Welcome back to Personal Finance for Medical Professionals, Part I.  In this series, we follow a curriculum designed to make you knowledgeable and confident enough to manage your hard-earned finances.  This is Lesson 3, The Financial Vitals Checklist, Intro & Steps 1-2, where we introduce a blueprint for you to follow to financial independence.  If you haven’t already read the first two lessons, you can access them here: Lesson One and Lesson Two.  

Introduction 

In the first two lessons of this series, we discussed how important it is to have a high savings rate and gave some example rates based on your net income.  We learned that the more you make and the less you spend, the more capital you will have to save/invest.  The correct use of this capital will eventually provide the money you will use to pay for your life in retirement.  Sounds great, but some questions remain.   What is the correct use of this capital?  What qualifies as saving/investing?  What exactly do you do?  

What Qualifies as Saving/Investing?

For our purposes, saving/investing includes any money that increases your net worth, excluding your primary residence:  emergency savings, regular savings, funding retirement accounts, brokerage investing, loan paydowns, and other investments such as rental real estate.  

Not all of these uses of capital are appropriate at all stages of your financial journey.  The following three lessons will focus on an order of operations for you to follow to optimize the use of your capital.  During the course of your financial life, you will pass through five distinct stages that will determine the best use of your capital.  

The Five Stages of Your Financial Journey

The financial journey of most high-income medical professionals can be broken down into five distinct stages.  

Nothing is more important than protecting yourself and your family as you start your career, so this is stage 1.  The 2nd stage is taking the easy financial wins that maximize the returns you generate.  Once all the low-hanging fruit is picked, securing your retirement becomes the focus in stage 3.  Stage 4 is to get wealthy.  You can focus on wealth-building activities now that your future is secure.  Stage 5 allows you to fine-tune your finances & give back since you have already done the heavy lifting.   

In the first two installments of this series, you have discovered why understanding personal finance is so important for medical professionals and have learned the three general principles that will guide your way.  While these introductory lessons are important, it’s now time to get specific and actionable.  In the next section, I will introduce the Financial Vitals Checklist, a guide that will help you traverse the five stages of your financial journey smoothly and efficiently.  

The Financial Vitals Checklist

It is equally important to know what to do and in what order to do it.  Enter the Financial Vitals Checklist, a sequence of ten steps medical professionals should follow in their financial lives.  These ten items meet you where you are and lead you through the five stages of your financial journey.  The steps are listed sequentially, much like a pre-procedure checklist, so wait to move on until you have completed the prior action.  If a step doesn’t apply to you, or you have already completed it, you may move on; otherwise, don’t skip ahead!  Use the checklist as a guide on what to do with your next dollar as you march toward financial freedom.

Follow The Steps in Order

You may not be able to complete all the steps at once.  That’s ok!  You follow this path at your own pace throughout the year and your career.  If you can only complete step 1 with your first paycheck, start your emergency fund with your next.  It may take you six months to complete your emergency fund, but only move on to the next step once you do.  Once you have obtained your employer match, start paying off any high-interest debt, and so on. 

Steps 1-6 are rigid and have a defined starting and stopping point.  Do not move on until you have completed the prior step unless it doesn’t apply to you.  Steps 7-10 are more nebulous, but by the time you reach them, you will have a solid financial foundation on which to build your unique dream.  Once you have reached your target savings rate for the year, you are done.  Stop at whatever step you are on and congratulate yourself!  You are on the path to financial freedom; you simply need more time for your investments to grow, so enjoy your life.  

     The remainder of this post will take you through the first two steps of the checklist, with the following two lessons completing it.  If you are one of those overachievers who wants to work ahead, we already have a complete guide to the Financial Vitals Checklist available here, along with a free pdf of the checklist to download.  

Protect Yourself

1. Buy Disability & Life Insurance

Disability Insurance

As you start your career, your most valuable asset is your earning potential.  You have trained long and hard to obtain a professional license and the high salary that comes with it.  Your potential is literally worth millions of dollars throughout your career.  Nothing is more important, which is why the first step of the Financial Vitals Checklist is to protect yourself with disability insurance.

