Every other month there seems to be a hot topic in the finance space. Some months the story is about cryptocurrency. Bitcoin mining is setting the world ablaze and Dogecoin has gone to the moon (and back). Other months it’s all about stocks. Tesla is undergoing stock splits. Amazon is crushing small competitors, and Walmart is taking over healthcare. Sometimes we can’t get enough of real estate as we hear stories of folks using cash to pay above-asking price for average homes or scroll down our newsfeeds of targeted marketing for overpriced real estate courses. The recent weeks are no different. Only the craze isn’t crypto or individual stocks or real estate, it’s bonds. Yep, you heard that right, bonds. More specifically I-bonds. Let me clarify some half-truths and dispel some myths.
What are I-bonds?
Generally speaking, bonds are a type of asset. You loan money to an organization, company, or in this case the federal government and they pay you back the money with interest. They promise to give you back the money with interest by issuing you a promissory note called a bond. There are different types of bonds and each one has a slightly different structure. I-bonds are “inflation-protected bonds", which is one of the many different types of bonds a person can purchase.
How do I-bonds work?
You pay for the bond (through the treasury website). Each person can buy a maximum of $10,000 worth of bonds each year. The interest rate that you make on the bonds is based on two factors: a fixed rate and a variable rate. The fixed rate is pre-set and based on market terms. Currently it’s 0%, which is about the norm. The variable rate is based on inflation and changes every 6 months. Currently, its around 9% per year. (A person would earn half of that amount for 6 months and then the rate would be changed once more if inflation changes during the next 6 months).
Why do people want them?
Because they think they can make a lot of money. Because I bonds or inflation protected bonds are based on the inflation, the rate of return on these I bonds seems extremely attractive. As of early May of 2022, the stock market is down, the price of real estate has skyrocketed, cryptocurrency is volatile, and cash is losing value. Having an investment like I-bonds that provides you with a guaranteed interest rate over 9% (at least for the next 6 months) seems like a good deal and much better than other investment choices at the moment.
What’s the catch?
Although I-bonds protect against inflation and provide a guaranteed interest rate the real rate of return on your money is actually zero, or negative. Let me explain. Because the fixed rate of I-bonds is zero and the variable rate is set to inflation (currently around 9%) you haven’t made any true gains. If inflation has gone up by 9% and the value of your bond has gone up 9% then then your true gain is actually zero because your purchasing power is still the same. Stated differently, If you invested $1,000 in I-bonds, with a guaranteed inflation protected rate of 9%, the value of your money is now $1090. However, if the price of monthly groceries for your home also went up by 9% from $1000 to $1090 then you haven’t really gained anything. The price of goods and services went up at the exact rate your bond went up so your net gain was zero. You don't make money by just seeing an asset go up in value. You make money by increasing your purchasing power to outpace inflation. If all you do is simply break even with inflation each year then you haven’t really gained as much as you might have thought.
Are there any other downsides?
Yes. There are taxes and liquidity issues. Per the rules of governmental I-bonds, you must hold the bond for at least 1 year. This means if an emergency comes up, you cannot liquidate or sell your bond to get your money back. You have to keep the money there for at least 1 year. Secondly, if you take out your money in less than 5 years you forfeit 3 months of interest on your money. This means if you cash out the bonds in less than 5 years you lose some of the profit you made. Lastly, you must pay federal taxes on the interest gains (unless you use the money for college expenses or hold it for at least 30 years). So if your money was keeping up with inflation, but then you have to pay federal taxes on your profit, you’ve actually gained less than inflation, putting your real buying power in the negative.
Should you buy them?
It depends. It’s not like I-bonds are all bad. As we mentioned above, they keep up with inflation. So at a time where stocks are down, real estate is too high, and cash in a savings account is losing value, I-bonds can be beneficial. Although your real return is zero, your return is even more negative in other alternatives. For example if inflation is at 9% and your savings account is only giving you a return of 0.01% then the value of your money is losing value drastically day-by-day. I bonds can be a good way to protect some of your purchasing power or at least prevent you from losing so much of it in cash.
