In case you’re unfamiliar with doctor pay, there are two different tier systems: Resident physicians and attending physicians. Resident physicians are doctors who recently graduated from medical school and are still getting training in their field of choice. They are working as doctors but still actively learning at the same time. Attending physicians are different. They are doctors who have graduated medical school and have a minimum of 3 to 7 years of experience. They have a full state license, tend to be board certified, and make substantially more money. Resident physicians make the median household income ($55,000 to $75,000 per year). Attending physicians an average of $300,000 and beyond. If you’re a resident physician or a young professional who makes the median household income you should still invest money. Here are 4 reasons why:
1. Investing prevents your money from losing value. In case you haven’t heard, inflation is higher than it has been in awhile. Because of inflation, things like cars, homes, gas, and groceries cost more now than they have in the past. If that weren’t enough, the rate in which these prices are rising is putting a strain on our pockets and our lifestyles. We may have to delay buying the home we wanted, forgo that vacation we were planning, or drive our old cars for much longer than we anticipated. Since costs are rising so fast, we can buy fewer things with each dollar, than we could in the past. Unless we intentional about growing our money, it will continue to lose buying power just sitting in a savings account. One of the main reasons to start investing now as a resident, or young professional on an average income, is because it prevents our dollars from losing value. Investing gives our money a chance to grow which brings me to my next point…
2. Investing allows your money to grow much faster. You could stack money in a savings account, but that money will not grow much at all. The minimal increase of 0.25% that many people get by keeping their money in a savings account is not enough to keep pace with inflation and the rising cost of goods. Investing helps combat that because not only does it allow your money to grow, but it allows it to do so much quicker through compound interest. Compound interest is when your money makes more money (called interest) and then that interest stacks onto your original amount and begins to make even more money (added interest). This ability for you to make profits (interest) on top of existing profits (other interest), means that you get even more profit than you thought (compound interest). It is this compound interest that allows your money to grow much faster.
3. Investing gives you the chance to reach your financial goals sooner. Because investing allows your money to grow, it is through investing that you can accumulate a higher net worth sooner than you other wise would. As your net worth increases and the value of your investments rises you will be able to reach your financial goals sooner. For some people, these goals may be to accumulate a certain amount of money for a down payment on a home to use when they become attendings, for others it may be to have the ability to cut back to part time or just work one less day per week. Whatever your financial goals are, investing gives you the opportunity to reach them sooner. As your net worth grows, you start to accumulate wealth and one of the best things money can buy is control over your time. Think about how nice that would be.
4. Investing allows you to invest as you save. This is perhaps one of the biggest perks of investing as a resident or young professional. Investing money through a Roth IRA (that you can open by calling a place like Vanguard or Fidelity) gives you tons of options including the ability to invest as you save. What do I mean by that? You can contribute money to a Roth IRA then choose to invest it however you’d like (preferably in low cost index mutual funds like VTSAX or VIT). With a Roth IRA, you also have the option to take your contributions out of the account at any time. This means you can open a Roth IRA and contribute $500 per month up to the yearly maximum of $6,000 per year. During your time in training and career building this money is growing and gaining compound interest. Once you finish training you can choose to take your contributions out of the account (and use the money for a wedding, fancy vacation, or down payment on a home) but keep the profits you made on that money inside of the account. In other words, you were able to make money on your investments and still save for the big item you planned for. You can also choose not to take out your contributions and instead keep all the money inside of the Roth IRA until you retire. Having the option the take your contributions out of the account at any time allows you the flexibility to use this account as a backup savings account that actually earns interest.
What do you think? If you’re a resident physician or young professional making the median income, will you start investing money this year?
4 Reasons I Started Investing in the Stock Market
When you make the decision to invest money, you will have lots of choices. You can buy stocks, bonds, and mutual funds. You can venture into real estate, get some cryptocurrency, or purchase gold. Despite all of the options, I decided to start investing through the stock market by purchasing index mutual funds. Here’s why:
1. No barrier to entry. Unlike buying real estate which usually requires a 5 to 6-figure sum as a down payment or a high net worth to establish yourself as an accredited investor, getting started in the stock market was fairly easy. I logged onto the online portal for my job and clicked a button to start contributing to my work retirement account. I began by investing 3% of my salary and increased the percentage every few months until I got to my target of 10%. The next year I opened a Roth IRA to purchase even more index mutual funds and was able to set it up with one phone call. Some of my friends simply downloaded the Robinhood app to get started. My point? Investing in the stock market is a simple thing to start doing. No high fees, specific net worth, or long waiting period required.
2. Doesn’t require lots of specialized knowledge. Some people choose to invest in collectibles like art or specific commodities like gold or natural gas. They purchase expensive items they believe will increase in value over time or make various investments to enhance various energy sources. Although there is nothing inherently wrong with this practice, investing in collectible items and commodities usually requires a specific skill set. If you purchase art, you must have specialized knowledge of that industry so you can understand how much the art is truly worth. If you invest in commodities like gold or alternative energy sources, you must understand when and how the item or investment increases in value in order improve the chance that you’ll make a profit and decrease the chance that you will lose money. For those like me who aren’t art gurus and don’t have specialized knowledge of specific industries, investing in commodities and collectibles may not be the wisest thing.
