By Dr. Jim Dahle, WCI FounderMany a financial advisor will tell you that their new clients have gaping holes in their financial plans. However, that usually isn't why they come to see the financial advisor. A client often comes in looking for help selecting investments. Investments are sexy. People love to think about having great returns and even more money than they already have. Investing can seem really complex—so complex that one must hire a professional to assist.
However, that is actually one of the largest misconceptions in the financial world (two others are that you get what you pay for in financial services and that the more active managing you do, the better your returns will be). An even bigger problem with a huge focus on a complex portfolio is that it sucks up all of your time and energy. Keeping investing simple will give you the bandwidth to focus on the things that will have a much bigger impact on your financial life.
Ahhh . . . the majesty of simplicity.
10 Biggest Gaps in Financial Plans
Today, let's go over what people forget. What they ignore. What just doesn't show up in their financial plan, if they have one at all.
#1 Disability Insurance
It's amazing how many doctors are still running around without disability insurance. But you know what? Outside of medicine, it's far worse at 14%. That's right, only 14% of Americans are covered by a disability insurance policy. Want an even worse statistic? In 2012, it was 31%. No, I have no idea what happened. Fix this gap in your financial plan by purchasing a solid disability insurance policy. Protect your greatest financial asset (your ability to turn your time into money at a high rate).
#2 Life Insurance
Doctors can simultaneously buy too much of the wrong kind of life insurance (whole life because it seems more like an investment) and too little of the right kind of life insurance (term life). It might not be a huge gap in YOUR financial plan, but it sure will be a big part of your survivor's financial plans!
#3 A Will
The most important function of a will is to designate someone to take care of your kids and their finances in the event of your death. So, you have kids but no will? Seems like kind of a big gap, right? Go get a will.
More information here:
My Financial Plan Calls for Me . . . Being Hung by My Fingernails????
With Our Expanding Family, We’ve Had to Break Our Financial Plan – Twice
#4 Beneficiary Designations
Remember when you opened that IRA, HSA, 401(k), or 529? They asked you to designate some beneficiaries. Guess what? Not everyone did. Or maybe they didn't change the beneficiaries after getting a divorce or after some other life change. It doesn't cost anything and it usually doesn't take very long, but it's a pretty important part of financial planning.
#5 Your Income
People don't like talking about their income. The natural consequence of that is that there is a very wide range of incomes for the same or similar jobs. The intraspecialty pay variation dwarfs the average interspecialty pay variation. Knowing what you're worth and getting it is a big part of financial planning. Better yet, figure out what the top 10% of those in your field are doing to have such a high income and borrow some of their techniques.
#6 Your Budget and Savings Rate
Budgeting seems like a pretty basic part of financial planning, right? You might be surprised how many of your peers, many of whom have a financial planner, can't tell you what their savings rate is. Of all the numbers to keep track of early in your career, this one has to be near the top. It's not even hard to calculate. Take all the money you put toward retirement this year and divide it by your gross income. That's it.
More information here:
How to Write an Investment Policy Statement
#7 Goals
Want to have even less fun than you'll have budgeting? How about setting goals? This one is apparently so hard and/or so painful that lots of people try to invest without doing it. Seems hard to me. I mean, what's the point of investing without any sort of a goal? How does anyone even know what to invest in if you don't know what the money is for or when it might be used?
#8 Credit Card Debt
Sixty-one percent of Americans have credit card debt. Sixty-one percent of Americans report that they own stocks, so presumably, something like 70%+ of Americans are investors. That means that at least 30% of Americans are investing despite having credit card debt. Credit card debt, typically at 15%-30% interest rates, is by far the best guaranteed return investment available to 61% of Americans. Investing in pretty much anything before paying off credit card debt is one of the dumbest things an investor can do.
#9 No Mortgage Plan
Many investment advisors don't take into account the presence of a mortgage when they give advice. Perhaps the investment portfolio includes a bunch of bonds paying 3% while a 7% mortgage is sitting there. Or the mortgage should have been refinanced years ago. Or the mortgage is actually what is keeping someone from retiring. People always wonder, “What will I do for health insurance if I retire early?” Well, you could always use the money that was going toward the mortgage to pay for it if you had paid off that debt. The point is that a mortgage is a huge piece of most people's financial lives, and ignoring it in a financial plan is a mistake.
