Imagine that you have a brand new patient in your office. What’s the first thing you want to find out? It’s probably the problem that the patient wants you to understand and solve.
So after doing a history and physical, and perhaps ordering a few tests, you come up with a differential diagnosis. Once you decide on your most likely diagnosis, you take what is perhaps the most important step in the process:
Implement an action plan.
The action plan is your custom tailored path to achieving what’s important to the patient: going from where they are now to where they want to go.
What’s incredible about this is that as physicians we plan for patients all the time, but we don’t plan our financial lives very well for ourselves.
If you’re like me you’ve got places you want to go as well–whether it’s retiring at age 55, or leaving a legacy for your children, or working part time so you can enjoy your family more.
And that’s exactly why you need a financial plan.
So where do you start when you create your financial plan and what areas should a financial plan cover?
First and most importantly is to define exactly what your goals are. Don’t be vague about this. “Investing in my 401k” is NOT a goal–it’s simply a tool you can use to get to your goals. “Investing in my 401k so I can retire at age 55 and travel all over the world and maintain my current lifestyle”–now that’s a goal.
But while goals form the foundation and destinations of your financial plan, what should the plan itself encompass?
I believe the plan itself should focus on 3 broad areas: wealth protection, wealth enhancement, and wealth transfer.
Wealth protection involves minimizing the chance of suffering a catastrophic financial loss–whether a lawsuit, your house burning down, or a bear stock market that wipes out your investment portfolio.
Wealth enhancement involves increasing the value of your assets and specifically investment assets while at the same time minimizing the impact of taxes.
Finally wealth transfer addresses the efficient transfer of your assets during lifetime and after death to your loved ones and others who are important to you.
Now let me emphasize that while a financial plan is important, it’s far less important than the PLANNING.
Going back to your patient, when you chart out a treatment plan you’ll have to modify that plan as you implement it. Perhaps the patient is actually allergic to the medicines you prescribed or doesn’t respond to your initial therapy.
The same goes with your financial plan. What if you don’t get the investment returns you thought you were going to get? What if you become disabled and your income drops by 50%?
The implementation of your financial plan should be a dynamic process that evolves over time as your life circumstances change. That’s why financial planning is so critical to achieving your financials goals as a physician.