Unlike many investors, I don’t buy or trade individual stocks. I explain in detail why I’ve bypassed this new trend in a previous blog, but the main reason I don’t buy or trade individual stocks is because the price of stocks changes too quickly. It’s hard to predict if a stock will go up or down. Since stock prices are so volatile (and change so often) there is an increased risk that I might lose money. My goal is to invest in a way that increases the chance I’ll make a profit but has a low risk that I may lose money. The main way I maximize profit and minimize risk is by investing in index funds.
Index funds are groups of many different stocks that follow a certain index. For example, one index fund may follow the S & P 500 index and purchase hundreds of stocks from American companies. Another index fund may be filled with thousands of stocks from all around the world. There are many different choices. When you purchase an index fund you are buying a fund that has purchased a percentage of all the stocks in that index. By purchasing a percentage of hundreds or thousands of stocks, you have better diversification in your investment portfolio with much lower risk of losing money.
There are many different choices of index funds to choose from. I have accounts at Vanguard and Fidelity (which are two of many different types of brokerage firms). Through these companies I have chosen 5 main index funds:
1. Total Stock Market Index Fund I invest in this fund at Vanguard through my employer-sponsored retirement account at work (called a 403b which is very similar to a 401K). I also invest in this fund through my Roth IRA at Fidelity. This index fund has a portion of over 3,600 stocks from small, medium, and large sized American companies. With this fund, I own a portion of all the stocks in the United States. The greatest percentage of money in this fund is invested in Apple, Microsoft, Amazon, Facebook, Google, and Tesla. It also has much smaller percentages of thousands of other companies. Altogether, this fund has made over 20% in profit over the last year and 15% in profit over the last 5 years.
2. Total International Stock Market Index I also invest in this fund at Vanguard through my 403b and through my Roth IRA at Fidelity. Unlike the previous index fund, this particular fund has over 7,000 stocks from all over the world. 38% of these stocks are from European countries. 24% of these stocks are from emerging markets in developing countries. 26% are from countries in the pacific and about 6% are from countries in North America. This fund has made over 11% in profit over the last 5 years.
3. Total Bond Market Index Fund I invest in this fund at Vanguard through my work 403b. This fund buys almost all of the bonds in the United States. Since these are bonds, there is much less risk that I will lose money but because of this extra caution, the returns aren’t as great. This fund has over 10,000 bonds with 63% of them being US Government bonds. It has made a return of about 5% over the last 5 years.
4. Total International Bond Market Index Fund I invest in this fund at Vanguard through my work 403b. This fund buys bonds from all around the world. This fund has over 6,000 bonds with over 57% of them from Europe. It has made a return of about 4% annually over the last 5 years.
5. Real Estate Index Fund I invest in this fund through my Roth IRA at Fidelity. This fund is filled with lots of smaller real estate funds that are full of many smaller real estate deals. I chose to invest in this fund in an effort to add some real estate investments to my portfolio. Over the last 5 years, this fund has had an average annual profit of 5%..
Overall, about 20% of my money is in real estate index funds, 5% in bond index funds, and 75% is in stock index funds. What is the makeup of your investment portfolio? Are you using index funds?
4 Steps to Balance Investments in your 403b (or 401K) and your Roth IRA
Last year, I prioritized contributing to my 403b. Nowadays, I use the income from some of my side gigs and other jobs to contribute to a Roth IRA as well. If you are considering doing the same thing (by contributing to your employer-sponsored retirement plan and your own Roth IRA), here are a few steps you can follow:
Step 1: Have a plan for all your retirement investing. My investment portfolio is overwhelmingly filled with stocks. As someone who is [relatively] young with plenty of work years ahead of me, I’m decades away from retirement. Since I won’t retire for a while, I can include a high percentage of stocks and take more risks with my investments. By taking more risk, I increase my chances of making a profit on my money. Even if I “lose” money intermittently by taking so much risk, I have plenty of years to make up the losses, if they occur.
The percentage of stocks you have in your investment portfolio may be different. There are various investment allocations for people of all ages and stages of life with various risk tolerances. Some younger people choose to only invest in stocks, some choose to invest in stocks and bonds, and others like to have some real estate, commodities, or other alternative options. I’ve decided on a retirement investment allocation that fits me best: 75% in stocks, 15% in real estate, and 10% in bonds.