Some people think they could come out ahead by buying I-bonds during stock market dips then selling them and buying stocks when the market recovers. That strategy is flawed because it requires you to be able to predict the future and of course none of us have a crystal ball. Trying to predict the future by timing the market is a recipe for disaster. If you have large sums of money in cash or have transitioned from the wealth building stage of your life to the wealth preserving stage of your life, then I-bonds can be a great idea in today’s times. Just make sure you go into them with your eyes wide open and fully understand the value. If you are someone who is saving up for a large purchase like a home downpayment, a future car, or to buy into a practice or new business then I-bonds can be a great investment.
(Of note, I recorded a podcast episode on this topic at the Physician Philosopher with Dr. Jimmy Turner that you can find here)
7 Tax Tips to Keep in Mind
One of our largest expenses each year is the amount we pay in taxes. Although we should all contribute to various government programs and priorities, it behooves us not to pay more than we need to. Here are some tax tips to keep in mind:
1. Contributions to retirement accounts lower your taxes. As a young professional, you have many uses for your money. Perhaps you want to go on vacation, drive a nice car, or maybe just need to keep up with rising housing costs. Regardless of the expense, it is important that you not lose sight of the bigger picture. Many of you would like to build wealth or at least become more financially stable. One way to do that is to invest money on a consistent basis. Ironically enough, investing money through retirement accounts not only helps build your net worth, but it also helps lower your taxes. When it comes to tax lowering strategies, investing through retirement accounts is a no-brainer.
2. Remember that every dollar is not taxed the same. I’m constantly reminded of this whenever I’m contemplating a new side hustle or business partnership. The tax code is progressive. This means that lower amounts of money are taxed at lower rates than higher amounts of money. As soon as you reach certain thresholds you could jump from one tax bracket to another resulting in a higher tax bill. This is important to keep in mind as you continue to progress in your career. Chances are that you will make increasing amounts of money as you continue to work, so understanding the tax implications is vital. If someone is in the 24% tax bracket, then they will only get to keep about 76cents of each dollar they earn (and this doesn’t account for state and FICA taxes). I’m not saying earn less, but don’t forget that the more you earn, the more you will owe in taxes, so plan accordingly
3. Don’t forget to account for FICA taxes. For some reason, when I think of taxes, I think of my federal tax rate. Oftentimes I forget about another high tax: FICA taxes. FICA is the Federal Insurance Contributions Act that mandates workers contribute to Social Security and Medicare. If you are employed, then your employer deducts these taxes from your paycheck. However, if you’re self-employed or own a small business like I do, then this tax becomes a lot more noticeable. Those who own a small business or who turned their side hustle into an LLC are now responsible for paying taxes on the money they earn. In addition to paying federal and perhaps state taxes on the profits, they must also pay these FICA taxes. As a self-employed person, you have to pay the employee half of FICA taxes and the employer half of these taxes. This amounts to an extra 15% in taxes you must pay, on top of your normal federal and state taxes. You may want to consult with a tax attorney or accountant for the best strategy when your business becomes profitable.
4. If you’re single and childless, you’ll likely pay more in taxes. I’m reminded of this fact every year around tax time. Many of my friends from high school who have kids are usually excited to be getting money back from their taxes. Meanwhile, I file my taxes and just hope I don’t owe anything. Why is it that my friends are getting money back and I’m not? Could be due to a variety of reasons, but there are a couple things to note: 1) single people have higher tax rates than people who are married and file their taxes jointly and 2) people who have children get more tax credits and tax deductions than people who don’t have kids. I’m not saying get married and have kids to lower taxes. This is just some insight as to why some folks may owe more or less in taxes than others.
5. You must pay taxes on business profits. Many people are entrepreneurial and have dreams of building a business they can call their own. While there is nothing wrong with this aspiration, don’t forget about one of the responsibilities of owning a business: added taxes. As a business owner, you must pay taxes on profits you make. This means you have to keep good records of business revenue and business expenses so you can determine the business profit amount to pay taxes on. Since you don’t have to pay taxes on business expenses, be sure to keep receipts of business purchases you make. Failing to do so could result in higher taxes.
