Posted tagged ‘doctor’

How can a doctor retire?

September 4, 2008

How can a Doc retire early?

Docs start earning quite late in life – at least the big bucks come at a late stage. So is it really possible for a Doc to retire early?

It really looks difficult. Docs unless they are super specialized and have created some kind of aura about their capabilities do not really earn the mega bucks of sports star or a film star. However, they do have a lot of flexibility in their profession. They can be on their own, be in a partnership or grow it like Dr. Reddy of Apollo Hospitals.

Having established that it is a good idea to retire early, and to never stop, how does one go about doing this?

Investing early and well, normally means the doc can retire early and well. If things are done properly then by, say, age 55, or whenever the kids are coming off the doc’s financial hands, the income from investing starts to exceed the income from the practice. This is a great position to be in, particularly if the income consists largely of unrealized, and hence un-taxed, capital gains. Also given our current tax structure where there is no INCOME TAX on dividends, the doc may be in a good position to retire.

Interestingly, most docs continue to practice even when they are at this point. But thankfully they can skip the long hours, choose lesser locations, and work more sensibly. They can also decide to and take many more holidays and long weekends. And there is a huge difference between the doc driving to work because she wants to, and the doc driving to work because she has to. One is happier than the other.

The major issue here relates to the costs of general practice. Unfortunately Docs do not have much training in considering Fixed Costs, Variable Costs and Marginal Costs! Not all costs fall just because the doc is doing fewer sessions. Many costs, for example, rent, some wages, depreciation of equipment and so on, stay the same regardless of how many sessions are completed each week. These costs are called “fixed costs”. This is because they

are fixed irrespective of how many sessions are completed each week. It is also called a Period Cost. At the end of the period, the cost has to be paid – immaterial of whether the equipment or place got used. A common mistake is to assume that there are no fixed costs. A doc completing, say, 7 sessions a week (only Mornings) and making Rs.15,00,000 a year may reason that his income will fall to, say, Rs.950,000 if he cuts from 12 sessions a week. Sadly this is not so. More probably, because fixed costs stay the same, profit falls by much more than this, say down to Rs.700,000, if not less.

How can he avoid this? There may be some options which he can consider:

  1. He may start teaching at a Medical college including doing sessions on how to handle customer psychology. Lady docs are sometimes preferred because of better soft skills.
  2. The doc can stop practising solo or in a group practice where costs are shared equally irrespective of the number of sessions.
  3. The doc should try to change to a practice structure where all costs (or virtually all costs) are variable costs not fixed costs.
  4. The doc can join a friend who has similar ideas and become a partner. One of them could used the infrastructure in the morning and the other person in the evening.
  5. The doc could also get into an arrangement with 2-3 junior docs who will use the geography of his practice are – and split the fees.
  6. One more alternative is to sell a portion of his practice to a deserving junior and get into a fee sharing arrangement.

Many of these arrangements may look difficult, and in many cases involves the DOC selling all or part of the practice to younger Docs. In at least one case I know the doc used his practice till his age of 81, but sadly many of his customers had gone away. He had to just sell his premises to a dentist. The practice fetched him nothing. Surely retirements could have been better planned.

Doctors and wealth creation self help

July 29, 2008

Doctors can create wealth. A lot of wealth. However, it may or may not happen from their earnings alone. It can happen only with good wealth management techniques. Ha, the word wealth may mean different things to different people. When we talk of wealth we mean an amount of money which will let doctors do what they wish to do rather than what they must do. When Dr. Sunil Balinge and Dr. Dhavale decide to charge Rs. 5 for every patient in a slum in the suburbs of Mumbai, they are putting their wealth to good use.

The distinction is easy to understand – when Mr. Azim Premji, Mr. Ratan Tata and Mr. Rahul Bajaj work at their age of 70, it is by choice. When a 70 year old vegetable vendor or a taxi driver works hard, it is by force.

Wealth creation is largely for 3 purposes – one to support a good life style, second to help you in your non-earning times and very importantly to do charities.

There are enough books and magazines on wealth management, on real estate, on commodities – really that can get you active without earning a dime! Here I am creating a blog which is in the nature of a help for creating, preserving and giving away wealth.

