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How do you look after your own mental health? When you feel under pressure, do you play music, exercise or book yourself in for a massage? All these are valid forms of self care, and important.
Financial self care can have far longer lasting benefits to mental and physical health. How are you going with personal finance?
What is Financial self care?
There is a tendency in society to dismiss interest in money as greedy, self-interested or even sinful. Medical professionals usually enter the profession with altruistic ideals. They like to pretend money doesn’t matter. But money is just a fact of life. How we manage our personal finances can make a huge difference to quality of life now and later.
Financial self care includes forming a budget, tackling debt, paying for insurance to cover disasters and forming long-term financial goals, saving and investing to achieve them.
Just because money isn’t your number one priority doesn’t mean you should completely ignore it.
Unfortunately this money self sabotage all too common among doctors. A strong income can often give professionals a false sense of security. Unexpected losses of income, such as during COVID-19, a prolonged period of illness, unemployment or a desire to change to a new career or specialty can threaten that security pretty quickly.
High Income Households Experience Financial Stress
An ABS report reassures us that although wealthier households can find themselves in a stressful financial situation, this is usually due to discretionary, rather than essential spending.
These households have more resources to fall back on an can, after all, just sell that overleveraged home.
High earners are less likely to miss meals and suffer other extreme consequences of accumulated debt. They may also have family they can ask for help.
Having to sell your home because you can’t afford the mortgage doesn’t sound like a walk in the park though, does it? It sounds like the cause of many sleepless nights.
Financial Health Can be Hidden
The effects of poor financial management can only become exposed years into the problem. Living beyond our means is easier now than ever. Credit is easily available, often just more expensive the less you can afford it.
Higher earners who spend more than they earn may avoid experiencing financial stress until they want to retire. Their large income will cover a lot of monthly payments, but they fail to get their finances under control or save for the future, beyond government mandated super contributions.
A common misunderstanding is that with a high income, it will all work out effortlessly. High educational achievements do not correlate with high financial literacy. If a household is paying bills on time and the bank account isn’t overdrawn, it’s easy to assume all is well.
But are you saving money, making and meeting financial goals and actively planning retirement savings? Have you sought enough financial education to feel confident in these skills?
It doesn’t matter if you earn $50,000 or $500,000. If both workers save and invest nothing outside mandatory superannuation, their retirement account and income will be in a similar relative position after a 40 year career.
A Comparison of Two Hard Workers
Lets look at a theoretical case study.
John earns just $50,000 annually for his 40 year career.
Jack earns an impressive $500,000 annually for his 40 year career.
I have assumed they both have had 10% super contributions throughout their career (assuming neither are self employed). These hypothetical contributions earned 7% per year real return. We are working with a dream super account that doesn’t charge any fees!
Super Balance after 40 years of work assuming 7% real return minus tax Retirement
|Super Balance after 40 years of work assuming 7% real return minus tax||Retirement Income as if Tax Free||Retirement Income as percentage of Working income|
|John $50,000 income||$719,805||$28,792||66.5%|
|Jack $500,000 income||$4,542,645||$181,705||60%|
John has a reasonable $719.805 whilst Jack has accumulated over $4 million dollars!
John receives 66.5% of his post tax working annual income as a tax free retirement income stream after 40 years of work, aged 60+.
Jack is far wealthier with $181,705 annual retirement income. However, this represents only 59% of his post tax working income. On top of this, Jack will need to pay tax on this income as his super balance exceeds the $1.7 million super cap.
Although Jack is richer, he still has to cut his living expenses more drastically than John. There will be a lot of discretionary spending in that, although Jack may fail to recognise it. Jack will presumably have completed some postgraduate training, so will be older than John by the time he has worked 40 years, and is able to retire on approaching 2/3 of his working income.
Advantages of Financial Self Care
As soon as you can create a gap between your income and your spending, advantages occur.
Avoiding Financial Stress
Poor money management has long been quoted as a leading cause of marital conflict and divorce.
Not having enough money often leads to delayed health care. This is less likely to be so extreme in higher income households, but could still result in delays to diagnosis and treatment.
