As young professionals looking to make 2021 better than 2020, some of the decisions you make can have a huge impact on your overall net worth and ability to achieve your financial goals. In case you’re not quite sure where to start, here are some of the best money decisions I’ve made that have had a positive influence on my finances.
1. Learning the basics of personal finance. Dedicating time to learning the basics of personal finance has paid off much more than I can even imagine. Learning the importance of spending less and saving more has helped me gain self-control, live below my means, and set up an emergency fund. Understanding the different retirement accounts and the need to invest money has put me on track to retire early and have a high net worth in the not-so-distant future.
2. Deciding to get out of debt. This decision was a life changer. Before I realized that becoming debt free was so important, I had a substantial amount of credit card debt, a car loan that I was paying the very minimum on, and enough student loans to make your head spin. Once I realized that having these monthly debt payments was drastically decreasing how much money I had left in my pocket each month and once I saw how much I was paying each month in interest on all of this debt, I decided to make a change. Less than 2 years later, I paid off the credit card debt and car loan. Because I paid off this debt, I had more money left over from each paycheck and was able to use that extra money as an emergency fund and contribute more to my retirement fund. If you, too, decided to get out of debt, I’m confident it will have a drastic improvement in your net worth as well.
3. Living with a roommate. To be honest, this was a tough decision for me to make. As a doctor who was in her late 20s and moving to a new city, I really wanted my own space. I had lived with roommates for almost a decade and wanted to have something of my own. Although I could certainly afford my own apartment, deciding to live with a roommate saved me so much money! I was able to spend $600 per month less on rent which amounts to savings of over $7,000 per year. With this extra $7,000, I was able to invest a substantial amount of money and pay off my credit card debt and car loan relatively quickly. Although there were times that I wanted to have my own place, learning to live with another person allowed me to decrease my debt and build my net worth much faster. Take time to consider if this is something that might work for you as well.
4. Setting up a spending plan. When I started learning about personal finance, many of the books I read mentioned the importance of having a monthly budget. Although I tried to have a budget, I felt it was too restrictive. I started to get anxious whenever I had to purchase even one thing that wasn’t in my budget. Because of this anxiety, I scrapped the budget and set up a less restrictive “spending plan.” In my spending plan, I had a certain percentage of my paycheck invested for retirement, another percentage that automatically went to a savings account to help me pay off debt and save up an emergency fund, and another chuck of money that went to checking account I used solely for paying bills. Any money that was left over after those allocations, I was free to spend how I saw fit. This allowed me to enjoy my life a little more without feeling so restricted. If you also find that budgets are hard to follow, consider setting up a spending plan.
5. Buying a slightly used car. As a young professional who needs reliable transportation, I needed a car. Although I was tempted to get a brand new car that looked nice and had all of the newest features, getting a new car was going to cost me a lot of money. Paying for a new car meant I would have to finance the car through the bank or car dealership which meant I would get into tens of thousands of dollars in debt and have a substantial car payment every month for the next 4-6 years. Although I could have afforded the payment, buying a slightly used car instead of a new one, was going to save me so much more money. Since buying a slight used car that was only 2.5 years old cost almost half as much, I was able to save a substantial amount of money each month and use that savings to invest, travel more, and save up for retirement. Buying the used car also added a dose of humility and reinforced the importance of living below my means. If you’re considering buying a new car, I’d encourage you to consider getting a slightly used car instead. The cost savings could be significant.
6. Contributing money to retirement early. As a young professional with a lot of uses for money from each check, I seriously contemplated not contributing towards retirement. I was in my later 20s at the time and thought “I’m many years, if not decades, away from retirement. Holding off for a few years probably won’t make that big of difference.” Thank God, I changed my mind. One of the most powerful indicators of how much money we make investing is time. The sooner we invest, the more money we make in interest and the sooner that money starts to make even more money for us in return. This concept of compound interest is key to the overall value of our investment portfolio and net worth. If a person starts investing in their late 20s vs their late 30s, the person who invested earlier will have exponentially more money and a drastically higher net worth because of compound interest. If you are on the fence about investing toward retirement, I’d encourage you to make the decision to start today.
Now that you’ve read about some of my best financial decision, think about some of the decisions you’ve made. Which decisions have had the largest impact on your net worth? What things could you change in the future?
How to Invest Money from your Side Gig
There are many different ideas for a side gig and several different options for what we can do with money from our side gig, but what about investing it? There are 4 ways I’ve considered investing the money from my side gig and each have their own pros and cons. They are:
1) Put the money into a Roth IRA. This allows me to invest in index mutual funds in a way that’s tax free and will gain interest overtime. When I take the money out in retirement, I can do so tax-free. Plus, if I happen to need this money before that to put a down payment down on a home, pay off some of student loans, invest in real estate, or pay some unexpected medical expenses I can do so without any penalties.
2) Increase the money I contribute to my job’s 401K. Technically you can’t put your side income into a work 401K but you could open up a solo 401K or increase the percentage of money you contribute to your work 401K up to the $19,000 yearly limit. The benefit of this is that you are still investing toward retirement in a way that’s tax efficient and you don’t have to worry about managing another retirement account with different investments. Plus, if you have federal student loans like I do and are on an income-driven repayment plan going for public service loan forgiveness, increasing the percentage you contribute toward your 401K actually lowers your monthly student loan payments which may leave even more money in your pocket each month.
3) Open a taxable “brokerage” account. If you have already contributed the max amount to your retirement account or Roth account but still want to invest in stocks and index funds, open up a brokerage account. This will allow you to invest in the stock market in a way that will gain you interest over time but isn’t tied to your retirement. This means if you happen to need the money for home renovations, better car, or a lavish vacation you can have your broker sell some of your stocks and get the money you need when you need it. Opening up a taxable “brokerage account” isn’t the most tax-efficient account since you will pay taxes on the profits you make but it gives you easier access to your money when you need it.
