I love to read books, listen to podcasts, and watch videos on personal finance, but some of you may prefer to hire someone to take care of that for you instead. And that’s okay. Whether you decide to manage things yourself or get a financial advisor, it is vital that you understand the basics. Don’t blindly follow someone else’s investment plan without fully understanding it and don’t naively trust a financial advisor to have your best interest at heart. No one is going to care more about your money than you. Before this year ends, make sure you fully understand what is happening with your money. This is why:
1. To ensure you are not being taken advantage of. Many doctors and young professionals who are unaware of how their money is invested and know very little about personal finance get taken advantage of by people they thought had their best interest at heart. They may overpay for things, have their money invested the wrong way, or be overcharged for assistance in managing their assets. When people know you have more money, they tend to raise their prices and fees because they assume “you can afford it.” Having some knowledge of personal finance will allow you to better discern if you are getting charged a fair price for good advice, or not.
2. To ensure you aren’t being charged high fees that decrease your investment returns. In order to have your money grow over time, it needs to be invested. When you invest money, you usually do so by purchasing assets that will increase in value over time. The cost of acquiring those assets can vary but the key is to make sure the fees you are being charged to have those assets are not too high. This is especially true when it comes to real estate and the stock market. Overpaying for a home or investment property can cause you to lose money quicker than you think. Investing in mutual funds (groups of stocks or bonds) with high expense ratios can cut into your profits and minimize the growth of your money. For example, if the average mutual fund has a yearly increase of 8% per year but inflation is 4%, the fund fee is 1% and your advisor fee is 1% then the growth of your money is really only 8% minus 6% which is 2% per year. We cannot control inflation but minimizing the fees we are charged on our investments is within our control. Be aware of what you are being charged for certain investments and make sure it isn’t too high.
3. To ensure you are not invested in things that underperform the market. Another disadvantage of not understanding personal finance is having the wrong investments. Although personal finance is personal, double check that you are actually making good investments, which I define as things that have a high chance of increasing in value over time. There are lots of “good” investments but there are also investments that underperform the market or change in value too frequently to be useful. Learning about personal finance helps ensure that you are investing in things that will increase at an appropriate rate over time.
4. To ensure your investments aren’t just things that provide bonuses and commissions to your advisor. Believe it or not, there are some advisors who will use your money to enrich themselves. They will come to you claiming to help, all the while investing your money in questionable ways and buying products that result in a large commission to themselves at your expense. Although some are sneaky, others have simply been trained or groomed to believe that the things they sell are good. They attended a seminar or class that taught them all the potential benefits of certain products without mentioning the drawbacks of the investments they offer. As a result, they come to you with good intentions but bad information. They may try to talk to you about the benefits of whole life insurance and conveniently fail to mention the large commission they get for selling you the policy. They may suggest that you purchase an annuity but fail to mention the high fees and lifelong commitment to suboptimal mutual funds it requires. Having some knowledge of personal finance will help you avoid this and ensure that your advisor isn’t charging you money to enrich him or herself.
5. To ensure your investments align with your risk tolerance and investment goals. Another perk of knowing about personal finance and investing is being able to ensure that you are investing in ways that give you a good chance to make a profit (with little fees) with minimal risk. You want to make sure you aren't invested too heavily in one thing. It's also important that you plan for the unexpected. If you switch to a low paying job, your child care expenses increase, or the stock market or real estate industry crashes again, do you have room in your financial plan to handle it? You need to take some risk in order to make a profit but be careful not to take too much risk. You don’t want to lose all you have over one unexpected event. Diversify your investments, buy assets in different industries and consider using the combination of stocks bonds and real estate to protect yourself against the unexpected.
6. To ensure that you know your true net worth. As you continue investing and building wealth you should be keenly aware of not only what you are investing in but also where you are in your journey to financial independence. This means you should be able to calculate your net worth. If you stopped working today, how much money would you have? What is the total amount of your assets (the things you own) minus your liabilities (the debt you owe)? If you didn’t make any more money, how long could you still afford your current lifestyle? Are you reliant on your next paycheck or do you have enough money saved and invested to continue to live life and function as you do now? Part of being money savvy is not living paycheck to paycheck. It’s not being dependent on your job. It's being aware of where you are in your wealth creating journey. What is your net worth?