6. You may be able to write off some educational expenses. This was a pleasant surprise to me the year I graduated medical school. I was able to get a noticeable sum back on my taxes that year by accounting for my time in school. The IRS has a tax credit called the “lifetime learning credit” worth up to $2000. If you’re someone who paid for some sort of schooling in 2021, you can take advantage of this credit. Those who were still in undergrad may be eligible for a different credit that results in even more money. Simply ask your school for “From 1040” so that you can enter the necessary information to get the credit.
7. You can deduct some of your charitable donations. Many people give a portion of their earned income away. Some people do it at their church and give 10% of their income as tithes. Other people give to certain non-profits or noteworthy causes throughout the year. If you do something like this as well, keep in mind that you may be able to deduct this expense. Everyone can deduct at least $300 of charitable donations. Depending on your tax bracket and the way you file your taxes, you may be able to deduct even more.
I am not a tax lawyer or accountant. However, each year I continue working in my career and building my side business, I learn even more about ways to be more efficient with my money. This includes profitable tax strategies.
What tax strategies have you learned this year?
6 Reasons to Understand How your Money is Invested
I love to read books, listen to podcasts, and watch videos on personal finance, but some of you may prefer to hire someone to take care of that for you instead. And that’s okay. Whether you decide to manage things yourself or get a financial advisor, it is vital that you understand the basics. Don’t blindly follow someone else’s investment plan without fully understanding it and don’t naively trust a financial advisor to have your best interest at heart. No one is going to care more about your money than you. Before this year ends, make sure you fully understand what is happening with your money. This is why:
1. To ensure you are not being taken advantage of. Many doctors and young professionals who are unaware of how their money is invested and know very little about personal finance get taken advantage of by people they thought had their best interest at heart. They may overpay for things, have their money invested the wrong way, or be overcharged for assistance in managing their assets. When people know you have more money, they tend to raise their prices and fees because they assume “you can afford it.” Having some knowledge of personal finance will allow you to better discern if you are getting charged a fair price for good advice, or not.
2. To ensure you aren’t being charged high fees that decrease your investment returns. In order to have your money grow over time, it needs to be invested. When you invest money, you usually do so by purchasing assets that will increase in value over time. The cost of acquiring those assets can vary but the key is to make sure the fees you are being charged to have those assets are not too high. This is especially true when it comes to real estate and the stock market. Overpaying for a home or investment property can cause you to lose money quicker than you think. Investing in mutual funds (groups of stocks or bonds) with high expense ratios can cut into your profits and minimize the growth of your money. For example, if the average mutual fund has a yearly increase of 8% per year but inflation is 4%, the fund fee is 1% and your advisor fee is 1% then the growth of your money is really only 8% minus 6% which is 2% per year. We cannot control inflation but minimizing the fees we are charged on our investments is within our control. Be aware of what you are being charged for certain investments and make sure it isn’t too high.
3. To ensure you are not invested in things that underperform the market. Another disadvantage of not understanding personal finance is having the wrong investments. Although personal finance is personal, double check that you are actually making good investments, which I define as things that have a high chance of increasing in value over time. There are lots of “good” investments but there are also investments that underperform the market or change in value too frequently to be useful. Learning about personal finance helps ensure that you are investing in things that will increase at an appropriate rate over time.
4. To ensure your investments aren’t just things that provide bonuses and commissions to your advisor. Believe it or not, there are some advisors who will use your money to enrich themselves. They will come to you claiming to help, all the while investing your money in questionable ways and buying products that result in a large commission to themselves at your expense. Although some are sneaky, others have simply been trained or groomed to believe that the things they sell are good. They attended a seminar or class that taught them all the potential benefits of certain products without mentioning the drawbacks of the investments they offer. As a result, they come to you with good intentions but bad information. They may try to talk to you about the benefits of whole life insurance and conveniently fail to mention the large commission they get for selling you the policy. They may suggest that you purchase an annuity but fail to mention the high fees and lifelong commitment to suboptimal mutual funds it requires. Having some knowledge of personal finance will help you avoid this and ensure that your advisor isn’t charging you money to enrich him or herself.
