Best financial practices and how to implement them
By Greg Gulick
Think about your retirement. When you hang up your stethoscope, will your budget allow for fine dining in Paris or will it be restricted to a burger in Paris, Texas instead? Understanding your financial priorities today and what it takes to fulfill your financial goals is an important part of the long-term health of your financial plan. Building your wealth and investment portfolio and staying financially healthy will be much easier if you can stay on track with your plan. Try some of these best financial practices to help you succeed.
Take advantage of tax-advantaged accounts.
Once you find yourself in your high-income-earning years, contributing to a retirement plan is an important aspect of your long-term financial goals. For 2017 you can contribute $18,000 to a 401(k) plan and if you are 50 or older, you can contribute an additional $6,000. For those with their own practice, an employer-sponsored retirement plan provides you tax-advantaged retirement savings and offers your employees an appreciated benefit. The maximum annual retirement benefit an individual may receive in a defined benefit plan in 2017 is $215,000. There are several retirement plan options to choose from if you own or are a partner in a practice. In some cases, you can have more than one retirement plan, so make sure your plan is designed to meet all your goals.
Takeaway – Understand all your retirement plan options and the contribution limits. If you own your practice, review your employer-sponsored retirement plan or options for one.
Be wary of investment recommendations from someone on TV or a friend.
Who needs professional advice or to conduct research when your golfing buddy gives you tips? If his stock suggestions are as good as his golf handicap, you can’t go wrong, right? This is usually not a good idea and can be a very risky investment choice. Everyone has different financial goals, time horizons, risk tolerances, and portfolio sizes. Investing in stocks is a personal decision that depends on your financial situation and specific goals. Each stock needs to fit in your portfolio to maintain your temperament for risk and asset allocation, and each must be thoroughly evaluated.
Takeaway – Make sure you completely understand your investment choices and resist the urge to buy based on your buddy’s tips.
Take advantage of compound interest and lifestyle choices.
With a physician’s prolonged education, you may not achieve significant earnings until you’re in your 30s. Add your student debt and perhaps the cost of purchasing a practice or starting a new one. Throw in other major expenses such as your home and raising children, and you can see physicians face many obstacles to saving that delay your ability to build wealth.
It is important that your lifestyle allows you to save a portion of your earnings and invest for your longer term financial goals. The longer your time horizon for investments, the more compound interest can work for you. Living beyond your means is a sure way to erode your wealth, especially if you aren’t reducing your debt — or worse — you pile on more debt. Compound interest works against us when we carry debt and works for us when we invest. The plus side is you should have many years of consistent earnings, making those years the ideal time to set a portion away for your longer-term financial goals.
Takeaway – Reduce your debt, start investing early and often — even in small amounts — and live within your means.
Have a plan.
A financial plan will clearly identify your financial goals and what it takes it to reach them, putting you in a much better position to make financial decisions. A plan will help you identify your priorities and develop a clear picture of your current financial situation. The more you understand about your main financial goals — the amount of money needed for your retirement lifestyle, your children’s college expenses, or the amount needed in your emergency fund — the better informed you are to make financial decisions and understand the impact of these choices.
A financial plan can be very thorough and detailed, but having a plan that at least identifies your main priorities and financial goals will help provide clarity. There are also several other important areas regarding comprehensive financial planning that include tax planning, retirement planning, investment planning, education planning, and insurance planning.
Takeaway – Identify your financial goals and develop a financial plan.
Understand investment fees and expenses.
Investing expenses and fees can be a key factor in your net return. That’s why it’s important to fully understand every expense associated with your investment. Think of expenses as a hole in your investment bucket. To help minimize expenses, it is important to understand how they are charged to investments. Some investments have sales charges and annual expenses while other accounts have several layers of fees and expenses. Ask lots of questions and locate the expenses so you may better understand, evaluate, and compare investments. Though fees and expenses alone shouldn’t determine your investment decisions, understanding them fully will be advantageous for your entire portfolio.
Takeaway – Clearly understand the fees and expenses of your investments.
Don’t just buy and forget.
Perhaps you have an investment you purchased years ago, and you haven’t looked at it since. Or maybe like many investors, you still have an old retirement account sitting in a previous employer’s retirement plan. Or maybe you are an employer and you’re not regularly reviewing your employer-sponsored retirement plan for investment options, expenses, and plan design. You may be surprised at how inefficient those investments can become over time.
It is a good idea to review your investments and accounts at least once a year to make sure they are performing well to help you meet your goals according to your time horizon within the context of your entire financial plan. It is recommended to review the performance of each of your investments while comparing the performance of similar investments comparing such factors as investment objectives, performance, and fees.
Takeaway – Set some time to thoroughly review each of your investments at least on an annual basis.
Don’t react emotionally to market volatility.
A bear market, which is defined as a 20 percent sell-off from the market high, can be a very difficult time as an investor, especially since bear markets can sell off extremely quickly. Market sell-offs and bear markets can create waves of uncertainty and fear as we listen to the news and review our portfolios. This is when having a financial plan and an understanding of your financial goals can help.
With a well-diversified portfolio in which your assets are properly allocated, that has the right amount of risk for you, and is designed to meet your financial goals, you’ll be in a good position to weather these financial storms. If your financial plan does not call for you to sell any of your investments and your goals have not changed, then you may not be forced to sell any of your positions in adverse market conditions, even though your emotions and your feelings may tell you otherwise.
Takeaway – Keep your financial plan in focus and not your emotions, especially during volatile market conditions.