The more personal finance and debt free blogs I come across, the more I realize most doctors are striving to achieve financial freedom.
What exactly does this mean? In simple terms, a financially independent person has enough wealth to live on without working.
There’s an entire group of FIRE (Financially Independent Retire Early) people (like Physician On Fire) that have started a movement helping people achieve these goals.
They get to make life decisions without being stressed about money because they’ve prepared wisely. They control their finances instead of being controlled by them.
Now, you maybe asking yourself, “How’s this possible?“
This happens by reaching a point in life where your income generating assets (cash flow) are able to pay your expenses. This income is also known as “passive income.”
My good friend’s site at Passive Income MD is dedicated entirely to this topic.
Are you ready to start living the life you want without having to work until you die?
If so, then let’s get started…
What Does Financial Freedom Mean To You?
Many people view financial independence differently. For example, some say they’d reached it if they achieved a net worth of $1 million. (Are you tracking yours with Personal Capital?)
Others need more than a million dollars as confirmed by a recent survey from Charles Schwab. They asked 1,000 Americans, “How much money would it take for you to feel rich?” Most felt it was in the neighborhood of 2.4 million dollars.
Have you ever wondered what it means to be free of money worries?
- Freedom to choose a career they love no matter the salary
- Freedom to travel every year – cost doesn’t matter
- Freedom to pay cash for large purchases (vehicles, boats, etc)
- Freedom to help others that are in need
- Freedom to retire 10+ years early
Doctors typically have higher incomes than the “everyday millionaire” that Chris Hogan’s new book, “Everyday Millionaires” highlights.
The average millionaire he surveyed (over 10,000) made less than $100,000 a year.
If they can do it on their income, you can too.
“When you are financially independent, you have options. You don’t have to wonder if your bank account can handle replacing your hot water heater or buying groceries for a single mom who just lost her job.” —Chris Hogan
The 7 Steps To Financial Freedom Every Doctor Should Know
1) Think About Money The Right Way
In Jonathan Clement’s book, “How To Think About Money“, he states that most don’t ever reach their financial goals based on their thinking, or lack thereof.
His research made me realize that some of my goals that I thought would make me happy, wouldn’t after all.
Here’s a few of the books’ highlights that impressed me:
a) We tend to get more happiness when we spend on experiences vs stuff. To me, this translated into NOT being focused on acquiring things such as our “dream home” or “decked out bass boat.” Instead, focus on traveling with family and friends creating experiences that can be remembered forever.
b) Save everything you can early on so we can quickly buy ourselves financial freedom in our 40’s and 50’s. Some may not “buy” into this thinking, but in doing so, you give yourself options (there’s that word again) to continue working if you want or changing careers that you’re passionate about. You never know what life has in store for you.
c) Chronologically, retirement might be our life’s final financial goal, but we should aim to put it FIRST. Our life’s goal isn’t to get rich. Rather, it’s to have enough money to lead the life we want and hope for.
2) Set Goals & Dream Big
Before taking a trip, you’ve got to know where you’re going, right? A plan is needed in order to arrive at the desired destination.
During one of my recent coaching sessions with a private client, I asked, “What are you trying to accomplish?” He stated that he wanted to retire in his 50’s. I asked him how he was going to get there. He couldn’t tell me.
Do you think he’s going to accomplish his goal? Maybe, but he’d have a better chance if he develops a game plan.
Setting a goal to retire in your 50’s is a great thing to shoot for but it’s too vague. The more specific you can make your goals, the better.
A great book that can help with this is The Instant Millionaire.
It’s a fable about a young man on a journey to find out who he wants to be and how he’s going to make his living. His wealthy uncle refers him to a man that holds the secrets on how to attain financial freedom. When the young man gets to the instant millionaire’s mansion, the tale of wisdom and wealth begins.
It’s a great read and I don’t want to spoil it for you.
Here’s a couple of points that tie into what we’re discussing:
- Life gives you what you ask for! –> be clear!
- Secret to getting what you want – by writing out clear goals with a deadline as specific as possible.
3) Stick To A Budget
It’s hard to gain financial independence without having control over money. By creating and sticking to a budget, you’re able to tell money what to do instead of wondering where it went.
Adhering to the principles of budgeting and controlling the urge to spend can play a major role in creating wealth. When you live according to your budget, you’re living within your means, and when you control debt, you’re keeping yourself from negative financial forces that can wreck your life.
If you’re married, a budget allows both of you to set monthly and yearly goals and also decreases the temptation to splurge (sorry). If someone purchases something not in the budget, then their spouse is there for accountability. “You spent $300 on deer corn? It’s NOT in the budget!”
A budget gives each dollar a name before the month begins to help track spending throughout the month. It’s hard to build wealth without a budget and unfortunately, too many doctors are living paycheck to paycheck without one.
4) Eliminate Debt…All Of It
Proverbs 22:7 states, “The rich rule over the poor and the borrower is slave to the lender.” That’s great advice whether you’re religious or not.
This is also one of the key principles Dave Ramsey states why we should avoid debt….like the plague.
My good friend and semi-retired physician, Dr. Cory Fawcett, wrote an entire book on debt called The Doctor’s Guide To Eliminating Debt.
A few debt facts for you:
According to a Pew Charitable Trusts report about Baby Boomers, they found that:
- 47% have mortgage debt
- 41% have credit card debt
- 13% have school loans
- 36% have car payments
Baby Boomers still have school loans? What gives?
This research should make you realize that if you don’t take care of your debt early on in life, you could end up like the average boomer.
If you’ve made mistakes with your finances in the past (like me), no worries. Better late than never to start cleaning up the mess on your way to financial independence.
I used Dave Ramsey’s Debt Snowball to become debt-free. If it works for you, great. If not, try something else but know this….if you owe money, your paychecks have someone else’s name on them.
