If you’re like many physicians, you keep a more watchful eye on the fiscal health of your practice than on your personal financial affairs. That isn’t a good idea. These are two separate challenges; both need and deserve your best efforts. There is no better time than now to review your personal financial health and your plans for a secure future.
The upheaval in today’s economy is changing the ground rules for skillful handling of personal finances. Some of the time-honored methods for building and maintaining a secure financial future need to be modified while today’s unpredictable financial crisis runs its course.
Here are a few guidelines for giving yourself a financial checkup:
1) Never let any of your money lie idle.
Open a money market account at your bank. Ask the bank to link your new account to your checking account so you may transfer money between them by telephone or online.
From that point on, never make a direct deposit into your checking account. Make all deposits into the money market account where they will immediately begin drawing interest. While interest on money market accounts is currently at a low point, that’s temporary. Money market accounts will always pay more interest than checking accounts.
Transfer money online or over the phone to the checking account only as needed to cover the checks you write. The banks have made this technique so easy to use that there is no longer any reasonable excuse for not using it.
2) Save money by paying your bills online.
While you’re talking with your bank, ask about online bill paying. With the cost of postage about to go up to 50 cents for each check mailed, plus the time and expense for buying and writing checks, paying bills from your computer keyboard saves both time and money.
3) Don’t be in a big hurry to pay your bills.
There’s good reason why checks are slow to come in from people who owe you money. It’s because hanging on to cash as long as possible keeps that money available to draw interest.
That’s why it’s important for you to set up a system to pay your bills just before they come due. It’s easy to do, and it moves you up another rung on the ladder of profitable cash management.
Don’t jeopardize your credit standing by paying bills late. Pay your bills just before they’re due—not before, not after. It’s especially important to avoid late payment on credit card bills because of the oppressive penalties that most banks have put into place.
4) Maximize your tax-deferred retirement account early.
“Don’t wait until tax filing time to fund your retirement account each year,” says Carol I. Katz, a certified public accountant in Baltimore. “Making the maximum allowable deposits into your 401(k) or IRA account as early in the year as possible not only reduces your tax load, it also adds months to the tax-deferred compounding of your investment.”
Of course, you may not be in a position to make the maximum allowable contribution. In this case, making the highest contribution that finances will permit is a wise move from both the tax and investment points of view.
5) Let your computer help manage your personal finances.
Chances are that you’re using a sophisticated software package to handle finances in your practice. The same kind of help is available to help with your personal finances. Personal financial software such as Quicken, Money, or other programs for use on desktop PCs are infinitely easier to use than they were as recently as a couple of years ago. More important, they will teach you in dramatic fashion how much you can benefit from a sensible money management system for your personal finances.
6) Never forget taxes.
If you’re like most professionals, you probably think of every dollar as being the same as every other dollar. In truth, there are two kinds of dollars: before-tax dollars and after-tax dollars.
After-tax dollars are real dollars; when you spend them, each one is worth 100 cents. Before-tax dollars are quite different. While they may look the same on paper, a before-tax dollar is something of an illusion; it’s worth less than 100 cents. How much less depends on your tax bracket and how well you do your homework.
Once you start building your investment portfolio, it will be important to maximize those after-tax dollars. “One way to do that can be as simple as avoiding less tax-efficient investments,” says Peter Miralles, president of Atlanta Wealth Consultants.
“One tax trap is high-turnover mutual funds,” he says. “Fund managers who indulge in excessive turnover create additional tax burdens plus the additional cost of frequent sales and purchases within the funds.” Miralles suggests that the relatively new Exchange Traded Funds (ETFs) can be highly tax-efficient alternatives.
“The interest from Series EE and I-Bonds is deferred until redemption and is fully exempt from state and federal taxes when used for higher education tuition.” Series EE savings bonds are government-backed, and pay interest based on current market rates. Series I Savings Bonds, or I Bonds, are issued by the US Treasury. The rate of an I Bond adjusts to track inflation and is guaranteed by the federal government to never lose value.
Miralles recommends keeping certificate of deposits (CDs) maturities short for now. When interest rates rise, he suggests tax-free municipal bonds. “Tax-free interest may have other additional benefits by lowering your marginal tax rate on other income,” he says. “If you lower your marginal rate, you get to keep more of what you earn.”
7) Don’t follow the herd.
Virtually all financial professionals agree that investment in stocks is a necessity for building a solid financial future in our modern economy.
When it comes to investing in the stock market, human nature likes to play tricks on us. The market reaches new peaks, and we can’t wait to jump in. When it stumbles and falls, we stop investing, or worse, start selling. As a result, the typical investor tends to buy high and sell low—exactly the opposite strategy needed for profitable investing.
“Today’s economy has caused many investors to realize that their tolerance for risk is not as great as they thought during the stock market boom of 2002-’07,” says Bruce R. Barton, a certified financial planner in San Jose, Calif. “As a result, many are lowering the amount of stock they hold in their portfolios. Reducing risk by decreasing stock holdings may be appropriate. However, people are living much longer now, and a typical retired professional will live on his or her retirement portfolio for 20 years or longer.”
Barton points out that a portfolio must have a growth component to keep up with inflation for the long term. “That means portfolios should include a moderate amount of stock. You should think carefully before changing your long-term commitment to stock investments,” he says.
8) Don’t try to time the market.
“It’s better to invest regularly, without regard for the general condition of the economy or the direction of the stock market,” says Darrell J. Canby, the president of Canby Financial Advisors in Natick, Mass.
“Timing the market, trying to determine the best time to buy specific stocks, rarely works,” he says. “You might get lucky once in a while, but your luck isn’t likely to last.”
Rick Willeford, MBA, CPA/CFP, a financial planner in Atlanta, says simply, “Market timing and day trading are for suckers. The financial press makes money from advertising, and they do that by keeping you breathlessly chasing the latest tip or fad. They make money whether you win or lose.”
Waiting for stocks to hit the “bottom” before you buy or hit the “top” before you sell is a loser’s game. Select the stocks or mutual funds that you buy only on the basis of sound fundamentals.
9) Don’t neglect asset allocation.
Most financial advisors agree that asset allocation is one of the most important keys to successful investing. In the minds of many, allocating your assets skillfully among the various classes of investments is more important than your selection of individual stocks or mutual funds.
When you start investing, should you have 10% of your portfolio in stocks, or should it be 80% or 90%? What about the rest? Should you invest the balance in bonds or CDs, or should you stuff it under the mattress?
For people investing for 10 years or longer, some advisors suggest a balance of 60% stocks, 30% bonds, and 10% cash or cash equivalents. For really long periods, say a young physician just starting in practice, as much as 80% or 90% in stocks might be appropriate.
Chances are that your bank or brokerage firm has published guidelines for asset allocation in differing circumstances. In the end, however, the choice is yours. No one knows your investment goals and your tolerance for risk as well as you do.
Once you establish the right asset allocation for your circumstances, re-balance at least once a year.
“Quite often people invest money and then never make any changes,” says Seth Ingersol, the president of Premier Wealth Management Group in Tempe, Ariz. “Certain sectors of the market obviously perform better or worse than others at given times. This can alter your allocation mix to a level that may not be appropriate given your time frame and risk for tolerance. The days of letting investments sit and never addressing them again are likely over.”
How much money we earn is the yardstick by which many of us measure financial success. For those in the know, however, earnings are only one-half of the money equation. Equally important is the manner in which we manage those earnings. Making the right money decisions is an essential ingredient in the recipe for long-term financial success. Right now is the time to sharpen up your personal money-management skills.
William J. Lynott is a contributing writer for PSP. He can be reached via [email protected]