Benjamin Franklin is a friend that everyone would like to keep close to, if you know what I’m saying. The $100 bill is one that most people wouldn’t mind holding onto for a really long time. But not everyone can carry Benjamin in their pocket, maybe they can only have the $10 bill of Alexander Hamilton or a couple of Abe Lincolns. Regardless of which face’s you have in your pocket, a common concern for individuals is how to manage their cash flow. After all, with all these faces flowing in and out of our pockets or checking accounts, we should ensure that they are being spent and treated wisely. So, how exactly does one manage their personal cash flow?
Who to Pay First
Your employer sends out paychecks to their employees (hopefully) once or twice a month. Now even though those paychecks are sent to their employees, who is really first in line to receive those dollars? Most people assume that Uncle Sam has his hands out first looking for his cut. Often times this may be true, but there is someone that should be in line before him: you. When it comes to overall budgeting and cash flow, I’m a big fan of the concept of paying yourself first. You worked hard for your money, why should anyone get it before you? The first step of cash flow management and reaching financial independence is paying yourself first and saving in your employer sponsored retirement plan. Most of the time these dollars are saved on a pre-tax basis, meaning these dollars have not been taxed when you contribute to your 401k / 403b / 457b. Since these dollars are not taxed when contributed to these accounts, you’re getting a nice tax deduction today, meaning Uncle Sam is going to have to wait around a little while longer before he gets his cut. Your employer may offer the ability to have within their plan on a post-tax, or Roth, basis, which can be a nice compliment to your retirement savings plan. Maxing out your employer sponsored retirement plans should be the first step in managing your cash flow. Also, you never want to leave any free money on the table so consider contributing enough to these plans to recognize your full employer match.
Okay, Who’s Next?
Uncle Sam has waited patiently enough and sadly, he is next in line to collect a portion of your earnings in the form of taxes. But from here, money is now in your checking account and you have some decisions to make: do you pay the utility bill, get your kids a toy, buy a new car, replace old furniture? The answer here is actually the same as the previous section: pay yourself first. Continue to save money for your future self and contribute to retirement. According to the CFP board, the average American should aim to save about 10-13% of their gross pay (including your employer match). Doing so from an early age should set yourself up to have a comfortable retirement. This can be a solid gameplan for a common individual with a common financial situation, but most of our physician clients across the country find themselves in a unique position: they have cannot begin saving for retirement until a later age (once they become an attending), they start their career with a substantial amount of debt (aka student loans), and they hope to retire/ scale back their hours sooner than average (generally around their early to mid-50’s). Because of this unique situation, physician’s often find themselves needing a unique strategy to implement. I generally suggest that physicians aim to save at least 20% of their gross pay (excluding any employer match). We have found that saving at least 20% of your gross pay for 20-25 years should set a physician up to have a comfortable retirement, even under very conservative retirement assumptions.
Next To Bat
Once you have paid yourself first, forecasting and figuring out the rest of your budget is relatively straight forward. From here, make sure your short-term savings and investing goals are taken care of, such as paying all of your bills on time. The CFP board aims to keep your monthly housing and debt costs (debt payments can include student loans, insurance premiums, credit cards, auto loans, etc.) less than 36% of your gross pay. A good rule of thumb is to maintain 3-6 months of monthly fixed expenses in the emergency reserves. After your short-term savings and investing goals are taken care of, we move onto your long-term savings and investment goals. This includes game planning and savings for future goals, such as lump-sum goals (for example, a 2nd home, plane, boat), college education funding, legacy goals, and long term retirement goals. Along the way, be sure to enjoy life and have fun! Plan for those vacations, take those trips, do those things for the kids. You work hard for your money – be sure to enjoy the fruits of your labor.
Benjamin Franklin once said that, “a penny saved is a penny earned.” All those dollar bills and faces, including Benjamin’s, are going to be around throughout your career. Let’s make sure you have a sound cash flow plan to put this army of dollar bills to work efficiently within your financial plan. Afterall, throughout your journey you’re going to have competing financial goals: paying off student loans, taking a vacation, having kids, savings for retirement, buying a car. As a physician, you’re going to want to make sure that you have a unique financial strategy in place to help accomplish all these goals in life due to your unique situation of having a delayed start the savings and mountain of student loan debt you may have. Want to make sure you are on track to achieve your goals and objectives towards your path of financial independence? Check out the “Meet With Us” tab on our firm’s website to speak with a Finity Group advisor today.
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