As you start your journey into the “real world”, you’ll focus on being the best clinician you can be, not looking foolish in-front of your new colleagues and building a caseload. Although these are important things to focus on (and you’ll make it through no problem) we want you to think about one more thing…your finances. The life of an allied health professional, especially in the outpatient setting, can have its ups and downs in terms of caseload; and in both inpatient and outpatient settings, you’re limited in your earnings based on how much time you are at work. You’re trading time for money.
Our goal at Allied Health Financial, is to show you how to set up your finances so you can grow your net worth (money and assets you have minus money you owe) and start working towards financial freedom. In this post, we’ll introduce our five pillars of your financial plan, and show you where you can learn more about individual topics. Before we get into it, we want to ensure that you know that Allied Health Financial does not endorse a specific financial methodology, product or companies. We are not investment professionals and we suggest you seek out a licensed financial professional before you follow any of our advice.
Budgets get a bad reputation for not letting you spend any money on fun things and ruining your life, but we don’t think this needs to be the case. A well-designed budget helps you reduce financial stress (because you know that you’re saving the right amount) and gives you the freedom to spend money on things you want to buy. Sounds great, so how do you do that? Good question…here are a few key tips:
Following these recommendations and building a custom budget is the first key to building a solid financial plan. To get a custom budget tool and a step-by-step outline on how to build an effective budget, download our Financial ToolKit. It will take you through all the steps you need to save for retirement and still enjoy your newly hard earned paycheques.
Some of you may feel like you’re stuck under a mountain of debt and you’ll never see daylight ever again. We’re here to give you some good news – you’ll eventually pay it off, you just need a plan. First, you need to distinguish your “good debt” from your “bad debt”. Good debt is any money you owe on things that increases your overall net worth, like a student loan or a mortgage. While bad debt includes anything that reduces or does not boost your net worth (i.e. credit cards, car loans etc.) – these debts tend to have a higher interest rate as well. First, focus on paying off the bad/high interest. This will help you reduce the interest you’ll pay in the long run and ultimately help you pay off your debt faster. You can learn the most effective ways to pay off debt in this blog post.
But what about your good debt? Typically, good debt has a lower interest rate and some of it (like government student loan interest) is tax deductible; which leaves you with a choice based on your risk tolerance. If you’re more risk averse and prefer the guaranteed savings of paying off your good debt (i.e. you know you’ll save on interest fees) you might focus on debt repayment. If, on the other hand, you can tolerate more risk and the potential of higher returns is what you are looking for, you might be better off investing the extra money. On average, the stock market returns about 5%, which is typically a higher percentage compared to student loans and mortgage interest. The key is that the rate of return of the stock market is not guaranteed, it will rise and fall, and you need to be psychologically ready for that. To learn more about which option might be best for you check out our debt repayment article.
An emergency fund is made up of 3 to 6 months of living expenses kept in an easily accessible account. These funds are only to be used when you encounter unexpected and non-negotiable expenses such as a job loss, car or home repair etc. On top of reducing financial stress (if a financial emergency pops-up you know you’re covered – what’s more relaxing than that?), a proper emergency fund also helps you increase your net worth. In essence, the higher your net worth is, the healthier your finances are. Let’s look at an example comparing using a credit card vs an emergency fund in the case of a job loss as a result of an economic downturn, like a recession.
In both scenarios, we start with a net worth (a calculation of your assets) of $24,500 but it is distributed differently. In scenario 1, we have no emergency fund but a higher amount in our investments, and in scenario 2 there is less money invested and an appropriately sized emergency fund. Therefore, in the first scenario we use a credit card rather than an emergency fund as a safety net whereas scenario 2 lets us use that emergency fund to weather the storm. In scenario 1, we reach our maximum credit card balance and have to sell our investments during an economic downturn to cover our expenses. This is rarely a good idea as you are likely selling your investments for a cheaper price than when you bought them - the opposite of “buy low, sell high”.
When we look at the net worth at the end of our example, it is significantly lower in the credit card scenario vs the emergency fund. Furthermore, once we factor in the need to repay the credit card debt at 19.99% (assuming a monthly repayment of $500) it gets even worse. It will take twelve months to repay the credit card balance and cost us $514 in interest payments! This lowers the net worth in the credit card scenario to $3,590.54; that's almost half the size of the net worth in the second scenario. It is pretty clear that emergency funds are the better option. If you’d like to learn more, check out our Definitive Guide on Emergency Funds.
Insurance is the last thing on your mind as a newly minted healthcare professional, you’re young…why do you need to worry about insurance? It’s there for the “just in case” moments, and on top of your mandatory malpractice insurance, there are a couple of other products you need to think about.
The first is long term disability (LTD) insurance, which provides you with monthly income if you’re unable to work as a result of a serious injury or illness. Since jobs in the rehabilitation field tend to be more physical, disability insurance is extremely important. But why think about this now? Some Canadian insurance companies offer significant discounts on LTD insurance if you purchase it within the first year after graduation. Purchasing LTD insurance early can save you tens of thousands of dollars over your career. Speak with a qualified insurance advisor in your area that understands the rehab world to get the right insurance policy for you. A great website to learn more (and get quotes) for disability insurance is PolicyAdvisor. You can find a link to their website on our resource page .
The second type of insurance we want you to think about is life insurance. Life insurance protects your dependants (i.e. spouse, children, elderly parents) in case you pass away. It is designed to help them supplement your income to pay for things like mortgage payments, education for children etc. Here is the catch…not everyone needs life insurance, and the amount of insurance you need will differ from person to person. PolicyMe has designed a great tool to find out how much life insurance you need (if any at all). You can find a link to their website on our resource page as well.
The final pillar of your financial plan focuses on growing your “passive income”, that is income you “earn” without working. The reality of rehab is that you’re limited by your salary or, if you are paid a fee for service, you’re limited by your percentage split and caseload. So how can we earn income when we’re not at work? This is where your investment portfolio comes in. By investing, you can “earn income” in the form of market appreciation (when you “buy low and sell high”) or in the form of dividends. Dividends are a (very small) portion of profits a company gives to you for owning their stock which they deposit right into your account. You get paid just for owning shares in the company, either directly or through an Exchange Traded Fund.
First, make sure you should use of the tax advantaged accounts available to you in Canada like the RRSP and TFSA. For more information on how and when to use these accounts, follow the links above to read more in-depth explanations on our website.
What securities or products you put in these accounts depends entirely on your risk tolerance (how comfortable you are with the market going up and down), how involved you want to be in your day to day investing, and how much work you want to put into your portfolio. If you are risk averse, and don’t want to think too much about investing on a day to day basis, we suggest a Robo-advisor or ETF portfolio. Why? They tend to have similar returns (if not better) than most mutual funds and they are significantly cheaper. If, on the other hand, you are very interested in investing and want to manage your own portfolio – that is fine too. Just make sure you educate yourself, follow a plan and know that even the most seasoned hedge-fund managers make costly mistakes. This method can save you a lot in fees over time but can also lead to costly mistakes, so you have to be sure you can stomach the market. Again, before you make any large investment decisions make sure you educate yourself fully or consult a fiduciary (we suggest “fee-only”) advisor.
There you have it, the five pillars of your financial plan. We know it’s overwhelming, but once you get started, you’ll see that with a little bit of work you can set yourself up for success and even enjoy the process. To get started we suggest downloading our Financial ToolKit , and reading our blog posts on topics you are particularly confused about or interested in. You can also check out some of our favourite financial tools and books on our resources page. If you have any questions you can email us firstname.lastname@example.org or find us on Instagram , Facebook , LinkedIn and Twitter.