5 of My Best Financial Decisions

As a young professional, I'm finally feeling as though my finances are on track. Although I've done several things to put myself in a decent position, there are 5 things that have helped me get on the right track and may help you as well. They are:

1. Learning about money. Many young professionals were not taught the basics of personal finance and investing in school. I myself had to seek out this knowledge and even when I did, I still had questions I had to ask other people. Despite the effort I put in, taking the time to learn about money management was one of the best decisions I ever made. Once I learned the basics, I was able to quickly get out of credit card debt. Doing so, saved me hundreds of dollars in interest payments and allowed me to start investing for retirement much sooner than I would have otherwise. The decision to aggressively pay down debt and increase my investments has allowed me to become more financially stable and create the foundation needed to build wealth.

2. Picking a career that pays a high salary. Not every job pays the same, but choosing a career that compensates well has done wonders for my finances. Instead of worrying about whether or not I can pay my bills on time, I can now focus on increasing my investments. Although one shouldn’t pick a job solely for the compensation, if there are multiple jobs you like equally choosing the one that pays more can have a positive effect on your finances.

3. Buying a slightly used car instead of financing or leasing a new one. When I was a medical student, I chose to buy a slightly used reliable car instead of buying or leasing a new one. When I became a resident physician, I again chose to buy a slightly used car instead of buying or leasing a new one. This decision saved me thousands of dollars both time. Instead of having a monthly car payment of $400-600, I use that money to invest in my Roth IRA and save money for future vacations and travel.

4. Living with a roommate for most of my twenties. This decision was hard to make at first. I was in my late twenties and really valued my own personal space. However, living with a roommate gave me the ability to live in a really nice place while still saving and investing a good chunk of my income. I had to prioritize my desires. Would I rather have the place all to myself or share a place for a few years and stack money I could use to pay down debt, invest, and save for fun trips? For me, living with a roommate was worth the sacrifice. As I enter my 30s I’ll likely get my own place, but choosing to live with a roommate in my twenties helped advance my finances in ways I can’t begin to articulate.

5. Investing early into retirement accounts. One of the ways many people build wealth and become financially independent is by investing money. One of the main ways they invest money is by utilizing retirement accounts (like their job’s 401K or opening up their own Roth IRA). By utilizing retirement accounts I am able to invest money in a tax efficient, passive way and build money over time. A big advantage to starting early in my twenties instead of waiting until I was in my 30s was that I gave the money more time to grow. The earlier I invest, the more time my money has to let the magic of compound interest work, which allows my money to make even more money overtime. Plus, investing early into retirement accounts taught me how to live below my means instead of inflating my lifestyle.

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.

5 Pro Tips I'd Give My Younger Self:

1. Realize personal finance is important. Despite what we may have been told about our careers and future high incomes, how we manage our money now matters a lot more than we may think. A lot of us are falling into a danger zone of being okay with rapidly accumulating student loans, credit card debt, and never-ending car payments which is a very VERY scary place to be.

   How we spend our money today, can drastically alter our quality of life a few years from now. The last thing you want to do is be in your mid-40s still complaining about the student loan debt your friends and family forgot you had, picking up extra shifts at a job you hate to avoid racking up even more credit card debt than you already have. DO BETTER.

2. Figure out how much you spend each month. I cannot stress how much my life changed when I actually set down and tried to create a monthly budget. Regardless of how “simple” it is, I can tell you that 90% of my med school classmates didn’t have one.

   As a med student life was so stressful studying for organ systems tests, clinical rotation exams, or Step 1 of the US Medical Licensing Exam that you barely have time to wash dishes, let alone try to understand finance. Most of my us just filled out a FAFSA form each year and magically received money from the government that covered our tuition and basic living expenses. We’d pay our rent, buy the food we wanted, and then realize we’re suddenly broke when the semester was about to end and our account balance dwindled. We’d sweat it out for a month trying to make ends meet, then fill out another finance form (aka FAFSA) and “magically” more money appeared in our bank account. Rinse. Wash. Repeat.

   No one told me not to over-spend my loan money on the post-board exam vacation I felt I deserved. No one stressed the importance of resisting the urge to “treat yo’self” during happy hour or a colleague’s birthday dinner.

   I am not saying you can’t do these things, but I want to stress making a budget because I’d bet that most graduate students and young professionals have no idea how much money they are actually spending each month. I know I didn’t. I mean I knew I was broke because I kept filling out loan applications every year, but I honestly couldn’t tell you my overall loan balance. Heck, I couldn’t even tell you my debit card balance. Don’t be as naïve as I was, DO BETTER.

3. Minimize the interest rates on the loans you have. The money you borrow now will cost you much more in the future. Let that sink in. The higher the interest rate, the more money you will pay back later. When you borrow $30,000 for school, you pay back closer to $40,000 later (assuming a 7% interest rate that you pay back over 10 years). That’s $10,000 extra you’re paying just in interest.

   You can minimize this by not borrowing as much in the first place and by lowering the interest rate on the loans you currently have. If you have credit card debt, simply call your bank and ask if they can lower the interest rate on your credit card. Yes, it really is that easy.

4. Spend less! We all want to look good, feel well, and vacation like a champ. Trust me I get it. I get envious when I see the Instagram photos of my med school classmates or work colleagues taking another extravagant vacation I cannot afford. It’s hard not to let the positive balance in my bank account distract me from the big fat NEGATIVE sitting in front of my net worth.

   As a med student, the student loan money sitting in my debit account was fictitious. It tricked me into believing I was richer than I was or that I can afford things I knew I couldn’t. When I finally had to face the big fat loan balance alongside my car payment and expanding credit card debt, I realized I needed to make a change.

   I knew I didn’t have much self-discipline so I had to stay far away from the malls. I deleted the text alerts of new “sales” from my favorite clothing stores, resisted the urge to buy a new outfit for weekend outings, and started cooking more meals at home. Before I knew it, I had changed my spending habits and paid off my car.

5. Practice self-discipline and delayed gratification. For the love of God and all things man please break your expensive habits. Mine was wine and lots of it. I liked it red, aged, and expensive. It just tasted better. But man was it costing me.

   I was spending at least $15 a week on wine, which doesn’t sound like much but when spread that across 52 weeks a year that amounts to $780. I mean I was spending nearly $800 on alcohol! This was going to cost me closer to $1000 when I paid it all back, since I was buying the wine with my student loan money. What a waste.

   Every year for Lent I tried to give it up and the day Lent ended I picked back up the habit. Don’t be me. Curve your habits. Do not waste money you don’t have on things you don’t need. Granted there is a balance, but graduate school is not the time to be treating yo’self to wine and fancy dinners every other week. Face it. We aren’t rich…yet. Quit pretending you have more money than you actually do. Practice self-discipline so you can get out of debt and start building your net worth.

Tell me, what ways have you started practicing self-discipline? What things are you going to try to spend less on this month?