How to get ahead in your finances: Pay yourself first.

 
 
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If you’ve ever delved into the world of personal finance, you might have heard of the phrase “pay yourself first.” In fact, many investment gurus mention this approach as one of the keys to getting your finances on track and building your net worth.

What does “paying yourself first” mean? This concept can seem confusing initially, so let me break it down. Paying yourself first simply means making yourself a priority. It’s actively choosing to invest in things that build your net worth before you spend money on anything else. 

Pro Tip: This can be hard to do at first. As responsible adults, our first inclination may be to pay our bills, buy necessities, and use whatever is leftover to “invest in ourselves.” The problem with this approach, at least for me, was that there never seemed to be any money leftover. Some unexpected expense would occur or I’d end up spending money on something else that didn’t even need. I never seemed to have money leftover to save or invest. “Paying myself first” helped me change that. Now, instead of spending the majority of my check and wondering where my money went, I do things differently. I invest in myself first, then use the leftover money to pay my bills, reserve money for food and transportation, and spend the remainder on entertainment and incidentals. 


How is it done?  Do exactly what it says. Pay yourself first. In other words, the very first thing you do when you get paid is use a certain percentage of your check to build your net worth.  This means having a set amount of money reserved for the sole purpose of paying down debt, saving for retirement, or investing in other types of lucrative deals. When you reserve money for these purposes, you are actively investing in your future in a way that builds your net worth and puts you in a better position financially. 


Pro Tip: Make this automatic. Outline a budget of your monthly expenses and estimate how much you can afford to save for retirement or use to pay off debt each month. This can be anywhere from $5 to hundreds of dollars each pay period and beyond. Once you have a set amount that you can spend on investments and debt pay down, go into your mobile banking app and get this amount automatically deducted from your check the same day you get paid. Doing this ensures that you are “paying yourself first” and makes building your net worth a priority. It also prevents you from spending your “extra” money on things you don’t need.   


Why does it work so well? Most of know we need to invest in ourselves. We realize that having money is important and that spending all we earn isn’t the wisest thing, but sometimes life can get in the way. Either that or our bad habits can stop us from doing what we know is right. It’s this reason that the concept of paying yourself first was born. It forces us to implement the strategy of investing in ourselves before we do anything else, especially when set up this automatic withdrawals. Unlike other strategies, this method doesn’t rely on our own self-control or fail due to our lack of self-discipline.

Pro Tip: Before I got my first paycheck as a doctor, I set up the payroll from my job in way that would virtually ensure that I achieved my financial goals. The first thing I did was determine what percentage of my income I wanted to store away for retirement and choose the index funds I wanted to invest in to help my money grow. Then, I went to the “banking” part of my work payroll website and decided that I would have 25% of my check directly deposited into an entirely separate savings account. I use the money in this separate account to pay down debt and save up an emergency fund. Because I don’t have a debit card for this account, it’s almost impossible for me to spend this money. Since I don’t really “see” this money in my main checking account, I’ve gotten use to living on the remaining 75% of my take-home pay. 

My point? Paying myself first has helped me in so many ways. I’m investing in my retirement without even thinking about (since my retirement contributions are deducted before I ever get my check). I am also saving more money than I ever have before. I have a separate account for travel that I can now use to pay for my future vacation(s) in cash. Plus, I have paid off a substantial amount of credit card debt that I had from my years as a graduate student. This combination of paying off debt, saving money in separate accounts, and investing for retirement is helping me build my net worth faster than I ever would have thought. As my net worth increases, my credit score gets better. Paying myself first has given me reassurance that I’m on track to reach my financial goals.

Tell me, in what ways do you “pay yourself first?” If you haven’t yet started, is this something you’d be willing to try? 