Doctors as a group have a high IQ, they have undergone a lot of training and understand the advantages of discipline. All these are very, very useful ingredients for being a good wealth manager too. Surprisingly (or maybe not surprisingly?) creating wealth and managing wealth is a lot like managing health. Doctors only need to be re-introduced to some simple concepts like starting early, compounding, investing regularly, and some such concepts in investing.

If doctors understand that a gynecologist cannot attend to your tooth and an anasthesist cannot perform a brain surgery, surely they will understand that a broker, a chartered accountant, a financial planner and a fund manager have different roles. Won’t they?

A doctor understands the compulsion of a chemist – he cannot charge for time spent, but a doctor can charge for time spent. This is the difference between a financial planner and a product seller. Simple is it not?

Investing is not really rocket science. Wealth management is not as difficult as say brain surgery. However the skills required are not frivolous either. Nor can it be learnt by watching television or reading a generic pink daily.

So here we are empowering you to manage your wealth. You manage lives. This magazine will help you manage your life-style. Empower you to learn about risk, about retirement, about how to listen to your financial consultant, about how to document your assets, about how to plan for your kids’ education, how to set up a charitable trust and such other topics. I wish doctors keep reading my blog and giving me a feed-back about what they would like to see here.

Financial advisor or product salesman?

June 23, 2008

One newspaper in Mumbai has this headlined in one of their news items. It is an article on page 3 of the paper – telling people not to self medicate. It warns people of malaria, gastro, and generally saying if you have fever please go to a doctor.

However, a few pages later there is a chemist who runs a column on whether you should buy life insurance or no! Sorry I have no clue about the author. However, in India there is no clear line between a “financial planner”, “financial adviser” a “certified financial consultant” or a financial product salesman or what have you!

So you do not know whether you are dealing with a chemist or a doctor. At least medically speaking I know I am running the risk of going to a chemist (not recommended) instead of going to a doctor (recommended)! In case of a medical emergency at least my body will throw up some symptoms which will make me revisit my decision of going to a chemist.

In case of a financial decision my choice of going to a chemist maybe a bad decision, but I may not get the signals that it is a bad decision for a long time.

Say I find out that my decision to put money in a medical insurance or a pension plan was WRONG at the age of 55 years, maybe I cannot do anything about it. That would be a tragedy.

Write down your financial plan…like this

May 15, 2008

Make that first investment; waiting is costing you a bomb!

After every lecture on financial planning, I get many requests for information from, young people just starting out in life. Regardless of their age, people do realize that a little upfront planning and action can put them ahead of the game. Therefore, here is what I would call a lesson 101 for you to do something. For those parents who have approached me with “how do I teach my children financial responsibility” kind of questions please pass it on to them!

Let us start at the very beginning…a very good place to start

The first steps have to be A, B, C or Do Re Mi…..if that sounds better!

Set your goals. So what are the steps?

1. Think where you want to be in five years: How much will you have invested? Will you own a home? Where? What size? Will you have kids who will go to college someday? What kind of car do you see yourself driving? Will you take time off from work to study? To have a baby? To pursue a different career? What else is important to you financially?

2. Think about the roadblocks and the potholes along the way – you do not want to fall, do you? Write down your financial worries. Being late on credit card payments, delaying the student loan repayment, borrowing from your parents (anybody), increasing housing EMIs, ..could be endless, so please be truthful. Make a list of your financial worries

Set Your Goals, NOW!

Let us put some numbers and dates in place to see if it helps to explain what I have said. Use this timeline to sketch out what you hope to accomplish year by year:

Saving Goals by Time Horizon

Goals for 2007:
1.
2.

Goals for 2008:
1.
2.

Goals for 2009:
1.
2.

Goals for 2010:
1.
2.

Goals for 2011:
1.
2.

Khyati and John are in their late 20s. She has a MBA in finance and he a doctor. They were married last year. She owes Rs.500, 000 in educational loans. He has just started his practice and has a student loan – Rs. 800,000. She makes Rs.800, 000 a year and he makes Rs.200, 000. They live in a rented house. John has just started his practice after quitting his job in a big hospital. He wants to buy a clinic before he commits to a house. They think they want to start a family in about four years. They have been using credit cards since their college days and now owe Rs.6, 000 on three cards. Like all 26 year olds, they want a house, a better car, a vacation in Europe, a couple of babies, but they were quick to realize one thing. There is too much of conflict of what they wish to do with their money, and too little money!