5 Black Friday Budget Tips
I’m not sure about you, but I love a good sale. As a young professional who hates paying more for something than I could, I marvel at the chance to buy valuable items at a discount. The only thing I don’t like are the crowds at stores or the look of my bank account the weekend after I go shopping. If you are like me and would like to enjoy the sales without spending too much money, here are some Black Friday Tips to consider.
1. Plan ahead—set aside money for holiday spending. It can be easy to overspend during the holidays. Minimize the chance it will happen this year by planning ahead. Reserve some money from your last paycheck and find ways to lower your expenses on other items this month. Consider working some overtime at your job, try to make some extra money from your side hustle, and pull in cash from other revenue streams. I plan ahead for holiday expenses throughout the year by setting aside $100-$200 each month for holiday spending. I know other people who forgo retirement contributions during the month of December and instead use that money to pay for added expenses during Christmas time. There are even folks who sell some of the investments they made throughout the year and use the profits to pay for expenses. My point? Plan ahead to make sure you have the money you need for all of your holiday expenses.
2. Make a list of your expenses and expected purchases. One of the things that can hurt your finances is buying things you don’t need or didn’t expect to purchase. Try to avoid this by making a list of your expenses ahead of time. Include flights, money for gifts, and any social outings or restaurants you may go to. If you know you are going to do some holiday shopping, write down the things you plan to buy and leave a little extra room for unexpected purchases. Making a list of your expenses gives you a glimpse of how much you will spend and can help you prepare in advance for your purchases.
3. Search for deals but avoid the temptation to buy more. It can be great to find sales on the items you already plan to purchase but be careful. In the midst of looking at deals, try not to fall into the trap of buying more than you anticipated. If you know you need to buy clothes for one of your family members, avoid looking in the electronics section. If you already plan to buy a household appliance, avoid browsing the shoe section. In fact, if you already know what you need, then you may want to consider buying the items online to avoid the temptation of buying more than you anticipated at the stores in person.
4. Set a spending limit and stick to it. Sometimes we have good intentions but still fall short. One way to avoid that is to set an overall spending limit. Make a goal not spend more than a certain amount this holiday season, and stick to it. Set a spending limit each time you decide to go shopping. For example, my gift giving limit is $500 (which includes secret santa gifts, stocking stuffers, and gifts for each of my family members). Since I usually buy clothes during the holiday season, I also set an overall limit for how much money I will spend on myself. Once I reach my spending limit, I go home and avoid looking at additional sales. You should too.
5. Avoid credit card debt. It can be so easy to swipe a card and get all the things you desire. The temptation to buy something we really want can be quite strong. In fact, many people accumulate a substantial amount of credit card debt during the holiday season as a result. Don’t let this be you. Make a goal right now to avoid credit card debt. Don’t let one month of spending during the holidays derail all the progress you made toward your money goals this year. Simply put, don’t use money you don’t have to purchase things you don’t need. Avoid debt.
4 Reasons I Started Investing in the Stock Market
When you make the decision to invest money, you will have lots of choices. You can buy stocks, bonds, and mutual funds. You can venture into real estate, get some cryptocurrency, or purchase gold. Despite all of the options, I decided to start investing through the stock market by purchasing index mutual funds. Here’s why:
1. No barrier to entry. Unlike buying real estate which usually requires a 5 to 6-figure sum as a down payment or a high net worth to establish yourself as an accredited investor, getting started in the stock market was fairly easy. I logged onto the online portal for my job and clicked a button to start contributing to my work retirement account. I began by investing 3% of my salary and increased the percentage every few months until I got to my target of 10%. The next year I opened a Roth IRA to purchase even more index mutual funds and was able to set it up with one phone call. Some of my friends simply downloaded the Robinhood app to get started. My point? Investing in the stock market is a simple thing to start doing. No high fees, specific net worth, or long waiting period required.