4) Invest in real estate. One of the main ways many American’s build wealth is through Real estate. Not only can it help you get higher returns on your investments which increase your profits, but it also allows you to do so in a way that’s tax-efficient and even tax-free. If you already have a decent chunk of money in your work retirement plans invested in index mutual funds perhaps you may want to diversify your invests a little and get started in real estate. You could start buying rental properties to increase your monthly cash flow and become an active investor who can write off taxes from your day job, you could start investing in crowdfunding deals or real estate syndications with other investors who focus on making money from apartment deals as a more passive investor, or you could simply start buying smaller properties and renting them out over time, or even just invest in some Real Estate Investment Trusts (REITS) which are like index mutual funds for real estate deals. There are many options available.
My point? The correct option may differ for each person. If you are young, haven’t maxed out your retirement accounts, and don’t need the extra cash on hand, perhaps putting the money into a Roth IRA or extra money in your job’s 401K may be the best option. If you’ve already maxed out your retirement accounts or think you might need this money before you turn 55, then perhaps opening up a brokerage account may be the best move. Although you pay a little more in taxes it may provide the flexibility you need to take the money out if an emergency arises. If you already have a good chunk invested in the stock market perhaps you should consider other investment vehicles like real estate. Contrary to popular belief, you don’t have to be rich to invest in real estate and there are many different options that may suit your lifestyle and risk tolerance best. Right now, I’m putting extra money into retirement accounts, but I plan to invest a lot more into real estate once I finish my residency training. Look into the different types of investment options and choose the one that may be best for you, keeping in mind that it may vary based on your life circumstances and net worth.
What should we do with money from our side gig?
Many of us have side gigs or extra income outside of our day jobs. While the extra money is nice, is there something “smart” we should be doing with it? Here are 4 options:
Choice 1: Pay off Debt
Whether it’s student loans, a car loan, or credit cards, one of the first things you should consider doing with any extra income, is paying down any debt or loans you have. As someone who is going for public service loan forgiveness (PSLF), paying off my student loans is not a priority for me, right now. With PSLF, my payments are currently capped at 10% of my discretionary income. After 10 years of these low payments, the government will “forgive” any debt I still have left, tax-free. This is a pretty sweet deal, so I have little incentive to pay more money towards this debt than I have to. If you aren’t going for PSLF, then your strategy may be vastly different. Perhaps you’d want to consider refinancing your student loans at a lower interest rate and paying them off as quickly as possible. If that’s the case, then using money from your side gig to pay off your student loans faster might be a good option.
For those who don’t have any student loan debt or have already paid theirs off, you could use the money from your side gig to pay off any other debts, especially anything with an interest rate higher than 8%. For example, if you have credit card debt or a car loan, using the money from your side gig to get rid of these debts quicker may not only save you money in interest over time but it will also leave more money in your pocket each month as you begin to get rid of that debt and no longer have those payments as one of your monthly bills.
Choice 2: Save It.
As a first-year physician, saving money is a major priority for me. Unlike many other graduate school programs, it was virtually impossible to work a job in medical school. The inability to work, precluded me from making money which meant I couldn’t save money. As a result, my emergency fund was non-existent and I didn’t have all the funds I needed to move to a new city, make necessary travel plans for various events, or even schedule the celebratory vacation I needed before starting one of the most demanding jobs in the country. After going through that experience, I never want to be in that position again.
If you haven’t been able to save a good chunk of money from your main job, perhaps you should use the extra money from your side gig. You should not only consider saving money for emergencies but also factor in saving money for future vacations, Christmas gifts, car maintenance or any other large purchases. They key is save the money in a high-yield savings account or money market account which will allow you gain a interest on your money in a way that is risk-free while still giving you the freedom to pull money out of the account easily whenever you need it.
Choice 3: Spend It
As a resident physician who can sometimes work up to 80 hours a week without any extra over-time pay, work can be a bit exhausting. Sometimes being able to purchase something I really want, have monthly self-care days that include a massage and trip to the spa, or going on an international vacation to one of the places on my bucket list can be just the refresher I need. While I’m all about financial independence and having enough money to create a life you don’t need to vacation from, career longevity is vitally important, at least at this stage in my life. Sometimes the best thing we can do to maintain career longevity is to take necessary breaks and occasionally treat ourselves to some of the things we really love and enjoy. We all need balance in our lives, especially in terms of work vs play or work and relaxation.
Choice 4: Invest It
As I’ve stacked up a decent emergency fund and paid off all of my credit card debt, one of the things I’ve been contemplating more and more is how to invest the money from my side gig. While I don’t like the risk associated with buying individual stocks, I’m a huge fan of index mutual funds and have always liked real estate, so when it comes to investing side income I have a few options:
-Put the money into a retirement account (such as Roth IRA or increase the percentage I contribute to the 401K I have at my job)
-Open a taxable brokerage account (so I can make different types of investments in a way that isn’t tied to my retirement so that I can more easily pull the money out if I need it)
-Invest in real estate (either through rental properties, apartment syndications with other investors, or a variety of other options).
My point? I’ve listed many options of things you can do with income from your side gig. However, the right choice may be different for each person. If you don’t have a decent emergency fund, perhaps you should start by saving your side income. If you have some high-interest debt from credit cards or a car loan, eliminating that might be your second option. If you’re nearly debt-free and already have money saved for emergencies and other large expenses, consider investing your side gig money into retirement accounts, taxable accounts, or real estate.