5 Truths Every Resident Needs To Know

July 1st is just around the corner and for those who are new to medicine or unfamiliar with residency life, July is the start of the new resident physician year. A resident physician is a doctor who graduated from medical school and is getting specialized training in his or her field of choice while still seeing patients. Residents are doctors who are still actively learning (like a student in school) while they are also working and earning money.

Besides experience, the main difference between a resident physician and a regular physician (like an attending physician who is done with his/her specialized training) is that resident physicians work a lot more and get paid a lot less. I’m still a resident myself, so as you can imagine, it’s a busy time in our lives. There are a lot of things we have to worry about, but finances shouldn’t be one of them. Here are 5 money-related truths every resident physician, and young professional with high earning potential, needs to know:

1. You are not guaranteed to be rich. Just because you are a doctor and will have a high salary, does NOT mean you don’t need a plan for your finances. Most people who make more money, get into more debt. Your time as a resident is not an excuse for poor money management and credit card accumulation. Many doctors’ net worth is not nearly as high as it should be considering how much they get paid. Make some financial goals for yourself now and try to avoid some common pitfalls. Learning a few finance basics as a resident can go a long way.

2. Spend less. Save more. Minimize debt. Things can be challenging during residency so try to live below your means or at least avoid living above your means. You don’t have to have a detailed budget but creating a basic spending plan to prevent yourself from accumulating [more] debt during training might be helpful. Save money in an emergency fund so that small, unexpected expenses like a car repair, urgent trip back home, or new cell phone doesn’t derail your budget or financial goals. Vacations can serve as a much-needed break from the stress of residency, but try to pay for them in cash by saving a couple hundred dollars from each paycheck. If you can, invest some money in index mutual funds via your work retirement plan or your own Roth IRA. The goal in residency is to keep your head above water financially and avoid getting into more debt. 

3. Have a plan for your student loans. Choosing to “deal with it later” is NOT a plan. Read about the different student loan repayment options and choose one, likely an income-driven repayment plan, so that your payments are affordable in residency. Most residency programs qualify for public service loan forgiveness so take a couple minutes out of your day and sign up for this free program so that you have an option for your student loans to be forgiven after 10 years. When choosing a student loan plan recognize that the optimal student loan plan for you as resident may change when you become an attending. That’s okay. Just figure out the best federal repayment plan for you now, likely PAYE or Re-PAYE and consider hiring a company like Student Loan Advice or Student Loan Tax Experts once you finish training so they can run the numbers for you and help you determine the best repayment plan for you as an attending.

4. You need Insurance. As a resident physician, there’s a good chance you have health insurance from your employer that is either free or low cost, but health insurance isn’t all the insurance you need. Every resident physician needs long-term disability insurance. You may get a small amount through your residency program but that is unlikely to provide enough coverage. Most residents and attendings will need to purchase an additional individual long-term disability insurance policy. If you have a spouse, kids, or family members that you support financially, you may also need to purchase term life insurance. If you have a side business, you may also need extra liability insurance coverage. Figure out all of the insurances you need and make sure you get them.

5. Think twice before you buy a house. Owning a home can be a major milestone and lifelong dream, but it may not be wise to do so in residency. You cannot just compare the monthly mortgage price to the monthly rent price and make your decision. There are additional fees and costs associated with home ownership that can be challenging to deal with as a resident. Do what is best for your family, but make sure you consider all of the pros/cons of buying a home before you make the decision to rent vs buy.

5 Ways to Pass Wealth to Your Kids

As you continue to get your finances in order, you may also want to help your kids. Perhaps you plan to pay for their college education or assist them financially in some other manner. Here are 5 ways you can pass money (and wealth) to your kids.

1. Teach them good money habits. The first way to pass wealth to your kids is to teach them good money management skills. You can do that by modeling good financial habits yourself and by helping them learn how to handle money from an early age. Life can be unpredictable. Unexpected events or expenses can occur that may deplete your cash flow or alter your finances. Teaching your kids how to manage money, build wealth, and invest in efficient ways will help them create an endless number of resources and cashflow that could last years if not generations to come. However, you also have to commit to be a good example yourself.