Here is how they prioritized their goals over the next five years:

Khyati and John’s Goals
Goals for 2009:
1. Pay off Rs.100, 000 of school loans.
2. Pay off remaining credit card balances and resolve to pay bills in full each month.
3. Start contributing Rs. 50,000 to a unit linked insurance plan.

Goals for 2010:
1. Pay off Rs. 300,000 of student loans. Khyati feels this will be possible because some of her National savings certificates are maturing (worth Rs. 50,000) and her employer is creating a scheme by which she will get a matching grant to pay off an educational loan.
2. John to start a SIP of Rs. 5000 per month to build a “clinic buying corpus” – in 5 years they hope to have enough money to make a down payment.
3. Increase Unit linked plan contributions to Rs. 60,000 – including a Rs. 10k top up.

Goals for 2011:
1. Pay off all educational loans! Now fully debt free.
2. Buy a car. Downsized EMI from Rs. 11,000 to Rs. 4340 p.m.
3. Think about a house and start looking. Alternatively, start looking for buying a clinic.
4. Increase SIP amount to Rs. 15000 per month. Continue the unit linked plan at Rs. 65,000

Goals for 2012:
1. Make a down payment – for a clinic or house, whichever is first!
2. John to accept full responsibility for the mutual fund SIP, unit linked premium, and the car EMIs. Since his income has gone up vertically, he is comfortable doing this.

3. Planning to have a baby!

Goals for 2013:
1. First child is born. Take out term life insurance to cover the clinic mortgage and the child’s education if something should happen to either parent.
3. Have a will drawn up by appointing a friend as a guardian for the baby.
4. Save 500,000 per annum in unit-linked plans, mutual funds, and plan to buy a house.

You can see from this example that if you have competing goals, it may call for a multiyear approach. Try to make some progress on each goal every year. Also Khyati was very happy to have been able to make this plan, postpone their car purchase, shelving the second car, downsize her car EMI, downsizing the “vacation goals” to what could be covered by her LTA, realizing that since theirs was a love marriage and parental support was missing, they had to be far more frugal than some friends. John was happy to have his clinic – he never thought it possible. He was happy to give up his personal expenses to save for a goal. They were happy to be free of debt so soon.

It is your life and you need to make the choices – in this case Jointly.

You can see from the example that in order to meet your financial objectives, you have to have some discretionary cash to put aside. The only way to do that is to take a close look at the money coming in and the money going out. You should also make sure to budget money to invest. Ideally, that will be about 10% of take-home pay. Otherwise, you may need to work up to that goal over a couple years.

Set Aside an Emergency Fund
Your first investment goal should be to set up an emergency fund–money you can tap in case you lose your job or are hit with an emergency bill, such as medical expenses. I cannot emphasize enough how important it is to set aside some emergency cash: It gives you peace of mind, and it gives you a cushion so you do not fall into a vicious cycle with credit card debt. Typically, you will need enough in your emergency fund to cover three to six months’ worth of living expenses. This money should be invested in a money market or savings account.

Start Building Your Core Portfolio

Once you have taken care of the emergency fund, it is time to choose the building blocks for your portfolio. This does not have to be difficult. Index funds–either conventional funds or exchange-traded funds–fit the bill nicely. An index fund buys enough stocks or bonds to mimic the benchmark it covers. An exchange-traded fund is an index fund that trades like a stock. With regular mutual funds, (that is what an index fund is), all movement in and out of the fund happens at the end of a day.

If you are going to be adding to your investments monthly, use a conventional mutual fund Systematic Investment Plan. If you are in your 20s or 30s and are investing money for the long term (you do not plan to touch it for at a long time), you can use an allocation something like this:

• 10% Money market mutual fund (emergency reserves being built up)

• 25% Unit linked life insurance plan – for 40 years and willing to pay premia for longish period of say 30 years plus. This should be in funds with very low asset management charges – sub 1% if possible. It does not matter if the upfront load is high.

· 65% – SIP in a multi-cap mutual fund as an SIP route. This should be in a flexi- cap fund (also called Dynamic asset allocation)

Regardless of which fund or Unit linked plan you use, make sure the expense ratio is low. For example, try not to pay more than 0.9% for a unit-linked plan and 2% in a managed mutual fund. Expenses hurt! Check the costs of a fund!

