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While most doctors are usually financially well off, you need to remember that you are a daily wage earner , and earn only when you work ! While doctors do get paid well for their work, this means that their cash flow is good as long as they are young and are working. However, this is not a comfortable situation to be in, and you need to develop alternative sources of revenue generation, which will ensure you a source of passive income.
How to Invest Money
Many doctors believe that the only way to earn more is to work harder . However, you only have 24 hours in a day ! You need to learn to work smarter, not harder - and financial planning is vital. A financial plan is like a connect-the-dots puzzle -you cant finish the picture without connecting all the points.
To improve your chances of reaching your goals, you must first define as many of your goals as possible, then prioritize them and establish a timetable for reaching them. If you know where you want to go, you have a better chance of getting there !
Pick your own targets, but make them specific. It’s not enough to say – " I’d like to save more money"? How much do you want to save ? By when? Where will you keep that money? Put all the particulars down on paper. Once you get beyond meeting your daily needs, a sensible investment strategy is an absolute necessity for reaching many goals, especially big long-term ones, such as your childs education or your retirement.
When should I invest?
Because of the magic of compounding, starting early is vital. So is patience. Its an investing adage that you can only get poor in a hurry; getting rich takes time. The idea is to invest well, and then allow your investments time to grow. Don’t make decisions about your portfolio on a daily basis – it’s far more effective to devote your day-to-day attention to your practice, instead. !
Besides investing early and for the long term, you should invest regularly. This concept-called systematic investment or rupee -cost averaging relieves you of worrying about buying at the "right" time and tends to lower your average cost.
What should I invest in?
Most investors need a mix of investment types, and you need to diversify to reduce your risk. If you are investing for the long term, carefully selected shares should play a big role in your portfolio because they provide the best returns. The idea is to produce your desired result while exposing yourself to the least risk.
However, doctors rarely have time to evaluate the risk factors in countless stocks, or the know-how to quantify value and compare it with price, and so on. Most would like a portfolio of well-chosen stocks without the headache and responsibility of putting it together. For them, the easiest alternative is mutual funds.
However, many doctors cant resist playing around with shares! Many enjoy dabbling in the market, and end up spending more time talking to their brokers than with their patients ! Others act on "hot insider” tips from their patients – and as with anything hot, often end up burning themselves ! If you like speculating, go ahead, but do so with a small portion of your portfolio .
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An important tool of financial risk management is called asset allocation, and the key is diversification. The goal is to own a portfolio of assets that dont move up and down together. You need to balance risk, return and liquidity - based on your income, age, long-term goals, financial needs and risk-taking ability. Thus, if your risk tolerance is low, a suitable mix might be 25 percent of your capital in equity ( shares) , 35 percent in debt (bonds) , and 40 percent in bank accounts ( fixed deposit) . Your emotional profile can be as important as your bank balance in designing the right financial prescription for yourself – and just like you tailor the treatment regime according to which kind of patient has the disease, you need to design a plan which suits you. Do also remember to review it regularly, as your goals will change with time.
However, remember that your most important investments are : in yourself ( medical conferences, continuing medical education, medical journal subscriptions), your staff ( salary hikes, perks) and your clinic ( updated medical technology, new office equipment) – these investments will give you the best returns !
Financial advisers, Accountants and Taxes
Most doctors will need an accountant, who will help you to prepare and file your tax returns. A good accountant will analyze your previous three years returns, look for ways to cut your tax bill in the coming year, and help you plan for the future. Money spent on a good accountant is usually money well spent ! He will check your accounting systems, and also present you with financial reports, such as profit and loss account and balance sheets - the financial equivalent of the pulse and BP of your practise ! Never hesitate to ask about items you dont understand - after all, its your money !
Your accountant will ensure that your accounts are uptodate, and that you maintain the legally required records. Accurate paperwork is important and will help you to keep your Income Tax officer happy. Accounting software and computers have helped to make this much easier.
While doctors don’t like patients who ask for free medical advise, most are very happy to take free financial tips from those of their patients who are stockbrokers or accountants. However, listening to the wrong person could lead you astray. Just as you wouldnt go to a psychiatrist for brain surgery, you shouldnt rely on your banker to advise you on which shares to buy - hes not the expert you need.
Before you can select an appropriate adviser, you must decide what type of guidance you want. Depending on your income, you may need several advisers, such as a share broker, money manager, personal banker or financial planner. Financial advisers now come in many shapes and sizes – and you need to select the right person, depending upon your needs.
There are now a number of websites which will offer you tons of valuable information on investment and personal finance management.
Useful ones include:
www.myiris.com, www.equitymaster.com, www.sharekhan.com and www.fool.com.
You also need to think about what will happen to the money you have earned after you are dead and gone. This is why it is advisable to make a will as soon as possible. Dying intestate can make life difficult for those left to sort out the affairs of the deceased and leave the intended beneficiaries with potential legal wrangles and unnecessary inheritance tax. Professional advice should be sought because a poorly written will may be worse than none at all. A will may be revised at any time to take account of changing circumstances.
Live Rich, Die Broke is the title of an excellent little book written by Polan.
Rich Dad, Poor Dad
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