In case you’re unfamiliar with doctor pay, there are two different tier systems: Resident physicians and attending physicians. Resident physicians are doctors who recently graduated from medical school and are still getting training in their field of choice. They are working as doctors but still actively learning at the same time. Attending physicians are different. They are doctors who have graduated medical school and have a minimum of 3 to 7 years of experience. They have a full state license, tend to be board certified, and make substantially more money. Resident physicians make the median household income ($55,000 to $75,000 per year). Attending physicians an average of $300,000 and beyond. If you’re a resident physician or a young professional who makes the median household income you should still invest money. Here are 4 reasons why:
1. Investing prevents your money from losing value. In case you haven’t heard, inflation is higher than it has been in awhile. Because of inflation, things like cars, homes, gas, and groceries cost more now than they have in the past. If that weren’t enough, the rate in which these prices are rising is putting a strain on our pockets and our lifestyles. We may have to delay buying the home we wanted, forgo that vacation we were planning, or drive our old cars for much longer than we anticipated. Since costs are rising so fast, we can buy fewer things with each dollar, than we could in the past. Unless we intentional about growing our money, it will continue to lose buying power just sitting in a savings account. One of the main reasons to start investing now as a resident, or young professional on an average income, is because it prevents our dollars from losing value. Investing gives our money a chance to grow which brings me to my next point…
2. Investing allows your money to grow much faster. You could stack money in a savings account, but that money will not grow much at all. The minimal increase of 0.25% that many people get by keeping their money in a savings account is not enough to keep pace with inflation and the rising cost of goods. Investing helps combat that because not only does it allow your money to grow, but it allows it to do so much quicker through compound interest. Compound interest is when your money makes more money (called interest) and then that interest stacks onto your original amount and begins to make even more money (added interest). This ability for you to make profits (interest) on top of existing profits (other interest), means that you get even more profit than you thought (compound interest). It is this compound interest that allows your money to grow much faster.
3. Investing gives you the chance to reach your financial goals sooner. Because investing allows your money to grow, it is through investing that you can accumulate a higher net worth sooner than you other wise would. As your net worth increases and the value of your investments rises you will be able to reach your financial goals sooner. For some people, these goals may be to accumulate a certain amount of money for a down payment on a home to use when they become attendings, for others it may be to have the ability to cut back to part time or just work one less day per week. Whatever your financial goals are, investing gives you the opportunity to reach them sooner. As your net worth grows, you start to accumulate wealth and one of the best things money can buy is control over your time. Think about how nice that would be.
4. Investing allows you to invest as you save. This is perhaps one of the biggest perks of investing as a resident or young professional. Investing money through a Roth IRA (that you can open by calling a place like Vanguard or Fidelity) gives you tons of options including the ability to invest as you save. What do I mean by that? You can contribute money to a Roth IRA then choose to invest it however you’d like (preferably in low cost index mutual funds like VTSAX or VIT). With a Roth IRA, you also have the option to take your contributions out of the account at any time. This means you can open a Roth IRA and contribute $500 per month up to the yearly maximum of $6,000 per year. During your time in training and career building this money is growing and gaining compound interest. Once you finish training you can choose to take your contributions out of the account (and use the money for a wedding, fancy vacation, or down payment on a home) but keep the profits you made on that money inside of the account. In other words, you were able to make money on your investments and still save for the big item you planned for. You can also choose not to take out your contributions and instead keep all the money inside of the Roth IRA until you retire. Having the option the take your contributions out of the account at any time allows you the flexibility to use this account as a backup savings account that actually earns interest.
What do you think? If you’re a resident physician or young professional making the median income, will you start investing money this year?
Plan for the Unexpected
If there’s one thing I’ve learned as an adult it’s that sometimes things just happen. You may think you are on track with your career, your finances, or your personal life, but life has a way of surprising us. Sometimes these unplanned events are good. We get a promotion at work, another stimulus check from the government, or an impromptu visit from a friend we haven’t seen in a long time. But other times, these surprises are major problems we couldn’t have predicted or avoided, especially when it comes to finances.
You may be costing along, saving and investing a certain percentage of money and then something unexpected happens. Your car breaks down, your laptop dies, or something urgent comes up that requires your time, attention, and money. Up until a few years ago, these unwelcome occurrences would get me down and make me anxious. I’m a planner who would get frazzled whenever things deviated from how I envisioned.
In order to decrease my anxiety, and feel better prepared, I needed to start planning for these inconveniences, at least the financial ones. I used to just rely on my emergency fund, but then I realized I was needing to dip into that fund a little too often, so I had to put a better plan in place.