Summing Up

To start your life with a good financial base, you need to understand your assets and liabilities (net worth), set priorities for your goals, create a realistic spending plan, set up an emergency fund, and put the core pieces of your investment plan in place.

If you have been academically successful, socially successful, you surely can be financially successful. To start, you need not be successful, but to be successful you need to start!

Hey Doctor you need some insurance..!

February 18, 2008

Insurance is mandatory if you have a car!  If your car is worth insuring what about other assets?  Most doctors need at least some insurance to be in place as part of their overall financial plan. The question is how do you work out what insurances you need, how much and what for?  And which is your most valuable asset?  If you have insured your house, car, your life, should you not have some insurance for your medical needs and your life too? Think through what would happen to even the best laid financial plan if the doctor, at age 40, suffered a health trauma and was not able to work again. It would not matter what other strategies had been put in place, almost certainly the plan will fail and the doctor, and his or her family, would be in dire financial straits. Barring generous relatives, the financial future would look dim indeed.On the other hand, insurances are a bet you are most likely to lose.  The insured, i.e. the doctor, pays a premium to the insurer (the insurance company) in return for the insurer promising to pay an agreed amount to the insured if a specified event occurs. The process of the insurance company considering the risk and evaluating the risk is called “underwriting”, then the pricing is arrived at by the “actuaries”. The “price” so arrived at is called “premium” – which is a risk transfer fee. The probabilities are that the specified event will not occur.And the premium is calculated to be sufficient to pay out to those insured who do suffer the event, cover the insurer’s administration and selling costs, and then leave a profit for the insurer. Most of the insureds will end up paying more in premiums than they will receive back as benefits. That is, most of the insureds will lose the bet. And I guess we are all happy losing this bet! So some balance is needed when considering insurances. The advisors tend to be salesmen who talk up the need for insurance and the sums that should be insured. It is not uncommon for doctors to be over-insured and wasting money.   The key steps when evaluating any insurance proposal are: (i) Identify the risk, i.e. what is the event you wish to insure against? – It could be theft, illness, disablement, death, malpractice suit, etc. (ii) Ask what is the probability of that event occurring? – the probability of illness is far greater than death, hence a critical illness insurance which covers say 20 diseases will cost much more than a pure death (or life!) insurance (iii) Ask what are the economic consequences of the insured event occurring? The cost of losing a mobile is negligible whereas the cost of a dentist’s chair breaking down could be much higher and more critical. (iv) Ask what is the proposed cost of insuring against that risk and those consequences?  And (v) To then decide if the cost worth the benefit? This is the most difficult part. Most people do not know the cost of their family being on the roads if they are not around. Hence they think the premium being asked for is high. Only when you know the cost of “not having” a product can you compare the cost of “having” that product. A competent financial planner will guide a doctor through these key steps as part of your financial planning process. This requires a consideration of a many subjective factors and attitudes. But it all gets down to risk management: understanding risk and being comfortable with it. Indeed a financial planner has to consider risk management when preparing a financial plan for a doctor. This is so even if the doctor has asked the planner not to: the plan should on its face contain a statement that risk management advice has been declined.This is because a financial planner can be negligent and in breach of contract if they fail to advise on insurances.  What should the sum insured be? A basic principle permeating insurance law is that the sum insured must be connected to the expected loss from the insured event occurring.  

Good life insurance starts with a good life insurance agent

January 31, 2008

The key to quality insurance is in choosing a good quality Agent.  The word agent comes from the Indian Contract Act, 1872 and it is the Christian name for the guy who brings insurance / mutual fund product to your door step. Nowadays they have various names like Consultant, advisor, and the like, but I will use the word in its real meaning!

Very many people do not think it is really material as to whether you select a good quality agent or a friendly neighborhood agent. Risk cover and wealth management are both things that you need to plan for much, much in advance before the event. Imagine thinking you have cover for medical emergencies….but realizing that it is not renewed AFTER you have had an accident. Imagine getting up on your 55th birthday and realizing your retirement target amount is 15 years away. It will be too late to react. So choose an agent carefully. He / she can make your sunset years golden or red!  Lets’ look at reasons for NOT selecting a person as an agent:

1.      He is a neighbor. This can mean he is available for you, not that he is best. Typically if he has meandered in his career and at last (?) decided that selling insurance or mutual fund is his calling that may not be sufficient.

