The Six Most Important Numbers in Personal Finance

(Today I am at the Real Estate & Entrepreneurship Conference for Physicians, in Dallas. If you desire the information presented at this conference, this is your last chance. Click on the link above to attend virtually and avoid the FOMO. The lectures start at 2pm today.)

Personal finance is driven by two things, numbers and behavior. No matter how well we understand the numbers, our behavior can ruin our results in an instant. One can fully understand the value of compound interest and diligently fill the retirement plan because of this. But if all the money gets pulled out of the 401(k) to buy a dream home, then all the retirement predictions go out the window.

If you get a firm grasp of the numbers, you will likely be able to keep your behavior in check long enough for the numbers to work. Today I want to go over what I consider to be the six most important numbers in personal finance. My hope is that by understanding the importance of these numbers, you will develop the behavior needed to help reach your goals.

0.5%

Half of a percent is the maximum amount you should pay for the expense ratio on a no-load mutual fund that you purchase. An expense ratio is the percentage of the fund that is taken out each year to cover the cost of running the fund. (The 12b-1 fees should be combined with the listed expense ratio.) The higher the expense ratio the lower your return on investment and as the years go by, these small reductions in return can compound into big differences in the final balances.

The Fidelity 500 Index fund has an expense ratio of 0.015% and no other fees. Templeton Growth Fund has an expense ratio of 1.04% and a 12b-1 fee of 0.25% and a front load of 5.5%. So, the first-year cost of the Templeton fund is 6.79% vs the first-year cost of the Fidelity fund of 0.015%. The Templeton fund’s fees are 450 times more than the Fidelity fund ‘s first-year fees. That is money they take out of your investment that reduces your annual return.

The ongoing expense ratio and 12b-1 fee for the Templeton fund is 86 times more every year to keep the fund running than the Fidelity fund. 

Lower expenses mean a better profit for you. Don’t consider mutual funds that charge total annual fees greater than 0.5%

4%

This is the amount of money you can safely spend from your investments during your first year of retirement. After that you can index this number for inflation and remove a slightly higher percentage every year. 

This number is based on the Trinity Study which looked at historical stock market results and what happens with different withdrawal rates. Four percent turns out to be the magic number that predicts you will not run out of money before you die.

When I retired, I began taking about 4% out of my stock market investment portfolio and today my portfolio has more money than it had when I retired. My portfolio has continued to grow even though I have been taking money out.

During years when the market returns are greater than 4%, as they have been recently, your portfolio will grow, providing a surplus. When the market return is less than 4% your portfolio will shrink, using the surplus. Most of us will likely die with more money than we had when we retired, despite living off the money. As you age, you may be able to draw out even more money, but 4% is the place to start.

20%

This is the minimum percentage of your gross attending physician salary that should be saved. For some of you that is way more than your current saving rate. If that describes your situation, begin to increase your saving rate every year until you reach 20% or better.

My wife and I married during my first year of residency and we agreed at that time to live off 50% of our income and save the other 50%. We established our lifestyle based on those numbers. At the time, we both worked, and we each made about the same income. We chose to live on one income, and we saved the other.

When my income jumped after becoming an attending, my wife stopped working outside the home and became a stay-at-home mom to raise our children. We continued saving about 50% of each year’s income and did so for the rest of my working years. 

We now have a large nest egg to live on during retirement. In fact, just the money we saved during residency is valued in the high six figures today. Compound interest combined with a high savings rate produces a big payout.

25%

Twenty-five percent is a sad number in this list. This is the percentage of physicians who never reach millionaire status. I am very surprised by this number.

As a group we earn a very high income, well above the national average. If we were to simply put $6,000 a year ($500 a month) into an IRA starting at the age of 30 until we reach age 65, and the IRA earned an 8% average return over those 35 years, the account would be worth more than $1.1M. 

The average salary of physicians exceeds $200k a year. A savings rate of $6,000 a year is less than 3% of our salary. This means on average, 25% of physicians are saving less than 3% of their income. We can all do better than that. Don’t reach age 65 having failed to save $1M. You should be well above that.

50%

This is another sad number which represents the loss of net worth that will be dealt to your finances if your marriage ends in divorce. Divorce is the most expensive disaster that is likely to hit physicians and usually costs greater than half of the family assets. For this reason and others, it is imperative that we all work hard to keep our marriages strong.

Physicians have a difficult job. It requires long hours which draw us away from our home and family. We likely miss a lot of important events and milestones in our family’s lives. With this in mind, we must work extra hard to be present with our family when we can. 

Date night might just be the most important financial activity in your life. It provides a lot of other benefits as well. Cultivate your marriage and it will pay greater dividends than you will ever get from the stock market.

72

The rule of 72 is a great rule that helps predict investment growth. When we divide 72 by the interest rate percentage we are earning, the result is the number of years required for compound interest to double the value of the investment. 

I love using 7% and 10% as an example because it is easy to do in my head. 72/10% = 7.2 years. That means my money doubles in value roughly every seven years. If I invest $10,000 today, and I earn 10% interest on my money for 28 years, it will undergo 4 doublings. My balance will be $10k now, $20k in 7 years, $40k in 14 years, $80k in 21 years, and $160k in 28 years.

If I earn 7% interest on my money, 72/7% = 10.28 or about 10 years. My money will double every ten years. If I invest $10k today at 7% interest, it will be worth about $20k in 10 years, $40k in 20 years, and $80k in 30 years. 

I love using this rule to predict what will happen in the future with different rates of return.

If you keep these six numbers in mind, and use them to your advantage, you will improve your financial future. That is if you can keep your behavior in check.