3. Provides tax savings and liquidity. As a young professional who invests a good chunk of my income and pays a decent amount in taxes, I want investments that can help lower my taxes each year. Along with tax savings, I also want liquidity. Although my plan is to keep the money in investment accounts for decades, I want a back-up option as well. In other words, I want the ability to take my money out of the investments fairly easily if some large, unexpected event occurred and I happened to need cash quickly.
Investing in the stock market via index funds through my Roth IRA and my work retirement account provides me with both of these perks. My work retirement account allows me to use a portion of my income to invest in index mutual funds in a way that saves me money in taxes each year. My Roth IRA allows me the liquidity I need. It allows me to take my contributions out of the account at any time serving as a backup emergency fund that can give me access to cash fairly easily if I needed it.
4. Steady growth with lower risk. Unlike folks who pick and choose individual stocks to purchase or who try their hand at stock “options” or “puts,” I invest in the stock market much differently. Instead of trying to predict which companies’ stocks will go up and down in value over time, I purchase index mutual funds. Buying an index mutual fund, like the Vanguard Total Stock Market Index Fund, means that I own a small percentage of stocks from almost all of the companies in the country. I have a little bit of Apple, a little of Tesla, a little of Google, but I also have a little of thousands of other companies too.
Although the exact value of the index mutual fund can vary a bit day-to-day, on average the total stock market index fund tends to increase in value by about 10% each year. This allows for steady growth over time with very little effort on my part. I don’t have to learn a bunch of different skills or read up on various companies. Plus, unlike those who invest in cryptocurrencies like Bitcoin, the price of index mutual funds doesn’t vary as much. This makes index mutual funds a bit more predictable and easier to plan around. With index mutual funds, I can better estimate when I’ll reach a certain financial milestone because the average growth per year is fairly consistent (usually around 10%). When it comes to my money, I like consistent steady increases.
My point? When I started investing I did so by purchasing index mutual funds in the stock market. Nowadays, I invest in a little real estate as well. But I know people who invest much differently. I have family members that invest in cryptocurrencies, friends who own gold, and college professors who collect art. We all have reasons for investing the way we do. There is no one-size-fits-all. However, for most folks looking to make their first investment, buying an index mutual fund may be a good place to start.
Want to Invest in Real Estate? Consider REITs
As we continue to mature and focus on our careers, we may start to prioritize building wealth. Many people use retirement accounts and the purchase of stocks and bonds to grow their money over time but there are other ways to build wealth. Another type of investment to look into is real estate. Although there are many different types of real estate investments, one option to consider is real estate investment trusts also known as REITs.
What are REITs? Real Estate Investment Trusts (also known as REITS) are large funds that are full of real estate investments. These investments can be single-family homes, multifamily homes, apartments, or commercial buildings. Just like you can purchase an individual stock from one company, you can also purchase an individual REIT, which is a small share of a company that owns various forms of real estate. I prefer to invest in stocks via index funds and I also prefer to invest in REITs through index funds. A REIT index fund is a large fund full of smaller REITs that are each invested in many different types of real estate. When you invest in REIT index funds you are a partial owner of several different types of real estate investments, just like when you invest in other index funds you are a partial owner of several different types of stocks or bonds.
Why are REITs a good option? REITs are another type of investment option that can help you make a profit on your money, especially the money you have in retirement accounts. Many people use their employer-sponsored 401Ks or IRAs to invest in various types of stocks and bonds. REITs give you a chance to add index funds that are full of real estate deals. Adding real estate to your investment portfolio can make your portfolio more diverse (since you’re adding another investment class), increase your profits (since they have the potential to make you even more money each year), and add increased protection for your investments (since it can shield your money from some of the day-to-day changes and volatility of the stock market). For example, there may be times when certain stocks and industries lose some of their value, but real estate prices don’t change as often. Regardless of the economy, everyone needs a place to live.
How do REITs compare to other types of real estate? REIT index funds are very large real estate funds full of smaller real estate deals and each of those smaller deals are invested in many different types of real estate. By investing in REIT index funds, you own a small part of hundreds if not thousands of real estate deals. Unlike investing in real estate directly by purchasing homes or buildings alongside other investors or with your own money, when you invest in REITs you are much more removed from the daily operations of the properties. You are not making decisions on which properties to purchase, how to manage/renovate them, or when to sell them. Because you have less responsibility, you make less profit than more direct investors. However, you also have less risk. If one property fails to sell in a timely manner you are not out of hundreds of thousands of dollars. REITs give you a chance to get started in real estate and diversify your portfolio in a safe, less-aggressive, more “hands-off” way.
