Self-Diagnosing Your Financial Health

As a physician, you have many issues in your life that compete for your attention. Unfortunately, planning for your finances often may take a back seat due to more pressing concerns, such as family, job, and, even, adjusting to health care reform.

The start of the New Year is not only a perfect time to make annual resolutions, but also to do an annual financial checkup to ensure that your financial goals and wealth management strategy is on track. An annual financial checkup doesn’t require hiring a financial advisor or an investment broker to go over your documents. This process can be done at home in just a few hours of your time by simply reviewing the past year and planning for the upcoming one.

Below are some key considerations to take into account when performing your own annual financial checkup.

Review the past year

Before you can move forward with your annual financial checkup, it is always beneficial to review the past year. This will provide the ground work and the framework to plan for the future. Some of the key indicators to review include whether or not your net worth grew, whether or not any life changes occurred, and whether or not your portfolio needs to be rebalanced.

Net worth

One of the best barometers for measuring your overall financial health, your net worth improves if you are paying down debts and/or adding assets. In order to determine whether your net worth is growing, compile your year-end bank statements, brokerage statements, mortgage statements, credit card statements, student loan statements and car statements.

January is a great time to compile this information because most of this information will also be pertinent to your tax return. Once you have compiled all the information create two lists. One list will include all of your assets such as bank accounts, investments accounts and the fair market value of real estate and other property of value, such as automobiles. The second list will include all of your outstanding liabilities such as mortgages on real estate, student loans, credit card debt and auto loans.

Your net worth is calculated by subtracting your total liabilities from your total assets. Your net worth for the year is then compared to previous years to determine whether or not your net worth is growing. If your net worth has dropped because of a particular asset class, such as your home has fallen in value, there is no need to panic.

However, if your debts are increasing while your assets are not, you maybe heading for trouble because this indicates that you are spending more money than you are making.

Life changes

Events such as marriage, divorce, widowhood and having children also will have a large impact on your financial goals and wealth management strategy. Any change in marital status will require revising wills, powers of attorney, trust documents and also possibly changing the beneficiaries on your retirement accounts and investment accounts.

Any delay in revising estate tax documents and/or your beneficiary information due to a change in marital status may prove to be detrimental in that your assets maybe distributed to individuals who you no longer wish to receive such assets. As for having children during the year, this is a great time to revisit whether or not your current insurance is adequate. You want to make sure that your children are taken care-off in the event of an untimely death or disability.

A good rule of thumb for life insurance is to have at least eight to 10 times your annual salary. In addition, long-term disability insurance is also extremely important in that this will protect against lost wages due to the inability to continue to work.

Portfolio rebalancing

Whether or not you have an investment broker, your investment portfolio should be rebalanced each year to ensure that you have the appropriate mix of stocks, bonds and other investments.

By rebalancing your portfolio on an annual basis you will ensure that you do not become heavily invested in one specific area. The key is to ensure that your portfolio is diversified in order minimize the risk associated with such investments.

Your investment strategy should correlate with your risk tolerance, as well as meet your time horizon for when you will need the money. For example, if your risk tolerance, is low and you are close to retirement your portfolio maybe a 40/60 split between stocks and bonds; but if your risk tolerance is high and you are not close to retirement your portfolio maybe an 80/20 split amongst stocks and bonds.

In any event, rebalancing your portfolio should be an important piece of any annual financial checkup.

Planning for the future

After analyzing the past year, it is important to divide your future financial goals amongst short-term goals and long-term goals.

Short-term goals can range anywhere from a few months to one year and can include goals such as saving for a deposit on a new home or to pay-off credit card debt. Long-term goals are generally longer than a one year time frame such as saving for retirement and/or saving for college. However, it is extremely important to set reasonable and attainable financial goals so that you do not end up disappointed.

By reviewing the past year, it will provide you with general guidance in developing reasonable and attainable future financial goals. For example, if your net worth is decreasing, it maybe because you are spending more than you are making. In order to reverse this, you may need to prepare a budget for the upcoming year, reduce unnecessary expenditures and try to pay down credit card debt.

If you had a life changing event such as having a child, you may want to divert some excess cash-flow to fund a child’s Section 529 plan (College Saving Plan). If you have excess cash accumulating in a bank account, you may want to maximize your contributions to your retirement account, which will reduce your taxes while providing financial security for your future.

Whether using a financial advisor or doing it on your own, physicians who spend a little time each year reviewing their financial plans will find it bears fruit over the long haul and provides them the control necessary to pave the way to financial security.

John Teixeira, CPA, MST, is a tax manager with Sansiveri, Kimball & Co. LLP. Located in Providence, R.I., Sansiveri, Kimball & Co. LLP, is a leading provider of accounting, tax and consulting services to the medical community. For more information about Sansiveri, Kimball & Co. L.L.P., or the topic discussed in this article, John Teixeira can be reached at [email protected].Sansiveri, Kimball & Co. L.L.P. is also a proud member of the National CPA Health Care Advisors Association. HCAA is a nationwide network of CPA firms devoted to serving the health care industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at [email protected].