5. To ensure your investments align with your risk tolerance and investment goals. Another perk of knowing about personal finance and investing is being able to ensure that you are investing in ways that give you a good chance to make a profit (with little fees) with minimal risk. You want to make sure you aren't invested too heavily in one thing. It's also important that you plan for the unexpected. If you switch to a low paying job, your child care expenses increase, or the stock market or real estate industry crashes again, do you have room in your financial plan to handle it? You need to take some risk in order to make a profit but be careful not to take too much risk. You don’t want to lose all you have over one unexpected event. Diversify your investments, buy assets in different industries and consider using the combination of stocks bonds and real estate to protect yourself against the unexpected.
6. To ensure that you know your true net worth. As you continue investing and building wealth you should be keenly aware of not only what you are investing in but also where you are in your journey to financial independence. This means you should be able to calculate your net worth. If you stopped working today, how much money would you have? What is the total amount of your assets (the things you own) minus your liabilities (the debt you owe)? If you didn’t make any more money, how long could you still afford your current lifestyle? Are you reliant on your next paycheck or do you have enough money saved and invested to continue to live life and function as you do now? Part of being money savvy is not living paycheck to paycheck. It’s not being dependent on your job. It's being aware of where you are in your wealth creating journey. What is your net worth?
9 Reasons Doctors Aren't as Rich as You May Think
Many people think doctors are rich. While many physicians have high salaries, I can tell you firsthand that a lot of doctors are not as rich as everyone thinks. Here’s why:
1. Med School Debt. Like other young professionals, many doctors have student loans. But unlike undergrad, medical school is expensive. In fact, most med students take out at least $30,000, per semester of medical school. The average medical student loan debt is over $240,000 by the time we graduate and this balloons to over $300,000 by the time we finish training and account for the interest that has accrued. It’s a lot harder to become rich when you start off with a net worth of negative $200,000 or $300,000 after graduating from medical school.
2. Prolonged Schooling. Doctors spend many years in school. Many of us start school at age 5 and don’t finish all the schooling and training needed to be a doctor until we are in our late 20s or 30s. Because of this prolonged schooling, doctors don’t start earning money until much later in life. While people in other professions have full time jobs with benefits and guaranteed salaries in their 20s, many doctors are living off of student loans. This means we can’t earn money, save money, or invest money in our twenties like many other people can. As a result, we have a delayed start to building our net worth.
3. Residency and Fellowship. After medical school we spend years in additional training working as residents physicians in which we are paid an average of $60,000 a year to work 60-80hours per week. In other words, we are full-time doctors, with full medical licenses getting paid a little more than minimum wage per hour. And this is mandatory. Every practicing physician must go through residency. The length of residency depends on the medical specialty, but it ranges from 3 to 7 years. Once residency ends, many physicians go through additional training called fellowship which means they spend another 1 to 3 years getting paid this lower rate.
4. Specialty Hierarchies. There are wide variations among physician salaries after residency. Pay can range from $120,000 a year to $600,000 a year and beyond. The amount of money a physician makes is heavily dependent on one’s primary medical specialty. Specialties that do more procedures (like surgery and radiology) tend to generate more RVUs (revenue value units) which results in higher insurance reimbursement rates than specialties that do fewer procedures like family medicine and pediatrics. Specialties like plastic surgery and dermatology that are more cash-based and offer cosmetic services tend to generate higher salaries as well.
5. Taxes. Once doctors finally finish training and start making higher salaries, they are often in the highest tax brackets. This means a large chunk of their earnings is deducted from their pay before it ever hits their bank account. Unlike many of the rich, who are able to shield a lot of their income from taxes by making real estate investments or business dedications, many doctors are employed as W-2 workers which is taxed at a higher rate. Along with higher tax rates, and fewer tax shields, doctors are often phased out of many of the subsidies that benefit the middle class and are ineligible for tax breaks and refunds enjoyed by the rest of the population.
6. Overspending from Delayed Gratification. After spending many years in school and training, doctors have a great deal of delayed gratification. Many of us want to buy a home, start a family, purchase a new car, take a nice vacation, and make other large purchases. After so much delay, it can be hard to resist the urge to do all of these things at once. Many physicians finance expenses, take out debt, and purchase things before they have all the money needed to do so. This exponentially increases the debt we already have and delays our ability to build wealth.
