As 2013 begins, many of us have made resolutions to improve our lives. Being CPAs, we tend to reflect more on the financial issues. After years of observations, we have witnessed 5 common mistakes that, if avoided, help establish foundations for successful financial futures.
Mistake #1 Not developing a team of trusted advisors.
Working with the following team of qualified professionals would be of great value to a physician: Attorney, Financial Advisor, Insurance Advisor, Private Banker, and Certified Public Accountant (“CPA”). Each team member should have a strong background and understanding of healthcare and be willing to work with each other towards a common goal – your financial success.
Your medical expertise comes from dedicating many years to your career. Many professionals have likewise dedicated their careers to developing their own expertise. You shouldn’t try to be an expert in everything. Because of the constantly changing nature and technical aspects of these professions, it would be easy to make a costly error or overlook a great opportunity without expert advice and the latest knowledge in these areas.
This does not mean that you should blindly leave each of these areas up to the professionals, as it is ultimately your career and your financial well-being. Your advisors should be able to explain things to you in terms you understand, so you can select the best option for your situation. Just like a basketball team has a starting five, you should have a starting five for your future success.
Mistake #2 Not spending the time to understand the employment agreement (or other contracts).
Regardless of where you wind up practicing, odds are you will have to sign an employment agreement. Become familiar with the contract so you know what to expect. These agreements are presented in the beginning when everyone is excited about the future. However, it will be pulled back out again when a dispute arises. You need to know how situations will be handled based on the contract language.
Ask questions about sections you do not understand. Your attorney should help you understand most parts of the agreement. Your CPA will assist you in understanding the sections of the document that address compensation, incentives, buy-in options, or other financial components. If something you believe is important is not specifically in the document, please be sure to have this matter addressed before signing the contract.
Mistake #3 Not developing a personal budget.
Nobody plans to fail, but many people fail to plan. Without developing a personal budget and tracking your spending, you will have no idea where your money goes. There are two components to obtaining self-made wealth: earning the money and saving/ spending the money wisely. Many people ignore the second part.
When developing a personal budget, you need to account for all expenses, including easily overlooked items such as car repairs, medical expenses, gifts or vacations. Lastly, it is critical that your budget address retirement, savings, taxes, insurances, and debt repayments. Your financial advisor, insurance advisor and CPA can all provide valuable insight on these items.
Mistake #4 Incurring too much debt.
The ability to borrow funds presents wonderful financial opportunities in the right situations, but also creates problems when used for the wrong reason. It is very easy to get caught up in a lifestyle that consumes most of your cash flow. If your cash flow is already committed, you maybe forced to incur debt for important purchases that could have been avoided.
When shopping for major purchases like your auto or home, consider the long term impact of the debt repayment and how it will impact the other commitments and choices you may have in the future. Just because your lender pre-qualifies you for a large loan based on your current income, it does not mean that you should always purchase a home or auto that is near the maximum that you can afford. Also, not all investments are wise just because a friend told you about it and assures you that it is a winner. Your financial advisor and private banker will be able to guide you in these matters.
Mistake #5 Not planning for the future.
You should always consider the future impact of current choices when making financial decisions. Getting started in a retirement plan is a great way to start planning for your future. Many employer-sponsored plans include an employer match which is an additional benefit for you. Consider obtaining adequate life and long-term disability insurance as another crucial component of your overall financial plan.
Planning for the costs of other major financial events such as weddings and your children’s education, should be part of your future plans. Lastly, all plans should include some amount of savings for emergencies and unexpected events. At a minimum, we recommend consulting with your insurance advisor and financial advisor on an annual basis.
While you may think these ideas are common sense, you would be surprised at how often these mistakes are repeated. Our goal is that at some point you will be able to choose between having to work longer or working longer because you want to. We incorporate these ideas in our planning and recommend that you do the same. We wish you good luck and good planning in 2013. As Thomas Edison said, “Good fortune is what happens when opportunity meets with planning”.
L. Porter Roberts, Jr., CPA, Medical Services Group of Barr, Anderson & Roberts, PSC in Lexington, KY. To contact him, via email lporterts@barcpa.com or (859) 268-1040.