Building Wealth or Just Making Money?
Doctors get a bad rap when it comes to managing money. Probably because most of them aren’t good at managing money. To be fair, it takes years of living on ramen noodles before physicians begin making a decent wage. They’re not thinking about wealth.
Even once the money starts coming, there’s typically $200,000+ in student loans to pay off. Depending on your interest rate, it takes up to 13 years to get out from under it.
By year 14, it’s easy to justify an inclination to splurge. It’s understandable many doctors are buying boats instead of building a retirement fund.
Wealth vs Income
No one can begrudge a person from having a few toys if they can afford them. There’s nothing wrong with buying a boat or taking a trip. Most doctors can afford them. But that’s part of the problem. If you can buy anything you want, chances are good you will.
That boat is going to depreciate every year you’re paying for the berth in the marina. A boat loses around 20% of its value in the first year. Most will have lost at least 1/2 of their value in 10 years. (Yachts are the exception.) Maintenance costs are around 10% of the purchase price. Five years out: $30,000 for a new Bow Rider, $15,000 to maintain/house it, estimate its value at 54% or $16,200.
Not the best return on investment. The real killer is to ask yourself how often you’ve been out on the boat over those 5 years. If it’s less than 3 times a year, it was probably an impulse buy.
Impulse buying is the guilty pleasure of the rich. Notice I didn’t say wealthy. Wealthy people build their net worth. Rich people tend to spend what they’ve got. Especially when they go from lower-income to higher.
It’s easy to understand. Doctors are in school for at least 8 years. Then comes the residency, from three to seven years, depending on your specialty. According to Medscape, the average salary during residency is $63,400 a year. When you finally start earning a couple hundred thousand a year, it feels like you won the lottery.
So yeah, you bought a Bow Rider! And a tricked-out Range Rover too – got a sweet deal! That’s 30,000 for the boat and 90,000 for the SUV. The former depreciating at 20% and the latter at a whopping 60% in the first year. After one year, the two assets are worth $24,000 and $36,000 respectively. (This is if you paid cash, no financing.)
After one year. Note the value of your “tricked-out” SUV.
Stop The Spending
Wealth management requires that you have some wealth to manage. It’s not that you can’t treat yourself once in a while. Making a purchase should be a decision, not a reaction to beautiful brochures or sleek videos. Instant gratification does not a millionaire make.
Here’s some rules to slow down impulse spending:
- Never buy on the spot. Go home and think it through.
- Don’t get suckered into a high-pressure sale. “It’s the only one. If you don’t get it now, it’s probably going be gone.”
- Take a good long look at the limits on your credit cards. Having a limit of $75,000 or more on your cards is spending binge waiting to happen. (Especially if you have a family using the card.
- Pay cash. No cash, no purchase. (Much easier in theory than practice.) Avoid financing anything.
- If you’re going to get that boat or car anyway, make it a practice to put 10% of the purchase price in a high-interest savings account. (Might slow you down but if it doesn’t, at least your savings account is growing.)
Speaking of Saving
Remember the 120k you spent on your boat and SUV? If you put that $120,000 in a high-interest savings account for one year, with a 0.80% APY, compounded quarterly, your balance is $120,963.53. This is the difference between earning money and creating wealth.
5 Steps for Growing and Managing Wealth
Getting spending under control is essential for building wealth. Try following the 50/30/20 rule. Take 50% of income for needs, 30% for wants, and 20% for savings. Here’s a calculator to see what that looks like for your income. If your necessities are less than 50% of your income, shift the leftover to savings.
These are the 5 best tips on getting started.
1. Get a Financial Advisor
For some reason, professionals are less inclined to seek outside financial expertise. It’s like they’re embarrassed by what they don’t know. You wouldn’t hesitate to hire a lawyer if the situation warrants. Don’t expect yourself to know about building wealth, learn. Work with someone who does.
The first qualification you’re looking for is a fiduciary financial advisor. Fiduciary duties mean the advisors are legally required to act in your best interests. Not their own, not their other clients, not their employer. Kind of shocking that all financial advisors aren’t fiduciaries.
If you need a solid starting point, try a certified financial planner. They’re experts in financial planning, including taxes, retirement planning, estate planning, and insurance. Don’t let the taxes part slip by you – chances are good you’ve jumped up a few brackets. You’ll need to know what you can do to offset that.
Working with your financial planner, it’s more comfortable to ask questions. If you aren’t familiar with the market, it’s easier than asking a broker. Plus, a plan built around your goals, values, and income will drive informed decisions.
2. Fund Liquid Assets
It’s hard to imagine how easy everything can change. Take a look at your monthly nut – how much do you need to stay afloat? How much of that is dependent solely on your income? Now let’s consider what happens if your income is gone or substantially reduced?
We told you the bigger your salary, the easier it is to spend. It’s also easier to think you’re set for life. Do you have any money you could fall back on? If you scoff at the idea of savings accounts, you’re not up to date.
Start with a high interest savings account. These online banks have an APY of up to .90%, which may not seem like a lot. Then you realize a regular savings account offers an interest rate of .1%. Most accounts have no minimum – here’s a list to consider.
