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?
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.