So you've finally finished your medical specialty. The long nights of study are over (for now!) and you've got a shiny collection of new letters after your name. And of course, along with those letters goes a bigger pay packet. Time to reward yourself for all that hard work and start living a life of luxury, right? Well, maybe not...
Unfortunately a little extra income often brings with it a damaging illness. Fluids won't help and paracetamol is useless. It's splurge fever, the almost uncontrollable urge to make lifestyle purchases now that you've got a little extra coin.
Splashing out on holidays, fancy gadgets, expensive clothes, even upgrading your car or home can all be symptoms. And if you're not careful they can quickly add up to a cracking financial headache.
So what can you do?
The good news is splurge fever is easily treated. The bad news is the best cure is prevention (what, isn't there a pill I can take???). And in the world of finance when we're talking about prevention, what we mean is planning.
There's no reason why your extra income can't mean rewarding yourself or even looking at upgrading your home or car, as long as it's part of a planned, well-managed process.
The biggest financial danger for new specialists is uncertainty. Yes, you will likely be earning more money. The big question is how much more? Unfortunately many new specialists overestimate their new income and commit to spending that becomes like a weight around their neck.
It might not be as exciting as splashing out on a new private movie room for your house, but my advice to new specialists is to follow a four-stage process for approaching this new stage of their career:
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The mere mention of the word is often enough to trigger a boredom-induced coma. But how about insurance where you get to share in the profits? That's a little more interesting.
The reality is that any responsible financial strategy includes good-quality life insurance, income protection, and total and permanent disability insurance. So why not consider obtaining these products from an organisation focused solely on benefiting its members?
PPS Mutual is a new provider in the Australian market that does exactly that. Profits get returned to the people purchasing its products as bonuses.
What's more, PPS Mutual products are only available to a select number of professions, including general practitioners, medical specialists, dentists and dental specialists. That means the products have been specifically tailored to meet the needs of professionals.
If PPS Mutual sounds familiar, it may be through a colleague who has worked in South Africa where they have enjoyed great success amongst the medical fraternity for over 75 years. PPS Mutual is South Africa's largest mutual financial services company, with assets in excess of $3 billion. In the last 10 years alone it has assigned $2.2 billion in profit-share to its members.
Medical Financial Planning is fortunate enough to be part of a small, select group of advisors that have been accredited by PPS Mutual to give advice on their products.
As with any financial decision it's important to look at each individual's specific circumstances to determine if a particular product is the right fit. It's also important to note that Medical Financial Planning will always consider a broad range of products to ensure our clients receive the most appropriate option for them.
For many doctors and dentists, the PPS Mutual products may offer a genuinely compelling alternative to the traditional insurance providers.
Once you've learnt more about PPS Mutual's products you might even find yourself dropping the word "insurance" into conversations with your colleagues. Just make sure you follow up quickly with the interesting part before they pass out...
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Upon finishing their years of training, many medical specialists make hasty financial decisions that they live to regret (and that get in the way of their long-term financial success).
In our white paper, "Are you planning your journey to financial independence?" we identified key financial challenges faced by medical specialists. Chief among these is that practitioners are either complacent that they're now earning good money so don't need to plan financially, or they're eager to finally enjoy the rewards of all their hard work and want to spend money now!
I have a good friend who is very successful in his career and has come up with the phrase 'toy fever' to describe the urgent desire to make lifestyle purchases. While it can apply to the nice-to-have things in life, I believe it can equally be applied to the purchase of houses and cars so I've recoined the term 'purchasing fever'.
One of the doctors we interviewed for our white paper commented: "It's very tempting when you are surrounded by people on good incomes, driving around in new sports cars and living in multi-million dollar properties. I find I am trying to keep it real within my own capabilities and trying not to get caught up in what others are doing."
Keep in mind that as a doctor you're in training for almost half your working life more than most other professions and this puts you well behind many others on your journey towards building wealth and gaining financial independence.
Committing to new cars and an expensive house too soon after finishing your training can often add pressure while, at the same time, you are trying to establish yourself as a specialist or GP. Increasingly, we are seeing doctors completing their training and going into private practice due to the lack of public appointments, which in the medium term can be very financially rewarding, but in the short term can mean some uncertainty around cash flow.
In this blog I address the reasons why it can be beneficial to wait a while upon finishing training and delay important financial decisions and investments, especially if you're going into private practice.
Let's start by looking at a couple of real stories:
These two stories are opposite sides of the coin, but the end result is the same a costly exercise to change the situation.
Issues can also arise as the result of a car purchase:
If you're not careful, you can easily go from a situation where you're tight for money because you're in training to a situation where you're tight for money because of the financial decisions you've made.
However, if you delay these important financial decisions to understand your pattern of income especially if you're setting up in private practice then you will be in a position to make those decisions with more confidence, removing the stress caused by over-commitment and strengthening your ability to achieve financial independence. Waiting could also put you in a stronger position so that you build up your equity, making it easier to find a loan arrangement with better rates.
