First Things First
Before anything else, what's the first thing new attendees must do financially?
Let's talk straight. You're busy as heck, although maybe a little less busy than you were toward the end of residency, and your new bi-weekly paycheck is multiples of anything you've earned ever before. There are also probably a lot of distractions. On the one hand, you want to enjoy your money. And you should! You've worked extremely hard to get to this point. On the other hand, you know that it's time to get serious about your finances. You need to start saving for retirement, a down-payment on a new home, and you'd like to payoff your school loans sometime this century. All good things.
Yet, before you get out in front of your skis, there's one thing that you need to tackle first.
The First Financial Task for New Physicians
The first thing financial task you must accomplish as a new physician is build an emergency fund.
That's right. Before you max out your 401k, get aggressive with your student loans, start saving for a downpayment, or buy your dream car, you must build up your cash reserves.
At Trailhead Planners, we think of the rainy day fund as the cornerstone of successful personal finance.
Well, we always point to the proverbial Triple Whammy:
- You lose your job
- You or a loved one has health event
- The economy enters recession and the stock market tanks
Tragically, during the 2020 Covid-19 Crisis, the Triple Whammy scenario played out for many individuals and families, offering another testament for why a rainy day fund is so crucial for families to maintain.
How Much Should I Maintain in my Emergency Fund?
When designing your emergency fund, we suggest a two-tiered approach:
Liquid Cash Reserve –
Maintain at least 10%-20% of gross annual income in readily accessible savings like a checking or savings account at your FDIC-insured bank(Ready Cash). If you are self-employed, a 1099 contractor, or have high variability of income, you may want to build your cash reserves to an even greater level.
Emergency Reserve –
On top of the liquid cash reserve or 'Ready Cash,' we suggest you also maintain the higher of twice the Ready Cash or if you have a mortgage, 20% of the mortgage balance in a separate account. These reserves are intended to provide a safety net in case of a true emergency, such as loss of employment or significant medical costs.
The emergency reserve can be slightly less liquid than bank savings account, and it should truly only be used in case of an emergency. For example, the emergency reserve could be kept in a short-term municipals fund for tax-efficiency.
In true emergencies, nothing beats cash. Make the emergency fund a core aspect of your financial life and create a plan to build it to a suitable level and sustain it over the course of your career. Before anything else, we think building an emergency fund is the first financial task new attendees should accomplish before engaging in other aspects of their financial plan.