 

6 Reasons I’m Not Buying Whole Life Insurance (and you shouldn’t either)

 

If you’re a physician or high-income earner, you’ve probably been approached to purchase whole life insurance. While many of your fiscally responsible colleagues may warn you not to buy it, many other financial advisors seem convinced that whole life insurance is a must-have. With such conflicting advice, you may be confused on who to listen to and unsure about what to do. Several of my physician friends are in the same boat. In fact, many of them have asked me to help them understand why “whole” life insurance is so bad and “term” life insurance is ideal. Here was my response:  

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Most whole life insurance policies, universal life insurance policies, indexed life insurance policies, (and basically anything other than term life insurance) is sold to us under false pretenses. These policies are branded as a way to “guarantee” our family money when we die. However, if you delve into the fine print of these polices you will see that they aren’t nearly as good as they sound. In fact, there are 6 main problems with whole life insurance:   

1.     You don’t need it. Unlike disability insurance, where we insure against the unpredictable risk of becoming disabled, life insurance is different. We already know that we will “pass away” at some point. Thus, dying isn’t necessarily a “risky” event, it is an EXPECTED event. Any event that you can expect to happen, you can plan for yourself. Since you can plan for this event yourself, you only need to insure against the risk that you could die before this plan is fully carried out. In other words, you don’t need life insurance for your “whole” life. You only it for a certain period of time or “term.”

2.     It’s inefficient. In order for whole life insurance companies to guarantee your family money after you die, they must have money to give them. Insurance companies aren’t charities, so they definitely are not giving your family money out of their own pocket. What they do is collect a large amount of YOUR money to pay into THEIR system. In fact, the financial advisors who sell you whole life insurance put a large portion of your money into their own pockets as profits, then take the rest and “invest it” into low-yield accounts. If you die young, your family may not get much of anything at all because you’ve haven’t paid into the system for long. If you die old, your family won’t get nearly as much as they should because the insurance company still needs to make a profit. With whole life insurance, you end up paying a huge chunk of money to an insurance company that will give you and your family much less in return.

3.     It’s expensive. Whole life insurance policies pay out to your dependents after you pass away. Thus, insurance companies will want you to pay for the cost of that benefit upfront. Paying for this benefit is insanely expensive. In fact, whole life insurance costs about 10x more than term life insurance. This means you could easily be paying hundreds if not thousands of dollars each month for this policy. That’s a lot of money to spend on an inefficient insurance product you don’t need.

4.     There are lots of hidden fees. The vast majority of whole life insurance products have a slew of hidden fees. These expenses take away from the value of the product and drastically decrease the benefit your dependents receive when you die. In fact, most of the money you pay the insurance company for a whole life insurance policy, is paid directly to the agent who sold you the policy as “commission.” I can think of many more ways you can spend your money, than to pay tens of thousands of dollars in commission fees to an insurance agent.  

5.     The benefit isn’t as good as you think. If you look at the fine print of these whole life insurance policies, you’ll see that the benefit it provides to your family isn’t very good. In fact, the “returns” are actually negative in the first few years. This means that if you die shortly after you purchase a whole life insurance policy, your family may not get anything at all, even though you’ve paid thousands of dollars in premiums. If you die much later in life, the average returns on your money are only 2-4%. In contrast, average returns from the stock market are 7-10%. This means that if you had simply placed your money into an index mutual fund, you’d have been able to give you family drastically more money and paid much less in fees.

6.     There’s a better alternative. The biggest reason I’m against whole life insurance is that there is a much better way to proceed. You can save money for your loved ones without ever having to purchase whole life insurance. How? By maxing out your retirement accounts so that you can save and invest money in a tax-efficient way. By converting money each year to Roth accounts (like a Roth IRA) so that your family can inherit the money you save tax-free. By purchasing a “TERM” life insurance policy so that if you happen to die before you’ve been able to pay off your student loans and stack enough money for your family, the insurance company will provide a hefty benefit to your family.

My point? As busy young professionals, we already sacrifice a lot. The last thing we need to do is to get tricked into purchasing an insanely expensive insurance product that has lots of hidden fees. There is a much better alternative. Save money for your family yourself and purchase a “term” life insurance policy to cover yourself in the meantime. Don’t buy whole life insurance.

 

My residency spending plan: a new way to think about budgeting

 

As a young professional with many competing expenses, it is paramount for me to prioritize my spending. However, adhering to a strict budget can seem a bit daunting and restrictive. To get over this anxiety, I started out with a spending plan that mirrors the “50-30-20 rule” by allocating money into 3 different buckets: things I have to buy, things I want to buy, and things I should buy. Let me explain.

