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.
7 Principles to Help You Start Investing
We all have friends and family members who are investing money. Whether it’s stocks, bonds, real estate, or cryptocurrency we all know a few people who are investing. And this is a good thing.
Why? Because we can’t save our way to wealth or financial freedom. We must invest.
Although savings accounts may be “safe,” keeping all of our extra cash in those accounts may not be wise. Money sitting in a savings account won’t grow fast enough or accumulate quickly enough to allow us to meet our money goals. Plus, because of inflation, things cost an average of 2-5% more each year. This means that one dollar today will only be able to buy you 95cents worth of stuff next year. As things increase in cost each year, the amount of things you can buy for one dollar decreases, so you lose more and more purchasing power each year. In order to overcome this “inflation effect” we must find ways to make our money grow.
This brings us to investing.
Investing is when you purchase assets or things are likely to go up in value. Buying assets allows our money to make more money over time.
But… you must know what you’re doing.
Investing money without fully understanding what you are purchasing and how it works can cause you to lose money quicker than you think. Instead of feeling like you have to know everything about every investment, commit to learning a few of the basics:
Principle #1: One of the easiest ways to begin investing is in the stock market.
Unlike real estate investing which has lots of moving parts and requires a unique skill set and high startup capital or investing in cryptocurrencies that use newer technologies that can challenging to understand or who’s intrinsic value changes drastically, investing in stocks and bonds is often much easier.
Principle #2: When investing in the stock market, it is much safer to seek average profits with minimal risk of losing money than to aim for extraordinary profits with a high risk of losing money.
In order to obtain average returns (8-10% per year) with minimal risk, it is wise to invest in diversified index mutual funds. Let’s break down what this means:
A mutual fund is a group of investments (like a group of stocks or a group of bonds). Instead of buying one stock or one bond in a specific company like apple or tesla, buying a mutual fund means that you purchase a group of investments (that contains a percentage of stocks from apple and tesla and many other companies altogether). In other words, instead of one whole stock, you have a mutual fund that has a little piece of many different stocks.
An index mutual fund is a specific type of mutual fund (group of stocks or bonds) that follows an index. This means the amount and percentage of stocks that are contained in this group are similar to those that are tracked by other validated measures and meet a certain set of requirements. Examples of indexes are: the Standard and Poor 500 also called the S&P 500 (which is a list/index of the largest 500 companies in America). Because these mutual funds follow an index, they tend to be well diversified, which means they contain many stocks from different companies in various industries.
Principle #3: Investing in diversified index mutual funds has less risk than buying individual stocks.
If the value or stock of one company decreases, then stock in the other companies can lessen the impact of that decrease. Thus, with an index mutual fund the value of your investment tends not to change as often. Because you are have a percentage of stock in many different companies you have room to capture increases in stock value from many different companies at the same time. It is impossible to predict which companies will have stock that increases in value each year instead of staying the same or decreasing in value. Index mutual funds offer a shield of protection along with added opportunities for growth that combat this uncertainty. Instead of having to buy individual stock in 500 companies, you can just buy the index fund and have a percentage of stock from all the companies for a much cheaper price. If the value of apple goes up, so does your investment. If the value of another company within that index fund goes up so does your investment.
Principle #4: Pick some of the most common index mutual funds and realize that different brokerages can have similar index funds that are called different names.
Many people may understand in theory what an index mutual fund is, but they may not know which one to invest in. In order to combat this problem many people invest in a lifecycle or target retirement funds. They may even pick a simple 3 fund portfolio (which means they invest in 3 different indexes at the same time). The goal is to invest in the index funds that have done the best over time, that are validated, that tend to have the highest returns year after year. That would be a combination of 3-4 different types of indexes:
A Total United States Stock Market Index (an index that buys a percentage of all of the stocks in the United States)
A Total International Stock Market Index (an index that buys a percentage of the stocks from companies all around the world)
A Total United States Bond Index (an index that buys a percentage of almost all of the bonds in the United States)
A Total International Bond Index (an Index that buys a percentage of almost all of the bonds from across the world)
You can get a version of each of these types of indexes at various brokerages (firms that allow you to buy stock). For example, the Total US Stock Market Index Fund at the Fidelity brokerage is listed under the symbol FSKAX and the Total US Stock Market Index Fund at the Vanguard brokerage is listed under the symbol VTSAX.