2. Doesn’t require lots of specialized knowledge. Some people choose to invest in collectibles like art or specific commodities like gold or natural gas. They purchase expensive items they believe will increase in value over time or make various investments to enhance various energy sources. Although there is nothing inherently wrong with this practice, investing in collectible items and commodities usually requires a specific skill set. If you purchase art, you must have specialized knowledge of that industry so you can understand how much the art is truly worth. If you invest in commodities like gold or alternative energy sources, you must understand when and how the item or investment increases in value in order improve the chance that you’ll make a profit and decrease the chance that you will lose money. For those like me who aren’t art gurus and don’t have specialized knowledge of specific industries, investing in commodities and collectibles may not be the wisest thing.
3. Provides tax savings and liquidity. As a young professional who invests a good chunk of my income and pays a decent amount in taxes, I want investments that can help lower my taxes each year. Along with tax savings, I also want liquidity. Although my plan is to keep the money in investment accounts for decades, I want a back-up option as well. In other words, I want the ability to take my money out of the investments fairly easily if some large, unexpected event occurred and I happened to need cash quickly.
Investing in the stock market via index funds through my Roth IRA and my work retirement account provides me with both of these perks. My work retirement account allows me to use a portion of my income to invest in index mutual funds in a way that saves me money in taxes each year. My Roth IRA allows me the liquidity I need. It allows me to take my contributions out of the account at any time serving as a backup emergency fund that can give me access to cash fairly easily if I needed it.
4. Steady growth with lower risk. Unlike folks who pick and choose individual stocks to purchase or who try their hand at stock “options” or “puts,” I invest in the stock market much differently. Instead of trying to predict which companies’ stocks will go up and down in value over time, I purchase index mutual funds. Buying an index mutual fund, like the Vanguard Total Stock Market Index Fund, means that I own a small percentage of stocks from almost all of the companies in the country. I have a little bit of Apple, a little of Tesla, a little of Google, but I also have a little of thousands of other companies too.
Although the exact value of the index mutual fund can vary a bit day-to-day, on average the total stock market index fund tends to increase in value by about 10% each year. This allows for steady growth over time with very little effort on my part. I don’t have to learn a bunch of different skills or read up on various companies. Plus, unlike those who invest in cryptocurrencies like Bitcoin, the price of index mutual funds doesn’t vary as much. This makes index mutual funds a bit more predictable and easier to plan around. With index mutual funds, I can better estimate when I’ll reach a certain financial milestone because the average growth per year is fairly consistent (usually around 10%). When it comes to my money, I like consistent steady increases.
My point? When I started investing I did so by purchasing index mutual funds in the stock market. Nowadays, I invest in a little real estate as well. But I know people who invest much differently. I have family members that invest in cryptocurrencies, friends who own gold, and college professors who collect art. We all have reasons for investing the way we do. There is no one-size-fits-all. However, for most folks looking to make their first investment, buying an index mutual fund may be a good place to start.
6 Financial Mistakes Most Residents Make in Training
As resident physicians most of us are just trying to keep our heads above water. While our time in training helps us become better doctors, many of us do some unwise things in terms of finances. Here are 6 of the top financial mistakes residents make in training:
1. Using the promise of future money to justify unwise purchases. I’ve seen numerous residents buy luxury cars and other expensive items during training. Although some have enough wealth or savings to afford these items, many others do not. There is nothing inherently wrong with having nice things, but going into debt to buy something you don’t need may not be the wisest decision, especially while you are in residency. Just because our salaries are set to increase once we finish training does not mean we should accumulate more debt before we get to that stage or finance a car with high monthly payments. Many of us already have six-figure student loan debt. Adding a high car loan to that amount at a time when we are only making around $60,000 a year can decrease our monthly cash flow and delay our ability to build wealth.
2. Not having a plan for their student loans. Some residents, especially those who live in high cost of living areas, find it challenging to cover their monthly expenses on their resident salary. As a result, they choose to defer their student loan payments until they become an attending. Although this may seem like a smart way to improve your cash flow, pausing student loan payments causes even more interest to accrue on your loans, forfeits interest subsidies you may qualify for, and prevents you from meeting qualifications for the public service loan forgiveness program. Instead of deferring your loans, come up with a plan. Look at the various income-driven repayment options and pick one you can afford. Fill out the employment certification form and take advantage of your time in residency in which you can make low payments that still count toward public service loan forgiveness.