Everything is FDIC insured, so your money is safe. Because it’s a savings account, it’s completely liquid. If you need money, withdraw it without penalty. You can also check out their rates on CDs.
Use this calculator to see how much your money can earn in a high interest saving account.
The other option is your retirement account – 401k, IRA or Roth IRA and a SEP for the self-employed. Whatever type of account you have, maximize your contributions to it. These funds are invested in the stock market. IRAs have some control over what percentage of their account is goes to stocks.
Though you have access to the money in these accounts, it will cost you to withdraw them. There are penalties for some, interest on others. Some withdrawals affect your taxes. It’s best if you can leave your retirement money alone. But if there’s an emergency, you’ll want the money to be there.
3. Invest in fixed assets
Fixed assets take time to liquefy. They are not for emergency funds. They’re for creating wealth. The simplest way to begin adding fixed assets is to invest in real estate.
Notice that we didn’t say buy real estate, though you’re welcome to do that. Investing in real estate is profitable, but you don’t deal with tenants or properties. It’s a passive income stream.
There are multiple ways to invest in real estate:
- Real Estate Investment Group (REIG)
- Real Estate Crowd Funding
- Real Estate Investment Trust (REIT)
REIGs work like a real estate mutual fund. The fund is built by a group of partners or shareholders. They pool their money and buy rental properties, like apartment buildings. They sell units to their investors, who then receive rents. Money is pooled by investors to avoid defaults during vacancies. Investors own one or more units, but the REIGs handle the day-to-day operations.
REIGs are notorious for over the top maintenance fees. Make sure you know what you’ll be paying.
Real Estate Crowd Funding
Crowdfunding is a new but simple way to invest in real estate. A crowdfunding platform connects developers with investors online. Investors lend money to real estate projects and make money from the interest on the loan. Investors don’t own anything but the loan – no involvement with the property.
Real estate crowdfunding began as a way to bring smaller investors into the lending market. But as the industry gained ground, some platforms are for accredited investors only. Accredited investors are banks or publicly traded funds. An individual with a net worth of $1M+ can also be considered.
The loans are not protected, so they are not for the risk averse. Some platforms let you buy slices or notes instead of funding the whole loan. Everyone who buys a note shares in the profit or the default.
A REIT is a company that focused on income-generating real estate. REITs finance, buy, and sometimes operate large scale properties. REIT portfolios include residential and commercial properties, from apartment complexes to hotels or hospitals.
REITs do two things. They own properties, lease them and collect rent. The rent pays out dividends to investors. Some REITs finance mortgages instead of leasing space. Investors earn money from the interest on those loans. There are also hybrid REITs that do both.
Some REITs trade on the stock exchange. They hold their value better than privately owned REITs. In 2019, REITs distributed $69 billion in dividend income. That’s not chump change.
4. Sell Your Expertise
Creating online courses is a profitable sideline, especially for people with specific expertise. For physicians and medical professionals, there are so many sidelines. The revenue from the eLearning industry is expected to reach $300 billion.
The first step is doing an eCourse is the topic. If you have a social media presence, ask your followers what they’d like to learn. Once you have a topic, break it down into steps. Then set some sales goals – how much would you like to make? Then think about your audience. Are you educating colleagues or students? Patients or the public? That helps you determine the course price and how many sales you need to reach your goal.
Pediatricians might teach child development, creating a series across different age groups. A primary care doc might teach Food as Medicine. “What to expect” classes for family members of patients with chronic disease. Teach Medicaid’s Value-Based Care payment model. Any doctor can speak to surviving medical school or choosing a residency.
There are multiple platforms available to host your courses. They range from self-publish platforms to eLearning academies.
5. Build a Diverse Portfolio
Work with your financial advisor to create an investment portfolio. This will include a mix of stocks and bonds. It’s not hard to start investing. Stocks are more profitable but also more volatile. Bonds are more stable but offer a lower return. Expect to hold your investments for 5 years at least.
Precious metals are another way to diversify your holdings. When the stock market took a dive in 2008, the price of gold shot up. Gold is an ultimate standard that consistently holds its value. Gold is in demand around the world and trades daily.
Platinum trades like gold and often at higher prices because of its scarcity. Silver tends to be a bit more uncertain. It’s used in jewelry but also has industrial uses. You can buy precious metals on the commodities market EFTs. Brick & mortar stores sell gold, as does this online site which has a lot of helpful information.
Socially Responsible Investing (SRI)
More and more investors want to align their money to their values. They choose to invest in companies that meet standards of governance and accountability. They also choose to divest from companies that don’t. Social or sustainable investments focus on social or environmental concerns. Alleviating poverty and slowing climate change are high priorities.
There are mutual funds available for investors. Socialfunds.com is an excellent starting point for new SRI and impact investors.
Are You Ready to Be Wealthy?
Stop messing around with your salary. What’s the point of making money if you can’t hold on to it? Put a stop to impulse spending and start getting rich for life.
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