Category #1: Things I Have to Buy 

This category is for my fixed expenses. It includes the bills and necessary purchases I must make to survive. This includes my monthly rent and other bills (like electricity, internet, water, and sewage). I also use this category to pay for groceries, gas, and different types of medical insurance (i.e. vision, dental, and disability). For young adults just starting out in their careers, this category of fixed, necessary expenses can take up about 50% of your take-home pay. For young professionals established in their career, it may be a much lower percentage. For me, this amounts to about 45% of my take-home pay. 


Pro Tip: If your fixed expenses add up to over 50% of your income, consider ways you can cut costs or increase your income. I tried to do both. In order to decrease costs, I decided to live with a roommate. This not only lowered my monthly rent payment, but it also allowed me to split many other bills, which substantially lowered my living expenses. Along with decreasing costs, I also created a second source of income. As a resident physician with limited free time, I couldn’t get a second job, nor did I want to. Instead, I decided to turn something I love (blogging) into a second source of income by monetizing my blog and accepting paying offers to write for other platforms. Whether you enjoy writing or have another area of interest, think about what you love to do and consider different ways you can turn your hobby into a second source of income. 

Category #2: Things I Want to Buy 

 
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This category is for my discretionary spending “aka” non-necessities that increase my quality of life. These expenses can differ for each person but for me they include: entertainment (like weekend outings to the movies, sporting events, and restaurants), self-care (like personal grooming, hair appointments, and gym memberships), and incidentals (such car maintenance, birthday gifts, and other unexpected expenses). This is also the area I dedicate to giving. As a Christian I try my best to give to the less fortunate and donate to organizations that do the same. 

Pro Tip: Everyone’s list of discretionary spending may vary. I choose to drive an older car and spend extra money on entertainment and self-care. You may, instead, choose to drive a much nicer car and opt for a car payment. The items you choose to purchase can differ from mine. The goal is to keep your discretionary spending to about 20-30% of your take-home pay. Mine is 25%.

Category #3: Things I Should Buy 

This category is for monetary growth. It is the part of my take-home pay I use to increase my net worth and build financial security. This can be done in a variety of ways, but I use this section of my budget to save, invest, and pay down debt. For example, I put a certain percentage of money into an emergency fund and secondary savings account (which I will use for unexpected expenses, a future vacation, a house down payment, etc). I also allot a portion of money from this category to invest in my employer-sponsored retirement account (which is a 403b retirement savings plan through which I invest in a combination of stocks and bonds). Lastly, I use this category of money to pay down student loans and credit card debt. 

Pro Tip: You can increase your net worth by either paying down debt or increasing your investments. I do both. The goal is to reserve at least 20% of your take-home pay to this category to ensure you have an adequate emergency fund and are saving enough money for retirement. Since I was unable to work during my time in medical school and incurred some credit card debt when I moved to another state, I am allotting about 30% of my budget to this category to “catch up.” However, your exact percentage may differ from mine. You may need to start off by allocating a much smaller amount to this category and increasing the percentage over time.


Generally speaking: the amount you allot to these 3 categories may vary. The important thing is to make sure you have a portion of your budget reserved for all 3 areas.

Tell me, was this helpful? What percentage of your check do you have allocated to these 3 areas?



 

9 Things I learned when I tried to purchase disability insurance

As an incoming resident physician, I need disability insurance. Although a group policy is offered through my employer, it doesn’t provide enough coverage to adequately cover my monthly expenses or insure my future income. Thus, I purchased an individual long-term disability insurance policy. This is what I discovered:

 

1.     Disability Insurance is expensive. Quotes from different companies from $100-250 per month.  Apparently, a substantial number of people use disability insurance, so companies raise the price to cover the payouts and ensure they aren’t losing money. Many companies offer “graduated” premiums (which allows clients to pay a reduced monthly premium for a few years in exchange for a higher premium later in life) to make it more affordable. I still opted for a “level premium” with a set rate and it’s $110 a month.

