Your habits inform the way you live your life — whether you consciously realize it or not.
Those habits don’t only impact your personal life; they can also affect your money.
- Are you a spender or a saver?
- How much do you invest?
- How do you view money?
Creating solid financial habits takes time, knowledge, discipline, and commitment. What money habits should doctors cultivate today?
Here are nine ideas to get you started!
- Habits inform behavior, and your choices can have a significant impact on your life and money.
- Creating keystone money habits can lead to strong long-term financial practices.
- Doctors need to establish healthy and productive financial habits early to help them reach their long-term goals.
- Nurturing positive money habits puts doctors on the path to financial (and personal) freedom.
Prefer video over the blog? We've got you covered! Watch our YouTube video as we dissect this blog post for you:
Introducing Keystone Habits
As a society, we are remarkably interested in how people do things and why they do them.
That natural curiosity has contributed to the growth of the self-improvement industry and in personal development products and services.
A few years ago, I read a great book from Charles Duhigg titled The Power of Habit. Within the pages, I discovered the idea of keystone habits. Keystone habits are the fundamental habits that inform the routines and practices that comprise your daily life.
Do you make your bed in the morning? Where do you eat dinner? How do you communicate with your spouse? What entertainment (music, podcast, etc.) accompanies you on your commute? Do you exercise regularly?
Keystone habits are intimately connected to every piece of your daily life and routine, and as such, help you build stable and durable habits (hopefully positive) into your life.
Keystone habits influence how you eat, play, live, sleep, communicate, spend, and more. Over time, they have immense power to implement change. Exercising regularly, for example, may lead to better sleep, increased mood, and improved health.
Doctors can apply these same principles to their finances. For example, once you automate investments in your 401(k), you likely forget about it, and your money just compounds quietly in the background. You can read more about this idea in a past blog post “How Much Do I Need to Retire as a Physician?”
Forming these keystone money habits is hard, but it’s truly a beautiful thing once they’re established.
So what are the top keystone habits doctors can form today?
Four Keystone Money Habits for Doctors
Doctors, get ready to change the way you approach money on a daily basis with these core habits.
Keystone Habit 1: Build and Keep Your Emergency Fund Fully Funded
We’ve strategically placed this habit as #1—it’s the most important and a progenitor for success in the remaining habits to come.
Your emergency fund protects your wallet when something goes wrong—unexpected job loss, sudden death in the family, relocation, medical costs, major repairs to your house/car, etc.
Some call it a rainy day fund; at WealthKeel, we sometimes call it the “course correction” fund. Whatever the name, it serves the same purpose: emergencies.
To be frank—things happen—and that’s what this account is meant for, to protect you when things go up in smoke (literally and figuratively).
Each person will require a different amount in their emergency fund. Often, people with kids need more of a cushion because monthly expenses tend to be higher. You simply want to make sure you can cover your ongoing obligations (food, housing, utilities, debt, etc.) for a set period, usually three to nine months. Here are a few tips on the amount that should be in your emergency fund.
Your emergency money should be accessible—you don’t want to sell your house to obtain the funds you need for your emergency. So, ensure you put your funds into a liquid account like a high-yield savings or money market account.
Once you know how much money you want to save and where to keep it, it’s critical to understand that you won’t hit that ideal number overnight. It may take months or even years of dedicated saving to reach your desired amount. To help you get there, establish an automatic draft from your checking account to your savings account every time you are paid.
Pro-Tip: Don’t fall in love with this account.
While it may be tempting to simply stare lovingly at the account balance you’ve accumulated, as the adage goes, if you love something, set it free. So, when you need the money for an emergency, don’t be afraid to use it.
That’s what the money is there for—to protect you! Let it do its job.
Don’t put the cost on your credit card just to retain your ideal amount. Your emergency fund is there to help keep you out of debt or financial stress at a crisis point.
When something comes up, get the money you need from your emergency fund, and replenish the account with your automatic contributions again!
Keystone Habit 2: Keep Bad Debt At $0.00 Every Month
Is your emergency fund safely stowed away for a rainy day in an accessible account you aren’t afraid to use?
Now you can start to intentionally form the second habit: stay away from bad debt.
What is bad debt? In reality, it comes down to a few sour flavors:
- Credit card debt
- Questionable car debt
- Sketchy personal loans
The first, credit card debt, is perhaps the most dangerous and important to ward against. Why? It can plunge your money into the red and make it extremely difficult to crawl out.
The most significant reason credit card debt can be so detrimental is because of sky-high interest rates. Currently, the average credit card interest rate sits at a whopping ~16%, according to a weekly credit report by CreditCards.com.