3. Failing to ensure themselves against catastrophe. Many of us are healthy and tend to assume that things will work as we plan. Unfortunately, life has an inevitable ability to surprise us with situations we didn’t see coming. One of the best things we can do as residents is protect ourselves and our future income by setting up an emergency fund and getting disability insurance. Saving up money in an emergency fund will give us a way to cover unexpected expenses without having to take out debt. Getting an individual disability insurance policy, outside of what is already offered through our residency, will provide give us a steady monthly income if we happen get disabled from a car accident, diagnosed with a progressive medical condition, or suffer a mental health disorder that prevents us from working full time as physicians.
4. Racking up high-interest credit card debt. Many residents have such a large amount in student loans, that they have become immune to debt. They assume they can just pay it off when they get their attending jobs. Because of this thinking, many residents purchase things before they can fully afford them and end up taking out even more debt during training. They charge vacations, large purchases, travel expenses, and other unnecessary items on credit cards that end up costly substantially more money in the long run. Although we may be able to pay off our debt as attendings, it still accumulates interest while we are in residency. Plus, money spent towards credit card bills in training is less money we have available to invest and build our net worth. If you absolutely need money in training to cover things like moving expenses or childcare, then take out a low-interest personal loan with a plan to pay it back as soon as you are able, but try your best to avoid high-interest credit card debt.
5. Not using retirement accounts to build wealth. Many residents are not taught the basics of personal finance in training and may not know or understand the benefits of investing early. Perhaps they have heard of a Roth IRA or are aware that there is an option to contribute to the retirement plan at their residency, but they consider retirement a long way away and do not know that taking advantage these accounts in training can jump start their ability to build wealth and create the life they want. The truth is, because of inflation, we cannot save our way to wealth. We have to invest. Because of the power of compound interest, the sooner we invest, the sooner we build our net worth. One of the best ways to build our net worth is by investing in the stock market on a consistent basis. Because of the tax benefits, asset protection, and retirement matches from our job, investing through retirement accounts is one of the best ways to build wealth.
6. Buying a home without considering the full cost. There’s nothing inherently wrong with purchasing a house, but I’ve noticed that many residents do it for the wrong reasons. They incorrectly assume that if their projected mortgage payment is less than their estimated rent payment then they should buy a home. However, comparing rent prices to mortgage prices will give you an incomplete picture. There are transaction fees involved in buying a home (like attorney fees, inspections, and appraisal costs) that can add thousands more dollars along with the added costs of maintaining a home (like homeowner’s insurance, property taxes, and repairs) which can easily add another $400-500 to your monthly mortgage amount. The truth is, even if the rent price is higher than the mortgage price, the added fees associated with home ownership can still make renting cheaper. Be sure to count the full cost when deciding to rent vs buy.
My point? As resident physicians we aren’t expected to do everything right but avoiding these 6 financial mistakes will help ensure that we are setting ourselves up for financial success when we become attendings.
My 5 Residency Money Goals
Residency can be challenging. We are perpetually overworked, underpaid, and trying our best to make it through. Even those who aren’t resident physicians may be able to relate to this in some way. While this time has its ups and downs, we can’t lose sight of the bigger picture. We will soon be attending physicians and one of the best things we can do during residency is lay the foundation for the life and career we desire. This means doing a few things during our time in training to set ourselves up well financially. Here are 5 of the money goals I set when I started residency:
1. Figure out what’s going on with my student loans. When I graduated from medical school, I had a substantial amount of student loan debt. I remember being called into the financial counselor’s office and being told that I had over $200,000 in student loans. I don’t know about you, but I had never seen or made that much money in my life. I knew I needed a plan. I began to read about the different repayment options and tried to pick one that would give me the lowest monthly payments in residency, provide some government subsidies, and still qualify for loan forgiveness once I finished my training. I didn’t want to be stressed about student loans in residency, so I signed up for an income-driven repayment plan and had my residency coordinator sign the form needed for me to enroll in Public Service Loan Forgiveness.
