The Winter is half over and we're all bundled under blankets on our couches here in the Midwest. The snow falls outside, and it creates a calming scene. I love snow. I think it's beautiful. But added to that calm is some nervousness. We have our first baby on the way, due the second half of February. That definitely adds lack of clarity, as we wait to see if she is healthy and if the remainder of the pregnancy goes well.
Major life events like this are a perfect chance to reevaluate things. I've already made career changes, health and life insurance changes, savings habit changes, and am building another bathroom in the house. But this reminds me that it is a perfect time to talk about it with you.
Whether you are working with a financial advisor, or not, any time you have a major life change that will affect your finances, it is a legit reason to also change budgetary/spending habits. So for example, we chose a different health insurance plan that has a lower max out-of-pocket limit. We have spent a few days determining which of our insurances to put our daughter under as well. I have also decided on a savings plan for her so that college costs are more bearable in 18 years.
Whether it is a baby in your life, or a new home purchase, or graduating from medical school with $200k in debt, or getting your first attending physician job, you should take time to re-evaluate. Ideally you already have a financial plan and budget in place.
So if you have a budget in place, and you save 20%; put 15% towards debt repayment; put 50% towards expenses/necessities; and then have 15% for what I call dining/culture, you can just tweak those percentages to fit new expenses or saving requirements. It is not a difficult thing. I've done it for many clients in the past.
So just keep cognizant that you need to plan and budget, and when there is a major change, your plan/budget must change with it.
On a different note, I want to make some changes to my blog. I think in addition to ideas about saving, budgeting, and passive income, I will begin reviewing books that are kind of self-help/performance/finance related. I think I can save you some reading time, by giving you the key points. I may not produce a review a week, with the baby on the way, but look out for these book reviews because I think they will be helpful.
Zero Based Budgeting was essentially created in the 1960s and applied to government and business budgeting. It has been imported to personal finance and is now suggested by some of the celebrity financial advisers out there. In my opinion, the value in a Zero Based Budget is that it is kind of a basic in the budgeting process and it forces you to allocate remaining monthly income to a useful purpose rather than just blowing it.
A Zero Based Budget is a method of budgeting that allocated every dollar in your budget. In that sense, it is kind of a bookkeeping method. It does not mean that you have zero dollars in your bank account at the end of the week or month. It is simply a reference to allocating your money. You can allocate to the things you really love. You can allocate to debt payments. You can allocate to necessities. But the key is that all the money is allocated. And it's near the end of the Zero Based Budget process that you see where you have extra money and decide where it goes.
So how do you do it? Easy as 1, 2, 3.
Estimate your monthly income after taxes. We'll assume you are contributing the amount to your 401k that gets matched. So after that and after Uncle Sam takes a piece, you have a certain dollar amount. That is the goal of Step One. Find that number.
We are going to start allocating that money. There is a special order that I believe you should use when allocating your income. Start with your home and allocate income for your rent/mortgage, electricity, cell phone, water, gas, cable, and internet. Next address your transportation and allocate for car payment, bus/Uber/subway fees, tolls, and gas. After you have allocated towards transportation, allocate your income to insurance, including home insurance, health insurance, life insurance, and car insurance. If life or health insurance comes out of your paycheck or your home insurance comes out of your home payment, leave these blank. Next you can allocate towards food, so groceries and dining out. After addressing food costs, you can allocate to loans. This includes student loans, personal loans, and credit cards. Then you can address entertainment, which includes any non-food based night out. After entertainment, you should allocate towards emergency savings a retirement account, and miscellaneous required costs.
Here is what it looks like in list form:
1) Home (rent/mortgage, clothing, electricity, cell phone, water, gas, cable, internet)
2) Transportation (car payment, gas, transportation fees, tolls,
3) Insurance (home insurance, car insurance, life insurance, health insurance)
4) Food (groceries, dining out)
5) Entertainment (Netflix, movies out, life shows, alcohol)
6) Loans (student loans, personal loans, credit cards)
7) Savings (emergency fund, retirement)
8) Miscellaneous (kid's clothes, tithing, gym membership, etc)
If you are going into the red, meaning you don't have enough income to cover expenses, then you have to start cutting, or you need another job. You want there to be a surplus if possible.