Let’s look at an example. Say you have $5,000 in credit card debt with a 16% interest rate. The minimum payment (often around 2% of your total balance) is $100 a month. By just paying the minimum amount every month, it will take 84 months to pay off (7 years!) with an extra $3,364 in interest payments; that’s over 60% of your original balance in interest alone.
The bottom line? Credit card debt is bad news.
To ward against it, you should build the keystone habit of paying off your credit cards in full every month. Doing so is financially savvy and can help you avoid interest payments and penalties.
Now, here comes the tricky part:
Should you pay off your credit card debt or invest?
We’re big proponents of doing both—balancing and prioritizing where needed. It’s critical to contribute enough to your employer-sponsored retirement plan (401k, 403b, 457b, etc.) to qualify for the entire company match (always take advantage of free money).
But if you have credit card balances, you should concentrate on paying them off before looking into other investing opportunities.
While I’m a huge fan of investing while you’re young to take advantage of compounding interest, this phenomenon has a double-edged sword. Sure, compound interest works in your favor for investing, but not so much with debt.
Your accumulating interest on your credit card is far and above more important to target than any returns from the stock market most years.
Pro-Tip: If any “advisor” promises a 15%+ return on your investments, don’t walk, run!
Keystone Habit 3: Keep Savings On Auto-Pilot
When it comes to building healthy financial habits, consistency is the name of the game. An excellent way to bring consistency into your financial life is to automate your savings and investments each month.
This idea is similar to automating contributions to fund your emergency account. It also works in the same way that you elect to have a certain percentage taken from your paycheck to fund your retirement account.
The key here is removing extra steps and barriers to saving. It’s so easy to say you’ll invest monthly and quarterly via a check, but it’s so challenging to follow through. You’re busy, and you don’t have time to remember to save. That’s where automation puts on its shiny cape and saves the day.
You can automate savings for all sorts of goals. For any other investments besides retirement, like a home, car, baby, wedding, etc., you can establish an automatic draft from your checking to your savings account every time you’re paid. Sound familiar? It should. This is the same strategy from keystone habit #1.
You can either house all the funds for your various goals in a single account or open separate savings accounts for each goal—whatever works best for you and is most convenient.
For retirement savings, you’re already watching automation at work. By withholding a percentage of your paycheck for your retirement, you consistently invest every time you get paid.
Ready for more?
Work to increase the percentage you contribute by 1-2% each year. As you earn more, you should save more. This way, you avoid lifestyle creep and adequately save for your desired retirement lifestyle. Here’s the thing: you’re never going to make it to retirement and wish you saved less—that’s one more vacation you can afford, twist your arm.
The same advice holds true for any IRAs or Roth IRAs that you can’t deduct directly from your paycheck. Once the money hits your checking account, establish an auto-draft to that account (usually monthly).
Once you make saving a keystone habit, you almost forget that you are saving. Then, you’ll look at your statement a few months later and say, “Wow, I can’t believe my account balance is that high already!”
Keystone Habit 4: Track Your Cash Flow and Budget Monthly
Yep, it’s time to tackle budgeting.
Budgeting is a critical financial skill. Once you master it, the lessons learned will stay with you forever. But it does require quite an initial time investment.
There aren’t too many universal truths in finance, but if there’s one, it’s that people don’t like budgeting. Disdain for this tool runs deep, but that’s often because people misunderstand its purpose and don’t know how to properly wield it for their lives.
Budgeting is a keystone habit that can serve you for life. Together, we’ll help you cross the first hurdle and make budgeting growing pains a thing of the past.
While there’s plenty of fancy software to help you track your budget, we suggest taking it back to the basics for the first three months—that means using the ole’ pen and paper method. This is a challenge—we know—but physically putting pen to paper makes the process much more tangible and real. It isn’t a computer simulation or projection; it’s you—your hands, paper, and money.
This way, you are physically accountable for your budget; you can’t rely on an app to do the work for you. Doing so is a profound mindset shift, and once you’ve discovered it, you may want to supplement your efforts with a tech companion. But if you find yourself slacking, break out the writing implements!
Here is a terrific article from INC. on why pen and paper are still the best way to track information. In it, the author discusses how our brains process information differently when writing vs. typing.
Another fringe benefit: your pen and paper have unlimited battery life and won’t leave you needing blue light glasses. Perhaps the pen will always be mightier than the keyboard (at least in some capacity).