The percentage that should be invested in each of these indexes depends on the person.
Principle #5: The general rule of thumb is to have most of your money invested in stock index funds and a smaller percentage in bond index funds.
I have about 90% of my work retirement money invested in stock indexes (with 60% in the U.S. Total Stock Market Index Fund and 30% in the International Stock Market Index). I have the remaining 10% of my work retirement fund invested in bond indexes (with 8% in U.S. bonds and 2% in international bonds). What is right for me may not be right for you, so you should determine your own percentages.
Once you know why you must invest and you understand what to invest in, you must then understand a couple more things:
Principle #6: The stock market will experience ups and downs, but over the long haul, it continues to increase in value. It is better to invest consistently over time than to try to pick and choose the best times to buy and sell your investments.
Continuing to invest consistently despite the market fluctuations (changes in stock values from day to day) will prove to be more valuable to you than trying to “time the market” or invest only at certain times when the market is reacting in certain ways. It is more lucrative to buy when things are priced low (when the market is experiencing a downturn) and sell when things are priced high (so you can maximize your profit) but trying to time the market is hard to do since no one can predict the future. Attempting to time the market often results in lower profits than if you had just invested consistently over time because it’s nearly impossible to which days certain stocks will be low in value vs high in value.
Principle #7: Your money makes more money over time via compound interest so investing consistently over many years will help you to build wealth and meet your financial goals.
It often takes years to reach that first milestone of $100,000 but much less time to reach the next milestone of $200,000. Time is your friend. Trying to get rich quick often results in losses and can lead to poverty and debt. Be patient and consistent. Invest.
4 Reasons I Don't Buy Individual Stocks
Investing in stocks has become increasingly popular over the last few years. Many people love the thought of owning part of their favorite companies/ Mobile apps such as Robinhood, Stash, and Acorns have made doing so seamless and easy. Although buying, selling, and trading stocks in the hopes of making a profit can be captivating, it may not be the smartest thing to do financially. Here are 4 reasons I don’t purchase individual stocks:
1. There are too many companies to choose from. There are thousands of different publicly traded companies in the world. This means there are many different stocks in a variety of different industries from which to choose. With so many options and a limited amount of money to invest, how do you choose which companies to invest in? Many people simply choose to invest in the industries and companies they have heard of the most. However, just because a company is well-known doesn’t mean it’s a good investment. There are too many options and many of the companies we have heard of may not be a the best investment. This brings me to my second point…
2. It is difficult to predict which companies will do well and which won’t. As the common investment saying goes, “Past behavior doesn’t predict future performance.” Just because a company has done well in the past, does not mean it will continue to do well in the future. You make money investing by purchasing stocks from companies that will continue to grow and make money over time. Although popular companies may continue to increase in value over time, it is also possible that some of these companies may have already hit their peak. If you make the mistake of purchasing stock in a company that doesn’t grow much over time, then you will have spent money on the stock without getting much in return. If you purchase the company stock and the company actually goes down in value, then not only have you not made any money, but you also may have lost money, which is the exact opposite of what you want to do when investing.