Modeling good financial habits in front of your kids is vital because it will provide them with an example of how to handle money. This will help solidify the financial lessons you want them to learn. Kids may not always listen to what you say, but many of them copy what you do. Teaching important skills and modeling good financial habits is key.

2. Put money into a Custodial (UGMA/UTMA) account. Another way to pass wealth to your kids is to invest money on their behalf by opening a custodial account. Technically, there are two main types of custodial accounts: a Uniform Gift to Minors Act (UGMA) account and a Uniform Transfer to Minors Act (UTMA) account. Both of these accounts allow you to invest money on behalf of your child as the “custodian” or person in charge of the account. You contribute as much money as often as you like in the account and invest it however you choose. Once your child reaches the legal age of maturity (which can range from 18-25 depending on the state), he or she will get all of the money and assets in the account.

The perk of using a UGMA or UTMA custodial account is that your child can spend the money in this account on whatever they want. If they decide to go to college, they can use it for college. If they want to start a business, they can use it to start a business. If they want to use part of it to pay for a wedding, a down payment on a home, or travel abroad they can use it for those things as well.

3. Invest money in a 529 account. Another way to pass wealth to your child is to help them avoid debt. Although children aren’t born owing money, many teenagers acquire a substantial amount of debt from one key event in their lives: college. If you can prevent your kids from having to take out student loans for their education, then you will have saved them thousands if not hundreds of thousands of dollars in debt. Without debt, your kids will have more money to invest, start a business and pursue their dreams.

One of the ways to prevent them from taking out debt is to pay for their college education. Since the price of a college education is so high, you should plan for this event in advance and invest money for it early. One of the best ways to do that is to open a 529 college savings account. Through this account, you can invest money for your kids’ education in a tax-efficient manner. The money grows each year and accumulates over time. When your kids go to college you then have a substantial sum of money with which to pay for it.

4. Open a Roth IRA. Another way to pass wealth to your kids is to invest money in a Roth IRA. Through a Roth IRA your kid can start building wealth and investing for their own retirement at an early age. Starting as a child allows them to use the power of compound interest to their advantage which can have drastic effects on their net worth as they age. Investing $10,000 from age 15 to age 16 in index mutual funds through a Roth IRA (assuming an average interest rate of 10% per year) will grow to over $1.1 million by the time your kid turns 65. This means their retirement would be fully funded from an investment they made as a teenager!

Helping them make this investment in a Roth IRA as a teenager not only helps them build wealth but it also gives them the freedom to take more risks in their lives. They can start a business, try other investments, and have the ability to live the life as they want. However, in order to make this investment in a Roth IRA, your child has to have "earned income" in which they are paid as an employee or contractor for work. In order for your child to get this "earned income," you can either have them work a summer job or you simply hire them for your own business. For example, you can start a business and hire your kid or launch a website with some family photos and pay your kid as a model. There are several ways you can help your child earn income to invest in a Roth IRA.

5. Start a Trust. Another way to pass wealth to your kids is to talk to an estate planner/lawyer to open a trust. Technically, there are two types of trusts: revocable trusts (in which you can set up the trust for someone but take money in and out of it at any time if you need to) and an irrevocable trust (in which money placed in the trust is permanently there and cannot be withdrawn by you at a later time).

There are various reasons people may choose one type of trust over the other. However, both types allow you to give money and assets to your kids as you see fit. For example, you can place $10,000 in the trust for them to get at age 25. Put $100,000 for them to get after you die. Or, you can place $20,000 in the trust for them to get in increments of $5,000 every 5 years once they turn 18. With a trust, you can make up the rules and have them implemented however you want.

What do you think? Do you plan to pass wealth to your kids using one of the methods above?

5 Ways to Increase Your Net Worth

As a young professional who is trying to become financially stable and build wealth, there are a few things you can do to increase our net worth even sooner.

