Here are the 5 pillars that together makes up a sound financial plan. A solid financial plan allows you to achieve financial resilience. With the strength of 5 pillars supporting your financial life, you can not only survive any crisis, but thrive in it as well, and be able to recover faster after the crisis. Strengthen your 5 pillars, and you won’t worry again even though there is a big crisis once every 7-10 years.  

1. EMERGENCY FUND

This is non-negotiable. This should be everyone’s first financial priority whether you are starting your practice or retiring soon. You need to have this. Before you start investing, or recovering from a crisis, this is priority number one. There is no way around this. You need to have an emergency fund set aside and protected from you.  Finance experts are unanimous in tagging this as everyone’s first financial priority. But nobody listened. Its only during this pandemic that people realized the importance and the wisdom of having a separate emergency fund they can tap into when suddenly their cash flow cut or impeded.

The general recommendation is to have 6-9 months of living expenses set aside in a separate account or instrument you can tap into during unexpected and severe emergencies. It helps you buffer the finance shock of an unexpected crisis like unemployment, sudden disability, accident, big natural calamity, or a prolonged HARD LOCKDOWN we just experienced last year. There are many uncertainties in life, this is one way to prepare for them. 

If you are the main breadwinner of the family, you have to take note of this. Compute your household’s monthly expenses, then multiply it by 6 months. Example, household monthly expenses is 200,000 pesos, multiply it by 6-9 months, so you need to have an emergency fund of 1.2 to 1.8M pesos set aside protected from you. So where do keep your emergency fund? The idea is to keep it a little hard for you to access or use during times of abundance, and easy for you to tap into should it be a real emergency.  Your options include: 

1. A digital bank account with a 4% interest. Your money is still insured up to 500,000 by PDIC
2. Money market funds
3. USD 
4. Interest Paying Triple A-rated Bonds – yes, you can sell the bonds anytime you need the money in the secondary market, and no, you don’t need to hold the bonds until maturity should a real emergency arise, and you need the cash. There is no penalty for pre-termination (unlike your time deposit). Again, you just instruct the bank to sell it at the secondary market. 
5. Time-deposit – although it gives the lowest yield and carries a pre-termination penalty. This has been a trusted tool by doctors since they are most comfortable with this instrument. This is a carryover of the high interest environment of the 90s where the time deposit yield is as high as 12% per annum. 
6. Gold coins and bars – Gold has been a store of value since 5000 BC. And in times of crisis, it shines as a safe haven asset. Should an economic crisis hit where there is hyperinflation (think Venezuela, Zimbabwe, Germany in WW2, and the United States during the Civil war) paper currency becomes useless. Gold can be sold at any of the stronger currencies at that time, in less than 5 mins, and the funds wired to your account. So should the Philippine pesos lose 50-70% of its value in that crisis, (think 1980s and 1997) you are still covered. 

2. INSURANCE

Life Insurance

In this world, nothing is certain but death and taxes 

-Benjamin Franklin

Death is one of life’s certainty. Should that happen unexpectedly, you want to give a financial cushion to your family. Have at least a 10M peso coverage, more if possible. This pandemic gave us the perfect setting to review our life insurance policies to ensure we are adequately covered, your list of beneficiaries is up to date, and we have the essential policy riders in place such as critical illness coverage, loss of income coverage, accidental death coverage, disability coverage, family income benefit etc. Getting your life insurance early is one of the best decisions you will make because it allows you to pay only as little as 1% of your whole coverage (i.e., Paying 90,000 to get a 7M coverage).  Its is also prudent to assess the financial health of your insurance providers from time to time, because they need to outlive you for you and your family to get your insurance benefits. 

Health Insurance

As physicians, we are at the frontlines of this pandemic.  Health insurance is a must. It is for our protection. As well as shielding our families from the unexpected cost of a major hospitalization.  One major hospitalization can easily cost upwards of 1M. The best health insurance provider with very good hospitalization coverage which includes travel hospitalization coverage costs as little as 50k depending on your age. 