My solution was 3-fold:
Cut back on unnecessary spending elsewhere. I re-examined my budget and tried to think about ways I could cut back. For me, it was decreasing the amount of money I spent each month on food and wine, especially when I’d travel out of town. I set a preliminary spending limit every time I went to a restaurant so that I wouldn’t go overboard. I also began to cook more at home and was more diligent about searching for discounts whenever I’d travel out of town.
Set extra money aside each month. For me it was $200. Whenever I got paid I’d automatically plan for $200 to be gone in “incidentals.” If I didn’t have to spend the money one month then I could use it however I pleased but if I did need to spend the money then at least doing so wouldn’t totally wreck my budget. Having money set aside for these unexpected expenses made me less stressed when things would come up.
Increased my income. While I was waiting to see if I’d get a raise at my main job, I took matters into my own hands. How? By trying to make more money from other income sources. Whether it was working extra shifts at the clinic or trying to monetize my hobbies and side hustles, I tried to increase my income so that unexpected expenses wouldn’t totally destroy my budget and savings goals each month.
Do you also have added expenses that come up each month that throw you off your game?
If so, the solution isn’t to just charge the expenses on a credit card and hope to pay off the card someday. You may want to adopt a plan similar to mine so that you are more proactive and less reactive when/if these unexpected expenses occur.
8 Reasons Single Young Professionals Pay A Lot In Taxes (and what they should do about it)
It’s tax time and if you’re like most Americans you’re either hoping for a refund or praying you don’t owe Uncle Sam money you already spent. Unfortunately, many single young professionals are in the latter group, my brothers included.
After doing some research, asking other young professionals, and talking with my father (who is a government auditor) I began to learn several key reasons why my brothers’ tax rate, and yours too, may be much higher than the average. Here’s what I discovered….
They make a lot of money. This first reason is self-explanatory. In order to pay a high amount in taxes you usually have to be earning a high income. While everyone’s definition of “high income” may vary, it’s safe to say that if you are a single young professional making at least 6 figures per year (in any city except San Francisco, LA, DC, or NYC) then you are probably doing pretty well for yourself. Our tax code is progressive, which means that the more money you make the higher percentage you pay in taxes. While this may be a huge drag for many people in the higher tax brackets, the government provides services and protections we all benefit from and we can’t expect those struggling to provide for their basic needs to fund it. Much of the burden falls on the high earners.
They earn most, if not all, of their income from their employer. Earned income, such as the salaries we get from our jobs, is taxed at a much higher rate than passive income or investment income. So, if you get all of your money from your job and have not started generating other revenue streams from various investments or business ventures then you will be taxed at a higher percentage. Some young professionals make a good portion of their income from commissions due to sales or may earn end-of-the-year bonuses from their job. If these bonuses or commissions come in the form of a separate check, they are taxed at an even higher rate (22% in 2018). This means that nearly a fourth of the extra money they earned went directly to the government in taxes. Whether it’s all “earned income” from salary or a combination of salary, bonuses, and commissions, the issue is that the type of income they receive is taxed at a high rate.
They are single. It is no secret that married people have lower tax rates than single people. Just look at the tax brackets and you’ll see that a married couple making the same amount of money as a single person will pay much less in taxes each year. Why? Well because back in the day it wasn’t as common for both adults in a marriage to be employed. Typically, only the male worked and the wife stayed home to raise the kids. Thus, the government gave a tax break when people got married because it assumed that there was only 1 person working and didn’t want to overtax that one person who had to also use part of his (or her) earnings to financially support the non-working spouse. Nowadays, it is much more common that both people in a marriage work, but that tax benefit is still in place. Many young professionals are single and have waited longer to get married, thus they end up paying a higher portion in taxes. (Of note, this rule is reversed for couples that make over $600,000 a year, but for most folks, married couples pay less in taxes than single people.)
They do not have kids. The government wants people to procreate. Having kids that grow up to be productive members of society benefits the country as a whole and solidifies our viability as a nation. But kids cost money. Those little humans have so many needs and require a plethora of resources that can be quite expensive. The government understands this fact and has various tax breaks in place for people who have kids as a way of saying “here’s a small token of our appreciation for taking care of the little people.” Parents get a tax credit for raising kids, additional reimbursements for childcare costs, and other tax deductions for educational expenses. This does not make up for how much parents spend since kids are quite expensive, but it does help. Many single young professionals don’t have kids, so they are ineligible for these credits and tax breaks.