7. Mid-level Influx. Physicians cannot ignore the impact of mid-level providers. While nurse practitioners and physician assistants are valuable providers who can help increase access to care, they have been used by healthcare corporations as a cheaper alternative to care. Although physicians and mid-level providers are both immensely valuable, the influx of mid-levels has decreased the job options and lowered the pay range for some physicians. For example, instead of hiring two physicians to work in an urgent care, a company may instead hire one doctor and one mid-level provider.
8. Big City Saturation. Physician salaries vary widely in certain parts of the country, but not in the way one might think. In most jobs, people in larger cities get paid more to compensate for the higher cost of living. The opposite tends to be true in medicine. Because larger cities usually have more entertainment options and educational opportunities with large hospital systems that have more jobs for physicians in niche specialties, many doctors want to live in or near a major city. This creates physician oversaturation in these areas. Because the supply of doctors is so large in big cities, the demand for doctors in those areas decreases which results in lower salaries. As a result, doctors tend to get paid less when they move to larger cities. Along with taking a pay cut to live in a desirable area, many of these big cities often have a higher cost-of-living and tax rates which further decrease a physician’s take-home pay.
9. Lack of Financial Literacy. Despite our intelligence and skill when it comes to medicine, many physicians are never taught about money. Physicians spend years in school, often without ever having a salaried job, then go through residency where they are overworked and underpaid. They then finish training with a massive pay increase and zero guidance on what to do with their money. Many physicians spend too much too soon, and fail to save or invest enough of their income to build wealth over time. Unfortunately, many who doctors who seek professional help by hiring a financial advisor are often taken advantage of. Many are charged high prices for bad advice and are often tricked into purchasing inefficient financial products or investing money in subpar ways which further delays their journey to building wealth.
Thus, doctors aren’t as rich you may think. Some of it is our own fault, some of it is a system failure that impacts us greatly.
Tell me, what are some reasons you think doctors aren’t as rich as everyone thinks? Do you have any ideas on what we should do to overcome these hurdles?
Be Weary of Annuities
As a young professional who will make a lot of money over the course of your career, you may be approached by a financial advisor. Although some advisors can be great assets, others were trained as salesmen and may not have your best interest at heart. They may overcharge for advice or worse, convince you to purchase expensive investment products you may not need. One of the products you should be weary of purchasing is an annuity.
What is an annuity?
An annuity is a type of investment product you can purchase from an agent at a brokerage or life insurance company. You pay a set amount of money to the company (via a lump sum or in monthly payments), the company invests that money on your behalf. After a certain time period, the company will then return the money you gave them back to you in smaller fixed monthly payments (usually for the rest of your life) with interest. In other words, you give the company your money now to invest and the company returns your money back to you later (in small payments) with a certain amount of interest. It some ways, it is similar to a bond (with many more fees attached, as we will discuss below).
When it comes to annuities, there are different types. The main types are immediate annuities and deferred annuities. With an immediate annuity, you pay a lump sum for the annuity and the company starts paying you in monthly installments immediately. There is no waiting period between the time you purchase the annuity and the time you receive your first monthly payout. With deferred annuities, there is a waiting period. You may pay for the annuity with a lump sum or with fixed payments, then you wait a number of months or years before you get your first payment. Along with the timing of when you get your first payout, there are also variations in the amount of your payout. Some annuities have fixed payouts in which you receive the same amount of money each month. Other annuities have variable payouts (in which your monthly payment changes based on how well or how poorly your money is being invested). Lastly, some annuities have payouts that follow a certain index (like the S&P 500).
Why do some financial advisors recommend them?
It may provide a guaranteed income. By purchasing an annuity you get a set amount of money no matter how long you live. If you don’t know much about investing and want to virtually ensure that you will have a certain amount of money each month in retirement you can buy this product. Financial advisors may also state that this product is better than investing in taxable accounts because the profits are tax deferred until you start getting withdrawals/payouts. Annuities are sometimes purchased by retired individuals who fear they may outlive their retirement savings and want to guarantee themselves a monthly payout for the rest of their lives.
Why you should be weary of an annuity?