Step 2: Determine the type and percentage of investments to add to the Roth IRA. Now that I know what percentage of my retirement portfolio I want to allocate to each category, my next step is to determine which investments and how much of each investment I need to add to my Roth. Because I already have some of my investments in my main job’s retirement plan, I now need to add the remaining investments to my Roth IRA. When adding the remaining investments to my Roth IRA, I must make sure that the total value of all of my retirement investments remains at my desired allocation of 75% stocks, 15% real estate, and 10% bonds.
In my main job’s retirement account, I am invested in a target retirement index fund that invests my money in 90% stocks and 10% bonds. This means I need to add real estate index funds to my Roth IRA and also invest in some stocks and bonds in my Roth IRA to maintain my desired investment percentage. (Side note, although I plan to invest in actual real estate through the purchase of apartment buildings and multifamily homes, I like my retirement real estate investments to be in REITs aka Real Estate Investment Trusts - which are like giant real estate index funds that invest in many different properties). Also, keep in mind that since Roth IRA investments are made with money you already paid taxes on and never have to pay taxes on again, it’s often wise to make sure that you use this Roth account to make investments in things that pay dividends so you can avoid paying taxes on the money you make from those investments.
Step 3: Have the money automatically withdrawn from your account each month. Once I know how much of each investment I want to have in my Roth IRA, I just need to make sure I actually place the money into my Roth account. Although some people like to contribute the max allotment of $6,000 per year at one time to get their money invested sooner rather than later, I invest it in small pieces each month. Doing it in small pieces instead of all at once has two benefits for me.
First, it gives me more flexibility so that I can decrease the allotment one month and make up for it the next month if I need to. Secondly, contributing periodically each month gives me a greater chance of buying stocks at a “discount.” (The prices of stocks and index funds fluctuates. If I buy all of them at one time with by investing one large sum of money in my Roth IRA at once, then I buy all the stocks (or index funds) at the same price. However, if I invest a little each month then I increase my chances of buying stocks (or index funds) when they may be a lower price. Although there is also a chance I could buy the stocks (or index funds) at a higher price, doing it a little bit at a time has been shown to save people more money overall. This is known as “dollar cost averaging”. Each person is different, but I prefer to have the money automatically withdrawn from my account each month and invested into my Roth IRA. (When my salary increases, I’ll likely have the $6,000 taken out over 3 months instead of over the entire year)
Step 4: Adjust the investment percentages periodically. The prices of stocks, bonds, and REITs can fluctuate. Sometimes the prices change by only a small amount and thus stay at around the same price. Other times the prices of the investments can change by a lot and remain at this new level for a few months or even years. For example, when the coronavirus pandemic hit, the price of many stocks decreased and stayed low for a couple months before they started to come back up. When these fluctuations occur, they can change the balance of my retirement investments.
If stocks (or index funds) decrease then that means the value of the stocks in my portfolio have decreased, which means that instead of having 75% of my money in stocks this percentage may decrease to around 70%. In order to get back to my target of 75% I will need to buy even more stocks in the future (increase the percentage of new money I have going towards stocks) to make up this difference. Although different people have different preferences for how often they plan to adjust their investments, I plan to do it once a year.
Tell me, do you have a Roth IRA? If so, how are you investing it?
I invest in a 403b AND a Roth IRA, here's why:
As a young professional who is trying to build wealth, I invest money. Although there are a myriad of different investment accounts and strategies, I invest in index mutual funds through my employer-sponsored retirement plan and through my own Roth IRA. Yes, I have both types of accounts. Let me tell you why.
I invest in my employer-sponsored retirement plan (which is a 403b, that is very similar to a 401K) because:
1. I get a match from my employer to invest in their plan. Back in the day, many jobs offered their employees a “pension” when they retired. This pension would guarantee an employee a certain percentage of their salary even after they retired and stopped working. Although these pension plans were great for the employees, they were extremely expensive for many companies. Thus, most jobs today no longer offer pensions. They instead, want to encourage their employees to save for their own retirement and give them an incentive (in the form of a retirement match) to do so. Through this retirement match, your employer will match what you contribute to your retirement plan. My employer, similar to many other employers, offers a retirement match if I contribute to my work-sponsored retirement account (aka a 403b). Since I don’t want to forgo free money, I contribute to my work retirement plan to get their “match.”