How do they compare to other types of index funds: REITs are similar to other types of index funds that are full of stocks and bonds. Because they are so similar to these other investments, you can usually add REIT index funds to your retirement accounts or purchase them the same way you purchase other index funds. In terms of investment returns, the percentage return on your profit can vary from year to year, but over a longer span of time, REITs tend to do pretty well. Over the past 5 years, investors who had REITs made over 15% profit on their money, those who invested solely in index funds with stocks made an average of 10% profit of their money. Past performance doesn’t guarantee future returns, but REITs can certainly be a good type of investment to have in your portfolio.
FYI: If you’d like to learn more about REIT index funds check out Vanguard, Fidelity, or other investment institutions. If you’d like to read about individual REIT stocks to consider, check out this article.
5 Things To Do Financially In The Month of July:
July 1st is a big day in the medical world. It’s when graduating medical students start their first day as doctors, and experienced resident physicians get “promoted” with more responsibilities and a pay raise to match. Whether you’re in the medical field or not, the start of July marks the halfway point of the year and can be a great time to re-evaluate your finances and make any necessary changes. Here are 5 things we should all be sure to do in July:
1. Create a spending plan. For the interns who are now getting paid, the residents physicians experiencing a salary increase, or the attending docs that have more money than they ever have before, now is the time to create a spending plan. Going from barely having any money to a steady [large] paycheck can be exciting. However, if you don’t manage your money wisely, you may find that your money is gone sooner than you think or realize that you wasted it on things you didn’t need. Having a spending plan can help prevent this from happening. It’s having a basic outline of the things you need to purchase and reserving money for other things that may be important to you, without going overboard. It’s determining which bills and other costs you need to cover each month (rent, electricity, internet, car insurance, etc) and thinking about how much money you also need to set aside for other things like groceries, gas, personal grooming, etc. The goal is to figure out the max amount you can afford to spend on certain items each month so that you never have an issue paying your bills and have also managed to save money for other priorities and still have some money left over to enjoy.
2. Make sure you have insurance. You can try your best to plan for certain life events and expenses, but you can’t predict everything. For large expenses that we can’t predict, we need to have insurance in place to cover those costs. Although signing up for insurance may not be the most exciting task to complete, it’s absolutely essential. We all need some form of medical insurance to cover basic health expenses, prescription costs, and any hospital bills. We also need long term disability insurance so that we have income security in case we get diagnosed with an illness or get an accident that precludes us from working at our full capacity. Lastly, those with families or other people who rely on their income also need term-life insurance so that their families have a means of financial support if they happen to die before they have become financially independent.
3. Get a handle on your student loans. Many people have student loans. Physicians who are in residency or young professionals who work for non-profit hospitals and public institutions may qualify for public service loan forgiveness (PSLF) or some other type of student loan forgiveness plan. In order to sign up for this program or ensure that your payments over the last 12 months were properly counted, it is essential that you complete the employer certification form each year. Anyone with federal student loans may also want to consider signing up for an income driven repayment plan like PAYE or REPAYE so that your monthly payments are based on your income instead of a much higher amount that you may not be able to afford. Those who are already enrolled in an income driven repayment plan must complete the mandatory annual recertification to remain in the same plan each year. Once you determine a repayment plan and re-certify any forms, it may also make sense to have your monthly payments automatically withdrawn from your bank account. Many loan servicers will even lower your interest rate if you sign up for these automatic payments.
4. Pay down your debt. For those who want to build wealth and become less reliant on each paycheck, it’s imperative that you prioritize paying off your debt. Many people accumulated credit card debt in their early twenties or have used credit cards to cover moving expenses, furniture costs, or previous vacations. Other people may have taken out car loans or borrowed money from other sources to make ends meet. Although it may not be feasible to pay all of our debt off instantly, it’s important to come up with a feasible payment schedule to get rid of the debt sooner rather than later. Simply paying the minimum amount each month will cause us to pay a lot of extra money in interest and may really impede our ability to build wealth and financial security. Making a goal of having at least one of our credit cards or loans completely paid off within the next 12 months might be a decent place to start.
5. Start investing. Part of adulting means setting aside money for retirement, creating a savings account and investing money in a way that helps build your net worth. Many people have elaborate investment plans or try to play the exhausting game of picking individual stocks to purchase. While that may work for them, investing doesn’t have to be complicated. You can start by funding your employer-sponsored retirement account and a Roth IRA (or backdoor Roth IRA). Simply choose a percentage of your income you want to contribute towards retirement (ideally, you’d want to start off around 10%) and choose to invest the money in various index funds or a target retirement fund that invests your money in thousands of different stocks and bonds. When I started residency, I prioritized paying off debt and only contributed about 5% to retirement. Once I paid off the debt, I drastically increased that percentage and started fully funding my emergency fund and other savings.
My point? If you want to ensure you’re on the road to financial stability and independence, start by completing the 5 steps above.