A financial plan for busy people

financial plan for busy peopleOne the fundamental rules of sustaining and growing your hard earned money is to create a financial plan and stick with it. I’ve seen all sorts of guidelines and plans from financially independent bloggers. Some plans fit on a 4”x6” index card. Others include extravagant spreadsheets that include Trinity Rule references, real estate investments, tilt, and often brilliant means to reduce your tax burden.

All of these strategies will work in each individual case, particularly for those who stay on top of their finances and methodically track their money. This only works in two basic situations: (1) Your job allows you enough time either during work or after hours to focus on your finances, or (2) You’ve already reached financial independence and aren’t forced to live the cubicle or daily grind to generate income.

 

 

This type of lifestyle doesn’t work well for guys who are running to stroke codes all day long or dealing with 60 clinic patients a day. If that is your day job, you probably aren’t going to have much energy after you get home to do much of anything else. If anything, many professionals do the opposite—we vegetate, justify splurge purchases because we “earned it”, and neglect to focus much time to our financial future.

I still have those busy days (almost every day), but I also have tried to simplify my financial strategy to the level that I can relate to and automate.

 

Stick with the plan, but be willing to adjust throughout your working career. 

Some financial principles should be non-negotiable no matter what stage of your career you are in. You must save more than your spend in order to grow your financial stash. Period.

Everything else is variable depending upon your income level and net worth. Here are my principles depending upon your situation:

 

Student and resident (<$80,000)

  1. Pay off at least $2,500 in student loan interest per year. This is a deductible event. If you are accruing interest on your loans, this is the best time to reduce your tax burden. Once your income exceeds the ceiling for student loan interest deduction, you are out of luck.
  2. Contribute to your Roth IRA fully. Remember that a Roth IRA holds post-tax income. The earnings in this vehicle will not be taxed no matter how much they grow. Since the annual contribution amounts are relatively small, you are limited by how much time you have to build up the cash. I knew financially savvy college students who maxed out their Roth IRAs through part-time jobs. Their parents (upper middle class) were willing to max their salaries to give them spending money. Not a bad way to build up your Roth IRA amounts with time.
  3. Keep your Traditional IRA bucket empty. Most doctors and highly paid professionals will exceed the standard Roth IRA limits once they increase their earning potential. You can still contribute to your Roth IRA through backdoor method. If you have no money in your Traditional IRA, the conversion process is much easier, and you can avoid taxes.
  4. Save the rest of your earnings toward repayment of student loans or ancillary investment vehicles. I know a few medical residents who are landlords and generate a reasonable cash flow from their properties. Doesn’t always work out once they graduate and end up moving away.

 

Mid-career professional

  1. Contribute to the maximum limit in all of the investment vehicles available to you. This includes Roth IRAs, 401k/403b plans, Profit-Sharing Plans, and even better, Individual 401k’s. Be wary of profit-sharing plans and the terms. Some plans require you to work a certain minimum number of years before you’re fully vested. This won’t work well if you end up having move between jobs.
  2. Invest in a taxable account. Unfortunately maximizing your tax-deferred and tax-advantaged accounts will unlikely generate enough nest egg for you to retire on. I would roughly assume that a high-income professional would want to retire on at least $100,000 a year. Gotta have those fancy vacations, right? The 4% Trinity rule would say that you need to have $2.5 million in the bank, and that amount needs to be liquid too. It would be tough to build up that amount solely within a 401k.
  3. Buy umbrella insurance. If your net worth minus your protected accounts (401k’s, cash-value insurance…etc) is around $1 million or above, buy some umbrella insurance. The annual premiums won’t likely be much, and can give you more piece of mind. More on this in a later article…
  4. Figure out what other options you would feel comfortable with placing your money to diversify. Is it real estate? Is it stock market? Is it crowd-funding lending? Gambling? Restaurant franchises? This is your chance to make good on the hard work you’ve put in to get to where you’re at.
  5. Track your net worth growth. If you’re going to exceed the federal limit for estate tax, congratulations. You’ve won the game. Spend the rest of your time figuring out how to reduce your estate tax.
  6. Contribute to 529’s if your state allows tax reduction. You can make accounts for your kids, your nieces and your nephews. If you play your cards right, you can potentially have enough for the family.

 

Retirement

  1. At this point, if you played your cards well, you might still be under 60 years old. Perhaps even less than 50. Your money should run on auto-pilot. Work on your estate tax plans.
  2. Stay active. Volunteer. Travel. Start a blog. Spread the gospel. Teach other medical professionals. Do what you’ve always wanted to do.
  3. Stay out of trouble and don’t invest in get-rich schemes, no matter how much you have stashed for your retirement.

That’s it. Basic. Simple. As you become more well-versed in your career, you will have more time to study your finance or whatever else you like.

What other finance plans have your implemented in your strategy?

(Photo courtesy of Flickr).

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  • PhysicianOnFIRE

    Great advice! I think you could squeeze the advice onto 3 index cards, one for each life / career phase.

    Best,
    -PoF

    • SmartMoneyMD

      True. I like to automate as much as I can. As much as I like DIY on many issues, I like to enjoy my free time as well.

  • Middle Class Dad

    Excellent post.
    The only thing I’d add that is in my plan that I see no mention of above is HSA savings (though you do generically say “Contribute to the maximum limit in all of the investment vehicles available to you”). I think this is a great extra retirement account for a number of reasons:
    1. You can tap into it, if you choose, before retirement to pay your deductible.
    2. One of the biggest expenses after retirement is healthcare.
    3. You skip taxes when you put money in, skip them again while it grows (so you can use funds you wouldn’t in a taxable account) and skip them again when you pull them out in retirement – if you’re using them for medical expenses.
    4. If you pull funds out after 65 to buy a boat, you still got to skip taxes on contribution and growth and now you just have to pay ordinary income tax (no penalties) on it …the same as a standard retirement account.
    Probably worth throwing three more letters into the “this includes” line to specifically call attention to it.

    Thanks for the excellent post!

    MCD – middleclassdad.com

    • Smart Money MD

      Thanks for stopping by! You’re absolutely right about the HSA being a great “triple bonus” investment vehicle: (1) no income tax for amount placed in, (2) no tax on the growth, and (3) no tax on the amount used eventually if for healthcare reasons. It does only apply if you have a high-deductible healthcare plan as well. There are employers who pay a good portion of employee premiums (not many I’ve seen, however), and don’t offer HSA-eligible plans.