On EM Cases over the years, we’ve talked a lot about the various ingredients for enjoying a fulfilling career in EM. If I stop and think about it, that’s really what EM Cases is all about: learning how to be a better health care provider by sharing our knowledge in an engaging and effective way, so that we can all go to work feeling good about what we do, save some lives and improve outcomes. But you can’t really come up with all the ingredients of enjoying a fulfilling career in EM without talking about money. And it’s something we don’t often talk about at work. It seems almost sinful to talk about money – after all, in EM it should be all about taking great care of patients, right? Well, I’d argue that it’s really challenging to take great of patients unless we’re somewhat comfortable with our financial situation – because if we’re practicing EM just to make money, we’ll probably end up very unsatisfied and not take good care of patients. And if we hardly think about money at all and don’t have a good financial plan, we might end up having to work for way longer than we ever intended – and run the risk of burning out.
With the help of Dr. Matt Poyner, a Canadian EM physician who’s dedicated the latter part of his career to helping other health care providers think about their financial planning so that they can have a more fulfilling career, we will cover earning, spending, saving and investing wisely and answer questions such as: What is time affluence and how should it guide our financial planning? Why should our goal be financial independence rather than retirement? What are the 4 evidence-based cornerstones for financial planning for happiness? What is the 4% rule for figuring out how much money one needs to be happy? How should we approach spending in a way that is sound? When should we start saving and how much should we save through our careers? What is more important: how much we save or our investment returns? How much do you need to be financially independent or retire? What are the first steps of financial planning? What are the advantages and disadvantages of having a financial advisor vs DIY financial planning? What are the biggest risks for investors? What are the first steps to becoming a DIY investor and many more…
Podcast production, sound design & editing by Anton Helman
Written Summary and blog post by Matt Poyner, edited by Anton Helman April 2022
Cite this podcast as: Helman, A. Poyner, M. Financial Planning for Emergency Physicians. Emergency Medicine Cases. April, 2022. https://emergencymedicinecases.com/financial-planning-for-emergency-physicians. Accessed [date]
Beliefs about money that hold doctors back in their financial planning
One belief about money that hold some doctors back from financial planning is that personal finance and investing are too hard/complicated for the average doctor to learn. Any physician with a little interest and a little time can understand personal finance and take control of their own money.
Many studies have shown that people are not very good at predicting what will make them happy. Most of us are tempted to spend too much. This is understandable. We tend to spend with the assumption that nice things will make us feel nice, but the contentment is fleeting and we quickly adapt to nice things. They become our new normal – lifestyle inflation. But some doctors have the opposite problem. They’re super frugal because they think that they’ll feel happy if they just have 3 or 5 or 8 million dollars. Having more money doesn’t change the way we think about money. The solution to both of these is to reflect deeply about what we want our money to DO for us and then make a plan around those values.
Time affluence and financial planning for emergency physicians
“Time affluence” is feeling like you have enough time to do the things you want/need to do. It is at an all-time low and the effects are serious. Studies show that people who feel time-poor (time famine) are less happy, have more anxiety/depression, are less active, less productive, have poorer health and are more likely to get divorced. Both time and money are scarce commodities, but we can’t optimize one without sacrificing the other. The solution to this conflict is to realize that the highest purpose of money is to give us control over our time.
The highest purpose of money is to give us control over our time
Retirement vs. financial independence and “Ikigai”
Retirement – not working due to age – was invented only 150 years ago in Germany to solve an economic problem. Now most of us view retirement as the ultimate financial goal. Even though a life without work, full of leisure and relaxation sounds appealing, studies show that retirement is terrible for our physical and mental health. After adjusting for age, people who choose to stop working have 2x the risk of reporting their health as only fair or poor, 3x the risk of physical inactivity, and 40% increased risk of depression. Perhaps the goal of financial planning should not be retirement but financial independence: having enough savings that you can choose your activities based on your values rather than income.
Another alternative: The Japanese have a concept called “Ikigai” which translates roughly to “life meaning”. It is an activity that you not only love, but you’re also good at it, your community needs it, and you can be paid for it.
A study of 43 000 Japanese found that those who reported ikigai had:
- Better relationships
- Better education + employment
- Better health
- Longer life
Our challenge is to design our careers in medicine to tick all those boxes; that likely means a career that evolves as we age, but not working is not likely to keep us happy or healthy.
