When it comes to financial planning, there’s one universal truth: your success depends on how well you manage the resources at your disposal. Liquidity, cash flow, and diversification are cornerstones of any solid financial strategy. Yet, many professionals—including physicians—find themselves off track after years of hard work. Why? It’s often due to inefficiencies in managing income, savings, and investments. Let’s explore how a few key adjustments can set you on a path toward financial independence and wealth-building.

The Power of Liquidity: Why Access to Cash Matters

Liquidity—the ability to quickly access cash when needed—is an often-overlooked pillar of financial stability. Many professionals work with financial advisors for years, yet they remain underprepared for emergencies or opportunities. Why? Their cash is frequently tied up in tax-deferred accounts or complex, high-cost insurance products.

It’s not just about having cash for emergencies; liquidity also allows you to seize opportunities, such as investments, business ventures, or real estate deals. The key is to adopt a system that prioritizes both accessibility and growth.

The Solution: A Wealth-Building Account

A wealth-building account serves as the foundation for liquidity. Here’s how to set one up:

1. Choose a Guaranteed Account: Look for options like high-yield savings accounts that offer fixed growth without market volatility.
2. Ensure 100% Liquidity: Your funds should be accessible at all times without penalties.
3. Aim to Keep Pace with Inflation: Select accounts offering competitive interest rates to maintain your purchasing power.

Examples include high-yield savings accounts through online platforms like SoFi or Ally Bank, which currently offer interest rates exceeding 4%. By depositing your income into this account first, you create a buffer that grows while ensuring liquidity.

From Spend-First to Save-First: Rethinking Cash Flow Management

Many people follow a “spend-first, save-second” approach to cash flow, depositing their income directly into checking accounts and covering expenses such as:

• Mortgage or rent
• Student loans and debt repayments
• Taxes
• Lifestyle costs

Whatever remains is saved or invested, often inconsistently. This lack of discipline and structure leads to slower wealth accumulation, leaving many professionals feeling “behind” even after decades of hard work.

Adopting a Save-First System

Here’s a better way:

1. Direct Deposit to Your Wealth-Building Account: Instead of sending your income directly to a checking account (a “spending account”), deposit it into your wealth-building account.
2. Pay Yourself a Salary: Transfer only what you need for monthly expenses—your “burn rate”—from your wealth-building account to your checking account.
3. Consistent Savings and Investments: Automatically allocate a portion of your wealth-building account toward savings and investments before spending. This ensures disciplined and consistent progress toward financial goals.

This “save-first, spend-second” approach fosters long-term financial health, making it easier to grow wealth while maintaining liquidity.

Diversification: The Key to a Resilient Portfolio

When financial professionals discuss diversification, they often focus solely on portfolio diversification—spreading investments across stocks, bonds, and other marketable securities. While important, true diversification goes beyond the stock market. Let’s break it into three essential categories:

1. Tax Diversification

To minimize tax burdens in retirement, diversify across these tax categories:

• Taxable Accounts: Investments where earnings are taxed annually (e.g., brokerage accounts).
• Tax-Deferred Accounts: Accounts like 401(k)s or traditional IRAs, where taxes are deferred until withdrawal.
• Tax-Free Accounts: Options like Roth IRAs or Health Savings Accounts (HSAs), where qualified withdrawals are tax-free.

Balancing these accounts ensures flexibility and efficiency when accessing funds in retirement.

2. Asset Class Diversification

Most people invest primarily in marketable securities such as stocks and bonds. However, alternative investments can provide diversification and additional growth opportunities. Examples include:

• Real estate (residential, commercial, or agricultural)
• Private equity
• Oil and gas investments
• Mineral rights
• Businesses, particularly within your area of expertise

For physicians and other high-income earners, these options also open doors to advanced tax strategies, reducing taxable income while growing wealth.

3. Portfolio Diversification

Finally, maintain an appropriate mix of stocks, bonds, and cash based on your:

• Risk tolerance
• Time horizon
• Financial goals

Your ideal portfolio allocation may shift over time, reflecting changes in your life stage and financial objectives.

Putting It All Together: Building a Comprehensive Plan

1. Liquidity: Establish a wealth-building account to secure cash for emergencies and opportunities.
2. Cash Flow Management: Transition to a “save-first, spend-second” system for disciplined wealth building.
3. Diversification: Balance tax categories, expand into alternative asset classes, and optimize your investment portfolio.

These strategies aren’t just for high-income earners. Whether you’re early in your career or nearing retirement, adopting these principles can dramatically improve your financial trajectory.

Contact us to learn how to put this strategy to work in your family business!

This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. Provident CPAs assumes no responsibility for actions taken based on the information provided in this post.