2. It saves me money in taxes. As an unmarried physician with no children, I pay quite a bit in taxes. Although I don’t mind contributing money to ensure that our government can run smoothly and fund things like education, infrastructure, and national defense, there are certain incentives in the tax code that can help reduce the amount of taxes I’m expected to pay. One of the incentives is contributing to a retirement plan. By contributing money to my employer-sponsored retirement plan, I am able to defer paying taxes on the money I contribute which decreases my tax rate. I also have the option of contributing to my work retirement plan via a 403b Roth, in which I can choose to pay taxes now and shield the income and profits from taxes when I withdraw the money later. So, whether I choose the pre-tax 403b (to help me save money in taxes now) or the 403b Roth (to help me save money in taxes later), either way I get to save money in taxes. Thus, either option is a win-win.
3. It decreases my student loan payments. Like many college graduates, I have student loans. In fact, the amount of student loans I acquired from medical school is so high that I had to consolidate my loans and enroll into an income-based repayment plan to make the payments more affordable. This plan, called REPAYE (revised-pay-as-you-earn), caps my student loan payments at 10% of my discretionary income which makes my monthly student loan payments much more affordable. As a resident physician who works for a non-profit hospital, I am also considered a “public servant.” Through a program called Public Service Loan Forgiveness (PSLF), after making 10 years of student loan payments, public servants who work for non-profit companies can get the remaining balance of their student loans forgiven, tax-free. Since the student loan payments I need to make are based on my taxable income, the more I lower my taxable income, the less money I have to pay in my student loans. One way I lower my taxable income, and thus lower my monthly student payment, is by contributing to my work-sponsored retirement account.
In addition to my work 403b, I also invest in a Roth IRA because:
1. I can make other types of investments that I can’t make in my employer retirement plan. Unlike my 403b or 401K, a Roth IRA is not set up through my employer. Because it is not connected to my employer, I have more options in the way I want to invest my money. Instead of being limited to certain mutual funds or index funds, I can expand my options. Through my Roth IRA, I invest in REITs (real estate investment trusts). By investing in REITs, I am able to make money via real estate, since these REITs invest in a variety of real estate deals and syndications. Adding real estate to my investments helps diversify my portfolio in a way that can make me even more money overall.
2. It gives me more flexibility whenever I want to withdraw the money One of the things I really like about the Roth IRA, is that because I contribute to it with “after-tax” dollars, there are fewer restrictions on when I can take the money out of the account. Although it is supposed to stay in the account until I retire, I can withdraw my contributions at any time, with no penalty (as long as I keep all the earnings/profits in the account). Thus, if I contributed $5,000 and made $500 in profits, I can take out the $5,000 I contributed at any time as long as the $500 I made in profit stays in the account. This means that if I ever run in to an emergency or decide to use some of the money to pay off student loans or purchase a home, I can withdraw some of the money from this account when I need. A Roth IRA is like a retirement account that I can technically use as a back-up emergency fund if I absolutely needed to.
3. I don’t have to pay taxes on the money in retirement when I take it out. Unlike my employer-sponsored retirement plan, I contributed to this Roth account with after-tax dollars. This means, when I withdraw the money in retirement, I don’t have to pay taxes on the earnings I made or the money I contributed. Because of this fact, a Roth IRA helps me keep more money! For example, if I retire with $1,000,000 in a pre-tax 401K and $1,000,000 in a Roth IRA. I will have to pay 20-30% in taxes on the money in the pre-tax 401K. So even though there is $1 million in the account, I will have to pay $200,000-$300,000 in taxes on that money. With a Roth IRA, I will owe no taxes and will get to keep it all.
4. I can leave all the money in my Roth IRA to my children without them having to pay taxes on it. Another thing I love about the Roth IRA is that I can give it away to my [future] kids. Instead of trying to leave them a separate inheritance, I can simply leave my Roth IRA to my kids and their kids. Doing so, will help the money keep building overtime and allow me to set future generations of my family up for financial success.
My point? Both my employer-sponsored retirement plan and my Roth IRA have advantages. Instead of choosing one over the other, I contribute to both accounts to maximize the benefits. Tell me, do you contribute to your work-sponsored retirement plan AND a Roth IRA?
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?
5 Life Lessons from the book: You are a Badass
For those who may not know me personally, I love to read. Although many of the books are about finance and investing, I learn a lot from reading other topics as well. The self-help books inspire me to do more with my life and the autobiographies/memoirs from celebrities allow me to escape my own reality and delve deep enough into their world that I can learn from their struggles and share in their triumphs.
