Finance for Physicians How Can You Become More Financially Competent
What does financial competency look like? What are its fundamentals? Everybody wants to be competent, especially when it comes to competency with money.
In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about the components of and how to gain financial competency.
Topics Discussed:
- What is competency? Ability to do something successfully or efficiently
- Competency Components: Knowledge, skill, and behavior
- Competency Challenges: Knowing what you need, but not getting it done
- Overconfidence: Thinking you’ve gained wealth, but really, you have not
- Humans are Humans: Ask questions, ask for help, don't be too hard on yourself
- Warning Signs: Take literacy quiz to understand your relationship with money
Links:
Financial Capability Study: Take the Financial Literacy Quiz
Financial Capability Study: Take the Investor Literacy Quiz
What’s Your Relationship With Money?
Contact Finance for Physicians
Full Episode Transcript:
Hello, hello. I hope everyone's doing well today. I was reading an article recently about competency, how to gain it, or what the different components of it were. I thought it was really interesting. The article was not about finances, but I thought it would be great to explore financial competency and what that might look like.
That's what I wanted to talk about today. Going through what financial competency looks like. I think this is really important as far as fundamentals go. Everybody wants to go in that direction. Most people at least like the idea of competency with money. Exploring this, I think, will be helpful at a minimum as a refresh in some of the concepts. That's what we're going to dig into today and we'll get that going now.
For starters, what is competency? That would be, as you might think, the ability to do something successfully or efficiently. This article I was reading was breaking down those components. There are three main components. Number one was knowledge. What is knowledge? Knowledge is what is known of a particular subject. It's kind of theoretical. That’s like the book smarts.
The second component is skill. That would be the ability to do something. You're applying that knowledge to a specific situation. It's developed through experience and practice and is very much practical. The third component of competency is behavior. That would be like the way a person acts in response to a particular situation or stimulus, particularly in respect to others.
Behavior, skill, and knowledge are all necessary components to gaining competency in any given subject. If you think about people that are highly competent in something, you're going to notice they should be solid in all of these three areas.
I thought that was a good order, knowledge first, then skill, then behavior. I think you have to gain that knowledge first or at least some level of it before you start to work on the skill. Then when you get to the final level, it's like fine-tuning those behaviors and being aware of those. You got to learn the subject, you got to do it, then you got to learn those associated behaviors. I think that's a good order to follow for starters.
Some people have gained some knowledge but they're definitely not yet competent. Say you're a baseball wiz or something like that, but you can't actually play baseball or maybe you're a baseball wiz and you can play baseball really well. You can hit home runs all day long, but when you actually play a game, this mental block causes you to just shut down completely. The behavioral part is causing problems.
Competency is very difficult to achieve, but it can also be very rewarding especially when we're talking about your finances. A lot of you probably know competency with your profession. That's something you worked towards as you train.
We're talking about money today. In order to do this, you have to learn to use money competently. That's obviously the goal. As we start to talk about money, let's look at some examples of what it might look like to be competent with your finances.
Knowledge, knowing what a backdoor Roth IRA is. The skill will be correctly funding a backdoor Roth IRA. Then the behavior maybe is recognizing you're going to forget it and creating some sort of automation and reminder system so that you're continuing to fund it.
Another example is, knowledge will be a financial plan, here's what it looks like and here's why it's important. Skill will be knowing how to create a financial plan for my situation. The behavior will be I have an updated financial plan that I follow to the tee, even when life is crazy.
Another example is knowledge will be like this is what a will is or an estate plan. The skill will be these are the steps to create one for my family. The behavior will be I've created a will, it's signed, and even though it's very uncomfortable to do. There are a million examples of this that you can come up with around money.
When you look at all three components, it becomes very difficult. Classic examples of the struggle, maybe you know you need to save money, but you're not saving. Maybe you need a will, you're not getting one. Maybe you need a financial plan, but you don't have one. Sometimes you're not even aware of it at all. Knowing that you have an issue is actually better than having an issue and not knowing about it at all. That's probably the most dangerous situation at all.
Also, overconfidence can be an issue too in the struggle here. That would be thinking you got it going on and really not. That's a natural tendency for people to not be more confident than they really should be. These are the things to watch out for. Also, maybe you're thinking you made the end goal of becoming rich without realizing it. That struggle can happen where it's all about gaining wealth and that sort of thing.
Another thing too that we're always kind of battling on is you have to have some space, I guess, some capacity, to think in this view. When you're just crushing it at work, you don't have any capacity outside of that. It's to go to work and then in the few hours outside of work, it's like family or taking a break.
When you don't have any capacity at all, it's difficult to dedicate time to any of these things. That's the thing, all these things of gaining competency in anything is going to require a considerable amount of time and attention. These are the struggles. It's good to be aware of these things. How do you work in these areas? I'll throw out some ideas depending on which of these you want or need to work on.
Knowledge, the first component. Obviously, Google, blogs, and you're listening to podcasts right now so that's good. Podcasts on personal finance, reading books, or learning shortcuts from other people, those can all be good things.