2.     The definition of disability is important. The definition of disability is variable. Some people might consider themselves disabled if they can’t work full-time, while others may only consider themselves disabled if they are unable to work at all. The broader the definition of disability, the harder it is to claim the benefit. Physicians need “own-occupation” disability insurance so that if we are unable to meet the specific demands of our own specialty (i.e. Surgery) we will get compensated, even if we can technically still do the work of another specialty (i.e. Family medicine). As a family medicine resident who plans to specialize in sports medicine, I still opted for an own-occupation definition of disability.   

3.     Gender bias is real. Disability insurance is more expensive for women than it is for men. Insurance companies claim that women are more likely to get disabled and seek payout from disability insurance (due to factors like pregnancy) so they charge us more for it. To avoid paying such high premiums, I purchased a “unisex” policy (which is the same price for men and women). These policies offer similar coverage and tend to be cheaper than gender-based policies for women.

4.     Some companies are better than others. When I contacted a few disability insurance brokers, I realized that one company was vastly cheaper than the others. Mass Mutual was the only company that offered an individual unisex disability insurance policy for female resident physicians. Since unisex policies are cheaper for women than gender-specific policies, the monthly premium for disability insurance from Mass Mutual was vastly cheaper than any other company. On the flip side, Principal offers discounted gender-specific policies for men, so many male residents purchased individual disability insurance policies through that company instead.

5.     Certain “riders” or added protections are essential. When I shopped for disability insurance, I had the option to buy additional protections. As a resident physicians with high-income potential there were 3 main riders I needed: 1) a cost-of-living-adjustment rider (so that my payout will increase with inflation each year), 2) a residual & recovery rider (so that I am compensated for any partial disability until I am back to my full productivity), and 3) a future purchase option (so that I can purchase more disability insurance after residency when my salary increases without having to re-qualify or pay a much higher price). Since I have a substantial amount of student loans, I also purchased a student loan rider so that if I get disabled before I pay off my debt, the disability insurance policy will pay me an extra $1700 for up to 10 years to cover my student loan payments.

6.     There is a limit on how much individual disability insurance we can buy. By law, resident physicians can only purchase an individual disability insurance policy with a max benefit of $5,000 per month. (They don’t want to incentivize us to become disabled by compensating us more than our current salary). We can purchase more disability insurance as attending physicians, but we need to have an individual disability insurance policy as residents so that we are fully covered now and can upgrade our coverage later for a cheaper price.

7.     It’s cheaper if you’re healthy. As I filled out the disability insurance policy application, I answered a TON of personal questions. Insurance companies take a very thorough history to determine our risk of being disabled in the future. I was asked about my own medical history and that of my family. They wanted to know if I had broken any bones, got in any recent car accidents, and whether I had ever smoked cigarettes. I was also asked if I had plans to travel out of the country or engaged in any high-risk behaviors like rock climbing or sky-diving. They wondered if I had ever gotten pregnant and the result of my last “wellness check” from the physician. Because I was young and healthy, my rate remained low.

8.     The price varies by state. I currently live in Florida, but I will begin residency in Atlanta, GA. Apparently, my disability insurance premiums are lower with my Georgia address than they are when I use my Florida address. Insurance companies look at hobbies, accident rates, and other data and determined that we pose a greater or smaller risk to them depending on where we live. California is one of the most expensive places, Georgia is one of the cheapest.

9.     Be wary of group policies through professional organizations. As physicians, we can buy into the group disability insurance policy through the American Medical Association or our specialty-specific organization. These policies seem cheaper and looked enticing. However, after doing some research I saw several drawbacks. First, the premium was not “level,” meaning the cost of policy could increase every few years as I aged. Secondly, they did not offer sufficient “future purchase options” so I couldn’t upgrade my coverage as often as I’d like (i.e. when my salary increased as attending physician). Lastly, buying into these group policies would negate or significantly reduce the payout from any disability insurance coverage I already have from my residency. Group policies usually cancel each other out, individual policies do not.  

My point? Disability insurance is a must for resident physicians. It’s a bit expensive, especially for females, but we can get around that issue by purchasing a unisex policy and/or opting for a graduated premium. When we buy this insurance, we need a definition of disability specific to our own specialty, with the 3 main riders for complete coverage. Purchasing this policy in residency is cheaper and gives us the protection we need. Be mindful of what address you use on the application since the price varies by state and remember that group policies through professional organizations may be insufficient.