The agent and company takes a large portion of your investment returns
In order for the company to be able to guarantee you an income for the rest of your life they have to make sure you give them enough money to cover the cost of the payout they will give you while also netting themselves a profit. They need to be able to pay you and make money for themselves. Companies who sell annuities are businesses not charities. Ensuring a profit for themselves is how they stay in business. Unfortunately, this profit is at your expense. While a small cut is reasonable, many of the agents and companies who sell annuities take rather large cuts of your profit, often up to 10% of the total value of your payout.
The money you loan them is invested in inefficient ways which reduces your profit and payout
Along with the agent and company taking a rather large portion of your payout, the payout that you do receive is often not as a large as it should be. Why? Because the money you put into annuity is usually invested in inefficient mutual funds that have a track record of underperforming the market (getting lower investment returns than the average). Plus, many companies charge high expense fees on the profits you do make. In other words, you get lower investment profits and have to pay more even more money in fees for them.
Purchasing an annuity is inflexible and binding.
If you want to take money out of the annuity early (to get payouts sooner or increase the amount of your payout temporarily to pay for a large expense), it is extremely costly. You would have to pay a high percentage in taxes to take money out sooner. Plus, if you want to sell the policy or get rid of the policy at any point, the company will charge you an exorbitant fee (often 10% of the value) to “surrender it.” Lastly, once you start getting your fixed payments, you have to pay taxes on this income at your ordinary income tax rate which tends to be much higher than the capital gain tax rate you would have been charged had you simply invested your money in an taxable account yourself instead of purchasing/investing money in an annuity.
What is a better alternative to an annuity?
Prioritize retirement accounts like your work 403b and Roth IRA. Through employer-sponsored retirement accounts you can contribute money to invest for retirement in a way that lowers your taxes each year. You may also get extra “free” money to invest if your job offers a retirement “match” (extra money employers put in your retirement account free of charge as a bonus for choosing to invest). Along with those two perks, prioritizing retirement accounts lowers your taxable income which can decrease your student loan payments. Retirement accounts like a Roth IRA, even offer a wide variety of investment options and allow you to get tax-free growth on your profits. A Roth IRA also allows you to take out your contributions at any time instead of having to wait until you retire, providing more flexibility and serving as a backup emergency fund should unexpected expenses arise.
Invest money in index funds via taxable accounts (after maxing out retirement accounts). Instead of purchasing an annuity, you can simply open a brokerage account and invest the money in low-cost index funds. Doing so, will allow you to invest even more money, on top of what you already invested in your retirement accounts, to build your net worth sooner. With taxable accounts, you can withdraw the money at any time and your profits will be taxed at lower rate.
My point? Annuities may seem like good idea but many young professionals should be weary of them because they tend to be costly, expensive, and inflexible. The money in them is often invested in suboptimal ways and the agents and company who sell the policy take a large chunk of your money. Instead of opting for an annuity, invest money in low-cost index funds since they have low fees, good profits, and lots of diversification that decrease your risk of losing money. When investing in low-cost index mutual funds, you may first want to prioritize doing so through retirement accounts (due to the tax advantages) then opening up a brokerage account to invest the rest. Unless you are currently retired and fear you may outlive your savings, annuities may not be the best investment option.
5-Step Investing Plan to Build Wealth
Although many people invest money, the most successful investors often have a plan. In order to build wealth and meet your financial goals you need to have to clarify your investment strategy and decisions. Use the 5 steps below to map out an investing plan.
Step 1: Write down what you are investing for. Most people invest money with the hopes to make a profit. While this makes logical sense, you need to get more specific. In order to set up an investment plan you must first clarify why you are seeking to make more money. Are you trying to build wealth and retire early? Is your goal to increase your net worth or pay down your student loans? Do you want to stack money to buy home or finance your kid’s college education? Whether you have one goal or many different ones, the first step to crafting an investing plan is to write down your financial goals. What are the various reasons you plan to invest money?
