Are you using this benchmark for physician personal finance?

Many physicians have a poor understanding of personal finance. Since personal finance isn’t a required course in high school, college or medical school, physicians are often unprepared to handle their high income when they become an attending. Sometimes the results of this lack of education are not pretty. Other times it’s a downright disaster. Yet some of us are able to figure out this thing called money.

I was thinking about what a good and simple benchmark might be to get a grasp of how you are doing financially, and I kept coming back to a statement my grandmother told me many years ago.

We were talking about finance and living within one’s means. She had always lived within her means, and she did well financially.  Then she told me you don’t need any fancy calculations to see how you are doing. It was so simple, she blew my socks off.

She told me the easy way to see if you are living within your means is to just look at your savings minus your debts. The difference between those two figures on January first, compared to the same calculation on December 31st of the same year will show your financial growth or decline. If the figure is growing, you are living within your means.  If that figure is falling, you are spending more than you make.

Total Savings – Total Debt = Wealth Index

It really is that simple. Add up all your savings accounts and subtract all your debts. That number should be getting larger every year. If it is not, you are not living within your means. This is a simplified version of your net worth. Many doctors will not take the time to figure out their net worth, so this might give them a similar picture with less effort.

My grandmother didn’t have any debt or own any stocks. She just looked at the total balance of the cash she had in the bank and compared it to last year. If it grew, they were saving money. If it fell, they were overspending. For her, this was extremely easy to figure out. Add the amounts in two accounts, savings and checking, and compare to last year. Have you ever done that simple calculation?

Let’s look at the savings number for a moment for a person with no debt, which eliminates one variable. If they are living within their means, then they are spending less than they earn. The leftover money earned must be somewhere. Unless they are hiding money under a mattress or in a safe, it is likely hanging out in their bank account. Their wealth index will climb during the year.

If they are not living within their means, then the money to pay for expenses that exceeded their income must come from somewhere since they did not accumulate more debt. It would show up in the form of savings account withdrawals. In other words, their savings account would be shrinking to pay the bills. Therefore, the wealth index would be dropping during the year.

If we take out savings as a variable and only look at the debt, then we eliminate the other variable. If during the year a person was living within their means but put nothing into savings, the extra money earned must have gone somewhere. It would show up as extra payments on debt, and the debt would shrink. Therefore, the Wealth Index would climb since debt is subtracted from savings, which is zero, and debt has decreased. The wealth index would move to a smaller negative number.

If a person was living beyond their means and spending more than they make, the money needed to pay for their lifestyle would have to come from somewhere, and without any savings, it would show up as more debt. They would have borrowed more money to keep their lifestyle afloat. And their wealth index would be moving to greater negative numbers; in other words, it would be dropping.

But in real life, neither savings nor debt is usually zero. Most people have both savings and debt. When living beyond one’s means, the additional money spent must come from savings withdrawals or from borrowing more money or a combination of the two. All of these variables would cause the Wealth Index to shrink.

The only way to create a climbing Wealth Index is to live within one’s means. The leftover money would go to a combination of debt reduction and savings deposits.

I am oversimplifying personal finance here to look at a concept. So how do we use this information? Since we get statements for both the bank account balances and the debt balances, it is easy to go back into the past and look at how we are progressing. I suggest using five years as a benchmark.

Go back and look at the balances in every savings account, checking account, brokerage account, and retirement fund and add them all together to get the savings figure.

Then on the same date look at the total balance of all debts: Home mortgage, student loans, credit cards, car payment balances, appliance stores, medical debt, and anything else you owe.  Add these all up to get the debt figure.

Since most institutions give you a year-end balance, that is a good place to start and makes getting these numbers very easy.

Now subtract the debt figure from the savings figure to get your Wealth Index from five years ago. Then repeat the exercise for the same figures today.

Did your Wealth Index climb or drop in the last five years? Were you pleased with the results you got? Are you still in the negative? Do you want to be in the positive?

If you want the results to change for the next five years, what will you do differently? Remember, if you do not change something, you will get the same results you got before.

What does it say about a person’s spending if they have an income of $200,000 and they are unable to make their wealth index climb? When the average family lives on an income of about $60,000 a year, shouldn’t someone making more than three times that income be able to accumulate wealth and have a rising Wealth Index?

I challenge you to do this exercise. If you do not have the figures from five years ago available to look at, look at the figures you do have. Maybe even start figuring this out every December 31st to see how the year ended and how it compared to the figure from last year.

Cory Fawcett is a general surgeon and can be reached at his self-titled site, Dr. Cory S. Fawcett.  He is the author of The Doctors Guide to Starting Your Practice RightThe Doctors Guide to Eliminating Debt, and The Doctors Guide to Smart Career Alternatives and Retirement.

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