Over the last few weeks there has been a great deal of buzz about GameStop. In case you missed it, GameStop is a retail company that sells video games and associated equipment in shopping centers across the country. Due to the recent pandemic, many Wall Street Investors noticed that people are shopping in person less and thus predicted that the GameStop and its stock would go down in price. Some of those investors even made bets that this would happen (by “shorting" the stock).
Many individual investors on an internet forum disagreed with this prediction. In an act of defiance, they decided to buy large shares of GameStop stock and encouraged everyone on the forum to do the same thing. As more and more people bought the stock, the price of the stock increased drastically. The stock price increased from around $20 at the start of the year to over $400 at one point proving the Wall Street investors wrong and causing some of the largest investment firms to lose millions of dollars in the process. Conversely, many of these individual investors who were on the internet forum made thousands of dollars. Many people realized how much money they had made and began to sell the stock to realize their profits. As more people sold their stock, the price of the stock began to decrease. As I’m writing this article, the stock is around $60.
Here are 5 lessons we can learn from GameStop:
1. Sometimes buying individual stocks can make you a lot of money. The GameStop stock price increased from $20 to over $400 at some point. People who purchased shares of the stock around that lower number and sold it around the higher number made a substantial profit. There have been reports of people making thousands of dollars and beyond.
2. If you purchase a stock when it is already near its peak you can lose a lot of money. While many people on the internet forum who bought the stock when it was around $20 made a huge profit, many people who purchased the stock when it was near $300 or $400 were not as fortunate. Because the stock went down in price and is now around $60, anyone who bought the stock higher than this price lost a substantial amount of money.
3. Making money buying individual stocks relies on good timing and good luck. Some people made a lot of money by purchasing the stock and some people lost a lot of money by purchasing the stock. Which group you may fall into if you choose to buy individual stocks depends on many factors, but two of the biggest factors “good timing” and “good luck.” None of us can predict the future, so despite how good we think our guesses may be, making money by purchasing individual stocks has a great deal of risk. Who could have predicted that people on an internet forum would buy stock in a struggling company and cause the price to increase over 600%? Who could have predicted that the price would decrease to $60 less than 2 weeks later? A lot of the profit people make buying individual stocks requires them to buy the stock and sell the stock and just the right point and timing these two things can be challenging to say the least.
4. The prices of stocks can change drastically. In this situation, the price of GameStop stock ranged from $20 to well over $400 and the change happened in the span of weeks. Although changes to stock prices don’t usually have this wide of a range, this situation was a good illustration of a key investment principle: prices of stocks can change and some stocks are more volatile, and likely to have these types of changes more frequently than others. This can be great news for investors who are able to “time the market” and happen to buy the stock at its low point, but this can be hard to do. Stock prices change for myriad of reasons that you can’t always predict.
5. Stock prices aren’t always based on the company’s financials and overall value. GameStop prices changed a lot over the past few weeks, but this change wasn’t based on something that the company itself did. In fact, nothing about the actual business of GameStop or its financial outlook changed. Yet, despite this, the stock price fluctuated a lot. Although this worked out well for investors in GameStop who made profits, the fact that stock prices can change may not be so good for other companies who are more successful. In fact, it isn’t uncommon for successful companies to experience a drop in their stock price despite increasing their revenue and doing good from a “business sense.” Since a company’s stock price isn’t always based on the company’s financials, this makes it more difficult to predict which stocks will earn you a profit and which will not.
My point? Buying individual stocks is risky. You have the potential to make a lot of money, but you also have the potential to lose a lot of money. What actually happens for you depends a lot on luck. To avoid having to rely on good luck, I invest in index funds. This means I own a little piece of all the stocks. This strategy gives me steady profits and also minimizes risk.
4 Reasons to Open a Roth IRA
I am a huge proponent of saving and investing money for retirement, even as a relatively young professional. One of the best accounts to use is a Roth IRA. Here are 4 reasons why.