3. MANAGING DEBIT

Some of us took out loans to finance our properties, cars, and practice. That is ok. But we do have to be aware of something called the Debt-to-Income Ratio (DTI) given by this formula: 

 DTI = monthly debt payments ÷ monthly gross income x 100

1. Total all your monthly debt payments (mortgage, home loan, personal loan) 
2. Divide it by your monthly income (the formula uses gross income; I personally use net income) 
3. Multiply the result by 100 to get a percentage

You want to target a DTI of less than 15%. That means that only 15% of your monthly income goes to debt payment. This is a healthy ratio because you are not overburdened by debt repayments while having the benefit of extra leverage. During times of financial constraints and crisis wherein our income and cashflow is affected, hence our ability to pay our debts on time, having a healthy DTI would save you from a lot of headache and sleepless nights.  If you can keep your DTI below 10%, even better. 

4. CASHFLOW MANAGEMENT

MULITPLE INCOME STREAMS

The prolonged lockdown reminded all of us that we cannot rely on a single income stream lest that stream is suddenly cut off temporarily or permanently. What you want to do is to use the excess cash generated by your main income stream to “purchase” you other income streams so you will end up with several streams of income. Even if one stream becomes temporarily unavailable, income from other streams makes the loss of one more bearable. The least time-consuming streams are interest income, dividend income, and capital gains. Just sit back and collect interest and dividends or wait for capital appreciation. Mix and match income streams. Establish several income streams that will give you security and help you achieve your goals and aspirations.  

7 Main Income Streams

1. Professional income

– as we mature in our practice, this grows as well. But always remember that this one has a peak, then it plateaus, then declines later on. Also, this income stream is also prone to disruption, just like the long lockdown we all experienced last year. Or it may be cut abruptly by a severe accident, or serious illness. So do not rely solely on this. You want to use the excess generated by this stream to “purchase” or build up other income streams. 

2. Business income

– some doctors have the entrepreneurial gene built in. This pandemic allowed that gene to shine. Out comes old heirloom recipes, and a pandemic food business was born. Others are more attuned to selling, and many turned to online retail as an additional income stream when the main income stream was cut off. Some likes to sell jewelries, homewares, bags etc. If you have that entrepreneurial passion AND the time, this is a very strong income generator. However, it is also the most time consuming as it is as if you have taken on a second or even a third job. 

3. Interest income

– this is the easiest and least time consuming to start. However, for interest income to be meaningful, your base has to be substantial. The goal here is to have monthly interest income that is livable. Your triple A rated bonds, ROPs, and treasuries will help you with this. 

4. Dividend income

– this comes from ownership of shares of a company. We have companies called dividend kings or dividend aristocrats, and the perfect example is a company we are intimately familiar with ABBVIE. The reason why ABBVIE is considered a dividend aristocrat is that it has a 49-year history of continuous dividend growth. Receive a dividend every quarter that has an annualized yield of around 5-6%.  High quality Real Estate Investment Trust specially those in high growth industries like data centers, cell towers, industrial warehousing also gives good dividends with the added bonus of share price appreciation in the long run. In short, they are paying you dividends to wait for them to grow. 

5. Rental income

– this one all doctors are intimately familiar with, especially the once young. Rental properties, specially in areas that have an occupancy rate of 90% and up provide a reliable income stream. Commercial properties like those rented by banks and gas stations are on a different league of their own. Who collect rent, while waiting for the property price to massively increase in the next 20-30 years. The land is not idle, and is generating you rental income, while you are waiting for a massive capital gains should you sell the property 30 years down the line. Or should you pass it on to the next generation, then this becomes a source of generational wealth. This is a very good investment for doctors in the provinces. 

6. Capital gains

You buy an asset (stocks, gold, real estate etc.) let its value grow, then you sell it. With quality assets, time is your friend. 

7. Royalties

– from writing a book, to selling an idea or a discovery. If you are a subject matter expert in a topic or field, then a published book not only gives you academic standing, but also a royalty stream. 

5. QUALITY ASSETS

The best investment advice you can get actually came from King Solomon. This advice has stood the test of time and can be found in the book of Ecclesiastes. 

“Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”

This is the biblical way of saying not to put all your eggs in one basket. The reason King Solomon gave this advice is because he doesn’t want one calamity or crisis to wipe you out financially. This 7-asset class portfolio (2 of which are offshore) became known as the Solomon portfolio and has a zero percent failure rate and is one of the ideal retirement portfolios because you won’t run out before your time is up, and it allows your portfolio to survive any crisis. Bottomline, diversify with quality assets. This is where your trusted financial advisers come in.