1. Contribute to employer sponsored retirement accounts. Allocating a certain percentage of your income (like 5-10%) to your work 401K or 403b allows you invest money each month. Investing in this consistent way will help you increase your net worth over time. Contributing to your work retirement plan may also help you get even more money to invest with especially if your employer offers a retirement match (in which they put extra free money into your investment accounts on top of what you already put in there). Since the contributions you make are pre-tax, investing money in your work retirement plan decreases your taxable income which can lower your taxes each year and decrease your student loan payments.

2. Open a Roth IRA. Contributing to a Roth IRA also allows you to invest money for retirement. Some of the perks of a Roth IRA are that you have more options in what you want to invest in, whether that’s stocks and bonds, real estate, or other alternative investments. You can also choose to invest at any time since contributing money to a Roth IRA does not have to be associated with the paycheck you get from your job. One of the best things about a Roth IRA is that your money grows tax free (so you never have to pay taxes on the profits you make). Plus, you can take the money you contributed out of the account at any time, if you needed it for an emergency.

3. Pay down your debt. Your net worth is the income you make and assets you own minus any debt you owe or liabilities you have. By lowering your debt, or paying it off completely, you automatically increase your net worth. If you happen to have high-interest debt, like a credit card or car loan, considering paying it off as soon as possible. Doing so will increase your net worth and leave more money in your pocket each month.

4. Reduce your largest expenses. Another way to increase your net worth is to decrease some of your monthly expenses. While some people focus on saving a few bucks each week on coffee, you can instead get a bigger boost in your net worth by lowering your largest expenses, like housing. Whether you rent an apartment or pay a mortgage on a home, there’s a good chance a large chunk of your income is spent on housing. One of the best ways to lower your monthly expenses and increase the amount of money you invest each month is to decrease your housing costs. Consider getting a roommate, renting out a section of your home, putting your place on AirBnB, or relocating to a cheaper area. Saving money on housing costs can have a drastic impact on how much money you have available to invest each month.

5. Set up automatic savings and withdrawals. Another way to build your net worth faster is to set up automatic payments for any credit cards, student loans, or car payments you owe. Doing so will ensure that you make these payments on time and will even give you the option of paying more than the minimum each month (automatically) which can help you pay off any debt you have sooner. You should also consider automatic savings. Having automatic withdraws of money from your checking account to your savings account can help ensure you are saving a certain amount each month which will help you stack more money overtime.

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:

1. 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.

2. 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.

3. 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.

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.

5 Habits That Can Make You a Millionaire

1. Setting up automatic investments. The vast majority of young millionaires achieved their financial status by investing money. Unless they are a celebrity or were born into a wealthy family, they had to be diligent about investing money either in the stock market, a business venture, or real estate. You must do the same. One way to do this is by making your investments automatic. Have a certain amount of money (aim for 10-20% of your salary) automatically deposited into your work retirement account, Roth IRA, or brokerage account. Invest the money inside of the accounts in index mutual funds, which make a profit of around 10% each year. Making these investments automatically prevents you from having to put money in the account each month. When you don’t rely on yourself to make the investment and instead make it automatic you increase the chance that you will meet your investment goals and accumulate wealth faster.
 
2. Having a separate account for savings. Along with investing 10-20% of their income, many young millionaires also have a certain amount of money they save. While most people start off with a goal of having $1,000 in a savings account for emergencies, many young millionaires and financially savvy folks exceed this amount. The general rule of thumb is to have 3-6 months of living expenses in a savings account just in case your income changes or you happen to lose your job. Aside from having money in a savings account, many financially savvy young professionals also save money for other things like yearly vacations, home purchases/renovations, holiday gifts, or car repairs. Consider setting up savings accounts for those things as well.
 
3. Living a modest lifestyle. Aside from saving and investing money, many financially savvy folks who achieve millionaire status also live a modest lifestyle. Instead of spending money on numerous expensive things, they tend to live below their means. In fact, there’s a saying that you can either look rich or be rich, but most people can’t do both. In order to ensure that you have enough money to save or invest 20% of your income you have to decrease the amount of money you are spending on other things. This means, you will probably not be able to lease expensive cars or buy a large home. Becoming a millionaire requires that you prioritize building wealth by investing a large chunk of your income. For most people, living a modest lifestyle is the sacrifice they make to invest the amount of money needed to build wealth.
 