1. It allows you to save/invest money for retirement which can help you build your net worth quicker. A Roth IRA is a type of retirement account that you can invest in with income you earn from your job. The benefit of contributing money into this account is that although the account technically is for retirement, it has many other benefits as well. One of the biggest benefits is that it allows you to invest money in a way that builds your net worth quicker (since there are fewer fees and taxes associated with it). The sooner you are able to build your net worth, the more options you will have in life. Not only can you retire early, but you can also choose to work part-time, accomplish many of your financial goals a lot sooner, and rethink how you want to spend your life. If you choose to stay at your current job you may do so, but if you decide you instead want to take a year-long sabbatical to travel or work for a non-profit organization you can do that as well. Building your net worth sooner rather than later allows you to re-define how you want to spend your life. Investing in a Roth IRA makes this easier.
2. It’s tax-efficient, so you don’t have to pay taxes on the profits or the withdrawals. Taxes may not be the top thing on your mind, but when it comes to making and investing money, it is something that I think about often. The taxes you pay each year, from each paycheck, is likely your largest expense. If you are able to find ways to reduce your taxes, then you’ll likely have a lot more money in your pocket each month. One of the reasons I like the Roth IRA is because it’s tax efficient. Instead of having to pay taxes on the profits you make from your investments or paying taxes when you withdraw your money from the account later in life, a Roth IRA works differently. Since you contribute to a Roth IRA with earned income from your job (which is money that you have already paid taxes on), you never have to pay taxes on that money again. This means that any profit you make from your investments is tax free and you don’t have to pay at least 20% in taxes like many other people do with other types of accounts. Plus, when you withdraw the money in retirement, that money is also tax free.
3. There is more flexibility on when you withdraw money, so it can serve as an extra emergency fund. Unlike many employer-sponsored retirement plans like a 401K or a 403b, a Roth IRA is not tied to your place of employment. This means you have a lot more flexibility in the type of investments you can make. Instead of being limited to the funds supported by your job, you can use a Roth IRA to make various other real estate or stock investments. You also have a lot more leeway on when you can take the money out of the account. Although the goal is to leave money in the Roth IRA until you retire, you can take out the money you contributed sooner rather than later if you need. In fact, as long as you leave the investment profits you make inside the account, you can withdraw your contributions at any time tax-free. This means if you desperately need the money to pay off student loans, buy a home, or move to a new city, you can technically just withdraw the money from your Roth IRA account to do so. It can serve as a back-up emergency fund.
4. You can give the money to your children tax-free, which gives you an extra way to leave your family an inheritance. I am a single young professional with no kids, yet. However, at some point, I’ll have children and would ideally like to leave them an inheritance. Unlike other accounts you can set up for your children as an inheritance, any money you give your future kids in a Roth IRA is tax-free. This means they won’t have to pay any taxes on this money when they get it. The less taxes they pay, the more money they keep. Thus, each year you can contribute to your employer sponsored retirement accounts to work on building your own net worth AND contribute to Roth accounts which you can then use as extra money for yourself and eventually gift to your children as an inheritance.
6 of My Best Financial Decisions
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?
New [Money] Goals for the New Year
The new year has officially started and I’m not sure about you, but I couldn’t be more grateful. 2020 was filled with a lot of unexpected events and stress. Although many of us found ways to remain grateful and achieve things we are proud of, I’m glad 2020 is over and am really looking forward to this new year.
At the start of each year, I always make a list of goals I want to accomplish. This year is no different. One of the main categories of things I plan to improve in 2021 are my finances. If you’re also thinking of improving your finances in 2021, here are some money goals to consider:
1. Cut back on unnecessary expenses. I realize this sounds vague but for me it’s all-encompassing. Although I did a good job in 2020 saving and investing money in separate accounts, one the things I want to do better in 2021 is spend less money on things I don’t need. Although I do plan to enjoy my life, I want to be more diligent with my discretionary spending. Particularly, when it comes to my love for wine and guilty pleasure of buying new clothes. Do you also feel you should spend less money on unnecessary things in 2021? If so, what things do you think you can cut back on? What kind of plan are you going to put in place to ensure that you follow through on this goal?
2. Pay off one of my debts. One of my life goals is to become completely debt free. Although paying off all of my student loans (or getting them forgiven) may be a long way away, one of the things I plan to do in 2021 is pay off at least one of my debts. Since I bought a slightly used car a year ago, one of my goals has been to pay it off relatively quickly-which I should be able to do next month. What about you? Do you have a car loan, credit card balance, or student loan that you can attempt to pay off in 2021? If so, consider putting a plan in place so that you can achieve this goal by the end of the year.
