*As always, links are purely for reader interest. No affiliations to declare.
“So I’m on board to do this. Let’s get FIRE-ing! …What’s my first step?”
In medicine, we learn to try to get the fullest picture possible (or reasonable, if time is of the essence) before taking your next step. History, physical, investigations, diagnosis/differential, and THEN we talk treatment. Simplified, this is equivalent to:
- Information gathering (and the inquiries become more specific as you find out what you need to know that you don’t yet know)
- Assessment of the current situation
- Action plan
I propose a similar approach to finances. (Even in someone coming in with trauma, all those steps are taken – just in conjunction with stabilization. Happily, there are few trauma equivalents in finances. Outstanding credit card debt is a bit like an ongoing hemorrhage, though – more on that later).
In this post, we are going to focus on Steps 1 and 2.
Information Gathering
Time to tidy up all your financial information in one place. The key is to put all your numbers in one place, tally the total, and see where things are at. I use an Excel spreadsheet. Pen and paper could work just as well – my suggestion would be to have all your numbers in a column so that it’s easy to visualize and add.
- Find all of your bank accounts. Note how much is in each account in your digital file or on your physical paper.
- If you own a home, note its current worth (not how much you bought it for). *If you feel your home is not something you would sell, could be worth leaving off the assets line, or off to the side in a special category.
- If you own a vehicle, note its current worth.
- If you own any other assets, note their current worth (e.g. investments, trust fund, businesses, etc. I would not necessarily include furniture, clothing, household appliances or electronics. Your line of credit is not an asset, nor is the maximum limit of a credit card.).
- Add up items 1 through 5 to get the value of your total assets.
- Find all of your credit card statements (particularly if you have balances that are not paid off in full every month. Some people are lulled into paying only the minimum – we’ll discuss why this is a dangerous idea later).
- Find all of your loans (provincial student loans, national student loans, line of credit, any other loans you have).
- If you have a mortgage, factor that in.
- If you have anything that you’re financing, factor that in.
- Add up items 6 through 9 to get the value of your total debt.
- Total Assets – Total Debt = Net Worth.
The net worth is a snapshot of your finances in the moment. A cross-section. Now, if your net worth is negative, don’t worry. Even if the number looks big. This is quite common for medical students and residents. If it’s not negative, then celebrate!
As a way to put this net worth number in perspective, consider a specialty that you’re interested in pursuing (if you’re a medical student) or the specialty that you’re in (if you’re a resident or physician). Using the example of a family physician in Nova Scotia who shared his approximate gross (how much he gets paid) and net (how much he keeps after expenses) income, you can use this as a sample ballpark of how long it might take to pay down your debt if you were a family physician in Nova Scotia who worked the kinds of hours and did the kind of practice that this physician does. If you’re looking at doing Anesthesia, the gross pay to net pay ratio is much better considering the lack of overhead costs (refer to page 20 for the 2015-2016 national estimate of gross pay). If you plan to practice in Ontario or BC, you can look at the “blue book” for reference. Now, consider the reality that you will need to pay for housing, food, and bunch of other expenses during a year of work – it’s not like you can put your whole salary toward paying down debt – especially in your first year of practice (incorporation fees, provincial licensing fees, and other fees that I don’t yet know about – hello).
Overall, your net worth as a staff physician will vary depending on your practice type, how you practice (e.g. number work days or FTE equivalents), and where you practice (as provinces have different fee schedules, and rural areas might have fee premiums or incentives). You could consider your net worth as a primary endpoint in terms of finances, or an objective outcome measure of your financial journey. You can even use it to set goals. (You can even use it to set goals during residency, when we are finally being paid!) This depends on you.
Next up, let’s talk about cash flow!
Cash Flow: the general movement of money in and out of your account. This will show you what general direction the money is moving (hint = ideally, you’ll want the numbers moving in) and where different bits of money are leaving your pocket. You’ll want to find the following numbers:
- Monthly pay for medical work. (Medical students – you might get a stipend in the last year of your training. I’m not sure how this works out between schools – ask the clerks who are ahead of you in training. If you want to project into the future a bit, you can find the salaries of residents through the province’s resident association, and then factor in provincial taxes).
- Monthly pay for non-medical work, if any.
- Income from investments, if any
- Add items 1 through 4 for the monthly cash flow in.
- Interest that you pay on student loans (provincial and national)
- Interest that you pay on credit card loans
- Monthly housing payments (e.g. mortgage, condo fees, rent)
- Monthly utilities bills (electricity, heat, water, oil, natural gas)
- Monthly transportation fees (bus passes, fuel for a vehicle, parking fees in your building and/or at work)
- Monthly food expenditures (groceries, eating out)
- Monthly entertainment expenditures
- Miscellaneous expenses
- Add items 1 through 12 for the monthly cash flow out.
- Cash flow in – cash flow out = Net Cash Flow
You may notice as you look at items 10, 11, and 12 that these are a bit fuzzier. That’s alright. Give it your best estimate – and err on the side of overestimating rather than underestimating. We’ll talk later about how to bring the fuzziness into focus, as this is important on your journey through financial literacy (and into financial independence, if that’s a goal). Remember, you don’t have to exhaust every single investigation before making a reasonable provisional diagnosis and starting a reasonable course of action. Same thing here.
Assessment
So now you have an idea of what your net worth is and what your monthly cash flow is like. These numbers will change as time progresses, especially if you have debt that is accumulating interest charges, which add to the main amount (or “principal”, as they say in financial lingo) that interest can be charged from. Monthly expenditures can also increase with “lifestyle creep.”
- Lifestyle creep: the gradual increase of spending as pay increases. Physicians are notorious for being bad with finances despite the high pay. Keeping up with the Jones’ and lifestyle creep is one factor that can greatly contribute to this. “But I deserve to have the new Porsche! I worked hard for so long!” “But I make $___ now per hours, surely I can afford a Starbucks instead of a Tim Horton’s coffee. Who makes their own coffee at home anyways? Ain’t nobody got time for that.” Beware, oh beware. I’m not advocating for a life of self-denial. But later we’ll have more in-depth conversations about being intentional with your spending so that it brings the greatest fulfillment.
Now that you know where things are, think about where you want things to be. This will help guide the Action Plan. The next few posts are all going to be about the Action Plan. (In fact, my prediction is that most of this blog will be about the Action Plan).
This is the fun part! Dust off those dreaming goggles – this is going to be about turning those visions into goals, and formulating how to get there!
-Dr. FIREfly, MD