#3 DIRECT THE SURPLUS
Like we stated above, you want a surplus after you have allocated income to your expenses. Here is where it BECOMES a Zero Based Budget. We will take any surplus leftover, and we are going to allocate it all, bringing our balance to zero.
So for example, let's say that you started the month with $5000 of after tax income. And after allocating it to your monthly expenses, you have $450 left. To get to a Zero Based Budget, we need to have that $450 accounted for. In our case, we may put an extra $200 to student loans, $100 to dining out, and $150 to our retirement fund.
This does one thing well. It forces us to use any unaccounted for money conscientiously. So if we were not using this budgeting method, it would be easy to piss away a little of that money every day on extra food, drink, or clothes. By allocating it in advance and sticking to the plan, we have thoughtfully deployed the money, avoiding our primal consuming urges to waste it.
So there you have it. Zero Based Budgeting is simply a method for allocating every dollar thoughtfully. It doesn't prevent you from spending on things your like. It is just a method that helps prevent you from spending on wasteful things. This is a fundamental concept in financial planning and budgeting.
Stay tuned. I think my next post will be a review of the book Essentialism by Greg McKeown. I think there are many useful suggestions in the book that are transferable to budgeting and personal finance.
I wanted to take a moment to talk about something that comes up with entrepreneur financial planning clients. You see, for an entrepreneur, every penny and every day are typically spent trying to build their business. This presents some issues that other people like attending physicians do not have, since employed people just have to worry about how to allocate their paycheck and manage their 401ks and other retirement accounts. The entrepreneurs have to manage their personal finances and retirements, and also manage business finances. Hopefully I can provide a little extra insight because their are some legal aspects thrown in here and I have a background in that space too (this isn't legal advice, nor financial advice, and should not be taken as such). So let's get into it.
In my financial advisory practice, I focus on resident physicians and young entrepreneurs. In fact, when I open my own fee-only RIA, the firm will focus even more on just serving those two occupations. I say that to make clear that I have a special interest in focusing on 2 occupations so that I can dig deeper than a general financial adviser. And having served these clients, I have learned a few things that are worth mentioning.
1) It is much easier to begin working from a budget while in med school or the beginning of residency. This is probably because when you make less, there is much less margin for error and the benefits of budgeting are more apparent. It feels good to work off the budget and know you can begin whittling away student loans while affording some niceties in life.
Working off a budget before you reach the larger paydays of working as an "attending" physician also has the added benefit of building good habits. So when you become an attending your allocation amounts ramp up within the budget.
2) You have invested heavily in your education. It makes serious sense to buy disability insurance to protect your earning potential going forward. If you have a dependent spouse or kids, it makes some sense to look into term life insurance. You know what insurance does. It protects in case of disaster. Disaster happens all the time.
3) Keep an emergency savings account to cover your expenses for 6 months. This amount of time varies based on the adviser, but we tend to air on the side of caution.
4) Resist the urge to make a huge purchase that first 6-12 months of attending salary. Purchases still need to be thought out and fall within your long term plan.
5) Resident physicians need to realize that while they will make much more than most other careers PER YEAR, they also face a shorter saving window (thanks to lots of school and residency years) and higher tax rates. So there may be even more need for working off a budget.
Google uses AI Another modern way to create somewhat-passive income is to monetize your website or other social media status. Neither is totally passive, as they both require consistent new content to attract traffic.
Scenario one: you have a blog or website that has a consistent audience visiting it. There are multiple ways to monetize in this scenario. First, you could incorporate affiliate marketing. This is when you have an agreement with a company to be compensated when you are responsible for a sale.