One of the books I just finished was You are a Badass by Jen Sincero. It’s a New York Times Bestseller and was suggested by someone I trust so I decided to check it out. The book was great and there are some key life lessons we could all glean from it. Here are 5 of the key takeaways below:
1. “Our thoughts become our words, our words become our beliefs, our beliefs become our actions, our actions become our habits, and our habits become our realities.” In other words: You are in control of your destiny. What you end up doing and accomplishing in your life depends a great deal on what you believe is possible. What you believe is possible depends on what you tell yourself and what you think about yourself each day. If you want to change your reality, change your thoughts and beliefs. For me, that means saying positive words of affirmation each morning. It means reading devotionals and inspirational stories that help open my mind to what is possible. I tell myself I am smart and intelligent to help increase my confidence before heading to work each day. I tell myself that I will approach every situation as an opportunity to grow so I can view situations more positively. I tell myself that I am loved so I never doubt my self-worth. What things do you tell yourself? What beliefs do you have? What thoughts do you think? Your answers will shape your reality.
2. “Do yourself a favor and use irritating situations and people as opportunities for growth, not pain.” We have all been in numerous situations, either at work or at home, that have been irritating or annoying. Perhaps one of our co-workers is being unreasonable, one of your children refuses to stop talking, or you come home to a messy kitchen that you just cleaned the day before. Instead of letting these situations frustrate you or put you in a negative mood, why not use them as an opportunity to grow? Whenever I have hard days or a series of negative things happen in my life, I change my thinking and view it as a “character-building” opportunity. Instead of lamenting subpar situations, use them as a chance to grow.
3. “Procrastination is one of the most popular forms of self-sabotage.” There is no guarantee that you’ll have time tomorrow to do the things you are putting off today. Something may come up or take precedence that you didn’t expect. Don’t delay on your dreams. Don’t keep pushing off your goals. Recognize that there is no time like the present. Are there things you want to accomplish before you get married or have children? Are there things you want to do before you reach middle-age? Come up with a plan to start working on them now. You don’t want to look back on your life a year from now or 5 years from now and have regrets. Don’t delay on your destiny.
4. “Don't answer the phone or reply to texts while you're busy. Other people's needs can occupy several lifetimes' worth of our attention, and if you let them, they will.” Prioritize yourself. Set boundaries for yourself. Protect your time. If you are working on a creative project then put your phone away, dig your heels into the ground, and focus on the task at hand. While you can be available to others numerous times throughout the day, it is also important to carve out time for yourself that you can use to focus or recharge. If you constantly allow other people’s phone calls, text messages, and social media alerts to distract you, you will delay your own progress and find yourself engulfed in other people’s problems and issues. Put yourself first.
5. “The people you surround yourself with are excellent mirrors for who you are and how much, or how little, you love yourself.” Be mindful of the company you keep. Your friends are a reflection of the values you cherish. Are you around people who are of good character and who constantly strive to do the right thing? Are you around people who challenge you to view things with a different perspective, who are givers, who are ambitious? If not, re-examine your friend group. You will become like the people you hang around most. If you do don’t like who you’d become, then change your friends. Add people to your inner circle who challenge you, inspire you, and motivate you to be a better version of yourself.
5 Lessons GameStop Taught Us About Investing
Over the last few weeks there has been a great deal of buzz about GameStop. In case you missed it, GameStop is a retail company that sells video games and associated equipment in shopping centers across the country. Due to the recent pandemic, many Wall Street Investors noticed that people are shopping in person less and thus predicted that the GameStop and its stock would go down in price. Some of those investors even made bets that this would happen (by “shorting" the stock).
Many individual investors on an internet forum disagreed with this prediction. In an act of defiance, they decided to buy large shares of GameStop stock and encouraged everyone on the forum to do the same thing. As more and more people bought the stock, the price of the stock increased drastically. The stock price increased from around $20 at the start of the year to over $400 at one point proving the Wall Street investors wrong and causing some of the largest investment firms to lose millions of dollars in the process. Conversely, many of these individual investors who were on the internet forum made thousands of dollars. Many people realized how much money they had made and began to sell the stock to realize their profits. As more people sold their stock, the price of the stock began to decrease. As I’m writing this article, the stock is around $60.
Here are 5 lessons we can learn from GameStop:
1. Sometimes buying individual stocks can make you a lot of money. The GameStop stock price increased from $20 to over $400 at some point. People who purchased shares of the stock around that lower number and sold it around the higher number made a substantial profit. There have been reports of people making thousands of dollars and beyond.