3. Establish additional revenue streams to increase my income. 2020 reminded us that our jobs and our current incomes can change. One of the things I want to do in 2021 is become more financially secure by increasing my current income. Although an increase in salary is dependent on my job and other forces I can’t control, one of the things I can control is money that I make outside of my job. For me, that means making more money from blogging or working extra shifts at other medical facilities for added income. For you, it may mean, finding a way to monetize your hobbies and make additional revenue outside of your day job. Creating other income sources gives you more financial protection, allows you to save more money, and makes you less reliant on your day job. Are there additional revenue streams you can explore this year?
4. Save money for a large purchase or fun trip. 2020 taught us that life is unpredictable. Since our health and lives can change, one of my 2021 goals is to enjoy my time off from work more by doing something that makes me really happy: traveling. Since I didn’t get to travel nearly as much as I had planned to last year, in 2021 I plan to make up for lost time, if possible. One of the ways I’m preparing for this is by saving even more money from each check into a “vacation fund” so that I can travel to various places without incurring debt. What about you? Do you plan to travel somewhere in 2021? If so, perhaps you too should start saving even more money into a travel fund. If travel isn’t as important to you, is there an expensive item or gadget that you’ve wanted to purchase?
5. Invest more money by contributing more to retirement. Along with decreasing my debts and saving up money to enjoy a nice trip, I also want to increase my net worth. The two main ways to increase your net worth is to lower your liabilities (aka pay down debt) and increase your assets (purchase things like stocks, real estate, or business that allow your money to increase in value). One of the ways I plan to increase my assets is by investing more money in my retirement accounts, especially my Roth IRA. Contributions in Roth accounts grow and are withdrawn tax free which serve as a huge advantage when I take the money out in retirement. By contributing more to retirement via these Roth accounts, I can invest more money in index mutual funds (which are groups of thousands of different stocks) in a tax efficient manner. This will allow my money to make even more money over time, which will increase my net worth. Are you planning to contribute more to retirement this year?
6. Give more money to charity. One of the things that surprised me last year was how much joy I got from giving. Whenever I sent money or bought someone a gift, I would think of the person’s reaction to the gift or be reminded of how much I was helping someone else and instantly be filled with happiness . As a physician, I’ve been blessed in many ways and one of my 2021 goals is to give more and “pay it forward” to others. Tell me, have you thought about giving more to others? If so, what type of gifts or contributions are you planning to make in 2021?
Tell me, what are some of your 2021 money goals?
5 Questions to Ask Before You Hire a Financial Advisor
Many young professionals are quite busy and don’t want to spend what little free time they do have learning the ins and outs of investing. If you, or someone you know, plan to hire a financial advisor to handle your money, there are 5 questions you should ask before you entrust that advisor to your hard-earned cash.
1. How are you paid? Believe it or not, many financial advisors have incentives to invest your money in suboptimal ways. They get large bonuses from insurance companies to sell you unnecessary whole-life insurance policies that are insanely expensive. They get even more money from their own companies to invest your money in actively-managed mutual funds that tend to underperform market expectations cost of you lots of money in added fees.
As if that weren’t enough, some financial advisors charge too much for their advice. Instead of charging a set rate of a few hundred dollars per hour or a few thousand per year, many advisors are “fee-based.” This means they charge much more than that and can even have rates around 1-2% of all the money you want them to manage. 1-2% may not sound like a lot initially, but average yearly returns are only about 7-9% and 3% of that is inflation. Paying an advisor another 1-2% plus an additional 1% in added fees leaves you with a mere 2-3% return on your money which isn’t much more than what you’d make in a savings account or with a government bond. My point? Ask the financial advisor how much they charge and inquire about all of the other ways that person gets paid or earns bonuses. The goal is to find someone who charges a flat fee at a reasonable price.
2. How much experience do you have working with people in my career? There are millions of different jobs in a variety of industries. Each job can have different pay structures and hierarchies that may influence your income and level of financial security over time. Make sure the person you hire as a financial advisor is familiar with the financial incentives and barriers of professionals in your field.