 

Disability Insurance 101: why you need it, what to include in your policy, and how to purchase it

 
 
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When we’re first starting our careers, our focus is trying to advance and increase our pay. With our tight budgets, one of the last things on our mind is paying for added insurance. Trust me, I get it. However, as [future] high-income earners, long-term disability insurance is essential. It may not be at the top of our priority list, but it should be.

 

What is it and who needs it?

 

Unless you are already financially independent or were lucky enough to have a trust fund in your name, disability insurance is a must. Although we’d like to think we’re invincible, we are not. If some unfortunate event occurred that caused you to become disabled and prevented you from doing your job, you’d still need a way to support yourself. You can’t predict whether you’ll be disabled in the future so you must insure against that risk right now.

You may be tempted to wait to purchase this coverage when you make more money, but I’d caution you against that. The younger, healthier, and earlier in your career you are, the more you need disability insurance. You have your whole life ahead of you with decades of potential high earnings, long-term disability insurance protects you in case this were to change.

 

Do I still need it if I have a group policy through my employer?

More than likely. Long-term disability insurance may be offered by your employer, but that policy may not offer sufficient coverage. Most employer group policies only pay out 60% of your income if you get disabled, up to a certain maximum per month. The amount they provide may not be enough to cover your monthly expenses, pay back your student loans, and still allow you to save for retirement. As a rule of thumb, the higher your salary, the more likely you are to need an individual long-term disability insurance policy, outside of your employer.

Secondly, group policies may be less likely to pay out if you do become disabled because their definition of disability may be too broad. In other words, it may be harder to meet your job’s definition of disability to even apply to receive the benefit. For example, you may consider yourself disabled because you can’t do your current (high-paying) job as well, but the insurance company might deem you able to do some other (lower-paying) job and refuse to pay out, leaving you to deal with the decrease in pay on your own. You want to protect yourself against that risk by getting your own individual long-term disability insurance policy.

Some people may be able to purchase a group disability insurance policy through certain professional organizations. Although these policies seem enticing, they can have several drawbacks. The premium may not be “level,” meaning the cost of the policy may increase every few years as you age, eventually costing you a substantial amount as you get older. It also may not offer sufficient future-purchase options that allow you to upgrade your coverage as your salary increases.

 

What to look for in a good policy?

A good individual long-term disability insurance policy has 3 components: enough coverage, a specific definition of disability tailored to your own occupation, and additional riders for added protection. Let me explain.

Along with enough coverage and a specific definition of disability catered to your [high-paying] job, you also need to purchase disability insurance “riders.” Riders are added protections you pay for to ensure that you have all the coverage you need. Examples of riders you should consider purchasing are the: cost-of-living-adjustment (COLA) rider so that your payout will increase with inflation each year, residual and recovery rider so that you are compensated for any partial disability until you are back to your full productivity, and a future purchase option so you can purchase more disability insurance if your salary increases without being denied or charged outlandish rates because of your age or medical conditions.  

 

How do you purchase it?

As a graduating medical student, I knew I needed disability insurance. I emailed a few vetted brokers/agents that had a track record of working with high-income professionals and entered some basic information on their websites to get quotes. Once I found a policy that had the benefit I wanted with the riders I needed and an own-occupation form of disability, I then chose the cheapest policy.

The insurance agent asked me a bunch of medical questions as he filled out the application on my behalf. He inquired about my hobbies, medical history, and travel plans to discern my “disability risk” as requested on the form from the insurance company. I then reviewed the information in a secure portal and signed the form online. I was approved within 24 hours.

 

To summarize: Disability insurance is a must-have for high-income professionals. We can’t predict what may happen in the future so we owe it to ourselves to get insurance that will “protect our income” just in case we were unable to work for some reason. Oftentimes, group policies from our employer are helpful but not sufficient. We need an individual own-occupation disability insurance policy with extra riders until we become financially independent. If you don’t already have a policy, I encourage you to get one today.

Tell me, was this helpful? What additional information about disability insurance would you still like to know?