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DM 67 - Safety Net - Step 2 In A Resident's Financial Journey

Step 2 in a resident's financial journey. This is Jon from Financial MD, welcome to today's didactic minute.

Now we talked about step 1 last time so go check in our previous videos to see that, but step 2 is great all by itself, and that is your Safety Net. So we've been detailing what the steps are in a resident's financial journey and any young physician can follow this track. It might look a little different depending on your income and your situation but we've made it apply to everybody. We've made it be real simple to follow. So, check out step 1; that was Cash Flow – and I go into a decent amount of detail on that at least for TikTok and Instagram length – but step 2 is your safety net and it's two things. So, it is your cash in the bank or emergency fund and it is your insurance. Now, one-half of your safety net – your emergency fund – is going to cover the things in life that can happen that you can pay for with cash as long as you've got enough saved up, and the other half of your safety net is meant to cover the things that you really couldn't save enough cash for or at least shouldn't save enough cash for. Why is that? Well, because you are paying an insurance company to handle that risk for you. You pay them an affordable monthly or annual premium. They cover the off-chance that something may happen to your house or your health or your car…whatever the case might be.

So, a couple of tips on that. Let's talk about 2A, the safety net. Where do you put a safety net? Well, cash is fine. These days you should be able to get 4.5 to 5 percent in a money market if you really look for it, so that's probably where your safety net should be. Another tip to help you protect yourself from yourself – I do this – put your safety net, your emergency fund, at a completely separate bank. Have automatic transfers going from your checking account to that account – everybody can set that up – until you reach your goal and then it's there and you really got to make an effort to go get it. So, in your mind, or in your spouse's mind, it's really got to be an emergency.

Now how much should be in an emergency fund? We hear all sorts of rules of thumb and some are pretty close, pretty good. We've usually found through our research and just work over the years – three to six months of your fixed expenses is great. So take your fixed, necessary, expenses – the ones that couldn't change if something bad happened – multiply that by three – that's the number you need to have. Now six is great, but any more than six – why do we say cap it off at six? Well, because then your cash is sitting there, not really going to work for you, not really invested, not doing anything for you. We call it losing value slowly or going broke safely if you just have money sitting in a bank account. So, it can be there but up to six months of the value of your monthly fixed expenses. Anything beyond that, you should be talking to your advisor about where else should I invest money; where can I get a return. That can take a little bit more risk.

Now why wouldn't you invest your emergency fund? Well, because you don't know when you're going to need it. That's the whole point of an emergency fund. And so, you don't want it to be in an investment, say you bought some stocks with it and they're tech stocks and they're pretty volatile, and one day, they're down 20 percent and that happens to be the day you need to get to your money. Well, now your emergency fund is 20 percent lower than it should be where you'd like it to be and then you got to sell it out and you've lost all that money. So, just put it in something stable and safe – money markets; CDs are probably fine; cash – like that kind of stuff…cash and cash alternatives.

So. that's it. That's 2A. That's your emergency fund. We'll get into insurance in another video but I just want to again highlight. Here are the four steps. There's only four, real simple, of a young physician's financial journey. So be sure to go to our link tree in the bio to get to all of our other resources. We put up podcast episodes about this. There are more videos – there are longer ones – and please subscribe to this so that you can make sure you don't miss the other steps.

This is John from Financial MD, we'll see you next time.

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