They do not have any dependents. Along with receiving a tax credit for having kids, there are also tax deductions for taking care of other people. Anyone who takes care of someone who can not, or does not, care for themselves (such as a child, disabled person, non-working relative, or elderly parent) can file his or her taxes as “head-of-household” instead of “single” which makes them eligible for larger tax deductions that save them even more money. Now I’m not suggesting that young professionals become fiscally responsible for other people, but I am pointing out the noticeable difference in tax savings that come from changing one’s tax filing status from single to Head-of-Household.
They do not own a home. Many young professionals prefer to live in major cities. They like being close to their jobs and having the convenience of apartment-style living (i.e. free maintenance repairs, in-house gyms, the freedom to move to another place after the lease ends, etc.). As a result, they pay rent. The only bad thing about paying rent and living in an apartment is that they are ineligible for one of the largest deductions in the tax code: the mortgage interest deduction. Many people who own a home have a monthly mortgage payment (since they didn’t pay the full cost for the home up front). While a portion of this mortgage payment is used to pay off the amount they borrowed from the bank, another portion of this monthly payment goes towards “interest” (the fee that the bank charges for loaning you money for the home). The government wants people to purchase homes and have reliable housing so there is an incentive in the tax code that allows homeowners to deduct the portion of their monthly mortgage payment that is “interest” from their taxes. When you first buy a home the “interest” portion of the mortgage payment is a fairly large percentage, so the mortgage interest deduction adds up to a large amount in tax savings. Thus, while many single young professionals are paying rent, some of their counterparts have purchased a home. Even though the monthly payment for the person who lives in a home may be the same or slightly higher than the cost of rent, the person who lives in the home is able to deduct a large portion of their monthly payment from their taxes and could be saving tens of thousands of dollars each year.
They are not putting much money into retirement accounts. Although some jobs may not offer a 401K, the majority of salaried jobs have a retirement account in place for their employees. The advantage of these accounts is that many of them are “tax-deferred.” This means that when you contribute to retirement plans like a 401K, you aren’t taxed on the money you put into the account until years later. As a result, the more money you put into your retirement account now, the lower your tax rate will be when you file your taxes each year. Despite these tax savings, many single young professionals don’t put as much money into their 401Ks as they can. To be fair, it is usually because they prefer to have more money available to them during each pay period. They might have other uses for that money, want to prioritize paying off their student loans, or may simply desire to live a more affluent lifestyle. While these are all understandable reasons, the fact that they are not contributing more to their 401Ks raises their tax rates.
They do not have enough money coming in from investments. The profit you make from investments (whether it is investing the stock market, real estate, or various businesses) is taxed at a much lower rate than earned income from your job. Sometimes it can even be shielded from taxes entirely. If single young professionals really want to lower how much they pay in taxes, they may need to invest the money they have in ways that can decrease their tax rates and add to their monthly incomes.
Despite all of these reasons for a high tax rate, my solution isn’t necessarily to get married, start having kids, or quickly buy a home or condo. While those are all viable things to do, I don’t advise that anyone rush into a decision like that. Making a decision in haste could have endless repercussions that could far outweigh the tax savings.
Instead, single young professionals should start actively investing more of their money. I am not suggesting that they randomly buy some stocks they saw on Bloomberg, or start investing in things they barely understand (like Bitcoin). Single young professionals should strongly consider starting a side business or begin investing in things like commodities or real estate. They will have to increase their knowledge on whichever route they choose so that they make educated investment decisions. Nevertheless, becoming an active investor or business owner will not only lower their tax rate, but it will also increase their monthly revenue and make them less dependent on the salaried jobs that keep taxing them at high rates.
To summarize, many single young professionals pay a lot of money in taxes. While each person’s situation may differ, there are usually 8 main reasons their tax rate is so high. They make a high income, they get most of their money from their jobs, and don’t actively invest a significant portion of their income. They also are single (and forgo the tax benefits of being married), many don’t have kids or dependents (which may save them money overall, but still make them ineligible for the plethora of tax incentives available to parents). Plus many of them prefer the perks of apartment style living (and are ineligible for deductions available to homeowners). Lastly, they do not contribute as much to their retirement accounts (which would further decrease their tax rates). Until these single young professionals decide to get married, procreate, and find a home, they should strongly consider investing more of their money. Profit earned from investments can not only add to their monthly incomes, but it can also substantially lower the amount they pay in taxes. A pretty sweet deal, if you ask me.
Do you agree? What things do you think you could start doing to lower your tax rate?