Which Personal Finance Topic Should You Focus On First, Prioritizing Based On Your Individual Situation
There are so many aspects to personal finances, it can get overwhelming trying to focus on all of them. In this post I would like to briefly discuss the various branches of your personal finance tree and discuss how to prioritize them.
It’s important to prioritize personal finance topics depending on what stage of wealth building you are in. This will help eliminate unnecessary worrying and it will help you maximize what you have the most control over.
Why I Focus On Personal Finance
I like to remind myself and the 3 of you reading this blog why I enjoy focusing on personal finance topics. Almost everything we do and want to achieve has a dollar value assigned to it. Whether you prefer to “not think too much about money” or you walk around with a spreadsheet documenting each and every one of your expenses, you are affected by money more than you think.
Physicians earn among the highest salaries which is the most detrimental form of income – it’s taxed at the highest rates in our current US tax code.
Atop of high taxation, we are also victims to phase-outs. Certain credits and deductions available to lower-income earners simply aren’t available to us, because we make more money.
More importantly, the dollar bill in your pocket is not backed by anything of value. It’s a piece of paper that the US has assigned an arbitrary value to, and they promise to uphold its value by giving it a certain purchasing power.
This same entity, the United States, is completely broke. Not just broke in the sense that they don’t have enough assets to back the promised value of that dollar, but they are insanely over-extended on debt. The US owes more than it can pay back. This isn’t an anti-US sentiment, so before you go calling the INS on me realize that this is a simple economic fact.
If you don’t understand the financial scene that governs a lot of your life then you are at risk of being taken by it. There are many ways of protecting yourself, and that’s what personal finance is all about.
Doctors’ Personal Finance Topics
Taxes are our biggest expense, not the house you live in, not the fancy BMW you drive or the money you tithe to your church, it’s taxes.
Don’t ignore this expense by saying that it’s simply mandatory and therefore shouldn’t count as a real expense. Because in the US, every year, around 2,500 households show incomes exceeding $200,000 without paying a single penny in taxes, legally.
We require malpractice insurance and disability insurance. The malpractice part is self-explanatory, mistakes happen and even if you weren’t fully at fault, the legal system can draw blood.
Disability insurance is needed because doctors tend to have very specialised fields with usually only 1 source of income to support their household. They also start with a ton of debt which means that if the income disappears, the entire household depending on it is screwed.
Physicians are notorious for spending top dollar on their homes. It has to do with prestige and the false assumption that the more house they buy, the more they save on taxes.
Home ownership gives us the illusion of saving on rent but as a budget item it has one of the highest expenses, following taxes.
Most of us start with a healthy student loan balance, a debt which isn’t forgiven no matter what kind of bankruptcy you file. Though there are programs where student loans can be repaid on your behalf or even forgiven, you always have to give up something in order to gain this benefit – nothing is free.
As a profession we are heavily lent to. It’s easy to get $100k credit card balances, $1.5 million mortgages, $120k auto loans and $500k business loans. All that’s required is the MD/DO at the end of our names. Sadly, many of us don’t fully comprehend how easy it is to get into debt and how hard to get out of it.
Because of our high earnings, we are also heavily taxed on any profits on our investments, this drastically cuts down on the potential benefit from such investments.
As doctors we are targeted by scrupulous financial institutions. We are sold products which have no business in the portfolio of a young doctor. We lose thousands in fees and investment losses over our careers.
The path to wealth isn’t a whole life insurance policy, a complicated options investing strategy, that 529 plan or the backdoor Roth IRA.
How much do you spend a month for your comfortable lifestyle? I would guess that most physician households spend well above $100k annually to run their household.
We are a very traditional group, us doctors. We practice how our attendings taught us to practice medicine, many of us talk and think the same, we are drawn towards the same neighborhoods, we prefer the same kind of vehicles, have similar work-life balances and generally have similar “doctor” behaviours. When it comes to our lifestyle spending, the majority of us fall comfortably under the same bell-curve.
Whether you make $60,000 or $600,000 in wages, you are allowed the same $54,000 annual retirement contribution limit, set by the IRS. This sucks major ass for physicians because we lost out on many years of income due to time spent in school.
Not only do we not get to set aside money in proportion to our income but we are taxed disproportionately to our income. We lose out on many years of retirement savings and have no real way of making up for it.
Because we get to play with more money, we also are at risk for losing a lot more. When we earn, we earn big, when we lose, we lose big. Think of the following and try to avoid them because they can greatly set you back:
- failed businesses
- gambling investments
- cheating on taxes
- not carrying adequate insurance
How Should You Prioritize Your Personal Finance Topics?
The reason I have these topics listen in the following order is because certain actions tend to have the biggest positive effect on your personal wealth. It’s common to focus on things which you either have very little control over or which achieve minimal savings.
- Maximize your income early in your career.
- Protect your income by having adequate insurance.
- Minimize lifestyle expenses.
- Maximize tax-deductible retirement savings contributions. Can’t do it without #3.
- Invest your retirement savings in low-risk investments.
- Minimize taxes. See #4.
- Pay off your student loan early, regardless of its interest rate.
- Don’t add to your debt burden early in your career.
- Save outside of your retirement bucket.
Misdirected Personal Finance Priorities
Excessively focused on saving on taxes.
I can assure you, that my greedy ass hasn’t found anything that isn’t known to the masses. I have read 800-page books and talked to tax attorneys and clever CPA’s – nothing, maybe a couple thousand here and there, requiring a shit-load of work to claim.
You can go out there and start your own medical practice – now we’re talking about some major tax-saving strategies, but that move come with a ton of responsibility and work.
Battling the debt pay-off versus savings debate.
This is less of a mathematical equation and more of a personal preference. You should try to maximize your retirement contribution because it achieves both retirement savings as well as tax-savings. Beyond that, feel out your level of comfort regarding debt.
If the idea of having no debt makes you feel free then that’s exactly what you should aim for.
Maximizing investment profits.
Unless you can dedicate a full-time schedule to investing, it’s very unlikely that you will be able to gain a far higher return compared to your peers. Even the most ideal real estate investment will return in the 10% range.
Understand that the more returns an investment has, either the more risk you must take or the more work you must put into it.
Stop searching for the holy grail, start investing now.
Your home is not an investment.
The home in which you and your family live is not an investment, it’s a liability. Ask any astute CPA, CFP or investment banker – your home is not an investment. If you don’t understand this concept (some advisers don’t either) then you might spend more on your “investment” thinking that you are raising its value.
It’s wonderful if your $1 million home one day becomes worth $2 million – that’s the nature of major assets in a capitalist economy. But don’t mistake such occurrences as a savvy investment plan upon which you can build a personal finance strategy.
Suffering for the sake of saving money.
First understand what suffering is. You’re not suffering because you got the Honda over the Mercedes. You aren’t suffering because your car doesn’t have bluetooth. You aren’t suffering because you went to Thailand instead of Paris.
But you are suffering if you love enjoying a beautiful day at the museum but you instead choose to buy some fucking ETF with that money. You are suffering if you skip a gym membership that helps you stay in shape just so that you can save $80/month.
Be realistic and fair to yourself. If you are planning on luxury expenditure which truly bring you happiness then plan for it, plan to work a little extra perhaps or cut from wasteful spending so that you can achieve all your goals.