At your yearly physical, chances are that your primary care doctor will order a standard battery of labs to basically check how your system is running. We intuitively understand that our physical well-being is important and we should check it. Well, the same holds true for our financial well-being. But what battery of tests should we be using to check on our financial health?

To help us out, I asked key resource Enpo Tu, CFP and COO from My Financial Coach to share with us the financial tests that all doctors should be doing on a yearly basis. And the best part is that these financial tests are pretty easy to do right at home.

How this post will work

We break this article down into specific sections and areas that our firm uses when clients ask us to evaluate their financial position. Note that although we use financial planning software and tools, there are many people who are able to achieve similar results using open-source financial software or customized spreadsheets.

I would highly recommend that anyone considering at-home financial tests use some form of financial tracking tool, whether it comes in the form of spreadsheets or software. Much harm comes from relying on “gut-feeling” that is often false unless examined under the microscope of math and the science of financial figures via these financial tests.

How doctors can perform an at home financial review

If you are unfamiliar with financial tools or financial software, then you may want to work with a professional who has access to or familiarity with software. However, there will be sections in this paper that will still be of great value to you in determining financially distressing issues that do not require financial planning tools or software. I will highlight throughout the post when it will be necessary to use your financial planning tool or software to better understand and determine issues. Otherwise, I will go over the procedures on how to examine and evaluate each issue.

Employee Benefits/Contract Review (Done as a Combination)

Whether you are a 1099 contractor or a W2 employee, you have employee benefits. In the case of a 1099 contractor who has not set up benefits for themselves, you have bad benefits (because they are non-existent). For everyone else, there are decisions upon decisions to make when it comes to employee benefits.

Why is this area so important?

It is because this area is the foundation on which you build your financial framework when you are building wealth. Due to the group nature of these benefits, maybe large employers are able to negotiate down the costs of employer benefits versus what is available in the individual marketplace.

Related Post: 3 Ways I Defined My Value Ahead of My Contract Negotiations

Employee benefits also often come with a lot of tax advantages for you as well as your employer. If you are fortunate enough to be your own employer, you benefit from both sides of this tax advantage coin. If you have no benefits, you are doubly punished. This is through tax inefficiency and lack of structured benefits that others in your cohort have set up for themselves or through their employer. I will break this down into W2 versus 1099 and what to look for:

W2 Income (May have additional income on the side)

When you are performing this at-home test, I would highly recommend having a spreadsheet or financial planning tool. That way, you can use as much of this test will involve a comparison between what you currently have versus what your employer is offering you versus what your (former) employer had available. I will start with the tests that you can perform without the need for financial planning tools/ software first:

1. Start with careful examination of your employment contract

The area you need to focus on involves the description of your compensation. For example, we will illustrate two types of employees and how their compensation is structured around $300,000 of total income compensation:

Employee A: 

• $100,000 Salary/ Covered Compensation
• $ 100,000 Negotiated Pay
• $100,000 Performance RVUs

Employee B:

• $300,000 Salary/ Covered Compensation

In both cases, each employee “makes $300,000K” however, all employee benefits are that reference “salary” or “covered compensation” revolve around the first line item. For example, if your employer offers you a 1x Salary for group life insurance, in the first case, it would be $100,000 of death benefit, versus the second offer would pay the full $300,000 despite both employees making the same amount.

2. Carefully consider and weigh the “buy ups”/ voluntary benefits.

This section may for better with a planning tool. But you may not necessarily require it if you have sufficient knowledge of your personal financial situation. For example, if you know that you need to fill your contact prescription to the tune of $100 a month, you can contribute $100 into an FSA (if provided) which will save you from paying any taxes on the contribution to the account while allowing you to use that amount to pay for the prescription. This amounts to anywhere from (for most high income households) 32-37% federal tax savings. However, for the other “buy ups” such as life insurance/ disability insurance/ HSAs, you would want to use a tool to compare the relative costs versus the benefits before purchasing the right products and services from your employer.

