Are you financially future proof? Let's talk about a few ways to address this difficult question.
"Future Proofing" is the process of anticipating the future and developing products/services that would withstand the demands of that anticipated future. We all future proof on a daily basis - we eat in anticipation of being hungry, pay the electric bill in anticipation of darkness, bring an umbrella in anticipation of rain, etc. In fact, one of the biggest shifts in healthcare recently has been all about future proofing - "preventative care". Here are five steps to answer the difficult question - are you financially future proof?
This is the first, most important, and unfortunately, the most difficult step. Defining a financial future is easy when you speak qualitatively. It’s the American Dream - house on a hill, well paying job, nice car, family vacations, etc. However, it is very difficult, nay, impossible to determine exactly how much money one needs to achieve all those components. For one, your dream is likely going to change with your station in life. Single, married, kids, pets, chronic health conditions? Your goalpost is constantly moving. In addition, your dream is likely drastically different from mine. Are you a homebody, an adventurous outdoorsperson, an entrepreneur, or a world traveler? So how can you even start to figure out that magic number? Get comfortable talking about money. Find a person who you believe is living the lifestyle you want, get comfortable with that person and find out the total expense (not income) to live “your dream” in today's dollars. See? I never said this was going to be easy.
This step is easy. Most people want to work for a set period of time, then sit back and enjoy the fruits of their labor. Even those of us who love medicine are unlikely to want to work 60 hour weeks indefinitely. What is a comfortable time frame for you? 10, 20, or 30 years in practice? There is no wrong answer.
Your offense is your income earning potential. You presumably make a very healthy salary from practicing medicine. Great! What other offense do you play? Do you own rental property, stocks and bonds, a side business, consult for a medical device manufacture, receive publishing royalties, or run your own financial blog? Whatever offense you play, add it all up. Now some of these won’t generate a consistent income. For example, stocks may perform great one year but horrible the next. In those situations, I urge you to estimate the income potential of those assets, but be conservative. Low ball those numbers, the reason will become apparent later.
Your defense is all of your expenses. Rent, utilities, cellphone bill, insurance premiums, car payment, mortgage payment, student loan payment, prescription medicine, etc. If it costs you money regularly, tally it up. Notice I include insurance premiums in this section. Because adequate asset protection is vital to insure that no curveball is going to throw you off your path to your American dream. If you have no idea what your expenses are, then I highly recommend starting a budget — something as simple as an excel spreadsheet would do, but there are plenty of fancier solutions today like Mint.com and EveryDollar. Once you have a tally of your total defense, subtract it from your total offense in Step 3.
The difference is going to be your excess each year. Take that, multiply it by your desired working length. If the product is equal or greater than the amount of money you decided in Step 1, then you are future proof. If not, well, you got to either step up your offense, cut back your defense or lower your expectations. This is why you want to be conservative in estimating your offense in Step 3, because if I’m going to be wrong, I would rather err on ending up with too much money rather than too little. Some of you may notice that this simple calculation does not account for inflation, which is why I stress you define your financial future in today's dollars.
There you go — a quick and unfortunately not-so-easy way of determining whether you are financially future-proof. The difficult part is not the math, it’s getting comfortable talking about money. While the internet has democratized financial education, a conversation on personal finance has remained relatively taboo in our society. Guess what? Personal finance is “personal,” so you better start to get comfortable talking about it.
Thoughts and comments? Reach out to me at http://futureproofmd.com/.