Although many people invest money, the most successful investors often have a plan. In order to build wealth and meet your financial goals you need to have to clarify your investment strategy and decisions. Use the 5 steps below to map out an investing plan.
Step 1: Write down what you are investing for. Most people invest money with the hopes to make a profit. While this makes logical sense, you need to get more specific. In order to set up an investment plan you must first clarify why you are seeking to make more money. Are you trying to build wealth and retire early? Is your goal to increase your net worth or pay down your student loans? Do you want to stack money to buy home or finance your kid’s college education? Whether you have one goal or many different ones, the first step to crafting an investing plan is to write down your financial goals. What are the various reasons you plan to invest money?
Step 2: Determine how much money you plan to invest. Now that you have a list of the reasons you are investing, figure out how much money you want to allot to your goals. This should not be the first random number that comes to mind or a goal you plan to achieve some time in the distant future. This should be a concrete and realistic number, something you can start doing with your next paycheck. Take a look at your monthly spending and your monthly income. Pinpoint areas where you can cut back and write down a total amount you can use to invest each month or each year. Once you have the total amount you plan to invest, figure out which portion of that total you want to use for each of your investing goals. Perhaps you have $400 to invest each month and decide to use 75% of it to build wealth and 25% to save for a down payment on your future home. Or, maybe you carve out a special 10% of the total amount to start investing money for your kid’s education? The amount you invest is up to you, but come up with a number.
Step 3: Create a timeline for when you need the money (and the profits). Once you make your investing goals and figure out how much money you can use, the next step is to create a timeline for when you need your money and the profits. How soon you need to use the money affects what types of investments you can make. If you know you will need money to buy a home in a couple years then you will likely make much different investments and take much less risk than if you are investing money for your kids college over the next 10 years or planning to build wealth over the next 20 years. What is the timeline for each of your investing goals?
Step 4: Figure out the investments you want to make. If you know what your investment goals are, how much you can invest, and when you need the money the next step in your investment plan is to figure out what type of investments you want to make. You can choose to invest in bonds, stocks, cryptocurrency, real estate, fine art, startup businesses, etc. The choice is yours. However, it’s wise to remember that different types of investments have different levels of risk and different degrees of profit. For example, buying an individual stock or investing in a startup may have the potential to make a lot of money but those types of investments can also come with a high level of risk since there is a chance you could lose all of your money if the company tanks or the stock goes down in value. Investing in bonds gives you a guaranteed return on your money but that return may be so small that it barely keeps up with inflation and doesn’t allow you to meet your investment goals by your designated timeline. Other people choose to invest in real estate in an effort to increase their cash flow and decrease their taxes but take on a great deal of debt (in the form of a mortgage to do so). Most people who are new to the world of investing purchase index mutual funds (large funds that are full of hundreds, if not thousands of different stocks, from many companies in a variety of industries). They invest in these index mutual funds to increase diversification and minimize risk while still leaving room for a decent profit. The choice of investment is yours.
Step 5: Pick the right investment account. The last step of your investing plan is to invest money through the correct account. Many young professionals like to use apps like Robinhood to invest for simplicity and convenience’s sake. However, there may be other types of accounts that could provide more benefits. For example, if you are building wealth for your future and trying to invest for retirement, then using your employer-sponsored 401K or 403b may be a good option. If you want to open an investment account that is not tied to your employer and still desire the ability to take your contributions out of the account at any time, then opening a Roth IRA may be the right option. The type of account you invest in (whether it’s a 401K, Roth IRA, or taxable brokerage account like the Robinhood app or a traditional brokerage firm like Vanguard) depends heavily on your investment goals, timeline and risk tolerance.
My point? Everyone should have a goal to invest money on a consistent basis. If you haven’t already, use the 5 steps above to craft and investment plan that meets your needs and allows you to reach your goals.
5 Money Lessons from 2020
1. No job is guaranteed. The coronavirus pandemic has impacted our lives in numerous ways, especially economically. Many people suffered job losses they never imagined, pay cuts from a job they once felt was secure, and changes to work that required them to quickly adapt to video calls and zoom conferences. While some people were able to recover quite well, others were not as fortunate. Regardless of which group you identify with, one thing became abundantly clear: No job is guaranteed. With this realization comes the need to plan ahead and be financially prepared for whatever my come our way.
2. Emergency funds are essential. Since no job is guaranteed, the income we rely on each month isn’t guaranteed either. As young professionals with bills and other financial responsibilities, we need to have money set aside in an emergency fund for times like these. Although the exact amount needed may vary based on one’s living expenses, general advice is to make an initial goal of saving $1000 in a savings account. Once you have the amount, then then keep saving until you have enough money to cover 2-3 months of expenses. Ideally, your emergency fund should be in a savings account or money market account that you can easily access.
3. Too much debt can make us vulnerable to catastrophe. One of the best things we can do with our money, besides saving and investing, is using some of it to pay down debt. Whether it’s car loans, credit cards, a home mortgage, or student loans, many young professionals have some type of debt. Since our income may change in unpredictable ways, the more bills and debt payments we are obligated to pay each month, the more we are vulnerable to financial catastrophe if our income decreases. Plus, most people have to pay interest on the debt they owe. This means the longer you wait to pay it off, the more the balance accumulates and grows – costing you even more money. My point? Try to avoid accumulating unnecessary debt and pay off the debt you have sooner.