Always remember that these benefits are paid for “out of sight and out of mind” and you often do not miss what you never had. However, if you chose to “opt out” you would be $1-$1,000+ a paycheck wealthier a pay period based on what voluntary benefits you chose. This often adds up to a “silly-goose” tax of $10,000+ for many of our clients who often “opt-in” to every benefit whenever they change their employers without reading through each individual benefit. However, if you choose to elect no voluntary benefits each time, you run the risk of overpaying on the individual marketplace or potentially “leaving money on the table”. You should weight each benefit against the collective financial decisions you have made up until the employer change.

1099 Income (We will also lump in K1 folks into this category)

When you are performing this at-home test, I would highly recommend having a spreadsheet or financial planning tool as well as a tax planning tool available. As an additional bonus, I often recommend that you consult with a professional tax professional who is familiar with the relevant tax laws of your state. However, I will also structure this for things that do not require any of these and bring up when it would be better or more relevant to have these additional support structures.

1. Consider your employee benefits from your last job or a “corporate job” that one of your peers has in a similar line of medicine

Alternatively, you can compare it to the benefits of a W2 role you turned down. It is important to note that when those benefits are paid for by a third party, you may as well “take everything you can get” but when you are both employer and employee, you truly have the flexibility to be creative. For example, if you are young and starting in your career, perhaps you are still very eligible for low cost underwriting for life insurance, health, and disability insurance.

It becomes harder to qualify as you get older. The value of that benefit that was provided via your employer was not as valuable as the employer contributions to your retirement plan as well as the access to an HSA plan. Alternatively, if you are older, you look at the relative difficulty of acquiring disability, life, and health insurance and may highly value that the employer offered these benefits.

Once you have identified the benefits that you valued the most from your previous employer, you should decide how you will re-create the benefits you like and either minimize or eliminate the benefits you never utilized or personally want to elect. From there, consider that employee benefits purchased for a smaller practice or a solo practice will practically have similar or the same pricing as what is available on the open marketplace. Over time, as you develop your business, you may start to approach similar pricing and pricing structures of larger employers. Continue to monitor the size of your practice and know that once you get to at least 10+ employees, it may be time to consider consulting with a benefits broker rather than an individual-priced financial product sales professional.

2. Consider your entity carefully

I have spoken with hundreds of medical professionals who opened a LLC or S Corp or C Corp because they “read somewhere that….” or “know a friend who did…” lastly “it helps me save on taxes” know that not everyone has the same health goals and life style needs and not everyone has the same financial goals and financial life style needs. Know this truth, that if you do not treat your business entity as a business, the IRS will probably not treat your business entity as a business if you are ever audited. You need to be honest with yourself about what you are trying to accomplish and why you are setting up any entity before you spend the time and money to create these entities. Here are general evaluation tools for why you may or may not want to set up an entity and the “green flags”:

i. You are in an area of medicine where you can take advantage of lowering your “reasonable salary” to mitigate the OOASDI contributions. This is the “social security tax”.

ii. The medicine you practice can potentially cause litigation. The entity can create some legal separation from you and the medicine you practice. 

iii. There are minimal/ low time and financial costs for establishing your entity in the state that you choose to establish you entity in.

iv. You have credible tax mitigation strategies you want to pursue through business entities that can not be done under a sole proprietorship model.

3. Consider the long-term reason why you are “in business”

If the reason why you are in business is to make as much money as possible and invest outside of that business (i.e. retirement plans, rental properties, private investments… etc) you should build employee benefits that are focused on how to extract as much long-term value as possible. This will mean most if not all of your employee benefits will be extractive in nature.

Cash balance pension plans, profit sharing 401(k)s, all sorts of K1 distributions to yourself will be the types of strategies that you will explore. However, if you plan to either pass down your business to your children or plan to build your business for acquisition or a final pay-day, there are many other tax and legal considerations.

Remember that if you are building your business to go to your kids, all your employees will either resent this or understand that they are part of the vision. There are always carrot and stick measures that you can create using employee benefits to retain these top talents, similar to what the big fortune 500 companies employee to attract and retain. Unfortunately, all of this projection work will require financial planning software/ tools and credible consultants to design and implement.

