Month: January 2018

Money Mistakes Doctors Should Avoid

Today, Indian doctors are revered throughout the world as being amongst the very best. With a lot of focus being given to the patient care side of the business, most doctors end up neglecting their professional as well as personal finances. While it might seem like it’s the more intricate aspects of financial coaching that get overlooked, it’s actually the very basic concepts that get ignored. And this negligence can have detrimental effects on the doctors’ finances. The most common money mistakes that doctors routinely commit are:

  • An abundance of loans

    • Doctors don’t have the most stable income; their income depends upon the number of patients who come in for treatment. Despite this, their expenses are rather high. One of the major contributors to this large expenditure is the amount of loans doctors purchase. While the kind of loan purchased might vary from one doctor to another, doctors generally are holders of home loans, practice property loans, equipment loans, car and personal property loans. Higher the number of loans, higher the expenditure towards EMIs to pay off those loans.

    Insurance premiums, practice expenses and EMIs are major contributors to a depleting income. Add to that, spending money on buying real estate instead of leasing it and paying for swanky, new interiors, and you have a close to exhausted income. Since these are considered to be the big-ticket items for the doctor’s practice, servicing debt and maintaining other expenses could result in a liquidity crunch. This holds true even for the doctors who have built up a reputable practice for themselves.

    Many doctors act blindly on the advice of their accountants and purchase loans in lieu of tax planning. The primary reason for this is harnessing the advantages of depreciation and interest deduction. Very often though, this is done without accounting for the doctor’s liquidity and personal needs and causes severe cash flow problems for the doctor.

  • Over concentration in real estate

    • It’s no secret that doctors hoard real estate. A big reason for this is that large chunks of their income can easily be cushioned in real estate investments. Doctors not only believe that the real estate sector is insulated from market downturns, but also that it provides huge returns and tax benefits. Eyeing all these perceived advantages, doctors borrow money to make real estate investments and end up taking on debt. This strategy tough can be extremely dangerous, especially during market downturns because real estate isn’t a liquid investment.

  • Inadequate insurance against risks like death, disability, professional liability and loss of income

    • Most doctors view life insurance as an investment and pump in a lot of money into it. Given that doctor’s lead extremely busy lives, there is not much thought put into whether the policy purchased adds any value. The first agent who makes the pitch gets the sale.

    Due to high incomes, the premiums a doctor pays are sizeable, but the cover received in return is very low and most doctors remain underinsured. There is no forethought or assessment of the family condition to deal with the premature passing away of the breadwinner. Most liabilities aren’t covered, there is negligible disability cover, no income protection and no security benefits. It is imperative to appropriately look into this area to ensure lifestyle maintenance, wealth creating and wealth protection.

  • An ad-hoc approach to investments

    • On an average, a doctor’s portfolio follows the following pattern:

    • More than 60% invested in real estate
    • 10-20% in debt such as PPF, insurance policies, bonds and post office
    • 15-20% in cash like savings account and FDs
    • Negligible gold and equity investments

    Most doctors do not have the time to thoughtfully build their portfolio and, so they make decisions based on the advice of their CAs, colleagues, banks, family, friends, patients, etc. The result is a portfolio that is neither balanced, nor sophisticated. Instead, it’s a haphazard mix of investments that accumulate over time.

  • Absence of a written plan

    • Concepts such as financial goal setting, cash flow and debt management, insurance planning, asset allocation, retirement and estate planning are alien to most doctors for the simple reason that there is no formal education in personal finance or financial coaching. And it is this lack of knowledge that ends up costing them. They realize the importance of having a written plan in place only once something happens that damages their finances.

  • Lack of planning and vision to build a business

    • Often, a lot of money gets spent on superficial things such as doing over the interiors of the clinic in a bid to attract more patients. Investing in essential equipment is good and even necessary but it is better to defer expenses that will neither generate revenue, nor improve the patient’s experience. Also, doctors spend a lot of money to attend conferences where they could upgrade their skill set. But, these same doctors hesitate when it comes to spending on marketing and building their brand.

