Jag is back and joins Amy Walls of Thimbleberry Financial for the first of a 6 part series on finances for healthcare professionals.
Today they focus on three key areas: cash reserves, debt management, and cash flow. Healthcare workers often find it more stressful to manage their finances compared to the general population. Amy emphasizes the importance of having a cash reserve for emergencies and opportunities. She recommends having three to six months' worth of expenses set aside. Many healthcare professionals have lower cash reserves due to their higher incomes, but it is crucial to have a sufficient amount to cover unexpected expenses. Amy also highlights the significance of managing debt, including student loans, mortgages, and credit card debt. She suggests strategies such as paying off the highest interest debt first, or alternatively, using the snowball method. Additionally, Amy discusses the importance of cash flow and living within one's means. She explains that healthcare professionals often struggle with wealth accumulation due to factors such as the cost of education, late start in earning, and societal pressure to maintain a certain lifestyle. Amy encourages healthcare professionals to seek financial advice and education to better manage their finances.
**Key Takeaways:**
- Healthcare workers find it more stressful to manage their finances compared to the general population.
- Cash reserves are important for emergencies and opportunities. Aim for three to six months' worth of expenses.
- Healthcare professionals often have lower cash reserves due to their higher incomes, but it is crucial to have sufficient funds for unexpected expenses.
- Strategies for debt management include paying off the highest interest debt first or using the snowball method.
- Cash flow is about finding balance between current lifestyle and future goals. Seek financial advice and education to better manage finances.
For more information contact Amy Walls and her staff at 503-610-6510 or click here Thimbleberry Financial.
0:00:08 - Jag: Welcome to ThimbleberryU. I am John Jag Gay, joined as always by Amy Walls from Thimbleberry Financial, and we're doing a six part series geared toward those in the healthcare profession. Today's part one. Amy, what was the genesis for coming up with this series?
0:00:21 - Amy: Let me give you a statistic first that really sums that up. Based on a report by PR Newswire, 68% of health care workers find it stressful to manage their finances. Now, that may not be a shocking statistic. However, for Americans overall, that percentage is 56%. So what that means is that healthcare workers are actually finding it more stressful to manage their finances than Americans in general. I think that flies in the face of what people assume. And it's easy when you are someone in that profession to think, I should not be stressed by this.
0:00:59 - Amy: And we have a lot of experience working with healthcare professionals, specifically nurses and doctors. We also have a lot of experience working with researchers and professors at Oregon's largest hospital. And so we do hear commonalities in this arena that I think can really be a benefit to people to know. These are normal questions.
0:01:25 - Jag: Absolutely.
0:01:26 - Amy: And with education, you can move forward, same as they work with patients. If they are patient facing, they're educating their patients.
0:01:33 - Jag: We're going to educate them today. So again, part one of six today. Today we're covering assessing financial health. What are we going to focus on today, Amy?
0:01:41 - Amy: Yeah, we're going to focus on the basics. And in other episodes, we'll move into retirement and taxes and insurance and estate planning and the other things that are important. But today, the basics are not fun, not sexy. Cash reserves, debt management and cash flow.
0:02:01 - Jag: Got it. Three items. Cash reserve, debt management and cash flow. We'll start with the first one, cash reserves. It's a topic we've talked about in other podcasts, but not specific to healthcare professionals. Million dollar question, no pun intended. What's the right amount to keep?
0:02:14 - Amy: That's a great question. And Jag, you know my favorite answer. It depends. First, I think we need to talk about emergency funds. And I want to stress this specifically, more so with healthcare professionals maybe than other groups. That is, cash reserves are both for emergencies and opportunities, okay? So I think we regularly can think of them as emergencies. But the opportunity piece is so important, and a general rule of thumb is that people have three to six months worth of expenses set aside in cash reserves.
0:02:54 - Amy: What I find with healthcare professionals when they first come to us is that they often have less.
0:03:01 - Jag: Okay?
0:03:01 - Amy: And the reason for that is three to six months of their expenses, given their higher incomes, from a dollar perspective, often feels like more than they think they need. If you're spending $200,000 a year, six months of your expenses is $100,000. It may feel like having $100,000 sitting in the bank isn't useful.
0:03:28 - Jag: Okay.
0:03:28 - Amy: It may feel like too much and that you're not making a smart decision when in reality you do need six months. But you may be looking at that saying, well, I only want $20,000 in the bank because $20,000 seems reasonable. But when you look at emergencies, what if a big repair happens on your home? What if you're sued? These big what if questions? That's why that dollar amount, if you're laid off, that's where you would want that six month cash reserve.
0:04:01 - Amy: So there's a reason for it being the month, even if the dollar figure is higher. It's kind of like someone saying that has a million dollars. I'm comfortable with a 10% decline, but when the accounts go down to $900,000, being really worried about it.