Taxes (and how to properly pay them)

Whether you are 1099 or W2. Please remember to pay your taxes. Do not leave a tip on your taxes. This means many things to many people but ultimately, these are the general guidelines on how to perform at-home financial tests on your 1040, I will recommend that you really should get a competent tax professional to file your taxes if they are complex.

However; having a tax mitigation professional screen ideas may be even more invaluable:

1. Should you fire your CPA on your 1040?

This is a great question, I often ask clients: “What is a CPAs Job?” the answer is typically “save me money on taxes” that is the wrong answer. The right answer is: “make sure you are not audited for tax issues”. One great way to make sure you are not audited is to not try any creative or helpful tax mitigation strategies. In reviewing your 1040, check to see your tax deductions for the past two years. If you see that you have only taken the standard deduction for the past two years and have not done any itemized deductions, you have your first “green flag” for firing your CPA. You can file for a standard deduction yourself, why bother having someone file the standard deduction for you and your family?

2. Are you paying too much in taxes?

Great question, let’s see how much of your “cream” you are giving to the government. Imagine your income is like a delicious slice of cake that a very hungry government is trying to eat. The top layer of that cake is filled with light and fluffy icing while the bottom layer has a rich and dense cake. The top layer (because it is so light and fluffy) is easier to eat and the bottom layer is harder to eat. Your “top layer” of your cake is where you income is taxed in the 30%s while the rest of your income is taxed around the 20%s and 10%s. 

Try to mitigate the income that you have that falls under the “cream” category of your income cake. You can mitigate this with deferrals and credits. This is where having someone you hire specifically to go over “cream mitigation strategies” will be extremely helpful. Alternatively, you can research and model these mitigation strategies using financial planning software and tools.

3. Lifetime tax modeling is a life safer

You know what you are paying in taxes now, you do not know what you will pay in taxes in the future. However, using financial modeling and planning software or a best-guess estimate framework derived from spreadsheets can at least give you an idea of when to take income for liability management, when to defer income, and when you should try to mitigate future taxes by contributing after-tax income into various wealth creation strategies. Whether you are trying to create a real-estate empire, private equity portfolio, or any other strategy, try to think about all of your cumulative tax decisions not as individual products meant to “save taxes” but where they fall on your lifetime tax bill. Once you can determine the cumulative lifetime drag on your taxable income, you will be a better idea of whether a strategy “saves taxes.”

One popular example is rental properties, I will illustrate how I would model this out:

1. The cost of acquisition (generally 6% of your after-tax wealth) and cost of disposal (6% of the sales price). Anyone trying to tell you that only “one side” pays the costs is trying to sell you rental property.
2. Maintenance costs, after tax income that goes towards fixing a house, estimate it at ~1% of the total cost of the property a year. 
3. Property taxes, after tax income that can be calculated as an annual percentage that increases with a certain percentage of inflation. (but deducted up to the SALT limitations)
4. Insurance costs, after tax income that can be calculated by the current cost + inflation rate/ growth rate of your home.

This would be the minimum I would need to determine the “tax consequences” of holding this asset before factoring in any long term wealth creation from this asset.

These two topics are not yet fully fleshed out and only the start of what you can do via at-home financial testing for these topics.

However, I believe that doing these few financial tests (where relevant for you) will be helpful in preventing many of the areas where highly compensated medical professionals fail to look and where due diligence pays lifetime returns.

And look out for our next installment!

Wrapping up

I can't emphasize enough just how important it is to keep tabs on your financial health. It's not something you need to do on a daily or even monthly basis. But a couple times a year, you need to take an overall look at where you are financially versus your goals.

The trouble often comes in that we aren't sure which financial tests to utilize or hoe to utilize them. This post provides an extremely valuable primer for anyone stuck in self examining their path to financial freedom.

You can also learn more about My Financial Coach here. They are a financial advisory firm specializing in advice-only financial planning tailored for those with careers in the medical field using cutting-edge technology with a fixed monthly subscription with the freedom to cancel anytime.

What do you think? What financial tests do you use to assess your financial health? Can you do these financial tests at home? How often do you do them? Let me know in the comments below!