At Tall Oak Private Wealth, we are an independent firm that works with many medical residents in helping them transition to practice. Residents often ask us what the best thing is they can do to get ahead financially when starting in practice.
Our answer: “Live like a resident”.
In this second blog post in our series called Live Like A Resident, we focus on cash flow.
Understanding that cash flow drives all wealth plans is critical. This is why we offer unique complimentary 5-Year Wealth Plans for all residents as they transition to practice – plans that are centered around their evolving cash flow.
When asked how much they spend on a monthly basis, most individuals will not have a readily available or accurate answer. Almost without exception, spending is underestimated. However, there are only three things you can do with your money: pay taxes, save it, or spend it. And since it is relatively simple to know how much you save and pay in taxes, it is also relatively simple to know how much you spend in general. When working on cash flow plans, we calculate an individual’s spending by knowing how much they earn and subtracting what they pay in taxes and what they have saved (this includes debt repayment as well as investments).
For medical residents, this exercise is generally straightforward as your income is predictable. What also makes this exercise easy for medical residents is that you are paid on a net basis. That is to say, your employer withholds taxes, and you do not need to worry about saving and remitting taxes on your residency salary. On your pay stubs, you will be able to see how much is being withheld on your behalf. You can safely save or spend the money that is deposited into your bank account without having to worry about owing income taxes.
This reality changes once you start practice. At that point, it may take six months or longer to build up your practice to full income potential. You are now responsible for billing and saving for taxes. Your cash flow will transition from a consistent resident’s salary to, on a short-term basis, a less consistent but generally higher income.
During this time, it is critical to plan appropriately, and to have the right professionals by your side who can put a cash flow plan in place to help you accomplish your goals.
Some questions we can help you answer when transitioning to practice:
- How much should I set aside for taxes, when should I start and where do I keep that in the short term?
- Should I pay down my debt aggressively?
- When should I start investing?
- Does incorporation make sense for me and how would that affect my cash flow?
- How much should I maintain in an emergency fund?
- I’d like to save money for a down payment on a home. Does my cash flow permit that?
- I have costs to start my practice. How should they be funded?
There is no doubt that the world of finance becomes more complicated when you become a practicing physician. Having a great team of professionals who work together with your best interest in mind, having a clear 5-Year Wealth Plan, and having a good grasp of your cash flow are all paramount to helping you start on the right foot. And, the best thing you can do to make sure you minimize financial mistakes during this transition is to aim to spend early on like you were spending as a resident. In other words, Live Like A Resident.
If you would like to get your personal 5-Year Wealth Plan as you contemplate transitioning to practice, we welcome you to reach out to us. There is no cost or obligation to have your personal plan created for you.
For additional information on how to Live Like A Resident, reach out to us today.
This material is provided for general information and is subject to change without notice. Although every effort has been made to compile this material from reliable sources; no warranty can be made as to its accuracy or completeness, and we assume no responsibility for any reliance upon it. Before acting on any of the above, please contact Tall Oak Private Wealth of Raymond James Ltd., for individual financial advice based on your personal circumstances. Raymond James Ltd. – Member – Canadian Investor Protection Fund. Insurance offered through Raymond James Financial Planning Ltd., not a member – Canadian Investor Protection Fund.