Every medical professional should obtain own-occupation disability insurance immediately.  This insurance protects against any catastrophe that leaves you temporarily or permanently unable to work in your chosen field.  Ask yourself what would happen to your financial future if you could not work.  Your student loans don’t go away because you are injured.  Your mortgage doesn’t disappear because you are sick.  Being adequately insured allows you to continue to receive a monthly income should you end up being my patient in the ER.  

Ideally, you should purchase disability insurance during training, but if you have already graduated, buy it today.  You should purchase the maximum amount possible and pay for it through your personal accounts, even if you practice through a legal entity.  You can cancel the disability policy once you are financially stable enough to withstand a prolonged work disruption.  If you want to read more about disability insurance, including why you should purchase it in your own name, click here.  

Life Insurance

While every medical professional should buy disability insurance, not everyone needs life insurance.  Yes, we’re all going to die at some point, but that doesn’t mean we all need to insure ourselves against it.  Life insurance has little to do with you but everything to do with those who depend on you.  If you die, who will be financially impacted?  The answer to this question will instruct you on if, how much, and for how long you need life insurance.  You don’t need life insurance if you are single, without children, have no extended family depending on you, and no one co-signed your student loans.  However, if you have any of the obligations mentioned, you need term life insurance until you are financially secure enough to cover them out of pocket.  

There are two general categories of life insurance: term and whole life.  Whole-life policies cover the insured for their “whole life.”  These policies are expensive and generally unnecessary.  The list of exceptions is so small that it’s easier to make a hard rule: never purchase whole life insurance under any circumstances.  But since they are very profitable for insurance companies, salesmen disguised as financial planners, brokers, or advisors will try to convince you that their insurance product is actually an investment and that you are the perfect candidate for it.  Don’t be fooled.   

Term life insurance is insurance for a set term, which could be 10 years, 20 years, or 30 years.  These policies are much cheaper than whole-life and do exactly what you need them to do:  protect your loved ones in the case of your untimely death.  Once you have enough financial resources that your death would not significantly affect your family’s finances, you don’t need it anymore.  

Talking about our own morbidity and mortality is difficult, even for medical professionals who are around it all the time.  However, that is precisely why you must insure yourself and your family against the unthinkable.  Do it now to protect your future, then return to happier thoughts. 

2. Emergency Fund

Appropriately protecting yourself also entails having an emergency fund.  Once you have purchased the necessary insurance, you should save enough money to live for a few months if you lose your job or temporarily leave work.  Your emergency fund should be enough for 3 – 6 months of your monthly expenses.  

The money should be kept in an interest-bearing savings account that you can easily access in an emergency.  You want to avoid investing the money in your emergency fund.  The purpose of an emergency fund is twofold.  First, you can stop using your credit card to cover emergencies.  If your car tire blows or the air conditioner goes out at your house, you can cover that without resorting to high-interest debt.  Next, it will cover your expenses should you lose your job or become temporarily disabled. 

Whether you should aim for 3 or 6 months depends on how easy it would be to replace your job.  ER Jobs are plentiful, and since I am married and my wife stays at home with our children, I can work outside of our city.  Therefore, I’m comfortable with a smaller emergency fund.  If you can’t travel for work or if it will take you longer to find a job, you will need a larger fund.  

Two notes: First, an emergency fund is for emergencies.  You should not tap into this money unless it is absolutely necessary.  Second, the lower your monthly expenses, the less your emergency fund needs to be.  This is another reason that keeping costs down will supercharge your wealth accumulation.  The lower your expenses, the lower your emergency fund, and the sooner you can move on to the next step.

Final Thoughts

Hopefully, you can see how the three general principles we learned in Lesson Two guide you through the five stages of your financial journey.  The lower your expenses are, the less money you need to protect yourself.  The more capital you have to invest, and the earlier you start investing it, the faster you will progress through the first six steps of the Financial Vitals Checklist.  Finally, steps 7-10 of the checklist provide the flexibility to reach your goals using your individualized plan.

Thank you for reading Business Is the Best Medicine.  This lesson introduced the Financial Vitals Checklist and discussed the importance of protecting yourself with insurance and an emergency fund.  Stay tuned for Lesson Four, where we continue with steps 3-6 of the checklist.  Leave any comments and questions below and subscribe to the blog so you receive all new posts!