2. Pay down my credit card debt. I had credit card debt before I started residency. Most of it was accumulated before I was med student, back when I was struggling to make ends meet as a post-grad student in Washington, DC. However, I had also racked up some debt when I was starting residency. Moving from one state to another, paying the deposit for a new apartment, and affording basic expenses like food while I was waiting weeks to get my first residency paycheck was tough. I didn’t have the benefit of a working spouse or cash from my parents to lighten the burden. I didn’t realize doctors could get low-interest personal loans, so I instead charged the expenses on my credit card. My goal was to pay off this debt within the first year of residency, so I set aside money from each paycheck to pay down this debt until it was gone.
3. Save money for vacays and emergencies. One of my goals as a resident is to be able to take full advantage of my vacation time by traveling and visiting friends in other areas of the country. Before COVID, I had visited friends in Seattle and Chicago. In a few months I’m planning to attend a destination wedding. In order to afford those trips without taking out additional debt or charging the expense on a credit card, I knew I needed to plan ahead. Thus, one of my goals was to save a few hundred bucks from each paycheck into a “vacation fund” so that I could afford to take nice trips during my time off. Along with saving money for vacations, I also wanted to make sure I had money in an emergency fund so that if an unexpected expense occurred like needing new brakes for my car, a new phone, or a new laptop, I had the money to pay for them. So in addition to my vacation fund, I also had a few hundred bucks from each check put into a separate emergency fund via automatic savings.
4. Protect my income with disability insurance. As a resident physician I know my income will increase when I become an attending. (And as someone who feels underpaid right now, I cannot wait for that to happen). But even as I near the finish line of my training, I realize that a lot of the goals I have for my life—to buy a nice home, spend quality time with my family, have memorable international travel experiences, finance my [future] kids’ education, and build wealth for future generations—depend on my future attending income. Because the life I envision is so heavily dependent on my future high salary, I knew I need to protect it by getting disability insurance.
Having disability insurance means that if something unfortunate happens (like getting in a car accident, being diagnosed with a chronic medical illness, or suffering from a mental health disorder) I will still have an income high enough to help me reach my financial goals. Getting disability insurance as a healthy young resident allowed me to not only protect and insure my resident salary, but it also allowed me to lock in a lower rate with guaranteed coverage so that I would be insured as an attending physician as well.
5. Start Investing Money. With the goals I had above and an initial salary of $60,000 as an intern, I wasn’t sure I could afford to have any more money goals as a resident. Fortunately, I still decided to invest. I knew that I couldn’t save my way to wealth and that if I wanted to meet my financial goals sooner, I needed to start buying assets (things that increase in value over time). I also knew that one of the best things about investing is that my money can make even more money via compound interest and that compound interest would be more effective the earlier I start investing. So yes, even though my income would increase as an attending and money was tight when I started residency, I still made a goal to invest.
Because of the tax, student loan, and asset protection benefits, I prioritized investing through retirement accounts (like a Roth IRA and my residency 403b). I also knew that I wanted to invest money in a way that maximized the chance I would make money and minimized the risk I would lose money which meant I invested in index mutual funds like the vanguard total stock market index. Because I wanted to prioritize paying off my credit card debt, I started off as an intern investing only 3% of my income into my residency 403b. I gradually increased the percentage every few months as I paid off my credit card debt and stacked up my emergency fund until I got to my target of investing 10% of my income.
My point? Even as a resident, it’s important to have money goals. Maybe you want to pay off credit card debt and start investing. Or, maybe you want to save for a wedding or set aside money to buy a home. Regardless of what your desires are, the first step in becoming money savvy as a resident and setting yourself up well as an attending is to clearly define what you want and make some money goals that you can work toward while you are in training.
9 Reasons Doctors Aren't as Rich as You May Think
Many people think doctors are rich. While many physicians have high salaries, I can tell you firsthand that a lot of doctors are not as rich as everyone thinks. Here’s why:
1. Med School Debt. Like other young professionals, many doctors have student loans. But unlike undergrad, medical school is expensive. In fact, most med students take out at least $30,000, per semester of medical school. The average medical student loan debt is over $240,000 by the time we graduate and this balloons to over $300,000 by the time we finish training and account for the interest that has accrued. It’s a lot harder to become rich when you start off with a net worth of negative $200,000 or $300,000 after graduating from medical school.