I think if you're not sure where you're at, maybe take some sort of a quiz. I'll link to a financial literacy quiz. It's pretty good, like a baseline foundational quiz, or I'll link into another one like an investor knowledge quiz that gives you an idea of where you stand there.
I've had a few people ask me this question, but ask someone who knows what it looks like to be competent financially for people like you. Ask them how competent you are if they know you. Our clients we work with one-on-one, they've asked us this question before. How am I doing? Am I very financially literate? I don't know if they've ever asked it exactly like am I financially competent?
People should word it that way, but people have definitely asked us how I am doing? How is my financial literacy? That sort of thing. Asking someone that knows what it looks like and how you're doing. If they're honest, they can provide some good feedback on what you might need to work on and that sort of thing.
Skills are a lot about just practicing and being aware of where you're falling short, learning from mistakes, and not repeating mistakes. Asking for help is always good. When people tell you you made a mistake, listening and actually trusting that.
At the end of the day, sometimes people get hung up on the knowledge and never really get into the skills because you want to master the knowledge. I think it's good to have baseline knowledge, but you definitely have to get into the practice of it and work on skills that will complement things. As you experience it, that's where you can really start to get traction there.
If you have the knowledge and the skills, yet you're still having problems in terms of feeling good about finances, there's a really good chance it's related to the behavior or the psychology, whatever you want to call it, whether you admit it or not.
Typically, if you're still not feeling good or making progress and you do know the knowledge, you do know the skills, and you've verified that it's typically behavioral. Recognizing those warning signs and learning about your relationship with money, understanding what that looks like, and understanding what behavioral finance really is. Behavioral finances are all about the bias and tendencies we all have naturally as humans that can get in the way of us making good financial progress.
Just some quick takeaways to think about, as I mentioned, it will be good and helpful to take a financial literacy test especially if you're curious where you stand or ask other people that might know what it looks like to give you some feedback. If you're training or early in practice, some topics to focus on, I would say, in that stage are maybe learning how to make a financial plan or what a financial plan actually is and focusing on student loans, budgeting, insurance, and basics of estate planning. Those are good knowledge-based topics to focus on in an early career.
Now let's say you're established, further along, things I would add on would be investing taxes, compensation, and contracts. If you have your own practice like running a business, there's a lot of stuff that comes along with that as well.
I think the big thing though is don't throw in the towel on this stuff. It's like small steps. It's one of these lifelong things and there's no shame in asking for help. Ask us. Part of this podcast, the intent of this podcast, is to be something that helps you gain additional competency in personal finances.
If you feel like you want to learn about a particular topic, throw it out there, and we'll be happy to cover it. We try to focus on these three areas. I think it's important to focus on all three areas because you have to be solid in all three. No shame in asking for help.
If you're working with us one-on-one and you feel concerned about any of these areas, feel free to reach out and ask questions about that or get a little feedback. We're happy to provide it. If you're not working with a planner, we can help shortcut this.
As a planner—I can speak from first-hand experience—it's pretty easy from the third-party view to see where people are on these things. If you're talking about financial planners in general, a lot of them don't actually do this kind of stuff. That's probably good to point out as well. Keep an eye out for that. A lot of financial people are really just zeroing on one particular area or maybe they're selling financial products or that sort of thing.
You have to make sure you're talking to a more holistic planner that is working on your interest and broadly looking at your overall financial plan and financial well-being. If you're working with somebody like that, one of their main goals is to help you gain competency and essentially, you're leveraging their competency to help apply to your situation.
That's a potential add-on. Not everybody needs help for sure. You all have 100% capability to do stuff on your own. If you can get through medical school, you can completely learn this personal finance stuff, but it's okay to work and see the help. That can be a great thing for some people.
Even if you are working with someone to help you, you still have to have some level of competency on your own. Otherwise, you're not going to know how to gauge where you're at in working with that person. Feel free to reach out with questions if you want us to help in certain topics to help you gain competency, whether it be knowledge skills or behavior. We'll be happy to get into that. Ultimately, it's a lifelong thing like I said. That's part of what makes it so complicated.
If we just look at the knowledge, for example, it's pretty straightforward. It's like give me the book, I'll read it, I got it. It still requires attention and time, but you all know how to learn a subject and that's straightforward. Then we add skills and it gets a little more complicated. It's like applying the subject can get dicey, less straightforward. When things go off the book like I haven't seen this scenario before. It's easier to get locked up. Then you have the behavior on top of then it can easily become a mess because humans are humans.
This is, I think, what makes money so complicated. Just mixing all these things together and it's kind of a lifelong thing. Don't be too hard on yourself. Nobody is doing this perfectly. That's a mirage, we're not going for perfection here. Everybody is going to be making mistakes along the way. It's more about making steady progress on this type of stuff. I think that's the goal.
Just by listening to this right now, that shows me you're into making progress. Don't forget to give yourself a pat on the back. Definitely don't be too hard on ourselves either and we'll keep working towards gaining competency in personal finance. As always, I enjoyed chatting with you. We will talk to you next time.