  • Myopic view of tax planning

    • Tax planning is viewed as an instrument to minimize tax and following this philosophy, many doctors end up doing things that aren’t in their best interest. They take several loans and purchase real estate and life insurance in an unplanned manner. They also indulge in tactics such as showing a limited income or a weak balance sheet with the objective of not paying tax. However, the right goal of tax planning is to maximize post tax income and that is the goal to work towards.

Understanding these typical money mistakes is the first step towards rectifying them. The key is to learn from them and make better choices in the future. This will ensure that you will enjoy the real value of money.

Why a Goal Based Investment approach is your Best Bet

Traditionally, Indians have always been considered to be ‘good savers’. And while creating a savings corpus is a good thing and quite necessary to secure one’s future, this exercise can become quite pointless if these savings aren’t channelized into the right investments.

Over the years, we’ve moved from a savings mindset to a consumption one. Today, people would rather channel all their money into the next End of Season’s Sale rather than save and invest for the future. Of those who do invest, a majority are only concerned with and driven by one factor: Returns. But this is rather a foolhardy approach which ends up having the opposite effect on your wealth than the one you intended. By approaching your investments in the right way, you could end up creating a larger corpus, making the most of what the market has to offer and best of all, meeting your goals.

A goal-based approach to investing is the best way to make the most of your investments. The reason it is so successful is primarily because of two reasons. Firstly, when you set a particular goal, it caters to your unique needs. Therefore, you are emotionally invested in the process and tend to save diligently to meet the goal. Secondly, because this process accounts for your risk appetite and time horizon, the investment recommendations you receive are best suited to help you meet your needs. Therefore, those who invest towards goals end up more successful in their investment endeavours.

To begin the process of goal-based investing, you first need to figure out what your financial goals are. The basic idea is that unless you have a goal to work towards, you’ll end up going around in circles, even though you might have a general idea about your goals such as retirement, a trip to your favourite destination, children’s education, etc. It is upon further probing that realize that you need more clarity.

Start by asking yourself, “What’s important to me about money?”. Then go one step further and list down your answers in order of importance to you. There might be several goals you wish to achieve. Prioritizing your goals is imperative as it will help you zero in on your most important goals and channel your savings effectively. Once you’ve clearly defined your goals, begin quantifying them based on time; short-term goals for a period of 0-2 years, mid-term goals for 2-5 years and long-term goals for a duration of 5-25+ years.

Once you have established what your goals are, all you need to do is make payments towards each goal. This can be done either in the form of Lumpsum payments or by opting for a Systematic Investment Plan. Whatever option is chosen, the key is to be consistent with adding money towards each goal for maximum success.

There are a few important things to remember when you decide to go the goal-based investing way.

  • 1) First, understand that when you’re investing in goals, particularly of a long-term nature, don’t be hasty in making judgements about this approach not being profitable. This is because short-term performance isn’t the best indicator of your overall position and shouldn’t be used to gauge your success. If you stick to your goal-based investment plan diligently, you’ll find that you will be able to spend a lot more in the future than you think you are capable of.
  • 2) Second, due to our lives undergoing constant change, our priorities and goals tend to keep changing. So, it is extremely important to review and re-plan any goals that might become void because of changing life situations and circumstances.
  • 3) Third, money holds different meanings for different people. For some, it could mean a secure future or access to education, while for others, it could mean the ability to travel or buy whatever they wish to. No two people will ever have the same goals that make them happy and so trying to match your goals with someone else is a pointless exercise.
  • 4) Fourth, when it comes to getting advice regarding money matters, there’s no shortage of sources; family, friends, colleagues, insurance agents, etc. Be smart in what advice you take on. If you end up taking on all the advice given to you, it would result in a combination of products that might not necessarily go together and could end up hurting you instead.

Making enough money to lead a secure, comfortable and happy life is very important. But, a lot of times, people go too far in this bid to make money. A far more effective option is investing the money you have, even if it might not be a large sum, to make the most of your savings. Ask yourself what’s important about money to you and your financial goals will appear, giving you a clearer picture of how to best use your money to achieve those goals. So, go ahead and start listing down your financial goals to create a blueprint for your vision for your future.