My point is that there are very popular companies that may go down in value in the next few years and there are also relatively new companies you may have never heard of that could increase in value over the next few years. It can be difficult to predict how each of the thousands of companies with stocks for sale, will do in the future. This brings me to my third point…
3. Useful and timely information that could serve as clues, is hard to find. Since predicting which companies will do well in the future can be challenging, large investment firms on wall street, like Goldman Sachs, Morgan Stanley, Barclays Capital, etc have hired entire teams of people in their “research” division to find information that could serve as clues about a certain company or industry. They do different types of extensive analyses in order to predict how well a certain industry will do in the future. For example, they may conduct surveys, talk to various industry experts, and examine behavior patterns to make investment recommendations that will increase their odds of making a profit and decrease their risk of losing money. Many people in the general public who like to invest try to do the same thing. They may read the Wall Street Journal and glean information from a variety of news sources to also get clues on which companies to invest in and which not to invest in. The problem with this information is that it isn’t always timely, which means it isn’t always useful.
Oftentimes, the investment firms on wall street, with their large research divisions and teams of experienced investors, have access to key information about various industries and companies long before it is published or spoken about in news sources that people in the general public have access to. In fact, there is a common thought among investors that by the time information is given to the general public it is “too late.” In other words, by the time you and I find out about a certain company that is struggling, many experienced investors have already sold their shares of those stocks. By the time you and I find out about an up and coming company, investors on wall street have already purchased those stocks at the lowest price and made their own profits. Investment information is just not as readily available to members of the general public to allow us to make the best investment decisions at the best times. This brings me to my last point…
4. Purchasing individual stocks can decrease investment diversity and increase risk. Even if you did have access to timely information, purchasing individual stocks is still risky. Human behavior isn’t always rational so our rational predictions about what items people will purchase over time and which companies will grow as a result don’t always line up. In fact, many people who have investment portfolios that are actively managed by investors at the biggest wall street investment firms still lose money. Only one third of actively managed funds (in which investors pick certain stocks for their clients to purchase) actually beat the market index. This means most funds that are managed by experienced investors at the largest investment firms who have access to lots of information still do not out-perform people who simply invest in index funds.
An index is a group of many different companies in a variety of industries. An index fund is an investment fund that follows an index. In other words, instead of picking and choosing which individual stock to purchase, an index fund will simply purchase all the stocks in that index, which includes hundreds or thousands of different companies. By investing in an index fund, you are a partial owner of all the stocks in that index. There are many different types of index funds such as the Total Stock Market Index Fund (that includes all of the major stocks in the United States) and the Total International Stock Index (which includes all of the major stocks around the world). The benefit of purchasing an index is that you are a partial owner of almost all of the stocks. if one stock does really good then your investment increases in value but if another stock does poorly you have not lost that much money since you have so many other “good” stocks that can cushion the blow. In other words, index investing creates diversity (since you are invested in so many different companies) which protects investors from the risk of losing too much money. Purchasing individual stocks is the opposite of that. Buying individual stocks decreases the diversity of your investments (since you have a larger portion of your money tied up in the stock from one company instead of having that money distributed among many different companies).
My point? I don’t purchase individual stocks because I don’t have a crystal ball. I can’t predict the future or accurately tell which companies will do well and which won’t. The safest way to invest and still make money when you can’t predict the future is to limit your risk. You limit risk by purchasing a piece of all the stocks, that way if one company does poorly the other companies can help mitigate the risk and the make up the difference.
5 Financial Moves to Make This Fall
As you continue to mature you may begin to think about money in a different way. Instead of viewing money as something you can use to buy the things you want, you may start to consider the opportunities that money affords you and start thinking of ways to accumulate more. Here are 5 things you should consider doing this fall to take your finances to the next level.
1. Start investing in the stock market. Whether you are in your early 20s and just got your first salaried job, or are about to reach your 10 year work anniversary, investing in the stock market is something everyone should consider doing at all stages of life. Many people have opportunities to invest in the stock market through their jobs via a 401K or 403b retirement plan. Some companies may even offer a retirement “match” to incentivize you to invest through these venues. You should make it a goal to invest at least 10% of your income in index funds through your 401K, 403b or IRA retirement plan. If you’re able, consider investing even more money into your Roth IRA or using some of the money you have left over each month to invest via apps Robinhood, Acorns, or Stash. Investing in the stock market by purchasing index funds through retirement plans or brokerage accounts will allow your money to make money (aka “interest”) and after awhile, that interest will begin to make even more money for you (aka “compound interest”). One of the best things you can do for your financial future is invest your money and let the magic of compound interest work in your favor.
