Five Tried-and-True Money Rules

Every year brings new financial challenges, as well as new ways to address those hurdles. But regardless of the year, there are some sound rules when it comes to money management that -- albeit with a couple of tweaks -- remain tried and true, and perhaps always will. That’s because they’re philosophically sound, and they make financial sense.

For example, the old rule of thumb of paying yourself first still works today. “If you want to be the best caregiver for people, you need to make sure the caregiver is in great shape,” says Rebecca “Kiki” Weingarten, M.Sc.Ed, MFA, a career and executive coach at DLC Executive Coaching and Consulting. “It’s like being on a plane and putting on the oxygen mask first so you can help the person next to you. You have to be in the best shape to care for other people.”

Pre-Tax Means Prepared

Cameron Short, CIMA, a financial advisor and senior vice president with the CS Group of Stifel Nicolaus, agrees with this philosophy, and he suggests doing so by putting away pre-tax money in a 401(k) or profit-sharing plan.

It’s not just the best avenue for savings, he says. “Every physician is probably worried about the tax structure coming down the road, and the liability they’re going to have,” he notes. “Maximizing pre-tax contributions is only going to lower your tax liability. It also puts a buffer out there in regards to asset protection. Physicians need to have a focus there, and qualified accounts are a great way to establish an asset-protection program.”

In addition to traditional retirement savings accounts, many physicians may be eligible to contribute to a Roth 401(k), Short says. Higher-net-worth individuals may want to consider contributing to a Roth because it can ease estate planning, offers distribution flexibility at retirement, and tax diversification.

“I would definitely suggest that physicians who have not looked into it, should consider it,” Short says, though he notes that they should consult a tax advisor before opening an account to ensure their eligibility.

Planning and Budgeting

Another old money rule advises having three to six months of living expenses socked away in an emergency fund. It’s still important to put away those rainy-day dollars, but these days it’s more prudent to have a financial cushion of at least nine to 12 months. Physicians may not be facing the unemployment issues that hover over today’s workforce, but may already be feeling the drain of reduced revenue.

“People are cutting back on medical,” Weingarten says. “People losing their health insurance are not going to the doctor and paying out of pocket. So, physicians can’t count on having the kind of income they had three years ago. Any calculations and budgeting done back then has to be adjusted for today’s economic climate.”

Along the lines of budgeting, Short says physicians should always have a good grasp of their typical monthly expenses and the cash flow needed to meet those expenses. He’s also a strong believer that debt is not something anyone should feel comfortable with -- and that younger physicians should be more focused on the kinds of debt they carry.

“People might argue that, well, we have a low interest rate environment right now,” Short says. “But you know what? Your student loan isn’t an appreciating asset. It’s actually losing money against inflation, and you’re paying interest on it. Others will argue that your home is not an appreciating asset right now, but that will change over time. If I’m taking on debt, I would rather have debt that has the opportunity to appreciate.”

The Five Golden Rules

Bruce Bickel, senior vice president of PNC Wealth Management, teaches the “Five Golden Rules of Meaningful Money Management” to individuals and families. Adhering to these basic rules can go a long way toward helping physicians manage their money now, or during any economic environment:

Rule No. 1: Earning. Providing needed resources to meet your responsibilities through a variety of means, including diligent work and creative resourcefulness, such as bartering.

Rule No. 2: Giving. Making financial contributions to charitable organizations as well as volunteering your time, all aimed at helping the less fortunate.

Rule No. 3: Saving. Bickel echoes Weingarten’s and Short’s thoughts about paying yourself first, and creating a buffer fund to prevent debt.

Rule No. 4: Budgeting. Don’t just create a plan to save and spend appropriately, but figure out your working income on a monthly basis. Use 70 percent of working income for living expenses; 20 percent as the buffer fund; and 10 percent for permanent savings, such as retirement or college.

Rule No. 5: Spending. Don’t just spend disposable income within previously determined amounts, but adjust expenses as needed to stay within your budget.