#1 Financial Pitfall for Physicians
Let's face it, there are a number of issues that can derail a financial plan. Health concerns, job changes, family matters - simply put, the future is uncertain. By the way, this is why we see the need for financial planning, which engages with an uncertain future as it arrives, as opposed to just having a financial plan, a document which, though valuable, can quickly become dated.
However, though a handful of scenarios like the ones mentioned above often get the most attention, your daily financial behavior is what ultimately has the most impact on your financial future. In fact, we think the biggest pitfall for physicians to avoid is really something that's quite simple to understand, though much more difficult to effectively manage. At the end of the day, effective personal finance usually boils down to the following equation: Income - Expenses = Savings
Because your monthly and annual savings (and what you do with them) will ultimately define your future lifestyle and your level of financial independence, Lifestyle Inflation is the biggest risk for physicians to avoid.
What is Lifestyle Inflation?
Lifestyle inflation happens when your spending increases
Lifestyle inflation can happen in two ways:
- Proportionately to income: As your income increases so does your spending, though spending stays at the same percentage of income overall. In other words, though spending is increasing alongside your income, so are your savings.
- Disproportionately to income: Your spending increases both in absolute dollar terms, and as a percentage of your income. In other words, your overall savings rate is dropping as you spend a greater portion of your annual income.
Some level of lifestyle inflation is not only fine, we would suggest it. You work hard. You deserve to devote some of your financial resources to things that bring you joy, both now and in the future.
This of course is dependent on your goals