4. Pre-planning large expenses/vacations. Most people don’t just wake up rich. Becoming financially successful at a young age requires a great deal of planning. Instead of being surprised by unexpected expenses or accumulating lots of credit card debt after each vacation many financially savvy folks plan ahead. They save in advance for large purchases and vacations. They create a budget for how much they will and won’t spend. Then they stick to it. A large factor in who does and does not accumulate wealth, depends on how disciplined you are and how well you plan ahead. Start doing so now.
 
5. Paying down [personal] debt aggressively. Lastly many financially savvy folks who end up becoming millionaires for the first time at a young age try to minimize personal debt. They try to avoid taking out huge car loans or mortgages and tend to pay back any money charged on the credit card within a short time frame. They understand that accumulating debt and keeping it for long periods of time costs them more money in the long run since they end up paying a great deal in interest. Most financially savvy people seek to make interest by investing money instead of paying interest by accumulating debt.
 
Tell me, do you want to be a millionaire at a young age? If so, what are some things you can start doing to put yourself in a good position to reach that goal?

5 Ways to Invest Your Stimulus Check

1. Invest the money in an index fund through a Roth IRA. A Roth IRA is a type of retirement account. One of the best things about investing money in a Roth IRA is that you can invest money without having to pay taxes on the profit you make. You can also withdraw your contributions at any time before retirement (tax-free) if you need the money for something else. If you invest in index mutual funds (like the Total Stock Market Index Fund) through a Roth IRA and leave the money in the account until you retire, interest will build overtime and you can make a large profit. The average interest rate/yearly profit of index funds is around 10% per year. Investing $1,000 of your stimulus check in the Vanguard Total Stock Market Index Fund is estimated to grow to over $17,000 in 30 years.

2. Increase the contributions in your 403b or 401K. Another way to invest your stimulus check is to invest in mutual funds through your employer-sponsored retirement account. Although you can’t physically transfer the stimulus money from your bank account to your work retirement account, you can go to your work portal and have your job invest $1400 from your next check into your work retirement plan. Similar to a Roth IRA, investing this money in a retirement account allows you to build wealth overtime. The benefit of investing this money in your work retirement account (or having the money deducted from your next check) is that it can save you money in taxes and may allow you to get extra money from your employer in the form of a retirement “match.” if you decide to have your job take out an extra $1400 from your check to invest in the Vanguard Total Stock Market Index Fund, that money is estimated to be worth over $24,000 in 30 years.

3. Open a 529 account to invest the money for your kid’s college. For those who are parents, investing the money in index mutual funds through a 529 account may be a good idea. A 529 account is similar to a Roth IRA or a 401K, but instead of using the money for retirement you can use it to fund your kid’s college education. Through a 529 account, you can invest in index mutual funds and allow the interest to stack up over time. Once your kid hits college age, you can use the money in this account to pay for their education. By investing money in this account, you can accumulate a lot more money for your kid’s education than you would by merely saving money in a savings account. If you invested the $1400 stimulus check in the Vanguard Total Stock Market Index Fund via a 529 account and let the money stack there for 18 years, that money will be worth almost $8,000.

4. Purchase index funds via a taxable account. Another way to invest money is to open up a regular brokerage account and purchase index funds through it. Similar to retirement accounts or a 529 account, a taxable account allows you invest money that will make you a profit over time. The good thing about a regular taxable/brokerage account is that you can invest money over time and withdraw your profits at any time (you don’t have to wait until retirement). You can also open these accounts invest in stocks or index funds through apps on your phone like Robinhood. The disadvantage to investing money in regular brokerage accounts is that you have to pay taxes on the profits you earn. So if you invest the $1400 stimulus check in the Vanguard Total Stock Market Index fund and it has a profit of 15% over the next year (so grows to $1610 making you a profit of $210) you have to pay taxes on the money at your ordinary income tax rate (which can range between 10-35% depending on your income level).