5 Underlying Money Principles To Support Your Keystone Habits
Your keystone habits help you form daily practices that impact your life for the better. When it comes to money, your keystone habits are like your home base—the things you always want to return to and the launching point for other ventures.
Now that you’re comfortable with your keystone habits, what other financial habits can help support them?
Here are five you’ll want to adopt ASAP.
Money Principle 1: Tax Refunds Aren’t A Good Thing
Are you all geared up about your tax refund? At first, it might feel nice to have a shiny $5,000 check from Uncle Sam, but that money is far from no strings attached.
Essentially, you gave the government an interest-free loan that they finally paid back. It’s safe to say that’s not a great deal for you. To add insult to injury, many people spend their returns spontaneously on extravagant dinners, front-row concert tickets, or buying their friends several rounds of expensive drinks.
When you get a tax refund, instead of looking at it as an extra payday, consider it an opportunity to look at how much you’re withholding.
To understand why refunds aren’t all they’re cracked up to be, think about why you’re getting the refund in the first place. The government isn’t giving you money because they like you or think you deserve it; they give you the money because it’s rightfully yours.
Each paycheck, your employer withholds funds to cover taxes (federal and state). The amount they withhold depends on how you fill out your W-4. You remember the W-4, right? It’s the form you filled out years ago and probably haven’t checked in on since.
If your W-4 alerts your employer to withhold too much, the government hangs onto that extra cash until you file your return to give it back to you.
Instead of getting caught in the cycle of giving 0% interest loans to the government, adjust your W-4 withholdings. Your answers should change with your circumstances. Someone single won’t have the same answer as someone married with a couple of kids.
As a general rule, the higher the number on your W-4 (aka your exemptions), the lower your tax withholdings, which translates to more money in your paycheck and less money lent to the government.
You want to plan your exemptions as accurately as possible so you don’t get money back or owe money come tax time. To play it safe, it’s often wise to increase by 1 each year to avoid tax shocks. You don’t want to go from receiving a $5,000 refund to owing $5,000 in taxes. Taking baby steps will allow you to adjust and find the right balance for you. If you have an accountant, they can also give you a specific tweak to the W4, instead of playing the year-by-year small update game.
In a perfect world, your taxes zero out each year—where you don’t owe money, and you also don’t get a refund. That is probably too close for comfort for many, so the happy place would be a refund of less than $1,000 each year.
YOUR money is more powerful today in your hands than it is a year from now.
Money Principle 2: Utilize Roth Accounts
Roth accounts are excellent long-term investment vehicles and can help bring tax diversity to your portfolio. You can invest in a Roth via your employer plan (401k/403b) as many offer both Roth and traditional investment options and a Roth IRA.
Here’s Roth 101: you invest after-tax dollars and give the government their cut upfront. The benefits come later. Your Roth account enjoys tax-deferred growth and tax-free qualified withdrawals in retirement.
Maximizing tax-free retirement dollars brings a lot of freedom and flexibility to your golden years. Keeping taxes at bay is a primary concern for retirees, and having tax-free spending money can help provide a necessary cushion.
In a perfect world, you’ll have an equal balance between Roth assets, tax-deferred assets, and taxable assets so that we can be strategic with your withdrawals.
Whether or not you should invest in a Roth comes down to one primary question:
What will your tax rate be when you retire?
The truth of the matter is that no one knows what tax rates will look like in the future. Tax law changes often, and it will likely fluctuate throughout your career.
While there’s no way of knowing what the tax climate will be when you retire, one thing’s for sure: the national debt clock isn’t slowing down. Presently it’s ticking at nearly $29 trillion.
With that type of tab, it’s unlikely taxes will decrease.
In general, the younger you are, the more beneficial it is to save in a Roth.
Money Principle 3: Don’t Be Scared of Stocks
The lucky folks that call themselves Gen X & Gen Y were either a part of the past stock market collapse(s) or they watched their parents’ 401k become a 201k and heard about it every morning at breakfast.
Either way, it left a sour taste and created a general distrust in stocks. But stocks aren’t the enemy. Intentionally investing in the stock market is a great way to help further your goals.
To approach investing more comprehensively, consider the various elements that comprise your portfolio:
- Risk tolerance—your willingness to take risk
- Risk capacity—how much risk you need to take to reach your goals
- Time horizon—the time frame you want to reach your goals
- Investment goals—why you’re investing in the first place.
Working with an advisor to create an investment portfolio that’s representative of your goals and needs is an excellent antidote to stock market anxiety. With a carefully crafted plan of intentional investments (not hot penny stocks, meme stocks, or other news phenomenona), you can approach the stock market confidently.
