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Complementing Personal Finance

INTRODUCTION

For an eye care provider to succeed professionally in business, personal finances need to be just as equally thought-out and optimized. The study of personal finance focuses on how an individual manages his or her own financial assets. A proper understanding and application of the principles used in common personal business situations can directly be translated over into starting, growing, and maintaining an eye care practice.

Providers rely on their knowledge of personal finance in day-to-day and long-term business decisions. The following are examples of these situations: apply and paying for loans on real estate, understanding tax implications for the purchase of capital equipment, determining company sponsored retirement plans, and selecting the type of business structure for the practice. The failure to comprehend the effects of these fundamental principles in the eye care provider’s personal life can cause the business to suffer. A provider cannot take care of patients and employ the staff if the front door to the office is closed. This chapter focuses on the key personal financial issues faced by a practitioner that build up to applications on the business side.

Maximizing Investments

Importance

One common opportunity and challenge is how to properly make investments for the future. Although an intelligent individual would be able to decipher all the information for each option and understand its repercussions, the reality is that time is limited. If the eye care provider spent all the necessary time to comprehend and evaluate these options, he would be an investor and not a doctor. This is where having trustworthy and knowledgeable individuals around can be a significant benefit. These professionals specialize in doing the due diligence that is needed and processing that information into succinct forms to be evaluated by the investor. The result is better allocation of time. The eye care practitioner is left to focus on making decisions on the larger scale.

This does not mean that the investor should be unaware and uneducated to what is occurring with his or her money by leaving all decisions to the advisors. It is the individual’s responsibility for what is done at the end of the day. The eye care provider is risking hard-earned money in these investments with the hopes of making an appropriate return. An effective investor takes time to understand the basics so he or she can follow along and, more importantly, question when something seems wrong. The latter ability keeps the individual out of trouble. When in doubt, the individual does not let the pride of being a doctor disable him or her from continually learning more. This behavior avoids making poor and costly decisions.

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The eye practitioner’s primary job is to practice medicine. Although proper education and time should be spent on personal finance matters, effective individuals understand when they need help and are humble enough to seek it out. Trustworthy financial planners add significant value by aiding the practitioner. An ideal goal is to own a group of assets that provides a good financial return but does so with minimum risk. This is achieved by diversification of the practitioner’s portfolio. The individual can decide the relative risk-to-benefit strategy they want to execute. A financial planner helps with asset allocation to achieve the desired mixture. The government uses the Securities and Exchange Commission (SEC) to ensure that all these parties involved in this area are practicing within accepted guidelines.1

An analogy is purchasing a car. It is easy to select one when an individual has a clear understanding and desire for a particular type. This is much less obvious to those unsure of their needs and have many options from which to select. The financial planner guides the individual to what is right and creates a path to own it. The actual investing and purchasing of the assets, or car in the analogy, occurs through a broker.

The individual selects among a group of options that include stocks and bonds.² They can pick within these choices or obtain a combination of them through mutual funds. The latter is managed by a professional company. This helps to reduce the workload that would have been required by the individual to complete.

Stocks are a form of investment where companies exchange shares of ownership for capital. The price of the stock varies over time. There are several indices that are utilized to make decisions on which stocks to purchase. An example is the price-to-earnings (P/E) ratio that helps to understand a stock’s health. The assessment for how well these investments are doing are expressed in terms of performance. The hope is to create value over a period of time that can eventually be recognized by the investor through capital gains.

Bonds and certificates of deposit (CDs) are forms of securities that are tradable financial assets. Investors use money to obtain them. At maturity, the investment is paid back along with interest. The difference between the two are typically who issues them—various institutions for bonds and banks for CDs. The date of maturity is generally longer in terms of decades for bonds and less for CDs.

Immediate Action Items

What’s in your portfolio? Do you have one? If not, it is never too late to start thinking about how to get the most for the money you worked so hard to generate. Begin by considering your goals for the future such as how long you want to work, what type of lifestyle you want to lead now and in the future, and your family obligations such as your children’s education. However, you should not reinvent the wheel. Ask around among your colleagues about recommendations for a great financial planner (do the same for all sorts of professionals from lawyers to plumbers). After your due diligence, select one and contact him or her for a meeting. Work together to answer questions like asset allocation and start executing on your plan. For added motivation, the sooner you start saving for things like retirement, the less negative effect it will have on your current lifestyle. For example, you will earn more interest on the dollar you invested today as opposed to one in a decade or two. Financial savvy individuals understand that they can only generate so much income from their own work. Instead, they let their money make money for them.

Optimizing Mortgages

Importance

Purchasing a home represents one of the most important investments for any individual. This venture is typically financed through a loan as most people do not have enough money saved to purchase it outright. The common misconception is that the hardest part of buying a home is locating the right one. The more difficult part is afterward with the numerous steps required to secure the needed financing via a mortgage. This challenging process, however, provides a wealth of opportunities to learn about the business world.

The successful practitioner takes advantage of this experience to benefit him- or herself, both privately and professionally. The value added to an individual’s private life by owning property is obvious. Skillful management of personal investments including mortgages build equity over time by using funds that would have been spent on housing. This equity provides the investor options should he or she need to tap into it for other projects requiring funds. Another additional benefit is the improvement of the person’s credit score. This helps in obtaining additional loans for private or professional reasons while minimizing the interest rates. Positive financial growth can have a snowball effect that benefits all sectors of an individual’s life.

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