We all have “circles of competence.” Each circle of competence corresponds to different aspects of our lives. Some overlap and some don’t. But they play an important role in our successes…and failures. And even us doctors can have a financial circle of competence that we can use to our advantage as we pursue financial freedom.
What Is a Circle of Competence?
A circle of competence is our sphere of knowledge and skill. It’s our niche. Our circles of competence are constantly changing and evolving. Note that I did not say our circle of competence is our “comfort zone.” Because it isn’t always where we feel comfortable.
However, despite their ever-changing nature, our circles of competence always exist. Ignoring them will lead to mistakes and failures. Not challenging them will lead to complacency. But optimizing and using them will lead to success.
If I had to distill my idea of a circle of competence down to one line, it’s this: Your circle of competence is when you find what works and stick to it.
What Is Your Financial Circle of Competence?
You may be wondering how this ties into investing.
There are many paths that will lead to financial freedom. The issue is not so much whether you are on Correct Path A or Correct Path B. The main issue is making sure you are on a Correct Path. After that, it’s all gravy.
In finance, once you are on one road, it’s more important to stick to it than to try to find the perfect alternate road. The risk of falling off completely and getting lost is much higher than any potential deficit gained by leaving your financial circle of competence.
So, how does this play out in personal finance?
I’m going to use three examples of potential financial “circles of competence” here to help illustrate my point.
Index fund investing
Let’s say I am a doctor interested in reaching financial freedom. However, I don’t love personal finance or necessarily have a passion for it. I just want to live my life and have something on autopilot to reach my financial goals.
So, I learn about index fund investing and how it beats active stock investing 80% of the time. I take my savings of >20% of my gross income and invest in index funds according to my chosen asset allocation.
I am on the road to success within my newly formed circle of competence: index fund investing.
However, a few years later, I start to hear doctors talking about real estate investing. It seems this is an accelerated path to financial freedom. I decide to jump into passive real estate investing.
I read a bit about it and decide to “go for it,” investing a substantial amount. Unfortunately, because I lacked education and experience, I did not properly vet the deal sponsor and ended up losing my investment and regressing in my journey to financial freedom.
In this case, my fault was that I did not extend my financial circle of competence to include passive real estate investing — which can be a great investment when done wisely — before actually incorporating it into my financial plan. As a result, I veered off a perfectly fine road to financial freedom and landed in a ditch because I thought I saw a shiny object.
Keep in mind that in this example, real estate investing can be a good investment option — if it is within our circle of competence. However, some “investments” are always best avoided because they are really just speculations.
Real estate investing
Let’s dive into another example using real estate investing because, as many of you know, I really believe in real estate investing as a wealth accelerator that all doctors can take advantage of.
Just like any form of investing, there are many perfectly fine and functional ways to invest in real estate. In this case, I’m going to use my wife, Selenid, and myself as the example.
Selenid and I have found a very successful niche investing in small, multifamily B/C class properties in Buffalo, NY. As I write this, we have seven such properties and 16 total units. All cash flow at 18+%. This is one example.
So, our real estate investing plan is not broken. However, I’m still continually focused on “scaling.” Because it seemed that’s what people do, and I found myself constantly being asked when we were going to scale.
So, I looked for bigger properties and nearly made a huge mistake buying a horrible property that did not meet our criteria. All for the purpose of scaling. It just didn’t make sense.
I had an excellent financial circle of competence. A great niche in real estate investing. Going outside of it nearly led to consequences hindering my financial well-being. In this case, it is not an example of needing to expand my circle, but rather to stick with it.
Physician side gigs
Let’s now use physician side gigs as our final example of a financial circle of competence.
Side gigs can be great. They exercise your entrepreneurial muscles. And they make you extra money.
However, the circle of competence theory still applies. And here, “competence” is not referring to being competent at the side gig. Instead, it means evaluating if the side gig is compatible with you and your needs.
I know of a physician who was very into side gigs. They had multiple side gigs that took up a good amount of time. However, the time that was sacrificed was not clinical time. Rather, it was family time and free time. Now, some of these side gigs made sense. They didn’t require an inordinate amount of time and paid very well. Pursuing them represented an enjoyable avenue to supplement and maybe one day replace their clinical income. But not all of their side gigs met this criteria.
Many of them were not actually enjoyable to the physician. They took more time than the compensation should have been worth.
However, the physician kept doing them because they really wanted additional money. This was a mistake. Most of the side gigs did not fit in their financial circle of competence. Their juice was not worth the squeeze!
That’s why, while I am a huge fan of side gigs, I set an hourly rate below which any side gig just isn’t worth it. Your hourly rate will be unique to you. But determine what that rate is, and if an external pursuit doesn’t reach it, exclude that side gig from your circle of competence.
Your Circle of Competence Accountability Partner
An accountability partner is always great to have. And your ultimate accountability partner to keep you within your (always changing) financial circle of competence is your…
…drum roll…
…written personal financial plan!
A written personal financial plan consists of your financial goals and priorities, followed by what you will and will not do on the way to achieve them.
When a new shiny object pops up, your written financial plan will remind you that staying on course is more important than, at best, some potential minor optimization and, at worse, catastrophic pitfall.
That’s why my financial well-being shot through the roof when Selenid and I first created our written plan. At the time, I was still in training with the same amount of debt and the same amount of (low) income. However, I now had a plan to reach financial freedom. And that meant all I needed to do was follow that plan. That’s a great feeling!
Jordan Frey, MD, is a plastic surgeon at Erie County Medical Center in Buffalo, New York, and founder of The Prudent Plastic Surgeon.
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