If you’re a doctor, you should ensure your advisor is well aware of the pay difference between a new resident and an established attending. There are certain tax-advantage accounts that may only be available to you when you are in the smaller pay range and exclusive investment opportunities that may become available when you get into the large pay range. If the financial advisor you hire is not aware of the way the pay structure works in your field, you may miss out on some of valuable programs and investments that could save you thousands of dollars in taxes each year. My point? If you are going to spend your money hiring someone to handle your finances, make sure you are paying for advice specific to your own situation and financial goals.
3. Have you assisted clients with “X” amount of student loans recently? Many of us took out a substantial amount of student loans while we were in school. Paying them off is a priority, but navigating the different repayment options without going bankrupt in the process can be challenging. There are so many different repayment plans and some of them may be more or less appealing for people in certain situations. Make sure the person you hire as a financial advisor is well-versed in all of these options.
There are pros and cons of each payment plan and one-size fits all does not exist. Some of the repayment plans are on an expedited schedule to help you pay off your loans in 10 years, others are income-based to ensure they aren’t taking a huge chunk of your income while you are still getting on your feet. There are even plans that provide government subsidies and may lower your taxes. If you have a substantial amount of student loan debt make sure your financial advisor knows about all of the different options and can adequately advise you on which one to choose.
4. What training did you get to become an advisor? Unlike people in other professions, the vast majority of financial advisors did not go through years of training or have to pass a series of difficult board exams to get their current job. Many of them were trained in sales and became an advisor with a few weeks of on-the-job training. As a result, some of them may not be as helpful as they claim.
Money management can be complicated so ensure the financial advisor you hire is as qualified as possible. Some of the most knowledgeable financial advisors are the ones who elected to get extra certifications to become a certified financial analyst (CFA), certified financial planner (CFP), or a chartered financial consultant (ChFC) so it may be wise to look for someone who has these credentials.
5. What financial plan do you think would best meet my financial goals and WHY? Before you hire someone to manage your wealth, you should make sure that person is giving you tailored advice that meets your specific situation and life goals. If you are in your late 20s with student loan debt, get an advisor who can help you make payments that don’t require you to eat Ramen noodles for the substantial future. If you are a young female planning to get married soon, you may want an advisor who can help you save for a wedding or the down payment on a home without charging too much or putting your financial future at risk. If you are a 32-year-old male who wants to save for a new car and lower your taxes, then someone who specializes in tax-efficient investments like real estate may be a great fit.
Although we would all love to be wealthy one day, we each have different financial goals and priorities that change the timeline and route we take to get there. Hire an advisor that takes these things into account to help meet your needs. More importantly, make sure you understand why your advisor has made certain recommendations and investments. The more you understand, the better you’ll be able to predict your investment returns and make better decisions in your life going forward. Once you understand your specific financial plan, follow up with your advisor once or twice a year to make sure you are still on track.
My point? If you plan to hire a financial advisor to handle your money, make sure you ask the right questions so you can choose the best fit for you.
4 Reasons I Don’t Buy or Trade Individual Stocks
Over the last few months, many of my friends have started investing. Because they know I love talking about personal finance, they will often ask me advice on which stocks to purchase. I tell them all the same thing: “I don’t buy individual stocks, I only buy index funds.” They usually seem a bit perplexed and want to know why. Here’s my answer:
1. It takes a lot of work and timely information is difficult to find. As a busy doctor, I don’t have a lot of free time. Some weeks I work 80 hours in the hospital or have over 20 patient message to review. I barely have time to fold my laundry on a regular basis let alone do extra work, outside of work. When I do get a free afternoon or “golden” weekend in which I’m not on call at the hospital, the last thing I want to do is be productive. Most of the time, I just want to relax with friends and family eating good food or enjoying quality time. Trading stocks or researching companies to invest in, isn’t on my priority list.
Even if I did have the desire to learn more about various companies, finding good, timely, information can be quite challenging. Most of the time when information about a company is finally published it has already been known to Wall Street investors beforehand. This means it’s almost too late to make an investment decision that could make you money. For example, if I turned on the news and heard that Facebook was acquiring another company that could increase its profits, chances are the price of Facebook stock would have already increased to reflect this change. By the time lay people like you or I tried to capitalize on this potential increase in stock value it would be too late.