Step 2: Determine how much money you plan to invest. Now that you have a list of the reasons you are investing, figure out how much money you want to allot to your goals. This should not be the first random number that comes to mind or a goal you plan to achieve some time in the distant future. This should be a concrete and realistic number, something you can start doing with your next paycheck. Take a look at your monthly spending and your monthly income. Pinpoint areas where you can cut back and write down a total amount you can use to invest each month or each year. Once you have the total amount you plan to invest, figure out which portion of that total you want to use for each of your investing goals. Perhaps you have $400 to invest each month and decide to use 75% of it to build wealth and 25% to save for a down payment on your future home. Or, maybe you carve out a special 10% of the total amount to start investing money for your kid’s education? The amount you invest is up to you, but come up with a number.
Step 3: Create a timeline for when you need the money (and the profits). Once you make your investing goals and figure out how much money you can use, the next step is to create a timeline for when you need your money and the profits. How soon you need to use the money affects what types of investments you can make. If you know you will need money to buy a home in a couple years then you will likely make much different investments and take much less risk than if you are investing money for your kids college over the next 10 years or planning to build wealth over the next 20 years. What is the timeline for each of your investing goals?
Step 4: Figure out the investments you want to make. If you know what your investment goals are, how much you can invest, and when you need the money the next step in your investment plan is to figure out what type of investments you want to make. You can choose to invest in bonds, stocks, cryptocurrency, real estate, fine art, startup businesses, etc. The choice is yours. However, it’s wise to remember that different types of investments have different levels of risk and different degrees of profit. For example, buying an individual stock or investing in a startup may have the potential to make a lot of money but those types of investments can also come with a high level of risk since there is a chance you could lose all of your money if the company tanks or the stock goes down in value. Investing in bonds gives you a guaranteed return on your money but that return may be so small that it barely keeps up with inflation and doesn’t allow you to meet your investment goals by your designated timeline. Other people choose to invest in real estate in an effort to increase their cash flow and decrease their taxes but take on a great deal of debt (in the form of a mortgage to do so). Most people who are new to the world of investing purchase index mutual funds (large funds that are full of hundreds, if not thousands of different stocks, from many companies in a variety of industries). They invest in these index mutual funds to increase diversification and minimize risk while still leaving room for a decent profit. The choice of investment is yours.
Step 5: Pick the right investment account. The last step of your investing plan is to invest money through the correct account. Many young professionals like to use apps like Robinhood to invest for simplicity and convenience’s sake. However, there may be other types of accounts that could provide more benefits. For example, if you are building wealth for your future and trying to invest for retirement, then using your employer-sponsored 401K or 403b may be a good option. If you want to open an investment account that is not tied to your employer and still desire the ability to take your contributions out of the account at any time, then opening a Roth IRA may be the right option. The type of account you invest in (whether it’s a 401K, Roth IRA, or taxable brokerage account like the Robinhood app or a traditional brokerage firm like Vanguard) depends heavily on your investment goals, timeline and risk tolerance.
My point? Everyone should have a goal to invest money on a consistent basis. If you haven’t already, use the 5 steps above to craft and investment plan that meets your needs and allows you to reach your goals.
Re-examine Your Career and Your Finances
Many of us are enjoying our summer and grateful for the opportunity to be outside after the pandemic. While this can be an exciting time, summertime is halfway through the calendar year and can also be the perfect time to re-examine our career and our finances. As young professionals, we sometimes get so busy in our day-to-day activities that we miss the opportunity to set goals and achieve milestones that may be important to us long term. In order to transition from merely living life to actually thriving in life, we must set some goals and make plans to achieve the things we want. Ask yourself these 6 questions:
1. Do you want to stay in your current career or job long term? Many people are employed and get paid to do a certain job but not everyone has a fulfilling career that they love. Where do you stand? Do you plan to stay at your current job or business long term? If so, what would you like the next few years to look like? Is there a milestone you want to reach? Being able to set some career goals is key. Once you have these goals, you can write down steps to achieve them and may find yourself more content with your life overall.
2. What aspects about your current work would you like to change? While some people may love their job or business, very few people enjoy every single aspect of what they do. What are some things you’d like to change about your work? What would make it even more enjoyable? One key ingredient to career longevity is enjoyment. The more you like and enjoy the work you do, the longer you will do it. Figure out if there are some things you can change about your career right now that would increase your work satisfaction.