2. Prolonged Schooling. Doctors spend many years in school. Many of us start school at age 5 and don’t finish all the schooling and training needed to be a doctor until we are in our late 20s or 30s. Because of this prolonged schooling, doctors don’t start earning money until much later in life. While people in other professions have full time jobs with benefits and guaranteed salaries in their 20s, many doctors are living off of student loans. This means we can’t earn money, save money, or invest money in our twenties like many other people can. As a result, we have a delayed start to building our net worth.
3. Residency and Fellowship. After medical school we spend years in additional training working as residents physicians in which we are paid an average of $60,000 a year to work 60-80hours per week. In other words, we are full-time doctors, with full medical licenses getting paid a little more than minimum wage per hour. And this is mandatory. Every practicing physician must go through residency. The length of residency depends on the medical specialty, but it ranges from 3 to 7 years. Once residency ends, many physicians go through additional training called fellowship which means they spend another 1 to 3 years getting paid this lower rate.
4. Specialty Hierarchies. There are wide variations among physician salaries after residency. Pay can range from $120,000 a year to $600,000 a year and beyond. The amount of money a physician makes is heavily dependent on one’s primary medical specialty. Specialties that do more procedures (like surgery and radiology) tend to generate more RVUs (revenue value units) which results in higher insurance reimbursement rates than specialties that do fewer procedures like family medicine and pediatrics. Specialties like plastic surgery and dermatology that are more cash-based and offer cosmetic services tend to generate higher salaries as well.
5. Taxes. Once doctors finally finish training and start making higher salaries, they are often in the highest tax brackets. This means a large chunk of their earnings is deducted from their pay before it ever hits their bank account. Unlike many of the rich, who are able to shield a lot of their income from taxes by making real estate investments or business dedications, many doctors are employed as W-2 workers which is taxed at a higher rate. Along with higher tax rates, and fewer tax shields, doctors are often phased out of many of the subsidies that benefit the middle class and are ineligible for tax breaks and refunds enjoyed by the rest of the population.
6. Overspending from Delayed Gratification. After spending many years in school and training, doctors have a great deal of delayed gratification. Many of us want to buy a home, start a family, purchase a new car, take a nice vacation, and make other large purchases. After so much delay, it can be hard to resist the urge to do all of these things at once. Many physicians finance expenses, take out debt, and purchase things before they have all the money needed to do so. This exponentially increases the debt we already have and delays our ability to build wealth.
7. Mid-level Influx. Physicians cannot ignore the impact of mid-level providers. While nurse practitioners and physician assistants are valuable providers who can help increase access to care, they have been used by healthcare corporations as a cheaper alternative to care. Although physicians and mid-level providers are both immensely valuable, the influx of mid-levels has decreased the job options and lowered the pay range for some physicians. For example, instead of hiring two physicians to work in an urgent care, a company may instead hire one doctor and one mid-level provider.
8. Big City Saturation. Physician salaries vary widely in certain parts of the country, but not in the way one might think. In most jobs, people in larger cities get paid more to compensate for the higher cost of living. The opposite tends to be true in medicine. Because larger cities usually have more entertainment options and educational opportunities with large hospital systems that have more jobs for physicians in niche specialties, many doctors want to live in or near a major city. This creates physician oversaturation in these areas. Because the supply of doctors is so large in big cities, the demand for doctors in those areas decreases which results in lower salaries. As a result, doctors tend to get paid less when they move to larger cities. Along with taking a pay cut to live in a desirable area, many of these big cities often have a higher cost-of-living and tax rates which further decrease a physician’s take-home pay.
9. Lack of Financial Literacy. Despite our intelligence and skill when it comes to medicine, many physicians are never taught about money. Physicians spend years in school, often without ever having a salaried job, then go through residency where they are overworked and underpaid. They then finish training with a massive pay increase and zero guidance on what to do with their money. Many physicians spend too much too soon, and fail to save or invest enough of their income to build wealth over time. Unfortunately, many who doctors who seek professional help by hiring a financial advisor are often taken advantage of. Many are charged high prices for bad advice and are often tricked into purchasing inefficient financial products or investing money in subpar ways which further delays their journey to building wealth.
Thus, doctors aren’t as rich you may think. Some of it is our own fault, some of it is a system failure that impacts us greatly.