Evidence-based happiness for financial planning for emergency physicians
The “Four F’s”
There are four things that are nearly universal in their ability to add happiness and contentment to people’s lives: The “Four F’s”
- Friends and Family: spending time with people we care about
- Fitness: eating well and exercising
- Philanthropy: doing nice things for people even when we don’t have to, and
- Flow experiences: activities that we find intrinsically rewarding, like sports, art, or music
(notice there is nothing here about big houses, new cars, or other luxury items)
How much money do you need to be happy?
More money does lead to more happiness, but only up to a certain point – about $100k/yr; after that, more money doesn’t mean more happiness. If you’re fortunate enough to make more than 100k per year, I think the best ways to increase happiness are to improve our time affluence and to help the people around us be happier.
Spending for sound financial planning for emergency physicians
Lifestyle inflation is a problem
Biologically we are designed to live in an environment with scarce resources. When we see something that is perceived as valuable for us, our primal dopamine system kicks in. Dopamine is primarily a motivational hormone, not a reward hormone. This is what drives much of our spending. The problem is that once we buy the thing we wanted, dopamine crashes, the excitement is gone, and we rapidly adapt to the new item, taking it for granted. Soon we set our sights on something new and the cycle repeats. This is called lifestyle inflation.
Also, the more intensely we want something, the more our dopamine FALLS after we get it – the bigger the purchase, the more likely we’ll feel worse than we did before. We get addicted to luxury. It pays to remember that our minds play tricks on us: we are terrible at predicting what will make us happy.
Spending smarter – a few quick hacks
- Delayed gratification – don’t say “no”, but delaying purchases let’s the dopamine fade and gives time to consider alternatives
- Convert the price from dollars to hours – how many extra hours would you have to work to afford it (use actually net hourly rate, which is probably ~$75/hr)?
- Realize that we are not bottomless wells of self-control: You will be ahead of 90% of other people by controlling your spending on just two things: your house and your vehicle
Saving in financial planning for emergency physicians
When should we start saving?
You’ll never lose money paying off debts – debts with interest rates over 5% should usually be paid off before saving. Otherwise the best time to start saving is always now.
How much should we save?
It’s best to think of our savings as a proportion of our income; if you’re saving more, you’re learning to live and be happy on less.
To use the example of a doctor earning 300k per year (200k after taxes):
- saving 30% would be 60k per year, leaving 140k to live on – you’re likely to be financially independent in about 28 years or so
- saving 10% would be 20k per year, leaving 180k to live on – a slightly higher standard of living but you have to work about 12 years longer
The more money we think we need to be happy, the less time we’ll have to enjoy it, and the less money we need to be happy the earlier we will achieve financial independence
Investing in financial planning for emergency physicians
What is more important: how much we save or our investment returns?
Don’t let fear of investing stop you from saving because for the first 10-15 years, your savings are contributing more to your account balance than your investment returns. Example: if I were to start investing 10k per year earning 7%, by year 15, I would have a ¼ million dollars – but 60% of that would be the money that I put in, and only 40% would be from investment returns. Depending on rates of return, it’s likely only after about year 15 that your investment returns become a bigger factor than your savings.
How much do I need to be financially independent/retired? The 4% Rule
A great rule of thumb: The 4% Rule
Based on historical stock and bond market returns and a balanced portfolio, you can take out 4% per year, adjusting for inflation, and be very unlikely to run out of money over a typical 30 year retirement.
Example: With a $2m portfolio and living expenses of 80k per year, you’re very likely in the ballpark of being able to retire, because 80k is 4% of $2m. It can also be used in reverse: say you know your annual expenses are 100k – that’s your 4% – just multiply it by 25 and that’s approximately how much you need. This is not a hard and fast rule – it changes a little with taxes, government benefits, what you hold in your portfolio, risk tolerance, etc., but it’s a great starting point, and from there you can use some planning tools with more detail.
Financial Planning for emergency physicians: flexible planning
Typical retirement plans are rigid: fixed spending (adjusted for inflation) every single year and no more active income. This rigidity will require a larger nest egg, thus financial independence is delayed. Consider flexible planning – it can mean financial independence earlier.
How? Two main ways:
- Earning: Now we know that not working is not good for us. There are many enjoyable activities that can generate a little income in retirement. Even a small amount of income can make a big difference, because that is money you don’t have to be pulling from your investments.
- Spending: multiple studies show that being flexible like that will significantly increase the success rate of your financial plan, i.e. if you are willing to adjust spending a little on discretionary items – spend a little more when your investments are doing well, and a little less when the markets are down.