2. If you purchase a stock when it is already near its peak you can lose a lot of money. While many people on the internet forum who bought the stock when it was around $20 made a huge profit, many people who purchased the stock when it was near $300 or $400 were not as fortunate. Because the stock went down in price and is now around $60, anyone who bought the stock higher than this price lost a substantial amount of money.
3. Making money buying individual stocks relies on good timing and good luck. Some people made a lot of money by purchasing the stock and some people lost a lot of money by purchasing the stock. Which group you may fall into if you choose to buy individual stocks depends on many factors, but two of the biggest factors “good timing” and “good luck.” None of us can predict the future, so despite how good we think our guesses may be, making money by purchasing individual stocks has a great deal of risk. Who could have predicted that people on an internet forum would buy stock in a struggling company and cause the price to increase over 600%? Who could have predicted that the price would decrease to $60 less than 2 weeks later? A lot of the profit people make buying individual stocks requires them to buy the stock and sell the stock and just the right point and timing these two things can be challenging to say the least.
4. The prices of stocks can change drastically. In this situation, the price of GameStop stock ranged from $20 to well over $400 and the change happened in the span of weeks. Although changes to stock prices don’t usually have this wide of a range, this situation was a good illustration of a key investment principle: prices of stocks can change and some stocks are more volatile, and likely to have these types of changes more frequently than others. This can be great news for investors who are able to “time the market” and happen to buy the stock at its low point, but this can be hard to do. Stock prices change for myriad of reasons that you can’t always predict.
5. Stock prices aren’t always based on the company’s financials and overall value. GameStop prices changed a lot over the past few weeks, but this change wasn’t based on something that the company itself did. In fact, nothing about the actual business of GameStop or its financial outlook changed. Yet, despite this, the stock price fluctuated a lot. Although this worked out well for investors in GameStop who made profits, the fact that stock prices can change may not be so good for other companies who are more successful. In fact, it isn’t uncommon for successful companies to experience a drop in their stock price despite increasing their revenue and doing good from a “business sense.” Since a company’s stock price isn’t always based on the company’s financials, this makes it more difficult to predict which stocks will earn you a profit and which will not.
My point? Buying individual stocks is risky. You have the potential to make a lot of money, but you also have the potential to lose a lot of money. What actually happens for you depends a lot on luck. To avoid having to rely on good luck, I invest in index funds. This means I own a little piece of all the stocks. This strategy gives me steady profits and also minimizes risk.
4 Reasons to Open a Roth IRA
I am a huge proponent of saving and investing money for retirement, even as a relatively young professional. One of the best accounts to use is a Roth IRA. Here are 4 reasons why.
1. It allows you to save/invest money for retirement which can help you build your net worth quicker. A Roth IRA is a type of retirement account that you can invest in with income you earn from your job. The benefit of contributing money into this account is that although the account technically is for retirement, it has many other benefits as well. One of the biggest benefits is that it allows you to invest money in a way that builds your net worth quicker (since there are fewer fees and taxes associated with it). The sooner you are able to build your net worth, the more options you will have in life. Not only can you retire early, but you can also choose to work part-time, accomplish many of your financial goals a lot sooner, and rethink how you want to spend your life. If you choose to stay at your current job you may do so, but if you decide you instead want to take a year-long sabbatical to travel or work for a non-profit organization you can do that as well. Building your net worth sooner rather than later allows you to re-define how you want to spend your life. Investing in a Roth IRA makes this easier.
2. It’s tax-efficient, so you don’t have to pay taxes on the profits or the withdrawals. Taxes may not be the top thing on your mind, but when it comes to making and investing money, it is something that I think about often. The taxes you pay each year, from each paycheck, is likely your largest expense. If you are able to find ways to reduce your taxes, then you’ll likely have a lot more money in your pocket each month. One of the reasons I like the Roth IRA is because it’s tax efficient. Instead of having to pay taxes on the profits you make from your investments or paying taxes when you withdraw your money from the account later in life, a Roth IRA works differently. Since you contribute to a Roth IRA with earned income from your job (which is money that you have already paid taxes on), you never have to pay taxes on that money again. This means that any profit you make from your investments is tax free and you don’t have to pay at least 20% in taxes like many other people do with other types of accounts. Plus, when you withdraw the money in retirement, that money is also tax free.