0:04:20 - Jag: Yeah. Percentage versus actual dollar amounts can be a very tricky thing. And I think the idea of an emergency fund is if there were an emergency, you wouldn't have to all of a sudden make massive cuts to your daily living expenses. You want to be somewhat close to where you are now while you're working, correct?
0:04:37 - Amy: Absolutely. That was spot on. So what we see is, like I said, sometimes it's a lower amount because that feels more reasonable. Another thing we may see is actually not having a cash reserve at all and using a home equity line of credit as that cash reserve if something does come up. So one of the reasons that can happen, and I think this can be coupled with also just having a lower cash reserve is, if income's high enough that if something does happen, hey, I can skip here and there to pay off this bill and that's okay.
0:05:15 - Amy: But cash reserves aren't designed to make someone wealthier in the sense of that money growing. They are designed to keep someone wealthier by not needing to destroy the other financial structure investments that they have built.
0:05:35 - Jag: Got it.
0:05:35 - Amy: So something that's interesting is that the average cash reserve of healthcare professionals isn't readily available, but the median transaction account balance for US. Households is $5,300. So from our experience, we do see a lot of healthcare professionals with very low to no cash reserves, often by choice, because they don't see it as important. They don't see how it's going to be of benefit to them.
0:06:04 - Jag: Okay, so obviously this emergency fund is important. What are some ways that folks can build up that emergency fund if they haven't done so yet?
0:06:12 - Amy: Yeah, setting aside money on a monthly basis. Banks make automatic transfers really easy now. So look at savings for cash reserve or other goals as a primary expense, like paying a mortgage, if you still have one, and maybe just shuffle that into a savings account or a bank account. If someone's created some habits where it's hard to not touch that, especially because lifestyle, we get used to bigger lifestyles and more fun, and that starts to become the norm, then maybe shuffle that to a bank account that you don't regularly log into so that it's out of sight, out of mind a little bit more.
0:06:51 - Amy: I think one of the first things, though, even before just that strategic tip is accept that you need a cash reserve. Get to the place where you can internalize. "I need this." Interestingly, one of my favorite books, The Millionaire Next Door by Thomas Stanley, talks about physicians not being good at accumulating wealth. And of course, that's kind of a blanket statement. It's not that they all aren't, but there's reasons that they struggle more with accumulating wealth.
0:07:19 - Amy: One is the cost of their education.
0:07:21 - Jag: Oh, sure.
0:07:22 - Amy: So you've got debt that may be needing to be paid back for years. Also, all of that education and then residency, which is also education on top of medical school, equates to a late start in earning.
0:07:37 - Jag: Yeah.
0:07:38 - Amy: So with this, I think of the Game of Life. When my daughter was little, she always wanted to take the path that was not college.
0:07:48 - Jag: Okay.
0:07:49 - Amy: Until she saw that my husband and I would always take the college path and end up better off later in the game and said, oh, I need to start taking that path. But it does make for a late start in being able to save. There's a third thing. Again, these are general ideas not meant to be. "Oh, if you are in the healthcare profession, you're experiencing this." But being a physician, being in the healthcare profession, professors, researchers, et cetera, as kind of having that doctorate, there's this idea that you need to keep up with the Joneses and there's a certain lifestyle you need to be living.
0:08:27 - Amy: Lawyers also experience this heavily. So that expectation. And I alluded to this earlier, can override the feeling of the need for cash.
0:08:37 - Jag: Having the nicest, bestest blank as opposed to putting that money in a cash reserve. That makes total sense.
0:08:44 - Amy: And additionally, I think especially in the earlier years, it's easy to say, well, I just lived really lean in residency. I've done that before, I could do that again. But the further you get away from that, the harder that is, the longer you've incorporated things into your lifestyle.
0:09:03 - Jag: Absolutely. So, Amy, you are pretty familiar with this area. You must have some stories of how having that emergency cash reserve has helped people.
0:09:10 - Amy: Yes, we've seen physicians laid off and both having a cash reserve and not having a cash reserve.
0:09:17 - Jag: Sure.
0:09:17 - Amy: And the difference that makes, on the flip side, we could also look at opportunities rather than emergencies. And I do have a great example here. Oftentimes, and this is true in the story I'm going to tell, physicians and just healthcare professionals will have most of their money invested in retirement accounts that will be taxable when they withdraw from them. What that can be hard for is when someone wants to buy something or experience something that is going to be a lot of money. So let's say buying a property in retirement.
0:09:53 - Jag: Okay.