2.      The brother-in-law, sister-in-law, father-in-law syndrome. Same as above. If they have built a business over a long period of time that is a good basis for selection. Not otherwise.

3.      length of being in the business – normally this is an excellent reason to buy from a person. However in some cases it might mean that these are not enough reasons. Check if he / she is unbiased. Normally such people get stuck to one company and so many years brainwashing has lulled them into believing all good things happen only in that company and other companies are bad. For e.g. in India you will find enough insurance agents saying “private companies may not pay the claim”. This is hogwash. All private companies are reputed and have come with very, very strong partners. Lets not kid ourselves. They will all pay. In case they decide to leave India, they will sell their portfolio to an Indian company and then leave. Look at Sanmar.

4.      Its’ the bosses’ wife: I have absolutely no excuses to offer! Play it by the ear, or get your CV ready!

5.      It is a customer’s wife: keep the premium to the diwali gift level!

6.      Its your bank: They know the exact amount of money in the bank, they know where you eat, how you travel, what school your kids go to, which credit card you have, but if they cannot plan your finances, be careful.

7.      The guy who does not talk about term insurance at all. It is not to say that TERM insurance is the best, or it is most suitable, but he should offer it to you. He should tell you that there is something called top up in an unit linked plan. He should tell you about single premium products. You choose the end product. He should give you the choice.

8.      The agent / bank / advisor who sold you a plan which somebody knowledgeable called a lemon! If you have been had once, that is enough. Do not repeat it.  

Having said what CANNOT be the reasons NOT to buy from a set of people, lets look at what you can do to protect / save yourself from trouble:

1. Ask to see the agent’s insurance (IRDA) / mutual fund (AMFI) license. You actually want to be treated by a doctor, not the doctor’s husband, wife, daughter, father…..A license is personal not transferable. See it check for validity. It is yours by right.

2. Ask how many companies the agent represents– if an agent represents a number of mutual funds / insurance companies, he has the ability to look for the best policy to fit your unique needs and to find the best value for your money. PLEASE note in Indian conditions the agency system is some kind of a irrelevant condition. In one house you will find agents for 4 companies. An agent is supposed to be tied a broker is free to choose any solution for you.

3. How long has the agent been in business? How long has the agent been associated with the agency? Check the length of the association. Longer need not be better. It is only an indicator that the agent will not leave it for another business.

4. Has the agent earned any designations signifying that she has received advanced training in the business of insurance / wealth management..

5. Did you learn about this agent from someone you trust and respect?

7. What are the other things he does along with this business? In Indian conditions there are very, very few people who make a full time income by selling only insurance. If he is also selling other wealth products, that may be acceptable. However if he is a PCO owner, real estate agent, or such other businesses you might need to ask yourself “Why is he an agent”.

8. Who will handle your account on a daily basis? If it is not the agent, ask to meet the other person. Ask about his background, length of service with the agency, etc.

9. Ask how the agent perceives his role in handling claims. In case of general insurance you will live to learn! In case of life insurance you cannot even ask him for a reference! Telling him your ghost will haunt him may not be enough.

11. Ask him his educational qualifications. There is nothing to say that a qualified person is more up to date than a person who is not qualified, but it might help. CFA, CFP, CA, CWA, ACS, are all selling life insurance and mutual funds. It is an alphabet soup out there! No single qualification really means that the person understands all your financial needs. Equip yourself with knowledge. That is the real protection.

12. Is the agent a member of any local / national body of professionals which is subject to some code of conduct?

13. Has any action been taken against him in any forum? Does he have any commendation given to him by say, a neutral body?

14. If he criticizes the competition, beware of him. It may be sheer lack of knowledge. Ask him to say good things about the competition. That is a great test at being balanced. Believe me, its tough!

15. Ask him whether the money that he earns from the product that he sells is significant part of his earnings. If it is not, he is likely to give it up.

16. Make sure he understands risk cover, asset allocation, risk profiling, switching between funds, and equip yourself enough to ask all these questions.

Start with a prayer that always helps!