Roth IRAs are one of the best tax-favored accounts to use for retirement investing. Many have heard that high earners are out of luck when it comes to Roth IRAs! This is a money myth, and one I can't wait to bust.
Within a Roth IRA, you invest "after tax" dollars (meaning your contributions are not tax deductible). The contribution limits for this account are much lower than your employer accounts. After age 59 and 1/2, all of the funds in the account can be accessed TAX FREE. Yes, you read that right. Tax free. In addition, Roth IRAs have several other benefits:
I started my career picking up extra shifts to make my financial goals happen. I wanted to pay off my debt early and build wealth. I had $161K in student loan debt to contend with. My income felt like it wasn’t enough, so my solution was to work evenings, weekends, and my scheduled days off to make up the difference. I used that to pay off $161,000 in student loans in 16 months, but quickly realized the downfalls to that strategy.
While the “working extra shifts” strategy may work for short term financial goals, like paying off credit card debt, it’s not a viable long-term solution. It can lead to burnout, and if it ultimately reduces your career longevity it may reduce your long-term income.
The most underleveraged wealth hack is to negotiate more compensation for what you’re already doing, and then use the increased income to reduce debt & build assets.
Here’s a few pearls for the negotiation process itself:
The easiest way to create a millionaire isn’t to become one yourself – it’s to invest for your kids and make them one.
Why? Compound interest + TIME is the magic formula. Kids have more time than you, meaning their ability to accrue wealth is significantly higher. Here's some sample numbers to give you an idea:
One way to do this is by utilizing various investment vehicles, such as UTMA accounts, 529 plans, Custodial Roth IRAs, and taxable brokerage accounts. These options provide unique advantages and opportunities for children to grow their wealth, learn valuable financial skills, and achieve long-term financial goals. Let’s break down account types and how you can use them.
UTMA (Uniform Transfers to Minors Act) accounts are a popular choice for parents and guardians who want to invest on behalf of their children. These accounts allow for the transfer of assets, such as stocks, bonds, and cash, to a minor, with an appointed...
The ultimate financial goal is to create total income replacement through investments. For the medical professional, this means you no longer have to work for income. Your stock/bond portfolio, investment real estate, etc generate enough income for you to live comfortably - indefinitely.
Inflation, the gradual increase in the prices of goods and services over time, will erode the purchasing power of our savings and investment portfolio. If you've been anywhere other than living under a rock for the last few years, you've noticed firsthand how inflation shapes your buying power.
Inflation has a profound impact on various investment vehicles, such as stocks, bonds, and real estate. Let's consider the potential consequences of inflation on each of these asset classes:
Index funds are designed to passively track, or "mirror", a group of stocks. Common examples include index funds that track the entire US stock market, or the S&P 500.
Passive investing sounds boring and slow. Turns out, the data doesn't support that conclusion. Index funds have been shown to outperform actively managed mutual funds over long periods of time - which is mostly driven by low fees. The additional benefit of diversification also means that your risk is generally lower than when investing in individual stocks.
Actively-managed mutual funds sound more aggressive & fancier, which makes us generally inclined to think they would be better. After all - isn't it true that you get what you pay for?
Investing is the one world in which this doesn't always hold true. Because actively-managed funds have a fund manager doing active trading in an attempt to beat...
Health Savings Accounts (HSAs) are amazing investment products to create wealth with the most tax benefits possible.
If you're thinking you knew what an HSA was and are now completely confused, let me explain...
An HSA, in its most basic form, is intended for medical expenses. When you contribute money to this account, you reduce your taxable income for THAT YEAR. Thus, you save money on taxes immediately.
These are very different than Flexible Spending Accounts (FSAs), so don't get them confused.
Here is the full scoop:
1. MONEY ROLLS OVER EACH YEAR
-Unlike an FSA, the money rolls over if unused in that year. It's not a "use it or lose it" system.
2. CONTRIBUTIONS ARE PRE TAX
- Contributions are pre tax if you contribute through an employer. If you purchased your own plan, they are tax deductible.
3. GROWTH IS TAX FREE
- Probably the best feature!
4. MONEY CAN BE USED FOR MEDICAL EXPENSES AT ANY TIME, TAX FREE
- Just make...
Becoming a millionaire feels like a lofty goal. It may even feel like something that's impossible to accomplish.
I became a millionaire at 31. When someone references between a millionaire, they are most often referencing having a net worth of $1,000,000 or more.
What I want to talk about here is an entirely different question: Is having $1,000,000 invested enough to retire?
The short answer is, no - at least for most healthcare professionals earning a six figure salary.
The recipe for $1,000,000 invested is this: consistent savings rate + time + compound interest.
Let's assume you're a PA-C earning $110,000 per year. You start investing 15% of your gross salary at age 28, and continue this until retirement at 65. Here's what your portfolio looks like as you age:
This is a fundamental part of the equation, and one that's often poorly understood.
When you decide to quit earning an income...
There are a few money goals every medical professional should be willing to hustle for. One such goal is reaching an investment milestone of $100,000.
$100K invested means total balance invested across all investment accounts. This could include your 401(k) or 403(b), Roth IRA, brokerage account, etc.
Although $100,000 is an arbitrary number, it represents something much bigger. Hitting six figures invested allows the beginning of a transition - the point where your money starts working harder to earn more money than you are.
The beginning of any investment journey is slow. It feels like you're contributing TONS of your income from your W2 job in medicine, but not seeing that beautiful growth of compounding returns that everyone talks about. Here's a visual representation of what a 401(k) portfolio looks like over time, looking at the portion of the total balance that is made up of your...
If you're a consistent investor, CONGRATULATIONS. That alone is a major accomplishment! If you're not there yet, no worries. Click here to learn how.
Considering the effort you're putting into preserving and growing your funds, it's important to be aware of any hidden factors that may be depleting your investments.
Unfortunately, such a factor does exist.
It's your investing fees.
Fees come in several forms. The first is related to the investment itself. Each fund you choose has an expense ratio that represents the fund's internal operating expenses. It is represented as a percentage, and can be interpreted as the percentage of your returns that is taken from your account to pay for the fund's fees.
Not sure what the expense ratio is for the funds you've invested in? Just google the fund's ticker (collection of capital letters representing the fund name). Click the Morningstar link. The expense ratio will pop right up.