If you want to reach your goal of financial freedom, you must have your full income at your disposal, not bits and pieces that are left over after paying credit card bills and student loan payments.
5) Focus On Short Term Savings
I rented an apartment during dental school and residency. If something broke, like the A/C unit or dishwasher, all I had to do was call the landlord for repairs.
Most doctors rent during training and then rush out to buy a house as soon as they get their first paycheck. Myself included.
I get it. Being cramped in an 800 square foot apartment ain’t fun. In our last apartment before we bought our home, it was amusing showing guests how I could stretch out (I’m 6′ 5″) and put one arm in bed room #1, one arm in bedroom #2, one leg in the den and the other in the kitchen.
Now you know why my wife was READY to get more space!
Once we bought our first (and still current home), I didn’t count on having to save money for emergencies until we had our first one.
Imagine if every time you had something break or an emergency (ex: kids ER visit), you had to pull money out of your 401(k) or put it on a credit card that carried a balance.
How would you ever get ahead if you kept borrowing money from your future?
You wouldn’t.
Hopefully because you’re reading this, you want to be financially free. In order to do so, you need a large cushion for all of life’s unexpected events it’s going to throw you.
Remember what the infamous Forrest Gump said:
My momma always said, “Life was like a box of chocolates. You never know what you’re gonna get.”
Studies show that 40% of Americans can’t cover a $400 emergency. It’s a good idea, before you start tackling your debt aggressively to start an Emergency Fund.
Once you’re out of debt, increase your savings until it can cover three to six months of expenses.
Our emergency fund is in Vanguard’s Prime Money Market Fund (VMMXX) which is currently paying 2.5%.
If you need help setting up other short term goals, read:
5 Easy Short Term Financial Goals
6) Automate Your Savings
According to SmartMoneyMD, only 41% of physicians average less than $500,000 in retirement savings found in a Financial Preparedness Survey via the AMA.
Here’s something even more disturbing:
- Of those surveyed, the majority (56%) under age 40 had an average retirement savings under $100,000!
Now that I’ve gotten your attention, it’s time to get serious about your investments and savings.
Let’s talk about a few key areas first…
a. Retirement
You’ve probably been told that you must pay yourself first. By doing this, you’re investing for the future right off the top, before you even look at living expenses.
Automation is the key because without automation, it becomes very easy to not save money and instead use it for an unnecessary living expense.
It’s really a simple concept, but most won’t do it because they think it’s going to “cost” them too much because they’re “just getting by” as it is.
If your employer offers a tax-favored retirement account such as a 401(k), take full advantage of it first. Most offer a match on your contributions so why throw away free money?
How much should you save? At first, shoot for investing 15% of your income. This is a good place to start, but once you’re debt-free, max out all company plans before investing in taxable accounts.
b. College
Once you get to the point where you’re saving 15% towards retirement, it’s time to open a kid’s college fund. Two of the most popular accounts are the 529 plan and Education Savings Account (ESA).
If you want to learn more about both accounts, read:
Coverdell ESA vs 529 – What’s The Best To Save For Kid’s College?
c. Mortgage
Once you’ve fully funded your emergency fund with 3-6 months of living expenses, investing 15% towards retirement and saving for kids’ colleges, it’s now time to get rid of the mortgage.
This is another area that you can automate too. All of the payments that used to go towards your now paid off consumer debt can be applied to your mortgage. If you follow this plan, expect to be completely debt-free including the house in 9-11 years.
7) Ignore Mr. & Mrs. Jones
Unfortunately in today’s world, social media can keep you from enjoying financial freedom.
Keeping up with the Joneses has risen to a new level, as we’re able to broadcast our purchases instantly to our friends, family and neighbors.
When the classic book, “The Millionaire Next Door“, was published in 1996, social media wasn’t around.
The millionaires featured in the book didn’t have to deal with the pressures of social media.
Today, people don’t think twice about posting pictures of their purchases & vacations which makes it harder, for many, to keeping their focus on financial independence instead financial hardship.
Building wealth means ignoring what others are doing, which is much more challenging today than in the past.
Last But Not Least
The only way you’ll ever achieve true financial freedom is by being content with what you have (no matter how much or little).
We’ve all been given gifts and studies show that we are the happiest with those that meet our basic needs such as:
- food
- clothing
- shelter
Practicing gratitude with what you already have will help change your outlook on life.
Generosity should be the foundation of your financial plan.
Proverbs 10:22 states, “The blessing of the LORD brings wealth, without painful toil for it.”
This past Christmas, my boys and I volunteered our time by serving meals for the needy at a local restaurant. They quickly realized that the gifts that they’d opened only an hour or two earlier didn’t mean much compared to the 1,000+ people that were standing in line for food.
Time Matters
Our most precious asset is our time. A few things you can do to with yours to help others is:
- Bring your family to a local shelter or soup kitchen to serve meals
- Tutor or coach under-privileged kids
- Bring groceries to the elderly at nursing homes
- Volunteer at your church
The list is endless. If you’re scratching your head trying to figure out how you can serve, simply use the gifts that God gave you.
Ask yourself what you’re good at and use that gift to help.
- Can you do yard work?
- Are you good at doing your taxes?
- Can you cook?
- Can you sew?
You know yourself better than anyone else.
My dad owns a hardware and can fix anything. He serves others by helping when things break around the house.
Whether you can help out a lot or a little, it doesn’t matter. You doing so is contributing something positive to someone else’s life.
When I first started helping others, I found out rather quickly that this helped me out more than them. Giving does something to a person that no amount of money can do. It works on your heart and makes you realize that any problems you maybe having are tiny compared to other people’s problems.
Now that you have a plan, you’re ready to take action in the right direction.
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