Five Threats to Financial Independence

Financial independence is an aspiration of many.  The desire to pursue what is valued in life without financial constraint is liberating.  While financial independence may be a heartfelt desire, many obstacles arise that may prevent this intention from becoming reality. We’ve identified five risks that threaten financial independence among physicians:

Failure to Maintain an Emergency Fund

Life is messy.  Emergencies happen.   Opportunities can come out of nowhere.  Wise financial planning requires planning for the unexpected.   The best way to do this is by maintaining an appropriate emergency/opportunity fund to account for unanticipated events.   The general rule is to maintain three to six months of living expenses in a liquid cash account.  For physicians, the recommended amount may be higher due to the highly specialized nature of their work.  Failing to do so can create a situation that forces the use of credit card debt, loans from a 401(k) or home equity line, or other undesirable options out of desperation.  Desperation decisions can quickly derail a thoughtful plan.

Outspending Your Income

Many physicians make sacrifices to pursue their profession – lengthy periods of expensive schooling and low pay during residency.   After training is complete, it’s common to experience an exponential increase in pay.  This sharp increase in income can create an environment that breeds poor financial decisions, many times without even being fully aware of the implications.   It is important to be conscious of spending patterns.  Many people have no idea the amount that they’re spending and are shocked when then go through a budgeting exercise.  Given that the span of peak earning years is condensed over a shorter period due to the length and cost of medical education, it’s critical to save the appropriate amount to achieve financial independence.

Supporting Adult Children

It’s natural to want to help adult children if they fall upon hard times, or if they can’t quite launch after completing college or graduate school. This can be a dangerous pattern – for both parents and their adult children.  Once financial support is given, it often creates a precedent that the support will continue, and then it becomes expected.  Not only does this prevent adult children from achieving independence as self-supporting members of society, it also may derail a parent’s financial plan.   As discussed above, physicians have fewer years to save.   As a result, decisions affecting cash flow have a much greater impact.  Make it clear to children that beyond a certain point; they will be entirely responsible for their own financial life.

Pouring Too Many Resources into Your Practice

One of a physician’s greatest resources is their ability to earn income.  The vehicle through which they do this is often their practice.  It’s normal for them to want to pour all of their available cash flow into the vehicle that allows them to utilize their greatest asset.   However, from a planning perspective this can be risky.  It’s not prudent for anyone to have all or a majority of their net worth in one asset, especially one that is illiquid.  It’s sensible to diversify assets to and create flexibility and reduce risk.

Chasing Returns and Investing for Thrills

Investing is not intended to be an extreme sport.  Day to day excitement should not be a goal of the portfolio.  Instead, we focus on four qualities of a long term investment solution.  First, investments should be coordinated with a financial plan.  Looking at a plan in isolation or investments in isolation will lead to disappointment.  They are intertwined and it’s important to look at the pieces together.   Second, investments should be tailored to individual needs and reviewed regularly in conjunction with the financial plan.  Third, investments should be durable in terms of being globally diversified, tactically managed, low cost and sensitive to taxes.  Fourth, investments should be adaptive in response to changing market conditions, trends and legislative updates.