Money Principle 4: Reserve Your Retirement Fund, For, Well, Retirement
Unless you plan to retire at 32 (good for you!), you shouldn’t touch your retirement accounts until retirement.
While you can draw from a Roth IRA to help fund other goals like a first home purchase, birth or adoption costs, and qualified education expenses, in general, you should keep your retirement funds stowed away for your golden years.
There are different ways to fund your other goals—savings accounts for emergencies, 529 accounts for education, etc. But retirement savings should stay for retirement.
Withdrawing funds from your retirement accounts early, which often translates to before 59 ½, will often stick you with unwanted taxes and penalties, especially in the case of a 401(k) or IRA. Taking a loan from your 401(k), for example, means that you miss out on the growth and compounding interest on that “loan.” While you do technically pay yourself back to a certain degree, it’s seldom worth it.
Let’s put some numbers to this example. Assume the money you withdrew would have been invested for 30 years and earned a 7% rate of return each year. Instead of leaving it to compound, you withdrew the funds for some expense (car, house, etc.). That decision now became a $152,000 error. The $20,000 you withdrew would have become $152,000 based on the scenario above. That money could be a year (or more!) worth of income in retirement.
The bottom line?
Your retirement funds should be reserved for retirement. We can use different vehicles to help you pay for other financial goals.
Money Principle 5: Don’t Pretend You’re Invincible
When you’re young and healthy, it’s easy to slip into the “invincibility mindset”—that nothing can happen to you.
But we all know too well that’s just not the case. Your circumstances can change in the blink of an eye, and you want to protect yourself and your loved ones if something happens to you.
Physicians need to protect themselves with a comprehensive insurance plan. While there are several types of insurance to consider, the two most important to discuss today are:
- Life insurance
- Disability insurance
Life insurance protects your loved ones if you pass away. Even if you are single with no dependents, a small life insurance policy to cover funeral and other end-of-life costs is a gracious gift to the family you leave behind. Also, if someone co-signed on your student loans, they could still be on the hook to pay those even with a premature death.
In general, the more dependents you have, the larger your life insurance policy should be. You want to make sure your loved ones are financially protected and set up for the future. Essentially, you’re looking to replace your income for a set amount of time.
There are two types of life insurance: term and permanent. While permanent insurance can offer unique benefits, it often isn’t right for the majority of the clients we serve. Term policies cover you for a set period and are much more affordable than permanent policies.
As with most financial endeavors, getting insurance early while you’re young and healthy is your best shot at an affordable term policy. In all likelihood, your premium will be less than your last trip to Chipotle or Starbucks and be WAY more critical down the road.
Your premium costs come down to several factors:
- Marital status
- Current health
- Underlying conditions
- Family health history
Your premiums will also be different depending on whether you purchase an individual or a group policy.
Disability insurance is the most underutilized and misunderstood insurance out there, in my opinion. Disability insurance protects your ability to earn an income—pretty important stuff. This is even more important the younger you are because it covers more of your working years.
Private disability policies can range in price depending on your specialty, income, and if you have an employer plan in place. We have clients paying less than $100 a month and clients paying more than $1,000 per month depending on those above factors.
Hopefully, your employer offers a solid short-term and long-term disability option for you. If they do, ensure you take full advantage of those. Your employer plans should be much cheaper than a private policy. However, most of them lack a good definition of “own occ” and are taxable since your employer pays the premiums.
With that, it may be wise to add a private long-term policy on top of your current group plan to really bolster your coverage, especially as your income continues to increase.
We could spend all day talking about the value of insurance for physicians, but long story short: don’t pretend you are invincible and that this stuff can’t happen to you. It can, and if you’re not prepared it can devastate your life and your family.
Insurance is one of those necessary evils: while you have to pay for it, you hope you never have to use it. But if you need it, you will count your lucky stars that you had it. You always want to insure the things that would change your life overnight—and a premature death or disability event would do just that.
Your Keystone Habits and Money Principles Work Together
Creating healthy financial habits can set you up for the future you want and deserve. While it may not be easy to adopt these habits, the benefits they provide will be well worth the investment once you do.
If you’ve lasted to the end of this article (just shy of 4,000 words!)—congratulations! We hope that you’re excited and energized about building sturdy financial habits that will help you reach your goals.
We’ll leave you with a few lines from this excellent book, The Power of Habit.
Keystone habits say that success doesn’t depend on getting every single thing right, but instead relies on identifying a few key priorities and fashioning them into powerful levers.
The habits that matter the most are the ones that, when they start to shift, dislodge and remake our patterns.
As always, thanks for reading!
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