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Opinion/AnalysisRx Resources

Finesse of Finance

By April 30, 2015April 20th, 2016No Comments

Understanding reality is a key to success for most anything. With weight loss for example, despite a billion dollar industry professing shortcuts, it really comes down to discipline, diet and exercise. The same thing holds true when dealing with your money. Regardless of your income or level of wealth, it’s valuable to review basic principles that can help you throughout your life.

Converting Human Capital to Net Worth:

There is a reason parents encourage their children to get an education. Studies show a correlation between one’s level of education and future earnings. After a long and arduous road through medical school and internships, human capital is by far the largest asset for most doctors. It’s one number that represents the estimated present value of your future earnings. Usually, people are often surprised to learn it amounts to millions of dollars.

As you go through your career—for no other reason than aging and the passing of time—our human capital diminishes and ultimately becomes depleted. As this occurs over time, it’s important to have a strategy aimed at accumulating assets and building your net worth. The ultimate goal is to own enough assets that can adequately supplement or replace your income when you retire, or are no longer able to work. This conversion of human capital to an increasing net worth is a critical concept to understand and measure as you go through your career. The challenge is to prudently manage a lifetime of cash flows/income to efficiently build wealth throughout your career.

 

Manage Your Standard of Living: Understand the Trade Off

Unless you’re one of the lucky few that can count on a large inheritance or a winning lotto ticket, the road to financial independence involves a disciplined approach in managing your current and future needs. To make an income, medical doctors must be present to see patients and perform procedures. Generally speaking, there is no passive income that accumulates when you are sleeping and not working. This makes managing and planning your personal finances urgent. The first step is to obtain a consistent level of net discretionary income that you can save and invest for your future.

People have different personalities and perspectives, and while we all wander outside the norm, an individual usually has general tendencies. When it comes to balancing our cost of living with our level of income, there are those that live below their means and those that live above their means. If you become accustomed to an unsustainable lifestyle that absorbs all your income, you may find yourself having to lower your standard of living in later years. The first sign of over consumption is an inability to save or invest, followed by increasing levels of debt.

If you live beneath your means, and prudently invest, you may be able to improve your standard of living in later years. This category of people are generally conservative about their finances and somewhat concerned about the future, which often leads to higher levels of cash and investable assets.

We recommend a balanced approach in managing your finances. After all, we never know when it’s our time to check out, so you need to enjoy life’s journey. It’s important to know and plan for a sustainable standard of living throughout your life. This strategy allows for a more enjoyable, consistent lifestyle and allows you to feel confident about the future.

 

Bringing It All Together

The important takeaway is to have an understanding of the basic financial dynamics at work throughout your career. You should know, with quantifiable numbers, about your personal situation — depending on your time horizons, average living expenses, income and net worth. You should have a clear vision and written plan that covers your current financial condition along with projected future balances. This plan should serve as a benchmark for future measurement and evaluation. The best way to make sure you’re on track is to monitor your progress. You’ve all heard of the old saying, “People don’t plan to fail; but many fail to plan.” Having a good plan that makes you more knowledgeable about your finances and investment strategies will help you achieve security, independence and freedom.

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