Setting up in practice as a specialist or GP can take time and an upfront financial investment. In addition to any upfront payments, it will take time to build referral sources. Any delayed payments can affect cash flow keep in mind that health funds can take up to three months to process payments. What we see is that it usually takes a year or so to build a good idea of how things look financially and what you can reasonably expect your income to look like.
With this in mind, in order to help you enhance your financial future for the long term, our team of financial planners advise you to:
For specialist financial planning, accounting and tax advice for medical professionals, please get in touch with our team.
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Firstly, the difference between an investor return and volatility is commonly misunderstood.
In finance, average returns and volatility are different things and affect investors differently. However, measures of volatility steal the limelight, often as the main focus of financial reporting.
To quote Investopedia, a return is "the gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment." A return is what you can realistically expect from a set of given assets over a period of time.
Volatility is how that return is likely to oscillate over short time periods. Investopedia states that "volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility is measured by using the standard deviation or variance between returns from that same security or market index."
Volatility means a security or market index can swing up or down on an hourly or daily basis, whereas a return is what you can reasonably expect over a given period.
Financial markets have been more volatile over the past year and this is likely to continue. But how it affects investors is perhaps not how you might expect.
This leads me to the second misconception I'd like to address: that a volatile financial market is bad for investors.
Every day, we hear news reports of stock market swings. I see firsthand how these swings affect many people's perception of financial market investment opportunities. They view these investments as risky. The constant, daily news commentary on the share market is about its volatility.
At the same time, the property industry is vocal about profitable returns, but I view a lot of this commentary as misleading. More often than not, these commentators are quoting gross returns not net returns and frequently neglect to provide a credible index or detail of what's included in the cost base, such as capital gains tax or costs associated with acquiring, holding and disposing of the property.
The key takeaway here is that financial market volatility should not worry you if you are looking to build medium - to long-term growth. The stock market is like a constant live auction, with assets marketable (at the push of a button) at any given time.
It's more important to keep in mind that volatility's effect on someone who is trying to maintain an established investment base is fundamentally different to its effect on a high-income earner without established capital.
The current financial market climate tilts the balance in favour of high-income earners who don't yet have a large capital base, rather than those who have already built their investment base.
When it comes to financial planning, I recommend the following to clients who wish to capitalise on their situation and build wealth:
If you are interested in reading more on this topic, why not download our 'Planning your journey to financial independence' white paper, written for medical specialists on making good decisions in order to build wealth.Or for specialist financial planning, accounting and tax advice for medical professionals, please get in touch with our team.
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No one wants to wait for anything anymore, or is that just me! We all expect lovely houses, smart cars, foreign holidays and the latest lifestyle accessories.
What's led to this? Over a period of time (the last 20 years), increasing incomes in real terms combined with an environment of high growth and increased asset prices, has made us all feel rich.
As a financial planning specialist, I believe there is a shift underway that we're moving away from an environment of high growth where market returns did most of the 'heavy lifting' for us.
Over the past twenty years, we could rely on rising housing prices and investment returns to grow our wealth. During this time, "he who borrowed the most made the most". There are a lot of people who made a lot of money simply by borrowing money and "investing". It didn't really matter where!
Yet, in spite of lessons learned from the GFC, banks are still prepared to lend us lots of money. This makes it easy to spend more and, overtime, cultivate the wrong behaviours. When it comes to your own financial life, beware of this.
In today's environment, we see a number of issues getting in the way of wealth creation.
Debt is currently cheap due to low interest rates. However, because of this, there's a danger of overcommitting to lifestyle assets (such as cars, houses, etc.), limiting the opportunity to invest profits until a lot later and thereby losing the benefit of time.
It's very easy for overspending to become a wealth-destroying habit. This can be especially damaging when you consider the other financial demands facing medical specialists today, such as:
All the major economies are struggling with a lack of inflation and lower growth rates. And in a low-growth environment, people have to invest more to get the same results or invest for a longer period of time.
Keep in mind that our current historically low interest rates are set at levels by the Reserve Bank of Australia to stimulate demand. Interest rates are low because we are in a low-growth environment so it's not all good news.
The consequences of this are:
Against this backdrop, can house prices really buck the trend and keep going up? I, for one, don't think so. And I would be cautious of excessive leverage with this.
What strategies are needed to achieve financial independence?
The upshot is if you are building wealth now you will likely need to do more of the 'heavy lifting' earlier on, by saving more, for longer, and you'll also need to have a strategy to repay debt rather than relying on inflation to discount it.
You will also need to be more selective about what you invest in, as the "rising tide that previously lifted all ships" may have turned, or become decidedly "choppy."
In this low-growth environment, in order to build wealth, you need to take a more methodical, considered approach to investment and debt.With this in mind, in order to help you enhance your financial future for the long term, we advise you to:
1. Understand what your goals are and what they will cost.
2. Model different financial scenarios with realistic returns to see the bigger picture and assist with decision making.
3. Develop a financial strategy to get you where you want to be over time.
If you are interested in reading more on this topic, why not download our white paper for medical specialists on helping people to make good decisions in order to build wealth.
Or for specialist financial planning, accounting and tax advice for medical professionals, please get in touch with our team by calling 07 3363 5800.
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