Breaking Bad Money Habits

Financial literacy is hard, and getting harder to obtain—a will-o’-the-wisp to try to get your hands around.

A recent article in the Los Angeles Times underscored just how clueless the average American is about finances. In a survey asking rudimentary questions (i.e. what is a bond, what is a mutual fund, etc.) that depressingly few were able to answer. And many experts agree that teaching financial literacy is a tough sell because it is a hard and long slog to learn.

In a complicated world where some financial literacy is required to participate in society, what is a person to do?

I have an idea, let’s try this thing backwards. Let’s look at some simple things that we already understand, but can easily improve upon. Instead of probing the arcane and the unknowable future, let’s start on the known present.

Money magazine recently published a list of bad habits with which we can work. First, we personally and professionally need to have a budget, even a short version. You can use one of the simple online programs or ask your CPA to rough one out based on last year’s income and expenses, when preparing your tax returns. Whatever a CPA costs, it is worth it, by the way. The tax code is unfathomable and their job is to keep up. A CPA will probably save you more than they cost—a fee by the way, that is deductible.

Next, if you are not doing it already, pay yourself first out of every paycheck into a tax-deferred IRA or 401(k). This could not be more important, as it may be worth millions over the life of your career, thereby insuring a secure retirement. And a big chunk of Americans, yes, even doctors, don’t do this vital task first. Your tax-time review of our sometimes foolish and wasteful spending in 2013 could give you that spot of motivation you’ve been looking for to break one bad habit and change it to a good one.

How about earning up to 24% on your necessary spending by paying off your credit card balance, on time, every month? And if you get one of those cash-back cards you will get a year-end 1% to 3% bonus for your better habit. Please note that these seemingly small percentage numbers on the margin do add up over time and must not be ignored. Successful businesses get this point and spend much time and effort because many of them realize that these small margins in total can be the difference between a profit and a loss.

Our next bad habit to break, which can save your family a small fortune, is to hire an estate lawyer to draw up that long neglected will, health care power of attorney, advanced directive, etc. This activity can be deductible but is priceless for the relief that having it will provide you. If put it off for too long, then do it now.

Our next crucially important area is that of insurance. Make sure that adequate term life insurance is part of that estate plan you just wrote. You have malpractice, auto, home, and business insurance. Do you also have a liability “umbrella” policy? Having one is critical and deductible. Ask your agent.

And how about adequate disability coverage? Especially, young docs whose primary assets are their youth, their health and their medical license. Health is always the wild card, at any age. Take this seriously.

How about ending with a few “don’ts”?

Don’t keep all your money in a checking account; borrow money from family or friends; ignore student loans; or dip into your IRA/401(k). Yes, I know, there are special circumstances for each, but they are usually only dire ones and should be avoided except in a real emergency.

We could go on and on. Just pick one bad habit that seems most manageable to convert to a good one and you can build on that success serially.

I don’t want to seem cynical, but it would be nice not to have this same conversation next January.