Financial Freedom In Healthcare? Totally Possible For You!

Personal finance is a topic that many couldn’t care less about, particularly for PTs and OTs. Many therapists say that they “got into their profession in order to help people, not making money.” We might have some professors at school, clinical instructors on our rotations, or other practicing clinicians telling us to “prioritize clinical excellence over personal finances.” Or we are simply too overwhelmed with our student loans to even think about anything too far ahead until paying off all the debts. To many of us, “Financial Freedom” just sounds too good to be true.

However, I have to tell you that personal finance is one of the most important aspects in your life and professional career. Also, I will let you know in this article that “Financial Freedom” is likely way easier to accomplish than you think!

Photo by Micheile Henderson on Unsplash

First off, let’s talk about how much you need in order to accomplish financial freedom… How much do you need to save and invest in order to generate enough gains to cover your expenses? A widely accepted approach is the 4% rule.

The 4% Rule Of Financial Independence

The 4% Rule, or The Rule Of 25X, suggests that you should accumulate assets that are worth 25 times of your annual expense in total in order to sustainably live upon your investment.

Theoretically, your investment in the stock market will yield 7–10% on average annually, and inflation will take place by 2–3% each year (which I mentioned in another article that you can CLICK HERE to read more). Hence, a 4% withdrawal rate ideally should be very sustainable even factoring in a lower return on investment and higher inflation.

A study done by the Trinity University in the late 1990s (aka the famous “Trinity Study”) also indicated that an investment portfolio predominantly composed of stocks has a 100% success rate to last for 25 years, and 95% success rate to last for 30 years. Many others conducted further researches and simulations to include market and inflation data till 2020, which still revealed a success rate of over 90% to last for 40 years and beyond.

Therefore, based on the 4% rule, you should be able to cover your daily living purely from your investment by accumulating a net worth that is 25 times of your annual expenses, which is financial freedom by definition. By that time, you can at least have peace of mind knowing that your living expenses are covered if anything ever happened.

Next, let’s talk about when you should start investing. I am sure that you already know the answer — YESTERDAY! You should get in as early as possible and let the market and time do their magic.

Time In The Market Beats Timing The Market!

Thanks to the compound effect, the longer you put your money into the market, the stronger momentum you will pick up, and the greater growth you will accumulate. Your investment right after graduation or even as a student, however small it is, will go a very long way. (Again, you can kind of see how the numbers play out in my previous article on student loans vs. investment.)

I understand that some of you have to pay off your loans as soon as possible before even thinking about investing for various reasons. But there are still ways to get a head start. However small it is, it still matters!

• If your employer offers you a 401K match (commonly 5%), you should absolutely take full advantage of it to not leave your money on the table and to lower your gross income for some potential tax benefits.
• If you are self-employed, you are able to set up a solo-401K or a SEP-IRA after forming your LLC/PLLC. As your “own employer”, you may contribute up to $58K per year or 25% of your income into these accounts (2021, per the IRS). These are pre-tax contributions that can lower your gross income, like a regular 401K.
• You should open up and contribute to a Roth IRA while you can for tax-free growth. You may contribute up to $6K per year (2021, per the IRS). Your income may increase along with your professional career. As a result, you might potentially make “too much money” and become ineligible to contribute to a Roth IRA anymore.
• There are multiple finance apps or products available that can direct your cash-back and round-ups into an investment portfolio. Remember… Every dollar matters!
• And apparently, there are always ways to generate more income and reduce your expenses so that you can pay off your loans faster and invest sooner/more.

Photo by Carlos Muza on Unsplash

Now let me use the same scenario from my previous article on student loans vs. investment to see how the numbers play out:

• $100K in student loans with a monthly minimum payment of $741 (4%, 15-year term)
• Bringing home $3K/month post-tax with $2K going into living expenses and $1K free of use

Say that this job offered a 5% 401K match, and the tax rate in that specific geographic location was 30%. Now let’s do some more numbers…

• This means your gross income would be around $4285/month.
• If you took on the full match, you’d have approximately $429/month going into your 401K, half from your employer, and another half deducted from your paycheck each month.
• Your gross income would now decrease to nearly $4070/month, which is about $2849/month post-tax, not factoring in any potential tax benefits.
• You would still have about $108/month after paying off living expenses and minimum loan payment, which you could then choose to either invest or pay more into your loans.

In order to accomplish financial freedom based on the 4% rule, you would have to set a goal of $600K in order to quite safely withdraw 4% each year (i.e. $24K/year or $2K/month).

If you chose to pay off your loans aggressively (i.e. paying $849/mo), here are your numbers…

• In 12.5 years, you would pay off your loans. Meanwhile, your money in the 401K would grow into around $97K-130K through your consistent monthly contribution and employer match.
• Afterwards, you started to invest the entire $849/month.
• You should be able to reach $600K in net worth in another 11 to 14 years.

In short, these numbers mean that in a relatively conservative way you should be able to achieve financial freedom after practicing for about 25 years, without factoring in any bonuses, promotion, or salary increase. To many of us, this means our late 40’s or early 50's.

Apparently, you are able to find ways to significantly accelerate this process:

• making more money to invest more;
• lowering your expenses to invest more and even cut down your goal number;
• choosing to invest much earlier and more aggressively.

Life happens. So you always have to keep up with your numbers and modify your goal and timeline as necessary. Also, this is not intended to be financial advice, and you should always talk with a financial advisor in regards to your own financial circumstance in more detail.

Knowing these numbers does not mean that you’ll quit your job as a PT or an OT for good once you reach your goal. Instead, it just gives you clarity and more choices. Sometimes, knowing these means that you are now able to choose to leave a setting or contract that you are absolutely hating, say no to some absurd productivity requirements, or choose to drop down to part-time at some point to pick up some pro bono projects or focus more on family and your own well-being.

A PT friend once told me this, and I wanted to share it with you…
Becoming an excellent clinician won’t necessarily make you more money. But making more money WILL HELP YOU become a better clinician. By having clarity, more choices in hand, and better personal well-being, you will be able to provide more to your clients, the people you serve, and those you care about.

Start your journey to financial independence today!