Basics of Financial Planning for Physicians - 5 Easy Steps
Sebastien Chevrier - Oct 09, 2020
Financial Planning is often considered laborious and time-consuming with varying scopes and definitions. We have broken down Financial Planning into 5 simple steps to help physicians build their own financial plan and plan their financial future.
Physicians have busy schedules and an incredible workload that barely allows for any personal time. Amidst all the chaos of practicing and balancing one’s personal life, a lot of priorities can get put on the back-burner. Whether it's completing or updating your will, confirming you are on track for retirement or making sure you are paying reasonable fees, amongst many other considerations, there’s a lot to keep on top of. Having a comprehensive financial plan helps organize these priorities and ensures they get addressed. Being proactive will maximize your accumulation of assets and will minimize the risk of getting caught unprepared.
Young physicians face a delay in earning due to training and often graduate with significant debt, so having a plan at the outset is important. Getting on the right path early will have a significant impact on retirement age and accumulated assets. It can also reduce the risk of burnout as a consequence of escalating work-load to generate income for escalating lifestyle costs that can get out of control quickly. Learning about mindful spending early on and careful expansion of lifestyle can protect the work-life balance.
Mid to later-career physicians may be so busy with their established practice and a busy personal/family life, that carving out the time to think about financial preparedness, ie whether they are on track for retirement or if their insurance is sufficient to protect them in a crisis, often falls to the wayside. Many physicians have had to face working into their late 60’s and 70’s as a consequence.
Setting out a road-map to follow to achieve your vision for your future can provide confidence and maximize your chance for success in arriving at the destination you strive for.
5-Step Process to Financial Planning
Here is a simple 5-Step Process to Financial Planning that can help optimize financial health and achieve future goals:
Step 1: Outline your Financial Goals
Every plan in life starts with defining clear objectives/goals and financial planning is no different. You need to explicitly layout your financial aspirations and where you see yourself personally/financially in the future. Retirement planning is a key part of this step as you will require income when you stop working. Few physicians can rely on a pension in retirement and consequently must self-fund their retirement years, which requires accumulated assets. You need to consider what age you want to retire and how much you will require on a yearly basis to support your desired lifestyle. You then need to determine how many years you will be relying on your retirement funds and how inflation will affect your yearly income needs. You will also have many other goals that need to be planned for (ie buying a house, sending kids to school, etc), which will also need to be considered.
Step 2: Understand your Debt Obligations
High debt load is the key reason why many financial goals remain unfulfilled for a number of physicians. Compound interest on debt can make it difficult to get on top of it. Be it educational debt, lifestyle debt, mortgages, or loans, debt needs to be managed from the outset which includes establishing a realistic repayment plan within the context of addressing your other important financial goals. It’s possible to pay off debt efficiently and enjoy a lifestyle you love, with a dedicated plan and a clear sense of your wants versus your needs.
Step 3: Pay Yourself First-Automate
While income streams grow, there is an obvious temptation to spend more towards increasing your desired lifestyle. With increased expenses, physicians are vulnerable to cash-flow imbalance and potentially sacrificing their own personal savings in an effort to pay off bills and avoid further debt. Automating your savings to ensure a portion of your income automatically goes towards your retirement plan and other financial goals is an important strategy to utilize to ensure you will be able to achieve your goals and retire when you want with the funds you require.
Step 4: Plan Your Investments
As savings accumulate, it is important to ensure they have the opportunity to grow. Many physicians have large amounts of funds sitting in their bank accounts, uninvested. Understanding your time horizon, risk tolerance, ensuring you are properly diversified, and minimizing unnecessary fees are all necessary factors to consider in optimizing your potential for investment returns. It’s also important to maximize tax efficiency by utilizing registered investment vehicles such as TFSA/RRSP/RESP and to consider whether incorporation is right for your personal circumstances.
Step 5: Estate Planning
Whether you decide to help the next generation(s) of your family, your community, or otherwise create an enduring legacy, you will require a well laid out plan to do so. Wills and estate plans must be kept up to date and revised with any significant life event and over time as your assets accumulate. Ensure they are kept in a secure, dedicated location that your loved ones are privy to so that they will be accessible to the people who will need them when you are gone.
Financial planning is an involved process that requires dedicated effort and ongoing attention. Whether you take this on yourself or outsource to a trusted professional, make sure it is at the forefront of your mind and properly optimized. Your future self will thank you.
Physicians Wealth Advisory is committed to helping Canadian Physicians achieve financial success and have a comfortable retirement. We are here to help Canadian physicians at different stages of their careers realize their true financial potential. To learn how we can be of help, feel free to contact us.