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Preparing For Hard Financial Times

Weak economic times always follow economic booms. I would say with the traffic as heavy as it is outside my condo, with studio condos selling for $300,000 in Portland, new startups getting multimillion dollar funding, and everyone, including myself, delivering financial commentary, it’s time to prepare for the opposite of whatever this situation is.

No, this isn’t a doom & gloom post. Economies are supposed to fluctuate which allows young investors innovation opportunities.

There is plenty of talk online about the US economy completely collapsing, the dollar losing all its value, negative interest rates, hyperinflation and talk of preppers stashing ammo, gold, silver, and stores of food in case the muslimites invade.

 

It’s 2018

In 2014 everyone predicted that the economy would be in the gutter by now. It’s 2018 and other than a slight blip the economy has produced some high returns in all aspects.

 

  • interest rates are low
  • bonds are doing decent
  • stocks are doing amazing
  • unemployment is low
  • businesses are expanding
  • no major wars going on
  • mortgages are stupid easy to get
  • people are buying their first homes
  • physicians are renovating their homes
  • physicians are looking for more lucrative jobs
  • consumers are refinancing debt and getting cash-outs

 

 

Preparing While The Going Is Good

When the economy is doing well, our jobs feel secure and there isn’t a whole lot of turbulence to cloud our judgement, that’s the best time to make sound decisions for the future.

This is a good time to revisit your investment policy or your personal financial statement – or whatever system you follow to decide on your personal financial strategy. If you have a statement in there that says “my property will always appreciate, no matter what” then this is a good time as any to rethink that.

During strong economic times most high earning individuals will look to spend more or will look towards speculative investments.

The savvy physician will use such a time to build up a larger emergency fund and pay down debt. The best way to enter a stagnating economy or a crashing one is with a solid job and no debt.

 

Economic Factors For Physicians

I suspect that the average physician household spends $120k/year and that’s conservative. There are plenty who spend $200k because their income allows it.

The major factors a physician household should keep in mind are:

  • budgeting
  • debt
  • career risk
  • burnout risk
  • retirement

 

Retirement

As physicians we start our first jobs at the age of 30. With that many years lost to learning about investing, saving, and investing we start out way behind.

Retirement and financial independence overlap in many circumstances but the wonderful thing for an Urgent Care physician is that they can become financially independent and continue working.

Budgeting

Why budget when your household earns $700k a year? I can appreciate this mentality. Either you are a CT surgeon or you and your wife are both specialists. The problem is that when you spend $200k a year and you plan your retirement on this budget then you’ll need a lot more money saved and invested.

Over a 30-year career it’s not hard at all to accumulate an 8-digit net worth but all that extra money places you at risk – there is nothing easy and safe about having a $15M net worth.

Budgeting helps you enjoy the same lifestyle on much less money. Budgeting isn’t suffering and it’s not giving up a cup of coffee – that argument brings out the cynic in me.

Debt

Without debt you don’t have any financial commitments to anyone but yourself. You can decide to vacation by checking out a local museum or take a $10k vacation to Hong Kong.

Paying down debt early in your career will make you more flexible, more likely to make good decisions for yourself rather than based on how much income a job can earn.

Risk

There are 2 major risks to physicians, career risk and burnout risk.

I’ve experienced both and never thought either was possible.

Most physicians are already burnt out according to any study you look at. Being burnt out placed you at risk for medical errors, less likely to want to save/invest, and less likely to want to get out of debt.

If you burn out and drop out for a while then you will hurt your career and finances quite a lot – this is the sort of thing which takes years to recover from.

Career risk has to do with getting sued, being investigated by your medical group or your medical board. The process is incredibly disruptive and costly and once it happens to you then your perspective changes which will require you to come up with a new approach to practicing medicine.

 

Hard Financial Times

Every household has unique risk factors which are worth identifying. For many it’s our health which is a risk factor. Next is unemployment. Finally debt.

Even if we are on the right trajectory to save and invest appropriately, an unforeseen event can ruin everything and set us back.

  • The house may burn down.
  • A family member dies unexpectedly.
  • We experience sudden poor health.
  • We burn out.
  • A large debt is called.
  • We get fired.
  • We get sued.
  • We get divorced.

Whenever I have experienced hard financial times it has been because of irresponsible spending which slowly caught up with me. In order to get out of those hard financial times I resorted to cashing out retirement accounts – not once, but twice.

 

Buffer Account

As I am applying to new jobs and working on my next project I end up with a few months where I don’t have enough income and I don’t want to depend on my investment accounts for lifestyle expenses.

My investments are compounding interest. It’s much less costly for me to live off of work-income than investment income. My investments will continue to compound over the years. Taking money out now would mean that I’ll have less of a cushion in the future.

The advantage of having a very low overhead and a high hourly income rate is that we can run our household on only a few hours of work a month.

During prosperous economic times I can take some of my dividend earnings and deposit them into my savings buffer account. The higher the buffer account the more flexible my work hours will be.

 

Emergency Fund

The emergency fund is different from a buffer account. The buffer account is helpful to create a little more wiggle room for the infrequent income or someone who is pursuing many different gigs.

The emergency fund is vital to prevent personal finance disasters. It’s a stash of easily accessible cash which should help protect you against financial catastrophe.

  • Unforeseen expenses
  • Replacement costs of vehicles
  • Consulting fees for a lawyer
  • Money to cover our household expenses for a year

What I love most about an emergency fund is that it gives you a genuine feeling of security. Not just during hard financial times but all the time. You don’t fear losing your job as much and you don’t fear random expenses which for a physician household can be astronomical.

The toughest part about an emergency fund is to avoid raiding it. It’s like the shiny 4 layer chocolate cake sitting in the fridge – I have a 1,001 excuses why I should dig into it.

 

Social Network

It’s important to have a good group of friends and family who are in stable situations who can aid each other during hard financial times.

If I’m flagrant when it comes to my budget and household savings then it’s unlikely that I’ll be a crutch for someone when the economy performs poorly. I need to depend on my social network but they too should be able to depend on me when they experience hard financial times.

We test our social network with little things such as asking a friend to be a character reference or write a letter of recommendation. Maybe we let someone stay with us or keep their personal items at our house while they are relocating.

We sometimes have friends or family stay with us when they are going through terrible personal times such as a health situation, emotional breakdown, or a divorce.

Physicians move away from their social network so often that it’s hard to even rely on family members. I am still learning how to perfect my relationship with both family and friends but I am recognizing how much I have benefited from these covalent bonds.

 

Actionable Steps:

  1. Minimize your debt burden.
  2. Find alternative modes of income.
  3. Build up your emergency fund.
  4. Improve your investing skills.
  5. Have a buffer account.
  6. Make sure you have right insurances in place.
  7. Minimize your risk of practicing medicine.
  8. Consider your level of burn out.

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