4. Having insurance is vital. As young professionals, the majority of us are fairly healthy with very few, if any, medical conditions. Thus, we may not feel health insurance is that critical. Or, perhaps you have medical insurance through your job but don’t any other types of protection like disability insurance or life insurance. Rethink this plan. 2020 has shown us that life can be unpredictable, and we never know what may happen. One of the best things we can do is protect our income in case we cannot work for a long period of time (via disability insurance) and leave money for our spouse or children in case we happen to pass away younger than expected (via term life insurance).
5. Multiple streams of income provide added security. Many people had job changes or job losses this year. Even for the few people who didn’t have changes to their income, many of us know other people who were not so fortunate. Having multiple revenue streams makes us less reliant on our main jobs. It also serves as a cushion of financial security that can help protect us in case we experience a change at our main job or a decrease in salary. 2020 has highlighted how important this is. Start thinking about hobbies and other activities you enjoy or are good at, is there a way for you to leverage these things and use them in a way that will make you money? Perhaps you can create another stream of income in 2021.
One of the best decisions I’ve made: automatic savings
When I graduated from medical school, one of the best things I did was set up automatic savings. I made a budget that had about 25% taken away in taxes, decided to live on 50% of my income, and made the bold move to have the remaining 25% placed in an entirely separate account. This account was reserved for building wealth through saving, investing, and paying off debt. It was one of the best things I did and here’s why:
1. It allowed me to grow my emergency fund. One of the best things about having part of my paycheck go into an entirely different bank account was being able to save money in a separate place. Because the money in this account isn’t connected to my checking account, I couldn’t spend it. Month after month, the money just kept adding up and before I knew it, I had saved thousands of dollars in an emergency fund. I remember looking at the account 6 months after I started saving and being so proud of myself. It made me even more motivated to keep saving. Plus, it gave me a sense of relief to know that I money to cover unexpected expenses.
2. I started investing early for retirement and building my net worth. Another awesome thing about automatic savings was that I was able to start putting money into my retirement account. Unlike money sitting in my savings account, the money I had automatically deducted from my check for retirement was being invested in a way that would make me even more money in the future. Although retirement may be decades away, I need to start saving and investing now in order to have enough money in those accounts to cover all of my needs. I don’t want to be relying on social security checks from the government trying to make ends meet on a small sum of money when I’m in my 60s. I instead, plan to invest the money now in a way that would allow me to live the life I want free from financial burdens.
3. I paid off a lot of debt. Regardless of whether you hate debt or don’t mind it, paying it off can feel like a weight lifted off your shoulders. Although I entered a loan forgiveness program for my student loans, I still had other credit card debt I needed to pay back. Unlike most people who go straight into medical school from undergrad, I lived in Washington, D.C for two years before starting medical school. Although that time was rewarding, I racked up lots of credit card debt. (The city was super expensive, and I used credit cards to cover some of my bills since my salary was low) By the time I left the city, I had thousands of dollars of debt to repay. When I got my first job as a doctor, I had hundreds of dollars automatically withdrawn from my separate account each month to pay off this debt. By the end of my first year as a doctor, I was credit card debt free! Now, instead of spending hundreds of dollars on a credit card payment each month, I’m able to invest even more money towards retirement and raise my net worth.
4. I now have money for vacations, Christmas gifts, and other indulgences. Along with investing for retirement, building my emergency fund, and paying off debt, having a portion of my check automatically sent to a separate account also allowed me to save money for things that bring me joy. I now have some money in a “vacation fund” so I can take trips and create memories with friends without racking up debt. I have also been able to save money each month for Christmas gifts so that my spending in December doesn’t put me in a financial hole for the next year. Plus, I have money saved for expensive purchases like a new phone or laptop should I need it.
5. I learned how to live below my means. I think this is by far the most important lesson I learned. As a physician, my life is a little different from most. I spent many years in school living off of student loans, and now must spend a few more years in residency where I’m paid a low salary by the government. However, once I finish residency, my salary quadruples. It’s an interesting timeline. Since there’s so much hard work and delayed gratification involved to get to the end goal, it can be very tempting to “not worry about money” and simply get what I want because I know that eventually I’ll be able to afford it. Although this seems fine, many people with this thought process inflate their lifestyles by too much, rack up lots of debt, and are unable to retire when they’d want to because they didn’t save enough money earlier on in their lives. I don’t want that to be me. Learning to live below my means has taught me to be less materialistic, more giving, and more appreciative for the things I have. It has also helped me learn to be humble and not to compare myself to other people. In other words, living below my means helped make me more mature.
My point? As you can see, automatic savings in a separate account has had many benefits on my life. Although it can be difficult to live on half of my paycheck while others seem to be living a much more lavish lifestyle, I realize that the sacrifices I make now will pay off in the end. Practicing self-discipline by saving money, is one of the best decisions I’ve ever made.
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.