2. Reconsider what car you drive. Another decision that can have a huge impact on your finances is what car you choose to drive and more importantly, how you choose to pay for it. Many people love to purchase brand new cars. They love the new car smell, updated features, and the peace-of-mind in knowing they have reliable transportation for many years to come. Despite these benefits, there are downsides to buying a new car. One of the main drawbacks of buying a new car is that it loses its value fairly quickly in the first few years. This means it will continue to depreciate (or lose value with time). Thus, you end up spending a lot of money and having pretty hefty car payments for many years on a car that will lose value. If you are trying to invest money for retirement, spend money on other things, or save money for future trips and vacations, having a $500 car payment for the next 5-6 years may preclude you from doing so.
Other people choose to lease cars. They like being able to drive a different car every few years and don’t want to pay the full price of a car that will lose value over time. However, the downside of leasing a car is that you will still have a monthly payment each month of several hundred dollars for the next 3-5 years. When your lease is finally up, you will have to give back the car, and take out a new lease with a new set of monthly payments so that you can continue to have transportation. The most sound decision to make is to pay cash for a slightly used car. Cars that are 2-4 years old tend to still be aesthetically appealing, reliable, and are more reasonably priced. Paying for a slightly used car in cash can also prevent you from having a big car payment each month. Because the car is cheaper, you can get a much smaller car loan with much smaller car payments that you can pay off quicker, even if you didn’t have all the cash you need to pay for the on day 1. My point? Car payments can be a rather large monthly bill, so reconsider what you drive and think of ways you can reduce this payment or prevent yourself from having the payment in the first place.
3. Prioritize paying off your credit card debt. Credit card debt can negatively impact your finances in numerous ways. It charges you extreme amounts of interest each month if you don’t pay back the money in a timely manner. Since many people are unable to pay back all the charges in one month, they keep accumulating interest, on top of what they already owe. By the time they finally pay off the credit card, they have paid hundreds if not thousands of extra dollars in interest payments. If you are spending money paying off credit card debt, and the interest you owe on that debt, that’s less money you have to invest. One of the best things you can do for you finances is make a plan to pay off your credit card debt as soon as possible and try to avoid accumulating more.
4. Think twice about your living situation. Buying a house is a major goal for many people, especially young families. The idea of having something of your own to build memories in is quite alluring. In contrast, living in a high-rise apartment is extremely attractive for many young professionals who live in the city, especially if they do not have children. The convenience of being able to walk to bars and restaurants and having short commutes to other forms of entertainment can be quite attractive. While there’s nothing inherently wrong with your desires about where to live, it’s important to remember that where you choose to live, and how much you decide to pay each month for housing, can have a big impact on your financial future. Be wary of buying a house that is too large or too expensive. Be wary of renting an apartment with rent that is too high. Housing is one of our largest expenses each month. How much you choose to pay for a mortgage or rent can have a big impact on how much money you are able to save, invest, and spend on other things in your life.
5. Set up automatic savings. One of the best things you can do to ensure you meet your financial goals is to set up automatic savings. This means having a set amount of your paycheck automatically sent to a different savings account. Ideally, this savings account would be separate from the checking account that the rest of your paycheck goes into. By having it automatically deposited into a separate account you essentially “pay yourself first” and protect yourself from spending the money you were supposed to be saving. Doing this will help you build your savings each month which will increase your net worth over time and allow you to save money for an emergency fund, upcoming vacations, and other large purchases like a home, wedding, or college fund for your children.
What do you think, which of these 5 financial moves do you plan to make this fall?
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.
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.