More information here:
Should You Pay Off Debt or Invest?
#10 No Student Loan Plan
It's really sad that student loan burdens are so high and that the student loan landscape is so complicated that this now must be a major part of the financial plan of many people, especially doctors. After we started StudentLoanAdvice.com, we found that just providing some education and a little help running the numbers saved doctors an average of $190,000 on their student loans. Like managing a mortgage well, managing the costs of education well goes a long way toward a sound financial plan.
Fill these gaps in your financial plan, and you and your finances will be a lot happier.
What do you think? Which of these gaps do you think is most common? Which ones do you still need to fill?
Something important pointed out to us by the first financial advisor we went to 25 years ago when we were expecting our last child: not only does the solo doctor/ high earner in a marriage need life insurance if there will be a family remaining after her death, but the other parent / partner dying may leave the doctor needing to replace a homemaker, housekeeper, childcare provider, chauffeur, etc etc. If your spouse is at home with young kids, or even in a two doctor family if you need both of you to juggle all the responsibilities of the home and kids, their death would really warrant several hundreds of thousands of dollars to replace everything they do for several years, or a move to get help from the children’s grandparents, etc. This epiphany prompted us to get another life insurance policy on me since the one we had ended about the time the first kid finished college, so we would have been short if I had died before the next baby was out of the house.
Yup, stay at home parents should often have life insurance purchased on them. It’s often cheaper too.
does anyone know how to calculate savings rate if much of the savings is in roth accounts?
The same way. Divide total money saved by total money earned.
I was thinking since money is being spent on paying Roth associated taxes in lieu of being spent on tax deductible investments. For example, let’s say someone makes 100k per year in income and puts 5k into a Roth , then pays 2k in taxes vs spending 5k in a tax deductible investment. In this example, you are saying they both have a 5% savings rate. What I’m saying is that it’s a 7% vs 5% savings rate because the 2k that went to taxes could have been used to increase the tax deductible investment by 2k.
You are allowed to calculate your savings rate any way you like. I do mine with gross income as the denominator and everything that goes into savings as the numerator, no matter whether it goes into a tax-deferred account, taxable account, or a tax-free account. When I tell attendings “you should save something like 20% a year” that’s what I’m referring to.
I don’t disagree that one of those contributions will be worth more later because you are contributing more after tax money to it now. If you’re worried about getting that accurate on your savings rate I’d say you’re definitely going to win the game. But don’t forget it’s a one player game, just you against your goals.
1. Not owning BTC
2. Not owning BTC
3. Not knowing what money is
Michael Saylor hacked the system. If you don’t understand money, you won’t understand why.
I hate to say it, but I told you so.
Please educate us on “what money is” lol
You don’t know? That’s why you are being left behind.
JD, have you not been paying attention to MSTR?
I’ve chosen to spend most of my time paying attention to things that matter in my life. Individual stocks and their performance or what their founders are doing or whatever are not on that list. It must be really stressful feeling like you have to watch things like that to reach your financial goals.
I am certainly not feeling “left behind” as I type this to you while sitting in a chair flying through the sky to the other side of this planet at 500+ MPH.
Like whole life insurance salesmen who feel whole life is the solution to all financial problems, Bitcoin fanatics feel like Bitcoin solves all financial problems.
That’s your editorialization. And that’s fine. But you’ve been wrong about BTC, so what’s it worth?
What have I been wrong about with BTC, specifically?
A few things to add out –
1) No planning for aging parents/catastrophic expenses.
– This could be as simple as having a conversation with your parents and having them have a savings play.
– If you have a side gig – finding some light work for them to do to pay them a salary and then have them save that salary for their own later years.
2) Planning/considering divorce.
– I’ve been married very happily and have 0 plan on ever getting divorced.
– But we still have a prenuptial agreement and understanding the devastating cost of divorce (both financial and personal), my wife and I make a deliberate effort to focus on eachother and our lives.
Great article as usual!
Thanks for your comments!
Yes, very sharp comments, and it brings up the problems in society, which is the fact that you even have to get a “pre-nup”. As if there weren’t enough problems already with family formation. I have yet to have someone tell me why a man would ever get married (by the .gov – not religiously). If it ain’t the priest deciding you get divorced, you ain’t divorced. Which means the existing system is all downside.