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One Doctor- Advisor’s [How-To] Diatribe

[By Dr. David Edward Marcinko; MBA]

[Publisher-in-Chief] www.CertifiedMedicalPlanner.org

For some doctors – even more than laymen – cash management is the pivotal issue in the financial planning process. Accumulation of investment assets cannot occur if cash inflows do not exceed cash outflows. On the other hand, accumulated assets are eventually spent to fund expenses during planned time periods when cash outflow exceeds inflow.

Inflation

Traditionally, financial advisors have opined that inflation has a dramatic impact on both ends of the cash management spectrum because inflation has a compounding effect. That compounding effect means that a mere ¼% change in planning assumptions about anticipated inflation can have more significant influence over long-term projected outcomes than a 5% change in the amount of a particular item of budgeted income or expense. Well, true enough if projected linearly using some Monte-Carlo type software simulation. But, in the real word, economists appreciate cost and efficiency improvements [email over snail mail] and the potential for substitution of goods [diesel fuel for gasoline – chicken for steak, etc].

Be More Like … my Dad

On the other hand, far too few of my fellow medical colleagues – and financial advisors – are like my dad. Not well educated by academic standards, but with common sense that seems a precious commodity, today.

Dave, he used to tell me – and still does at age 84:

“Invest your money for growth carefully – and take some risks – but don’t be too afraid of inflation.”

 Why not, dad?

“Because; if you’re not a conspicuous consumer, you’ll have less to worry about.”

Cash Management

Well, most of us are not like my dad; me included. But, his depression-mentality has never completely worn off. A doctor’s household can maximize the cash available for investing by setting up the account in this manner.

1. The first step is to open a checking account, money market account, and a brokerage account. The money market account is often included in a brokerage account.

2. The second step is to initiate electronic direct deposit of the paycheck into the money market account.

3. The third step is to determine the amount of cash reserve needed. As mentioned elsewhere on this ME-P, we are suggesting 3-5 years of cash-reserves on-hand, as an emergency fund for most medical professionals.

Once, when, and if, the amount of the reserve is determined and achieved, any extra money should be transferred to the brokerage account and invested according to personal goals, objectives and risk-tolerance. A small balance of a few thousand dollars can be kept in the checking account to prevent overdrafts. Beyond the few thousand dollars, the checking account should serve as a pass-through account where money is transferred from the money market account to cover checks written for the budgeted expenses.

Example of Managing Cash Reserve Amounts

A physician client recently asked me to help him increase his savings. He explained that he had a very detailed realistic budget, but had a hard time staying within the budget when cash was available; as he lectured occasionally and was fortunate to have a few extra dollars every now and then.

Recommendations

As a financial planner, and the founder of an online educational-certification program for physician focused advisors, I recommend that he set up his checking, money market and investment accounts and have his medical practice directly deposit his paycheck in the money market account. He then was to transfer only enough money to his checking account each month, to cover his very carefully budgeted and spread-sheet driven expenses. Furthermore, his money market account was to be equal to our predetermined cash reserve needs, with any excess cash transferred to his investment account and according to his financial and investing plan.

Assessment

Of course, his carefully constructed budget included no cash reserves or emergency fund!  He forgot to budget cash! And so; the usual conundrum ensued.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Filed under: "Ask-an-Advisor", Financial Planning, Funding Basics, iMBA, Inc., Op-Editorials | Tagged: American Institute of Certified Public Accountants, cash flow, cash management, cash reserves, Certified, certified medical planner, CFP, CIMA, CMP, david marcinko, Financial Planning, investment adisors, physician investors, reserve fund | 7 Comments »