A second method would be to utilize advertising. A prime example of this is Google Adsense. Google uses AI to search your site and determine which ads to place to get people to click.
Scenario two: You have a large Instagram (or other social media account) following. You can enter agreements to with product company for placement in your pictures. No need to necessarily advocate for the product, although that is worth more.
You've thought about it. How can you make money on the side? You have a job that provides income, but you can't help thinking that with your spare time, maybe you could make some more money.
While not ideal for everyone, if you have special knowledge, and an avenue to reach the public, you can probably start a consulting business. There are literally millions of people that want help or knowledge, and don't know where to turn. Or they don't have time to learn something. But they have an internet connection and like to use Google. So if you can reach them, they are a potential client for your new consulting business.
That is where you step in to fill a need. You either have unique knowledge, or you have been through an experience that gives you special insight into a process. For example, I left my life insurance employer to start my own RIA (registered investment advisory) firm, and it posed some special challenges that made the decisions surrounding it more difficult. Financial advisers that started in the insurance industry have considerations that non-insurance financial advisers don't have, and when they plan to leave to form their own RIA, they need special assistance or coaching. That is my consulting business.
I act as coach/consultant for financial advisers looking to leave their insurance company because they are tired of quotas or because they want to engage in a fee-only investment advice. This has proven to be a really nice consulting business, and I feel like I am providing a service they really need. And since I charge $90 per hour, if I spending 5 hours during the week coaching, it can add $450 in extra income to my weekly income.
So look at your own special skills or insights. Or increase them if you don't quite feel confident enough to provide the advice. There are likely tons of people searching the internet right now to learn how to do something, and you could fill that need.
The title of this article is misleading. A better title may be the Future of (the Majority of) Work.
But we all know the world is more connected these days. We've also all heard about how AI (artificial intelligence) is going to take jobs in coming years. I believe there will be many jobs that are unaffected, Some service jobs may be affected, but could change
It's been a melancholy day. We had to put our foster dog to sleep last night. He had cancer and lived longer than the veterinarian projected, so for that we are grateful. But when he lost all energy, couldn't hold down food, and lost considerable weight, the choice became clear. He was a good dog and very gentle and loving. He went out surrounded by friends.
RIP Bam Bam.
I met with a client today to talk about planning. He runs a successful business and is in the process of expanding it, and at home he has a young child with his wife.
The time to plan is something most people put off. They are either afraid to discuss finances with someone, or don't like the idea of having to follow a path with THEIR hard earned money. I sympathize with these fears. It can be scary to disclose that you have not saved anything or have large debts. It can also be uncomfortable to realize you curtail spending on some "creature comforts." But this is something I take very seriously, and I never judge clients based on past mistakes or events.
A lot of the time, a person can be thrust into a situation that is not their fault. And it can feel as if there is never a good time to meet with a financial planner. But sometimes we have to do things to plan ahead. A team or army or business never flies blindly, without goals and steps to meet those goals. Likewise, a person and their family should not go through life without some sort of plan.
If we weigh: the slight discomfort and time it takes to meet a planner versus the satisfaction of knowing why we are saving and that we are on the right path, the choice can become clearer. Imagine the satisfaction in knowing that little by little, debt is being paid off while we also save for retirement and a child's education. The assurance of knowing you are working towards a goal is the key to advancing in life.
That brings me back to my client today. Even though it was tempting for him to hold off planning and saving so that he could pay for business expenses and family comforts, the truth is he can do both. And most people can do both, as long as they accept that the amounts may start out small. Imagine agreeing to set aside $50 per week to begin saving. Starting small is better than not starting at all. That first financial plan can lead to greater benefits down the line. It can also provide peace of mind.
Whether the plan suggests a ROTH IRA and term life insurance, a 529 plan for a child, or a Simple IRA with employee group benefits, the willingness to sit down for the planning session is the most important thing. My client today saw that. Do you?
I am a Chicago-area financial adviser to young doctors & business owners.