2. It requires substantial research on each industry and company. Although apps like Robinhood and Akorns have made purchasing individual stocks easier, they haven’t necessarily made it more profitable for the consumer. In order to actually make money when you purchase stocks you need to purchase companies that will increase in value and do so in a way that you will still make money even after you pay the taxes on your profits. This may sound easy to do initially. You may be thinking that you’d just purchase stock of Netflix and Facebook or Tesla and Apple then call it day. Unfortunately, it’s not that simple. If it were, everyone would do that.
There are some companies that seem to grow exponentially in ways we could never expect and other companies that seem to implode overnight. It’s difficult to predict which ones will make money over time and which ones will not. In fact, Wall Street companies spend millions, if not billions, of dollars each year on market research to help provide more information to help them make better predictions and investment choices. Even they still struggle to choose the right companies year after year.
3. The market is volatile and things change quickly. If 2020 taught us anything, it’s that life can be unpredictable. Random unforeseen events that happen in other parts of the world can affect us in ways we could never have imagined. These effects not only impact our daily lives, but they can have drastic effects on our economy and the success or failure of certain businesses.
Before the coronavirus, many of us would have assumed that airlines and travel industries would do remarkably well in the summer. The weather is great, kids are out of school, and most people have time off of work to go on vacation. We all got a rude awakening in March when the coronavirus pandemic put a drastic halt to almost all leisure travel and many airline industries found themselves on the brink of bankruptcy. Past performance isn’t always indicative of the future valuations and this makes picking and choosing individual stocks to purchase quite risky. Which leads me to my last point…
4. It adds too much risk and I don’t like losing money. When you buy individual stocks you’re essentially rolling the dice and hoping that the company’s stock you purchased will increase in value over time. As we mentioned before, stock prices are volatile. A company’s stock could be worth $20 today but then drop to $5 tomorrow due to some global tragedy or company scandal that you had no idea about. They best way to mitigate risk and decrease your chances at losing money (and increase your chance of making money), is to diversify your investments.
This means purchasing stocks in a variety of different companies from a slew of different industries. Since it would be too cumbersome to individually purchase all the stocks, most people such as myself, just buy index mutual funds. An index fund does the work of buying all the stocks for you. That way, your investments are diversified in a seamless, stress-free, risk-averse manner.
4 Reasons I’m not a big fan of financial advisors
Every now and then I’ll get a spam email to my work account from some financial advisor offering an expensive dinner in exchange for an hour or two of my time. I usually ignore them. As a resident physician working 80+ hours a week, my time is valuable. Unlike a struggling college student, free food, even if it’s free good food, isn’t enough to get me to go somewhere or do something I know will waste my time. That being said, something unusual happened last week.
A business associate I met a few years ago reached out to me. He told me that he was starting a new personal finance company and asked if I would be interested in hiring him to manage my finances. I told him congrats on starting his new firm but made it clear that I didn’t plan on working with him or any other financial advisor any time soon. He seemed a bit taken aback and asked why. I stated that many financial advisors don’t have my best interest in mind. Here were my top 4 reasons why:
1. Many financial advisors sell subpar financial products to increase their own commissions
This is one of my biggest gripes with many financial advisors. They get paid a lot of money in commissions when they sell products like whole life insurance. Although life insurance gives us a way to provide for our families and loved ones after we die, term life insurance is sufficient. Whole life insurance, on the other hand, has poor investment returns, doesn’t pay out nearly as much as we may need, and is insanely expensive. Most of us can provide for our families by investing a certain amount of money each month in index mutual funds. We can also purchase a cheap term life insurance policy to cover us in case we die before we are able to make enough money in profits. Despite this fact, many financial advisors try to convince their clients to purchase whole life insurance instead.
They claim it’s a guaranteed death benefit that is better for the client but the real reason they sell that type of insurance is because they make tens of thousands of dollars in commission when they get their clients to purchase a whole life insurance policy. All the money in premiums you pay for the policy for the first 6months to a year goes directly into the financial advisor’s pockets. I don’t want to be affiliated with someone who is incentivized to make money by selling me something I don’t need.
2. Many financial advisors encourage their clients to invest in actively managed funds or individual stocks which have higher fees and add unnecessary risk
Financial advisors who have their clients’ best interest in mind, should encourage their clients to invest in diversified low cost funds. The goal is have the client invest money in a way that maximizes profits and minimizes risks. One of the best ways to do this is to invest money in many different stocks in a variety of industries through index mutual funds. That way, if one company’s stock goes down, you have investments in many other companies that can cushion the blow.
