Sticking to Your Financial Circle of Competence as a Doctor

I like the idea that we all have circles of competence in our lives. Each circle of competence corresponds to different aspects of our lives. Some overlap and some don’t. But they play an important role in our successes…and failures. And we do have a financial circle of competence that we can use to our advantage as we pursue financial freedom.

What is a circle of competence?

A circle of competence is our home. It’s our sphere of knowledge and skill. It’s our niche.

Our circles of competence are constantly changing and evolving. You will notice that above I did not say that our circle of competence is our “comfort zone.” Because it isn’t always where we feel comfortable.

However, despite their ever-changing nature, our circles of competence always exist. Ignoring them will lead to mistakes and failure. Not challenging them will lead to complacency. But optimizing and using them will lead to success.

But if I had to distill my idea of a circle of competence down to one line, your circle of competence is when you find what works and stick to it.

What is your financial circle of competence?

So, how does this all tie in to investing?

Well, while there are basic and underlying principles, there are many paths that will lead to financial freedom. The issue is not so much whether you are on Correct Path A or Correct Path A. The main issue is making sure that you are on a Correct Path. After that, it’s all gravy.

Here are some examples of perfectly acceptable paths to financial freedom:

Save 20% of your gross income, invest in broadly-diversified, low cost index funds, and retire after working 30 years
Invest actively in rental properties to cash flow sufficiently to cover all expenses
Split your investing between index funds and passive real estate syndications in a hybrid approach

These are just 3 of an infinite number of examples.

If we get even more granular, we could argue about whether a 70/30 stock and bond asset allocation is better than an 80/20 split. But in reality they are both great and should work really well.

In finance, and in contrast to navigating, once you are on the road, it’s more important to stick to it than to try to find the absolute, perfect, just right alternative road. The risk of falling off completely and getting lost is just much higher than any potential deficit gained by leaving your financial circle of competence.

How does this play out in personal finance?

I’m going to use three examples here to help illustrate my point.

1. Index fund investing

Let’s say that I am a doctor interested in reaching financial freedom. However, I don’t love personal finance or necessarily have a passion for it. I want to just live my life and have something on autopilot to reach my financial goals.

So, I learn about index fund investing and how it beats active stock investing 80% of the time. I take my savings of >20% of my gross income and invest in index funds according to my chosen asset allocation.

I am on the road to success within my newly formed circle of competence – index fund investing.

However, a few years later…

I start to hear tons of doctors talking about real estate investing. It seems that this is an accelerated path to financial freedom. I feel left behind and decide to jump into passive real estate investing.

I find the a few syndications and decide to “go for it,” investing a substantial amount. Unfortunately, because I lacked education and experience, I did not properly vet the deal sponsor and ended up losing my investing and taking giant steps backward in my journey to financial freedom.

In this case, my fault was that I did not extend my financial circle of competence to include passive real estate investing – which can be a great investment when done wisely – before actually incorporating it into my financial plan. And as a result, I veered off a perfectly fine road to financial freedom and landed in a ditch because I thought I saw a shiny object.

Keep in mind that in this example, real estate investing can be a good investment option – if it is within our circle of competence. However, some “investments” are just always best avoided because they are really just speculations – like these.

2. Real estate investing

Dove-tailing off of the prior example, let’s dive into one using real estate investing. Because, as many of you know, I really believe in real estate investing asa wealth accelerator that all doctors can, but don’t necessarily need to, take advantage of.

Anyway, just like any form of investing, there are many perfectly fine and functional ways to invest in real estate:

Active real estate investing
Passive real estate investing
Small multifamily properties
Large multifamily properties
Residential
Commercial
And on and on…

In this case, I’m going to use Selenid and me (I went back and forth but I think using “me” instead of “I” is correct here?) as the example.

Selenid and I have found a nice and very successful niche investing in small multifamily B/C class properties in Buffalo, NY. As I write this, we have 7 such properties and 16 total units. All cash flow at 18+%. This is one example.

So, our real estate investing plan is not broke. However, I must admit that I still continually focused on “scaling.” Because that’s what it seemed that people did. And I would constantly be asked when we were going to scale.

So, I looked for bigger properties and nearly made a huge mistake buying a horrible property that did not meet our criteria. All for the purpose of scaling.

It just didn’t make sense.

I had an excellent financial circle of competence. A great niche in real estate investing. Going outside of it nearly led to consequences hindering my financial well-being. In this case, it is not an example of needing to expand my circle, but rather to stick with it.

3. Physician side gigs

Let’s now use physician side gigs as our final example of a financial circle of competence.

Side gigs can be great. They exercise your entrepreneurial muscles. And they make you extra money – often a lot of extra money that can meet or even exceed clinical income.

(Here is a full comprehensive list of available physician side gigs.)

However, the circle of competence theory still applies as always. And here, “competence” is not referring to being competent at the side gig. Instead, it means evaluating if the side gig is competent or compatible with you.

I know of a physician who was very into side gigs. They had multiple side gigs that took up a good amount of time. However, the time that was sacrificed was not clinical time. Rather, it was family and free time. Now, some of these side gigs made sense. They didn’t require an inordinate amount of time and paid very well. Pursuing them represented an enjoyable avenue to supplement and maybe one day replace their clinical income.

But not all of the side gigs that were participating in met this criteria

Many of them were not actually enjoyable to the physician. They took more time than the compensation should have been worth.

However, the physician kept doing them because they really wanted side gigs to make additional money. But this was a mistake. Most of the side gigs they were engaged in did not fit in their financial circle of competence. Their juice was not worth the squeeze!

That’s why, while I am a huge fan of side gigs, I set an hourly rate below which any side gig is just not worth it. Your hourly rate will be unique to you. It’s personal. But come up with it and if an external pursuit doesn’t reach it, simply exclude that side gig from your circle of competence.

Your ultimate financial circle of competence accountability partner

An accountability partner is always great to have. And your ultimate accountability partner to keep you within your (always changing) financial circle of competence is your…

…drum roll…

…written personal financial plan!

A written personal financial plan consists of your financial goals and priorities followed by what you will and will not do on the way to achieve them.

It is basically a written document describing your particular path and road to financial freedom. It’s you map. And it’s job is to keep you on the road.

When a new shiny object pops up, your written financial plan is what reminds you that staying on course is more important than at best some potential minor optimization and at worse, and more likely, catastrophic pitfall.

That’s why my financial well-being shot through the roof when Selenid and I (“I” is the right one here I am 99% sure) first created our written plan. At that moment, I was still in training with the same amount of debt and the same amount of low income. However, I now had a plan to reach financial freedom. And that meant all I needed to do was follow that plan. That’s a great feeling!

If you are looking to create your written financial plan, here are some helpful resources:

You can also watch my Masterclass Webinar on The 12 Steps to Financial Freedom for Physicians here!

What do you think? What is your financial circle of competence? Have you ever gone outside of this circle? What happened? Let us know in the comments below!