3. What are your income sources and how can you grow them? While some people are paid a large salary for the work they do, many others have multiple jobs or revenue streams to boost their income and provide some diversification. Where do you stand? Are you adequately compensated for the work you do, or are you waiting for a raise? Have you thought of ways to increase your income or establish additional revenue streams? If so, what is your plan to grow them? More money tends to give you more freedom and options in your life, so increasing the amount you make is a good place to start.
4. Do you want to start a business or grow an existing one? Most people accumulate wealth by starting, growing, or investing in a business. Having a business you love can not only brings you fulfillment but it can also increase your income and allow you to positively impact others in your own unique way. Do you have plans to start a business or grow a business? If you haven’t yet started a business, think about the type of business you’d be good at or a hobby you’d like to monetize. If you already have a business, think about the next steps you need to take to grow it to the next level.
5. How have you invested the money you already received? It’s not enough to just make more money. You must also be a good steward of money. Do you spend all the money you get or are you saving some of it? Are you planning ahead for large expenses? Are you investing money for the long-term? If you simply spend all the extra money you have then how will you ever accumulate wealth or get out of debt. Think about your money habits and pinpoint which ones need to change.
6. What do you need to do to take yourself, your career, and your finances to the next level? Your life may be fantastic right now, but take a few minutes to think about ways it could be even better. What could you do to enjoy your career more? What habits could you implement to take your finances to the next level? What things do you need to work on personally to make yourself a better person physically, mentally, and emotionally? We should be constantly striving to grow as people. Re-examining ways to make our lives better is a good start.
5 of My Best Financial Decisions
As a young professional, I'm finally feeling as though my finances are on track. Although I've done several things to put myself in a decent position, there are 5 things that have helped me get on the right track and may help you as well. They are:
1. Learning about money. Many young professionals were not taught the basics of personal finance and investing in school. I myself had to seek out this knowledge and even when I did, I still had questions I had to ask other people. Despite the effort I put in, taking the time to learn about money management was one of the best decisions I ever made. Once I learned the basics, I was able to quickly get out of credit card debt. Doing so, saved me hundreds of dollars in interest payments and allowed me to start investing for retirement much sooner than I would have otherwise. The decision to aggressively pay down debt and increase my investments has allowed me to become more financially stable and create the foundation needed to build wealth.
2. Picking a career that pays a high salary. Not every job pays the same, but choosing a career that compensates well has done wonders for my finances. Instead of worrying about whether or not I can pay my bills on time, I can now focus on increasing my investments. Although one shouldn’t pick a job solely for the compensation, if there are multiple jobs you like equally choosing the one that pays more can have a positive effect on your finances.
3. Buying a slightly used car instead of financing or leasing a new one. When I was a medical student, I chose to buy a slightly used reliable car instead of buying or leasing a new one. When I became a resident physician, I again chose to buy a slightly used car instead of buying or leasing a new one. This decision saved me thousands of dollars both time. Instead of having a monthly car payment of $400-600, I use that money to invest in my Roth IRA and save money for future vacations and travel.
4. Living with a roommate for most of my twenties. This decision was hard to make at first. I was in my late twenties and really valued my own personal space. However, living with a roommate gave me the ability to live in a really nice place while still saving and investing a good chunk of my income. I had to prioritize my desires. Would I rather have the place all to myself or share a place for a few years and stack money I could use to pay down debt, invest, and save for fun trips? For me, living with a roommate was worth the sacrifice. As I enter my 30s I’ll likely get my own place, but choosing to live with a roommate in my twenties helped advance my finances in ways I can’t begin to articulate.
5. Investing early into retirement accounts. One of the ways many people build wealth and become financially independent is by investing money. One of the main ways they invest money is by utilizing retirement accounts (like their job’s 401K or opening up their own Roth IRA). By utilizing retirement accounts I am able to invest money in a tax efficient, passive way and build money over time. A big advantage to starting early in my twenties instead of waiting until I was in my 30s was that I gave the money more time to grow. The earlier I invest, the more time my money has to let the magic of compound interest work, which allows my money to make even more money overtime. Plus, investing early into retirement accounts taught me how to live below my means instead of inflating my lifestyle.