Six Money Moves to Make Before Next Year
Make financial health a goal for next year
If you have patients who need to improve their physical health, you likely give them a plan. You also need a plan to improve your financial health. That plan starts with a budget.
The main purpose of financial planning for physicians is to establish a spending plan so that you don’t spend more than you earn. This minimizes the need to borrow money and pay interest on credit cards. But your budget should also help you save money and pay down debt. No matter how little or how much you earn, a budget is necessary to meet your financial goals.
Saving money is easier if you know where and how much you spend on household items, bills, and other expenses. Set a budget that includes savings and unforeseen expenses, and stick to that budget no matter what tempts you to overspend. Another element of better financial health is debt management.
If you have several personal loans, medical bills, and/or multiple credit card balances, you should consider consolidating those unsecured debts into one loan. In addition to simplifying your life to one monthly debt payment, you can also potentially lower your interest rate and the amount of money you spend each month on loan payments.
If you have a physician mortgage, now may be a good time to look into refinancing, as mortgage rates are at record lows. Refinancing can help you lower your monthly payment or reduce your loan term, which will cut the total amount of interest you’ll pay.
Make sure your credit score is healthy
Checking your credit score is like getting a physical. It’s a way to understand your overall financial health. You should always have a general idea of what your credit score is, especially if it’s not in the best shape. A low credit score can indicate you have too much debt or that you’re behind on payments. It may also inform you of inaccurate information that is negatively affecting your credit score, or worse, that somebody has stolen your identity.
Review your insurance policies
We’ve all been reminded in 2020 that anything can happen. Therefore, it’s best to be fully prepared. Before the end of the year, you should review all of your insurance policies and assess whether you have adequate coverage. Even if you’re optimistic by nature, think about the potential financial impact of some worst-case scenarios and whether you’re adequately insured. For example:
- Do you have enough physician disability insurance to replace your income in the event you’re unable to work?
- How are you sitting for physician life insurance? Is the death benefit enough to provide for your dependents?
- If you’re hospitalized for an extended period and/or suffer a critical illness, how much will your out-of-pocket costs total? Do you have enough saved to cover those costs?
- Have you reviewed your medical malpractice insurance in the event that COVID-related suits materialize in the new year?
Give to charity
Tis the season of giving. Not only do charitable contributions help your community, but they can also reduce your taxable income. The CARES Act, passed earlier this year in response to the COVID-19 pandemic, makes it easier to earn a tax deduction for charitable contributions. The stimulus bill included a one-time $300 deduction for cash contributions to charity. That means you can take the deduction even if you don’t itemize your deductions. If you do itemize, you can deduct charitable contributions made before year-end on Schedule A of your tax return.
Contribute the maximum toward your retirement
Another way to reduce your taxable income is to maximize contributions to your qualified retirement plan. Doing so will also help you be better prepared for retirement. The IRS allows you to contribute up to $19,500 in a 401(k), 403(b) or another employer-provided retirement plan in 2020. If you’re 50 or older, you can up that amount by $6,500. Check with your employer or retirement plan administrator to see if it enables you to increase the amount withheld from your paycheck before year-end. Also, consider contributing a year-end bonus to your retirement savings plan if you have not yet reached contributed the maximum.
If you are saving for retirement through an IRA, you can deduct up to $6,000 for the year, or $7,000 if you are 50 or older. If you’re a self-employed physician, you can contribute up to $57,000 ($63,500 if you’re 50 or older) to a solo 401(k) plan. Your contributions can’t exceed your self-employment income for the year.
While you only have until year-end to contribute to a 401(k), you have until April 15, 2021, to contribute to an IRA or solo 401(k) and still be able to deduct it from your 2020 taxable income. However, you must open the account by December 31.
Set aside extra cash for emergencies
Rather than splurging at the end of the year, take whatever extra cash you have and start or add to an emergency fund. An emergency fund is money set aside to help you through unexpected events that can hurt you financially. Having an emergency fund can improve your financial security and minimize the stress of a job loss, temporary disability, or major repair.
Financial experts suggest your emergency fund hold an amount equivalent to at least three months of take-home pay. Another rule of thumb is to have enough to cover essential expenses for three to six months in the event you have no income.
Every year brings change. There are internal changes like earning more money or starting your own practice. Maybe you recently married, had children, and/or purchased your first home. Then there are external changes that can affect your finances. Interest rates have moved, as have various financial markets. Because of how much life changes year-to-year, reviewing your various financial plans with your team of experts should be a priority at least annually.