The index funds are weighted so that a larger amount of your money is invested in the stocks that are larger and more likely to increase in value. This kind of investing helps minimize the risk that you could lose a large portion of your money and increase your chance of making a profit. Unfortunately, many financial advisors don’t advise their clients to invest money in this way. Instead of explaining to their clients why trying to “beat the market” via individual stocks or actively managed funds is a terrible idea they encourage their clients to invest their money in funds that charge high fees or take on too much risk.
3. Many financial advisors over-charge for advice
Some financial decisions aren’t as clear cut. While some parts of personal finance such as investing in mutual funds, saving money for retirement, and getting a 401K match from our employer are relatively easy decisions to make, others are not so clear. Should we focus on paying off debt or investing money for retirement? Should we purchase a house or keep renting? Should we do a pre-tax account or opt for a Roth? The answers to these questions vary depending on our individual circumstances and this is why some people seek out a financial advisor. There are other people who simply need help getting started and want to make sure that they have various accounts set up correctly. Whether which camp a person is in, we all want to get great advice at a good price.
Unfortunately, many financial advisors over-charge for advice. Instead of charging a flat fee, may financial advisors base their rate on the value of the investment you want them to manage and can charge 1-2% per year. A 1% fee per year may not sound like a lot initially, but given that average yearly returns (after inflation) are only about 4% per year, giving 1% of that to a financial advisor can really eat into your profits. If you have a portfolio valued at $500,000, paying $5,000 a year to keep doing the same thing you did last year is quite a bit of money. The truth is, unless you’re ultra-rich, it simply doesn’t take much more energy to manage $20,000 vs $200,000. Once you have a solid financial plan in place, you just have to follow it each year as your money grows. If you want some help managing your finances, find an advisor that won’t overcharge for advice. Paying a few hundred bucks an hour or a flat fee of a few thousand dollars to get started seems fair. If they are charging a lot more than that, think twice.
4. Many financial advisors fail to help their clients lower their biggest expense – taxes
If you ask people what their biggest expense is each year many of them will mention their mortgage, student loan payment, or childcare. Although these payments can be high, most people’s largest expense each year is actually taxes. Many people, especially those in the upper middle class pay 20-30% of their entire income in taxes. Finding ways to lower this expense can have a drastic impact on our income. While we will likely still pay a certain percentage in taxes each year, finding a way to lower them, by even a few thousand dollars, can make a big difference.
One of the best ways to do this is to invest in index funds thorough you work-sponsored retirement plans. Many of these plans give you a pre-tax deduction so maxing out this account can reduce your taxes by $4000-$5000 each year. Unfortunately, many financial advisors don’t emphasize this tax advantage. They instead convince their clients to set up brokerage accounts, with after-tax money which has higher fees and results in higher taxes. If I’m going to pay someone to manage my money, I’d at least like to make sure they are helping me invest in ways that will reduce my tax bill, not add to it.
9 Things I Learned When I Signed Up for Public Service Loan Forgiveness
As someone who graduated from medical school with 6-figure student loan debt, I’ve looked into several different loan forgiveness programs that will help repay what I owe. One of the most popular loan forgiveness programs is Public Service Loan Forgiveness (PSLF). Through PSLF, doctors can get hundreds of thousands of dollars in student loans forgiven, tax-free. Although this seems great, when I attempted to enroll in the program last year there were several shocking truths I became aware of quite quickly. Here are some things I learned after enrolling in PSLF:
1. Not everyone who works for a nonprofit is eligible. In order to qualify for PSLF, you must work for a 501c nonprofit or government institution. Ironically, even if you do work for a non-profit, you still may not qualify. It all depends on your employment classification. If you are classified as an “independent contractor” at an academic institution who only has “hospital privileges” or gets 1099-income instead of W-2 income, then you are technically not a “employee” by that hospital. Thus, you likely don’t qualify for PSLF. If you’re unsure which category you fall in, check how you get paid.