5. Open a custodial account for your children. Another way to invest the money is to open a custodial account, which is also known as a UGMA (Uniform Gift to Minors Account). This type of account allows you invest money on your kid’s behalf. If you aren’t sure if your kids will go to college and want to invest the money on their behalf to give to them when they are in their 20s, you can use this UGMA/custodial account. Similar to a 529 account, you can invest money for your kids, but unlike a 529 account the money does not have to be used for college. It is your kid’s money to use however they wish when they turn legal age (between 18-25 depending on the state).

Tell me, do you plan to invest your stimulus check? If so, do you plan to use one of the methods above?

Saving money isn't enough, You must INVEST!

If you are a young professional, there is a good chance your job has a retirement plan. Since I work for a non-profit organization, my retirement plan is called a 403b, but it is very similar to a 401K that many other companies offer. Even though I am decades away from retirement and could use even more cash to pay for things now, investing, especially investing for retirement, is a necessary sacrifice that I’m making right now. So should you. 
 
Investing will allow me (and you) to:
-increase our net worth
-build wealth
-pay down debt sooner
-provide a better life for our family
-live a better lifestyle
-become less dependent on our job
-have financial security when we are no longer able to work
 
Contrary to popular belief, most of us cannot just save our way to retirement or to a better life. Saving money is important, but it is not enough.

The interest rates in savings accounts are too low (so our money doesn’t increase much just sitting in a savings account) and inflation is too high (which means the price of things goes up each year). This means money made today is actually worth less than many made tomorrow because you can’t buy as much with it. Given these two principals, it is vital that you invest money. Let me give you an example.

Let's say person A makes $60,000 a year and decides to merely “save” 10% of her income each year (which is $6,000) in a savings account. Let’s say person B makes the same amount of money but instead decides to “invest” $6,000 (through his work retirement plan or Roth IRA) in stock market index funds which earn an average of 10% in interest each year.
 
After 10 years, Person A will have $6,000 x 10 years = $60,000 saved. 

According to Table 1 below, after 10 years Person B will have a total of $95,624.55.

Person A contributed a total of 60,000 and didn't make any money in profits. Person B contributed the same amount of money ($60,000) and made over $35,000 in profits after 10 years. Person B now has $30,000 more than Person A by choosing to invest money instead of just save it. 
 
If this trend were to continue for another 10 years, this difference would be even larger. Person A, by continuing to keep the money in a savings account, would have $120,000. Person B, by continuing to invest in index funds that earn an average of 10% in interest each year, would have $343,650. Nearly 3x as much money!
 
As you can see from this example, investing is critical to building wealth!
 
It is so critical that once you have a certain amount of money in an emergency fund, you should start investing money, even as you try to pay down debt. If you wait until you are completely debt free to start investing, you may be delayed in investing by several years and would thus miss-out on years worth of extra profits. 
 
Thankfully, there are many different ways you can invest money. Some people invest in real estate, others invest in their own business. But as I’ve shown in the example above, one of the most popular ways to invest is in the stock market.  Some people purchase stock in individual companies, but I prefer to purchase index funds, which are large groups of stocks from many different companies. Index funds earn an average of 10% in interest each year, which is what I used in the example above. Getting a 10% profit on your money each year will add up over time. 
 
Although you may choose a different type of investment keep in mind that certain investments and accounts may cause you to make more money than others, some may pose a lot more risk than others, and some may require you to pay more taxes than others.
 
One of the simplest and tax-efficient ways to start investing is to open a Roth IRA or contribute to your work-sponsored retirement account (which is a 401K, 403b, or 457). Once you determine which account to use, decide how you want to invest the money in that account. I purchase stocks and bonds via index funds, but you can choose what is right for you based on the options your job has available. The important thing is that you start investing money now so that you can become more financially stable and start to build your net worth over time. While saving money is good, investing money is better. 
 
Tell me, have you started investing money? If so what investments are you making and what type of account are you using?