Here’s the question:
“I am an emergency physician who recently completed a residency. How can I make sure I am as successful in my finances as I do with my clinical practice?”
Business Experts H. James Harrington I once said,
“Measurement is the first step that leads to control and ultimately to improvement. If you can’t measure something, if you can’t understand it, if you can’t understand it, if you can’t control it, if you can’t control it, if you can’t improve.”
As physicians, we are often intimately familiar and perhaps too familiar with business-related metrics (e.g., door-to-door visit times, doctor satisfaction, and percentage of downcoded charts). There are also metrics in your financial life that you can measure, allowing you to “keep your score” towards your financial goals. Of course, the purpose of maintaining your score is not to compare yourself to others, but to compare your performance annually and with your own financial goals.
Today we revisit the four most important ways to measure your financial goals.
Four Measurements to Track Financial Goals
#1 Your net worth
Perhaps the most important measure that anyone looking for financial success can monitor is net worth. Net assets are the sum of all assets, minus the sum of all liabilities. Assets include the cash value portion of your bank account, retirement account, investments, home capital, and life insurance. Debts are primarily liabilities, including student loans, mortgages, car loans, and credit card liabilities.
It’s amazing that so many doctors don’t know how much they owe on student loans. Adding everything can be scary, but if you don’t know where to start, reaching a reasonable financial goal can be difficult.
Pour your favorite drinks with a tall drink, sit down all your student loan documents and actually add them all and write them down. If you’ve never done this, the total could be significantly higher than you think, given the relatively high student loan interest rates. Most doctors graduate from their residency with a negative net worth due to the high student loan burden. One of their initial financial goals is to return to their net worth of $0 (#livelikearest) as soon as possible. Many doctors find it harder to get to $0 than going from $0 to $1 million in net worth!
For more information, click here:
How did you go from your negative net worth in your 30s to early retirement?
We’ve (finally) broken! It’s amazing why it’s not worth it
#2 Savings Rate
Another important financial metric is the savings rate. This is the percentage of money saved in a particular year towards long-term financial goals such as retirement or university, which are split into your total income. There are many different ways to measure your savings rate, but it’s only important that you match yours (because you are only “competing” with yourself). It is best to count contributions and other investments to your retirement account and pay off your debts as “savings.” If you’re not sure what to count as income, keep it simple and use your total income from your tax return. You can find it in 2024 Form 1040line 9.
I usually recommend that doctors save 20% of their total income towards retirement. If you’ve been working long enough and don’t make too many investment mistakes, 15% may be enough, but for very early retirements, you may need 25%-40%. 20% is a good starting point for most doctors. However, 5%-10% is almost certainly insufficient. We measure savings rates every year. If you can’t achieve your goals, find ways to boost it throughout the year.
#3 Tax Rate
I am often surprised to find out I don’t know how much a doctor actually pays with taxes. There are two tax rates worth tracking.
Effective tax rates
The first is your effective income tax rate. To calculate this, add federal income tax, state income tax, and payroll tax, and divide the total by gross income.
For me, these numbers have been quite diverse throughout my year. It was low as 5% in the residency and military era, but in 2014 it was about 23%. It has exceeded 30% since 2017. If effective income tax rates appear to be equally high, it may be worth exploring ways to legally lower that tax burden, such as tax dependent retirement and contributions to health savings accounts, better tracking potential deductions, and moving to a state with a lower tax burden.
Limited tax rate
The second tax rate worth knowing is your marginal tax rate. This number is generally significantly higher than the effective tax rate. The easiest way to calculate it is to use tax software every year when you finish taxes. Add $1,000 in virtual revenue to see how much the tax bill is rising.
When I did this a few years ago, my marginal tax rate was 41.8%, as my tax bill increased by $418 at its hypothetical $1,000. Software records federal income taxes, state income taxes, gradual outages, and even payroll taxes if there are self-employed people. Knowing the marginal tax rate can be useful when making money decisions, such as investing in taxable bonds or municipal bonds in taxable (but low-pay) tax accounts. It may also affect the number of additional shifts you want to earn. Your marginal tax rate can be reduced using the same techniques used to lower effective tax rates.
For more information, click here:
Three major tax credits for doctors
1 (strange) tax trick the IRS hates
#4 Year Investment Returns
Many investors don’t know what the return on investment is. Therefore, it is extremely difficult to know if you are on track to achieve your goals. It is best to calculate the return on an after-tax basis. The most accurate way to calculate investment returns is to use the Internal Rate of Return (IRR) function in a spreadsheet or financial calculator.
The only data needed to do this is the amount of contributions and withdrawal to the account and withdrawal (including dividends not reinvested). Because the contribution is not regular, you should use an internal rate of return using a function called XIRR, or an aperiodic cash flow. This function provides an annual rate of return, as opposed to the average rate of return. It’s important to know the difference, as the only returns you can use are from the year.
By comparison, the average annual revenue for the S&P 500, whose dividends were reinvested from 1871 to 2024, was 11.0%. However, the annual return for that period was only 9.36%. This effect is due to volatility in investment returns. In short, 100% gain is required to make up for the 50% loss. The lower the return on investment, the greater the difference between average and annual revenue.
By calculating these simple financial metrics once a year to maintain your score, you can provide the knowledge and motivation you need to reach financial success.
What do you think? Which metrics do you track in your financial life? What is the reason?
[Today’s post was originally published at ACEPNow. This updated post was originally published in 2015.]