With prolonged financial pressure, particularly if associated with divorce or loss of the family home, depression and anxiety as well as substance abuse are more likely.
Stress is often expressed subconsciously through physical symptoms. Headaches and abdominal pains are common complaints.
Anxiety about money also affects your work. It is associated with higher absenteeism, lower work engagement and productivity.
Once you can pay expenses in the most cost effective manner, everything gets a little bit cheaper. For example, your car insurance may be cheaper paid annually. There are discounts for paying school fees upfront and you can bulk buy pantry goods when on sale. These all may seem like small savings, but little advantages like this compound over years to become significant advantages.
Ability to Deal with Unexpected Events with Minimum Stress
All the thing we talked about earlier, unemployment and long-term illness cause enough problems. Not having to worry about money would be a welcome relief.
A good sized emergency fund also allows us to fulfil obligations or desires to help care for, and be with (particularly distant) loved ones in crisis.
A central theme in personal finance is saving some of your earnings from every pay.
If you are saving 20%, you know you could drop your income by 20% and all your expenses are still covered.
This provides quite a lot of options, including dropping hours, changing jobs and starting a new career.
As that 20% grows and compounds over time and starts producing income of its own, your options and flexibility also grow.
Set & Achieve Long term Financial Goals
We have probably all stuck our heads in the sand about an issue we’d rather not tackle. Usually, we feel a lot better once we just get it sorted. Personal finance is a common topic to ignore and hope for the best. With that slightly worried feeling lurking that we should be doing better.
Having even a basic financial plan (budgeting to save and invest 20% and expand the plan later) will give you confidence. A little bit of finance knowledge building will empower you to make your own decision, or keep an eye on the advisor looking after your money.
Taking some time to dream up some bigger aspirations is a worthy goal. It is easy to get bogged down in the daily grind of daily life, and drift along mindlessly.
By taking the time to form dreams and goals, you will achieve far more of the important stuff in life.
The money is just a means to an end to achieve these aspirations.
Helping the Next Generation
I am of the belief that the best way to help your kids financially is by building their financial literacy. Money handouts tend to do the opposite. You will need to invest (time) in some financial education yourself in order to help out your kids.
Debt & Loans
Debt can be good, bad or tolerable. You (and your kids) need to know the difference. Good debt can accelerate wealth and even build intergenerational prosperity. Bad debt uses compound interest in reverse to destroy your finances.
Having great money skills, managing debt well and maintaining a great credit score will qualify you for better rates on home loans.
Not tackling your finances whilst feeling a little worried about neglecting this area of your life can leave you vulnerable to scams.
Doctors in particular, can be quite naïve. They are also known to have high incomes so are perfect targets for potentially fraudulent transactions.
Unfortunately, there have been facebook groups where doctors have recruited colleagues into scams they thought were great investments.
Don’t follow someone else blindly. Read (or listen to) several sources and tread carefully.
If you you want to use a financial advisor you need to be able to afford to pay them (and avoid commission). You also need to choose carefully.
Personal Finance Success is Easier as a High Earner
You absolutely can’t get away with doing nothing, and relying on your high income to provide financial security. You need to build assets over time.
But high earners are not facing the same difficulties the average Australian household earning $85K is. Saving and investing is a lot easier on a high income.
A small percentage of your income will compound significantly over a long time period.
Building Financial Literacy
How to Manage Your Personal Finance as a Form of Self Care
- The first thing you need to do is track your spending
- Set some short, medium and long-term life and money goals
- Next, set a budget to allow savings to be captured (20%?)
- Create an emergency fund of at least $2000
- Make sure you have adequate insurance coverage (health, life, income protection)
- Pay off all credit card debt as soon as possible
- Start investing in a sensible, low risk strategy
- Consciously note when having savings and investments improved your overall wellbeing.
With student loan debt likely to increasing over time, financial literacy only becomes more important. Try and forms some new habits of financial self care.
It won’t feel like self care initially, but over the long term it’s the most caring action you can do for youself and your family.
Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.