Tell me, what are some reasons you think doctors aren’t as rich as everyone thinks? Do you have any ideas on what we should do to overcome these hurdles?
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.
6 Money Moves to Make this Fall of 2021
If you’re like most people, your expenses increased during the summer. Between vacations, birthdays, entertainment costs, and weddings, many people tend to spend a lot more in the summer than they do in almost any other season. Fall is a time to get back on track. Make a plan to balance your budget, stick to a spending plan, and make some strides forward in your finances. If you’re not sure where to start, here are 6 money moves to make this fall:
1. Set aside money from each check for entertainment expenses. As a young professional, entertainment expenses can be a challenge area for my budget. Some months these expenses are lower than expected. Other months, I’m shocked when I check my debit card balance. Perhaps you feel the same way? Instead of repeating the same patterns, make a decision to act differently. Set aside money from each check for entertainment and put a limit on how much you will spend on social outings each month. The purpose of setting aside money for entertainment is not to restrict you from living your life. The goal is to help you enjoy life in a financially responsible way. By setting aside a set amount of money for entertainment each month you can spend money in this area guilt-free with boundaries in place so that you don’t go overboard.
2. Make a travel budget for every trip. As a young professional with lots of friends and good health, I love to travel. Work can be stressful and taking the time off to explore a new area or relax with my loved ones is the refresher I need to remain productive at work. While travel clearly has its perks, as adults, we must prepare in advance for it. It’s not wise to plan a trip and charge all the expenses on a credit card. The goal of vacation is to use the time away to recalibrate not to go on an expensive trip that puts you in debt. Create a travel budget and plan ahead so you don’t overspend.
3. Plan in advance for special events. This is vital when it comes to special events. As a young professional in my early 30s with quite a few friends and associates, many of the people in my circle are undergoing life events. They are getting married, having babies, and buying houses, among other things. As one of their friends, I’m frequently invited to partake in the celebration. While I love to support others, I recognize that doing so can be expensive. Maybe you’ve noticed the same thing? One way to decrease the financial burden of special events is to plan ahead. One of my budget coaches suggested that I create a wedding/life event fund and put a couple hundred bucks from each paycheck into it. That way, when I get invited to special events, I have the financial means to participate while still maintaining my financial goals. Perhaps this is something you can try as well.
4. Have a spending limit when you eat out. I don’t know about you, but I love to eat. Good food warms my heart and is a consistent source of joy. Although it tastes good on my palate, it can sometimes be detrimental to my wallet. I cook a good deal at home but there are times when I want to eat out. Maybe I’m too tired to cook or one of my friends has invited me out to a happy hour or meet up over dinner. Although I have good intentions, sometimes I spend too much or accept these invites too frequently. As a result, I find myself spending way too much on restaurant outings. One way I’ve tried to limit this is by having a spending limit. I glance at the menu before I go and have a max amount that I plan to spend while I’m out. Having a spending limit allows me to still partake in the outing but do so in a more responsible way.
5. Establish a second source of income. One of the major things to do this fall is to try to increase your income. If you can’t get a raise at work, perhaps you can try creating a second source of income by monetizing one of your hobbies. While some folks opt to work overtime or get a second job that is similar to their main job, that may not be the right move for you. Spending too much time do any one thing can create burnout. Instead, find something you enjoy, a passion project you’d love to explore, or an area of expertise that you can provide to others. Discover ways to monetize it. The goal is to increase your income in a way that brings you more joy and allows you to use the money you make to have more of the experiences you desire.
6. Make your savings and investments automatic. This is probably one of the most important money moves I’ve ever made. Automation. Instead of having to remember to contribute to my work retirement plan, save money, or invest in my Roth IRA, I do all of these things automatically. Setting up automatic savings and investment contributions helps ensure that I meet my financial goals. It also helps ensure that my money is growing. Consider doing the same. Don’t rely on your memory. Make a decision today to save and invest a certain amount of money per month then set up automatic withdrawals and contributions from your paycheck to make it happen.
I’m a firm believer that we can enjoy the money we’ve earned while also investing it in a way that allows it grow. This fall, let’s make a commitment to do both. Plan ahead for expenses and experiences with others. Automate savings and investment contributions. Be a young professional who does both.