to take a spur of the moment vacation with the family or invest in a friend’s business that seems to be the perfect fit for you.

Wealth Is What You Keep, Not What You Make

Building wealth has to do with what you are putting away towards assets instead of liabilities. The majority of households have the biggest chunk of their income going to liabilities.

Think about it, why is it okay that we allow the majority of our income to flow out of our pockets into someone else’s pocket. Interestingly, the more a household makes, they more they spend. Therefore, it’s not an intentional decision, it seems to be strongly influenced by something external. Perhaps it’s our desire to be happy, perhaps we are trying to compensate for the hard work that we’re putting into our jobs.

Sure, there are expenses which bring us immense pleasure or help us share experiences with our loved one. Think of vacations, a home and money spent on experiences.

Doctors earn an income several standards of deviation above the average household. Yet as a group we aren’t wealthier than the average household with a higher education, even though we likely earn the higher wages. Perhaps we have bigger homes and nicer cars, but rarely are these owned outright, they are often heavily depreciating items. We tend to do well after decades of work because our employers set money aside for us into retirement plans and pensions. My point isn’t to harp on wealth, that’s certainly not what life’s all about.

What’s Great About Wealth

Wealth creates much more than dollar signs in an account. Wealth creates stability, it curbs fears, it allows you to trust others, it allows you to take risks and pursue what matters most to you. Wealth can help you get out of a bad situation, it can help you make better decisions when you are no longer hindered by the need of income. It curbs the fear which leads to hate, and it drastically controls greed.

If you make $1 million a year and spend $1 million a year, then you are broke. But a household that makes $60,000 a year and spends only $20,000 is definitely on their way to being wealthy.

It’s not the same for doctors, we can’t just stash away $50,000 a year and think we’re going to be wealthy. We have a few strikes against us as soon as we start our careers. We start our income later in life, we deal with a ton of SL debt, and we have spent very little time in the real world learning about budgeting and personal finance.

We are pressured by society to spend on nicer things and pressured by family to spend more on our families. These are some of the factors that prevent us from achieving wealth.

And should we decide to buckle down and save, spend in a frugal manner but still enjoy the pleasant experiences in life, well, then we are simply greedy.

Steps Towards A Solid Financial Structure

All of us are in different stages of wealth building. Some have already built it and others are still trying to see daylight from under the burden of debt. Yet, no matter what stage we are at, we can make sure that our financial structure has various layers of security built into it.

1. Create buffers anywhere you can. If you have a house then make sure that you have adequate money set aside in an account to handle unexpected repairs. Have buffers for your car expenses and even buffers for your entertainment and vacations. You know those dental expenses will come out of nowhere – have $2-3k set aside for that.
2. Plan for the unexpected. What would happen if you lost your job? What if you go depressed, injured, or had to deal with a major personal catastrophe? Work your way backwards from such scenarios. Sit down with a pen and paper and plan out what you would do. Could you downsize your house, car, the city you live in, the number of subscriptions you’re signed up on?
3. Diversify your Investments. As a young attending there is no need to worry about this too much. Even if all you did is invest in a decent mutual fund, you likely won’t need to access this money anytime soon. As you get further along in your career, dabble in real estate, consider having more money in savings/bonds, invest some of your money in business ideas.
4. Invest in yourself. Ask for feedback from your chief or your staff, where do you stand in your career, how desirable of an employee are you should your field suddenly have less demand and more supply? You can learn to be a faster clinician, save more money for your medical group, be nicer to your staff, or you could learn a whole new skillset all together.
5. Turn liabilities into assets. If you have a home then consider building an ADU or preparing a spare room to rent out either long-term or short-term. If you have an extra car, consider renting it out on Turo.
6. Decrease your overhead. Don’t underestimate your dependency on your current lifestyle. You might say “I can cut these expenses anytime I want”. But when shit does hit the fan and you already have so much on your plate, the last thing you are going to want to cut is your expensive monthly cable subscription or your box seats or annual ski trips.
7. Insure whatever you cannot afford to replace. If your family depends on your income then get life insurance, don’t be cheap, get more than you think they might need. If you have no reserves then pay for comprehensive auto insurance, at least for one car. Get an umbrella policy if you have your own business or are exposed to a lot of risk. Get the flood/earthquake/hurricane insurance if those fears constantly cripple you.

Don’t Be In Too Much Of A Hurry

Some of you have only recently started working towards financial independence, don’t expect things to happen overnight. But on a brighter note, once you get the ball rolling you will be amazed how quickly your assets start compounding.

It’s so true that the first $100k is the hardest and then the first million. Because you have built solid habits to get to those initial numbers and constantly built on top of what you learnt, your investment will grow, your sense of financial security will deepen and you will lose more of your fears.

Believe in the process. If you save and invest then you will grow wealthy. If you avoid major mistakes then you will prevent having to start over from scratch. If you set a goal in your life and work backwards from it then you will achieve it. And finally, if you learn the recipe for financial independence then you will achieve it.