What is the first step of financial planning?
Taking stock of your current situation is the first step of financial planning: an honest accounting of your income, assets, debt, and spending. This can be intimidating – most of us are afraid of what we might find. But it’s usually incredibly empowering because obvious improvements are easy to find – and this step requires no special knowledge or skill.
What are the advantages and disadvantages of having a financial advisor vs DIY financial planning?
Not all financial advisors/planners are created equal.
Advantages of good advisors:
- They can walk you through the financial planning process
- They can help manage our behaviour when we’re tempted to do the wrong thing
- And they can take care of things like rebalancing your portfolio, and adjusting things based on changes in your life
If you use one, you still need to have financial knowledge to know what services you need, whether they provide those services and exactly what you are paying. Small fees have huge effects on wealth over time. Example: A 2% annual fee (about average) on a $1.5M portfolio means you are paying $120 every single working day. That same 2% fee over 25-30 years will eat up half of your wealth. Is it worth it? Or is it worth the time to start educating yourself about money?
Creating an effective DIY financial and investment plan is easier than many people think. It does not have to be complicated. In fact, a simple evidence-based plan is more likely to be successful. For people who want to retain control of their accounts and minimize costs but still want professional advice, there is a growing number of flat-fee advice-only planners. This model focuses on unbiased individual advice and education, usually for a one-time fee.
What are the biggest risks for investors?
- Paying high fees
- Not having an evidence-based approach – i.e. don’t try to pick hot stocks or time the market; instead, invest regularly using low-fee, broad-based index funds
What are the differences between stocks, bonds, mutual funds and ETFs?
- Bonds are loans, usually to governments or corporations, that pay interest
- Stocks are small pieces of ownership in companies that entitle the owner to a share of the profits from that company. Stocks are bought and sold on the stock market.
- Mutual funds are baskets of stocks selected by a fund manager, usually with the goal of achieving above average performance by picking stocks and/or buying low/selling high. Investors pay a fee (the MER) for this active management of the fund.
- Index ETFs, in contrast, are passive; rather than picking stocks and timing trades, they simply hold the whole market. In this way they never do better or worse than the market average. But because their fees are about 1/10th of mutual funds’, over 5, 10, 20 years, they will outperform 95+% of actively managed funds.
What are the first steps to becoming a DIY investor?
Do you have “The 3 C’s”?
- Do you care enough about finance and investing to learn more?
- Will you carve out the time to dedicate to this?
- Do you have the confidence to create a plan and stick to it?
You don’t have to go straight to total independence, you can:
- Start with a small amount of money
- Robo advisors
- Books, PFI (on Facebook), blogs, etc.
- Advice only, flat-fee planners can be very helpful
Dr. Poyner’s MoneySmartMD website
References
Gilbert, D. T. (2007). Stumbling on happiness. Vintage Canada.
Arditte Hall KA, Joormann J, Siemer M, Timpano KR. The impact bias in self and others: Affective and empathic forecasting in individuals with social anxiety. Behav Res Ther. 2018 Jul;106:37-46. doi: 10.1016/j.brat.2018.05.001. Epub 2018 May 7.
Quoidbach, J., Gilbert, D. T., & Wilson, T. D. (2013). The end of history illusion. Science, 339, 96-98.
Whilans, A. V. (2018). Time Poor and Unhappy. Harvard Business Review.
Park, J. Retirement, health and employment among those 55 plus. Statistics Canada. Retrieved April, 2022. https://www150.statcan.gc.ca/n1/pub/75-001-x/2011001/article/11402-eng.htm
Sone T, Nakaya N, Ohmori K, Shimazu T, Higashiguchi M, Kakizaki M, Kikuchi N, Kuriyama S, Tsuji I. Sense of life worth living (ikigai) and mortality in Japan: Ohsaki Study. Psychosom Med. 2008 Jul;70(6):709-15
Variable Percentage Withdrawal. Retrieved from Bogleheads.org April 2022. https://www.bogleheads.org/forum/viewtopic.php?t=120430
Drs. Helman has no conflicts of interest to declare. Dr. Poyner declares that he is the director of the MoneySmartMD course.
Epic episode Anton and Matt. There’s a poetry to me stumbling across this in that my usual commute listening to EM cases (being diligent with time and improving as a clinicain), popped this holistic gold under my nose instead!
Thank you for sharing very good post