2. You may have to bypass the grace period to start your qualifying payments. When you first graduate you will be automatically placed in a 6-month “grace period.” The good thing about being in this grace period is that you are not required to pay back your loans. The bad thing about the grace period is that this time does not qualify as one of the 120 monthly payments needed to get your loans forgiven. To my surprise, you can’t just waive this grace period to start your qualifying payments. When I contacted the Department of Education, I was told that the only way to bypass the grace period is to consolidate your loans. The consolidation can be done online, but it often takes weeks to process.
3. No digital signatures are allowed, you must sign the form by hand. As a millennial who doesn’t own a printer, I attempted to complete the PSLF employment certification form online and submit it with my digital signature. My application was rejected. In fact, I got a notice from FedLoans a few weeks later stating that my enrollment into the PSLF program was denied because I didn’t provide a “hand signature.” I’m not joking. I literally had to find a printer, fill out the form a second time, sign it by hand, then ask my boss to scan and fax it to them. A few weeks later they told me the application was approved.
4. The certification form takes weeks to process, so upload a copy to your online account. When I finally did get my loans consolidated and resubmit the form with my hand signature, it still took weeks to process. I called Fedloans to see how to expedite the process and was advised to upload the employment certification form to my online Fedloans account. As one can imagine, it takes days if not weeks for them to catch up on all the faxes they receive. Uploading the form directly to your account speeds up the process and they can make a decision faster than if you just fax in the form.
5. The “end date” on the form isn’t really an “end date.” Once I was accepted into PSLF, I received a notice indicating that I was only enrolled into the program for one month. The form showed a start date of 07/2019 and an end date 08/2019. I was confused and frustrated to say the least and promptly called Fedloans for an explanation. The representative assured me that I was still enrolled into the program. Apparently, the Fedloans employees need a way to process the form and then “close out the task.” The “end date” listed on the form isn’t an actual “end date.” It’s the date that your employer signed the form. Why they don’t simply call it a “processing date” or “employer verification date” is odd, but nevertheless, that’s what it says.
6. The payments they calculate may not be correct. A few weeks after notifying me that I was enrolled in the program, Fedloans sent me another notice estimating how many qualifying payments I had. The form listed zero. That wasn’t correct. Although I had just started residency 6 weeks ago, they should have at least recorded 1 payment, especially since I went through the process of consolidating my loans and waiving the grace period. When I called Fedloans to inquire about this issue, the representative said there was an error in updating my loan status from the consolidation but that it would be fixed soon. Ladies and gentlemen, double check your payments and count them yourself.
7. Your number of qualifying payments will not be updated in real time. Fedloans does not track your qualifying payments month to month. Instead, they check the number of payments you’ve made once a year when you re-submit the employment certification form. They then send you another notice with an arbitrary “end date” and update your account with the number of qualifying payments you’ve made up until that date. Ironically enough, the PSLF program does not require you to re-submit the certification form each year, but doing so is the only way to make sure Fedloans is keeping track of your qualifying payments.
8. You must submit another certification form when you change employers. In order for Fedloans to ensure that you continue to qualify for the PSLF program, you must show proof. I highly recommended that you submit the enrollment certification form each year so they can better track your payments, but it is required that you submit this form each time you switch employers. You have to notify them about the change in your employment status so they can update things in their system and verify that you still qualify.
9. It could take another 6 months for your loans to be forgiven after all 120 payments are made. Yep, you read that right, 6 months. Once you make the 120 monthly payments, you have to submit a different form called the “PSLF loan forgiveness form.” Unfortunately, it can take another 6 months after submitting the form before a person is notified that their loans have been forgiven or not. Because of this delay, you have the option to stop paying towards the balance of your student loans and go into “forbearance” while you wait to hear back on the status of your forgiveness. You can also just keep sending extra payments and hope for a refund at the end.
To be brutally honest, PSLF has a lot of inefficiencies. I’ve been enrolled in the program for a little over a year and have already had to call Fedloans half a dozen times. To say it’s a hassle is an understatement. Hopefully, it won’t be like this going forward. When all federal student loans were placed into forbearance during COVID, it took them a few months to catch up with processing but eventually they got my payments right without me having to call them every other day. Learning the ins and outs of this program and dealing with its quirks is a bit cumbersome, but the opportunity to get hundreds of thousands of student loans forgiven tax free is too good of a deal to pass up. Keep track of your payments and may the odds be ever in our favor.