0:09:53 - Amy: Buying a property for retirement. And so one of the things that I think is the most beautiful is when someone who hasn't had a cash reserve understands the reason for the cash reserve and builds up the reserve. And the happy example I'm thinking of right now, somebody who did that and realized we want to buy this property, that will be where we spend most of our time in retirement. And because they'd built up that cash reserve, it actually became an option and they didn't have to think about it and knew they would just rebuild their cash reserve after spending the money down. So it's been fabulous to watch the joy that that property has brought.
0:10:36 - Jag: That's a great point, Amy. As you said, that money wasn't tied up in retirement accounts, it was accessible. And I love that example because the first example yes, the emergency. But the second example was that opportunity. So the opportunity can certainly be useful for that savings account. Let's move on to the second part of this and that's debt. Let's talk about the debt that these healthcare professionals might have.
0:10:56 - Amy: Yeah, well, the first one that I think comes to mind from many people is student loans.
0:11:00 - Jag: Sure. Yeah.
0:11:00 - Amy: Right. From all that medical school and such. So that's one mortgages also. And credit card debt.
0:11:08 - Jag: Yeah. That happens to more people than you would imagine.
0:11:10 - Amy: Yeah, those are the three big ones. So let's talk about the simple debt, things like credit card first. There's a couple of different ways that that can be tackled. Paying off the highest interest debt first is one method or a snowball method, which is essentially the same thing. And I'll talk about this in more detail, but it's paying off the smallest debt first and working towards the biggest.
0:11:32 - Jag: Getting that momentum of the snowball rolling down the hill. Yeah.
0:11:35 - Amy: Yes. So the idea here with either of these is that you take an amount that is more than the total of minimum payments and you pay minimums on everything except one of the debts. You apply all of the extra towards that one debt you're focused on, and when it's gone, you move to the next one. So in the first example, you would focus it on the highest interest rate. The alternative is you focus it on the smallest debt. Hopefully those are actually the same, so you don't have to like which one's better.
0:12:07 - Amy: I psychologically often think the snowball works better than the highest debt, even if financially, it may not make the most sense, it makes the most internal progress. But I've also, in my 20 years of doing this, seen that quite frequently the smallest debt and the highest interest rate are the same. And that's a great thing when they match up.
0:12:27 - Jag: That's interesting. Okay.
0:12:28 - Amy: Yeah. Another thing here with paying things down is depending on the interest rate, perhaps it doesn't make sense to pay down a mortgage early. So in this group, I often see a desire to get the mortgage paid off pretty quickly. But at the low interest rates. We recently had a two and a half to three and a half percent interest rate. Even a little bit higher, extra payments may not make sense, especially with what else may exist, or in terms of debt, or in terms of needing a cash reserve, or the ability to save for other financial goals like retirement, kids, education, et cetera.
0:13:13 - Jag: It comes down to a numbers game. At that point, you might have debt that's at a higher percentage than that interest rate, so it makes more sense to pay that down first. Or, I mean, I opened a savings account when interest rates went up this year. Maybe you're making more in that money, percentage wise, when it comes to savings than you'd be spending to pay down the interest. And that math works out in your favor, too.
0:13:31 - Amy: Absolutely, yeah. With interest rates in money market accounts at 4% right now or higher, and a mortgage at two and a half to three, that's not hard. Now, we didn't talk about student loans, though, and I am not an expert in student loans. I don't put myself out there as one. So full and fair disclosure on that. But one of the things is that many of the hospitals, especially here in the Portland area, are not for profit.
0:13:59 - Amy: So when people do have student loan debt, they may be eligible for public service loan forgiveness. PSLF. Now, this is not what the Supreme Court just shot down. This is the forgiveness that results when you have the right kind of loan and you have worked for a nonprofit. Doesn't have to be the same one for ten years, okay? And so that can be really valuable in making minimum payments, and at the end of ten years, that loan will be forgiven. And in this program, what's especially nice is that forgiveness is not a taxable event, whereas some of the other loan forgiveness programs do create taxable income at the point where the loan is forgiven and you have to then have money set aside to pay that tax bill.
0:14:52 - Amy: And I've looked at that for clients, and that can be significant.
0:14:56 - Jag: This is where doing your homework and talking to a professional can be super helpful. The last item on our list, Amy, is cash flow. Earlier you mentioned physicians not typically being good at wealth accumulation. What's causing this?
0:15:08 - Amy: Yeah, well, interestingly, and I'll go back to Thomas Stanley in the book The Millionaire Next Door, physicians earn four times the annual income of average American households. But in the book Millionaire Next Door, for every physician that is in the top 25% of wealth accumulators. Okay? So basically, if we group people into four groups, there's the top wealth accumulators or the top 25% and the bottom are going to be the bottom 25%, and everybody else is in the middle 50%.
0:15:41 - Amy: For every physician in the top 25%, there will be two physicians in the lowest 25%. That flies in the face of what we think about physicians in income and wealth.
0:15:54 - Jag: Right.