3. There is more flexibility on when you withdraw money, so it can serve as an extra emergency fund. Unlike many employer-sponsored retirement plans like a 401K or a 403b, a Roth IRA is not tied to your place of employment. This means you have a lot more flexibility in the type of investments you can make. Instead of being limited to the funds supported by your job, you can use a Roth IRA to make various other real estate or stock investments. You also have a lot more leeway on when you can take the money out of the account. Although the goal is to leave money in the Roth IRA until you retire, you can take out the money you contributed sooner rather than later if you need. In fact, as long as you leave the investment profits you make inside the account, you can withdraw your contributions at any time tax-free. This means if you desperately need the money to pay off student loans, buy a home, or move to a new city, you can technically just withdraw the money from your Roth IRA account to do so. It can serve as a back-up emergency fund.
4. You can give the money to your children tax-free, which gives you an extra way to leave your family an inheritance. I am a single young professional with no kids, yet. However, at some point, I’ll have children and would ideally like to leave them an inheritance. Unlike other accounts you can set up for your children as an inheritance, any money you give your future kids in a Roth IRA is tax-free. This means they won’t have to pay any taxes on this money when they get it. The less taxes they pay, the more money they keep. Thus, each year you can contribute to your employer sponsored retirement accounts to work on building your own net worth AND contribute to Roth accounts which you can then use as extra money for yourself and eventually gift to your children as an inheritance.
5 Life Hacks to Save More Money
When I graduated from medical school and started working as a physician, my goal was to spend less, save more, and live below my means. I knew that in order for me to actually accomplish this goal I needed to take certain action steps. Here are 5 life hacks I used to help me spend less and save more.
1. Set up Automatic Savings As someone who doesn’t always have the most self-control, I knew that if I was really going to start saving more money, I had to do it when I first got payed. If I waited until the end of the month or pay period to save, there wouldn’t be anything left. Thus, I had to do it at the start. I went to the payroll section of my work website and put in parameters to send a percentage of each check to an entirely separate account that I would use to save money and build up my emergency fund. The rest of the money went to my primary checking account at another bank that I used to pay bills and spend as I saw fit. By setting up automatic savings in an entirely separate account, I was able to reach my savings goals, learn to live below my means, and spend left over money in my primary checking account without feeling guilty. For me, it was a win-win. It is likely to be one for you as well.
2. Decrease the Temptation to Spend. As someone who feels the need to “treat myself” more often than I should I had to decrease the temptation to do so. It wasn’t enough for me to say I wouldn’t spend as much. I literally had to remove temptation for me to spend. That meant deleting the text messages from clothing stores about new sales and unsubscribing from department store emails or sending those emails to an account I barely check. It meant avoiding trips to the malls or outlets and trying to pay attention during zoom meetings instead of online shopping during periods of boredom. What things can you do to decrease the temptation you have to spend money?
3. Minimize how much you eat out. If there’s one thing about me, it’s that I love to eat. I appreciate good food and like to enjoy it when I can. Although I cook a good deal at home, there is something about eating a nice meal from a restaurant that really makes my heart smile. If I wanted to save more money, I knew I had to curve this habit. Not eliminate it entirely, but at least minimize how often I ate out, because although it was enjoyable it was costing me a lot of money. I try to minimize brunches and have small gathering with my friends at one of our homes instead. Minimizing how often I eat out has saved me a great deal of money. If you also have a habit of eating out often, perhaps you should consider decreasing the frequency to save more money.
4. Wait before you buy. One of the things that has helped me save a lot of money was minimizing impulse buying. Impulse buying is when you purchase something spare-of-the-moment that you may not need and likely would not have gotten otherwise. In order to decrease this occurrence, I started implementing a new rule of “waiting before I buy.” If I see something I want to purchase that isn’t a necessity, I make myself wait a few days before I purchase it. If I still want the item after a few days, then I purchase it, but I’ve found that oftentimes I don’t need or want the item as much as I thought. Consider implementing a wait-before-you-buy rule to decrease your spending as well.
5. Invest what you spend. This is another life hack I’m planning to implement this year. It’s the art of investing the same amount you spend. For example, if you want to purchase something for $100, then you must also commit to investing $100 or putting $100 in a savings account. Thus, anything you want costs you twice as much. Doing this prevents you from buying things you may not need and also ensures that you build up your savings/investment accounts simultaneously. If you are truly committed to spending less, saving more, and living below your means, this is a life hack worth trying.