0:15:55 - Amy: And those in the top 25% have wealth that is typically four times that of the lowest 25%.
0:16:03 - Jag: Wow.
0:16:03 - Amy: So I think the real question here is, what does it mean to live within your means?
0:16:10 - Jag: Okay?
0:16:10 - Amy: And that's what cash flow is all about. And I think this is education. It comes down to education. Living within your means is not about having cash sitting in the bank in case emergencies and opportunities come up. That's cash reserves. It's a protection piece.
0:16:28 - Jag: Okay.
0:16:29 - Amy: Cash flow is all about the money coming in on a monthly basis, and it's about finding balance between lifestyle today and your desired lifestyle for tomorrow.
0:16:41 - Jag: Okay?
0:16:42 - Amy: And so to figure this out, it's important to get a good idea of what appropriate spending and savings looks like. And without information about where you're at, what you're saving, it's hard to know what's appropriate.
0:16:56 - Jag: Sure.
0:16:56 - Amy: As financial advisors, we see this across the board with clients that are coming to us that my expenses feel really good. We're comfortable with our lifestyle, but when we break it down, the savings rate isn't high enough, it's not strategic enough. So we have a podcast coming out on the 50-30-20 budgeting rule that 50% of money coming in goes to necessities, 30% goes to wants, and 20% goes to savings.
0:17:20 - Amy: It's not an absolute model for everybody. It needs to be personalized. But it gives an idea. And so by looking at someone's expenses, they can get an idea of if I'm in the right ballpark.
0:17:33 - Jag: Got it.
0:17:34 - Amy: Additionally, for healthcare professionals, it's not knowing where to save. So without having an easy place to save, money gets spent. So let me give an example here. Someone under the age of 50 can contribute $22,500 to a workplace retirement plan. Like a plan in 2023, if your income is $100,000, well, that's 22.5%.
0:18:03 - Jag: Right.
0:18:04 - Amy: If your income is $200,000, that's 11%.
0:18:11 - Jag: Yeah.
0:18:12 - Amy: So the person who is earning $100,000 is reaching that kind of rough target of 20% savings if they maximum fund their retirement plan. But the person with the higher income, like our healthcare professionals, are only saving half or even lower than half of that 20% target into their workplace retirement plan. So they have to have somewhere else to put money.
0:18:38 - Jag: Yeah.
0:18:39 - Amy: And without having that set up to be easy, that becomes hard. And so accumulating wealth becomes harder. Now, there are a couple of things that can happen. One, a financial advisor obviously should be helping with that. Knowing your numbers, making this easy for someone to facilitate. There's also tricks. So when I talk about that big hospital here in Portland and the biggest in Oregon, many of the people we see there have both a 401 and a 457 plan.
0:19:13 - Jag: Okay.
0:19:14 - Amy: If they're under 50, they can contribute $22,500 to each of those plans.
0:19:20 - Jag: I see. Okay.
0:19:21 - Amy: And if they're over 50, they can contribute $30,000 to each of those plans. Now, I'm not saying that necessarily makes sense, because maybe they need money somewhere else that will help them based on their goals, but it's a little bonus opportunity they have. Interestingly. And why I say this is also about education is I think education can solve almost everything.
0:19:45 - Jag: Sure. Yeah.
0:19:46 - Amy: And according to medical economics, more than half of healthcare workers, 52%, actually are feeling less confident about their personal financial situation compared to a year ago.
0:19:57 - Jag: I believe that, yeah.
0:19:59 - Amy: There's been a lot going on, and healthcare workers have been busy for several years, and so they probably have less time and energy to put into seeking out information. And this is why getting help and putting your energy into what you're great at in being a healthcare professional and with your families and hobbies to recharge is really vital. And using another expert to help map this out can be really valuable.
0:20:28 - Jag: It's an analogy that we've used countless times on the podcast before, and it's really relevant here. If you had a bad knee, you would go see a knee specialist. If you had a heart problem, you'd go see a cardiologist. So, speaking about the medical community here, if you've got questions about your finances or saving or anything we've talked about today, you're best to speak to a financial advisor. And if somebody listening, Amy wants to come find you and your team at Thimbleberry Financial. How do they do that?
0:20:51 - Amy: They can find us@thimbleberryfinancial.com or by giving us a call at 503-610-6510.
0:21:00 - Jag: All right, again, first part in a six part series, but topic two next month is going to be retirement. Also very important to these healthcare professionals. Thanks as always, Amy. We'll talk again soon.
0:21:10 - Amy: Sounds great.
0:21:10 - Jag: Jag registered representative securities offered through Cambridge Investment Research Inc. A broke or dealer member. F-I-N-R-I. SIPC investment advisor. Representative, Cambridge Investment Research Advisors, Inc. A registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.