Welcome to Personal Finance for Medical Professionals, Part I. In this series, we follow a curriculum designed to make you knowledgeable and confident enough to manage your hard-earned finances. This is Lesson Five, The Financial Vitals Checklist, Steps #7-10, where we complete our blueprint for you to follow to financial independence. If you haven’t already read Lesson Four, click here.
By following the first six steps, you have already laid a solid foundation for your financial future. In fact, if you stop here, you will eventually have a solid retirement. However, if you have completed the first six steps and still have money left from your desired savings rate, it’s time to get wealthy!
Get Wealthy
7. Accumulate Assets
In step 7, you have the freedom to make some choices. The path forward is only partially prescribed because you’ve already done so much groundwork. You can now use your money to continue investing in the stock market, start a business, invest in real estate, or participate in other activities that increase wealth. The important part is that you use your money to accumulate assets that are in sync with the goals you set for yourself in Lesson Two.
Invest in Securities
Your retirement account isn’t the only way to invest in stocks and bonds. Another way to invest in these securities is through a brokerage account. This is a personal investment account that you set up and control, and the good news is that no contribution limits or income caps exist! You can invest as much as you want or can afford. You make contributions with money on which you have already paid income tax. For this reason, a brokerage account is sometimes called a post-tax account.
This makes the contributions to your brokerage account just like money put in your checking or savings account. However, in this case, you can use the money to invest in stocks, bonds, mutual funds, index funds, or ETFs. Any growth in this account will be taxed. If you keep the investment for less than one year, it will be taxed as ordinary income – if longer than one year, as long-term capital gains. As the capital gains tax rate is less than the marginal tax rate, you can still increase your wealth in a tax-advantaged manner.
A brokerage account has several benefits as an adjunct to your retirement savings. First, as a high-income professional, your savings rate usually provides enough money to reach your retirement plan’s savings limit each year. A brokerage account allows you to continue investing, creating wealth for you over the long term. Additionally, the money in your brokerage account is liquid, or easily accessible, should a better investment opportunity arise. You will pay capital gains tax on any gains you withdraw, but the money is still accessible without a penalty.
A brokerage account gives you flexibility should you plan to retire early. Since you typically can’t access your retirement accounts until age 59 ½ without penalty, you can draw on your brokerage account to bridge the gap from early to traditional retirement.
Perhaps the most significant benefit of a brokerage account is its simplicity. As a busy professional with a career to manage, investing in a brokerage account is often the best option in Step 7 for building wealth. Running a business is hard work. Real estate investing is also not passive, regardless of what you see or hear. However, a brokerage account can be passive if you automate your saving and investing strategy.
Rental Real Estate
As a medical professional, you can invest in real estate in Step 7, but not before. Because you have a high income, you can build wealth automatically through your retirement accounts easier than the average American. Not everyone can take this path and must choose other avenues to build wealth. All real estate investing comes with risk and takes work.
However, if you are interested in real estate, this is the time to do it, as your financial bases are covered. Note that I am talking about income-producing rental real estate, not your primary residence. Real estate can grow your wealth in myriad ways: cash flow, appreciation, leverage, mortgage paid down, depreciation, and tax advantages can all work together to grow your wealth using Real Estate. A thorough discussion of real estate investing is beyond the scope of this discussion. However, there are plenty of articles about real estate at BusinessIsTheBestMedicine.com.
Start a Business
Starting a successful business is the most active way to grow your wealth, but it can also be the most lucrative. While not for everyone, this is an option for the budding entrepreneur. You have earned the ability to take some chances, including risking your time and money in a business that ignites your passion. Your new venture may be a medical practice, a medicine-adjacent business, or something completely unrelated. Freedom, optionality, and creativity are the hallmarks of small business. You get to decide!
While every investment type involves risk, starting a business is generally a high-risk, high-reward endeavor and is not for the faint of heart. For that reason, I generally recommend that you complete the first six steps of the checklist before you start a business.
However, suppose you are a medical professional and want your own practice at the beginning of your career. In that case, you may have to forego retirement investing for a few years while starting your business. This is the only circumstance in which I would violate the Financial Vitals Checklist’s order of operations. I fully encourage medical professionals to own their practice. I named the blog Business is the Best Medicine for a reason. But, if you choose this path, ensure you have protected yourself with a healthy emergency fund and disability insurance and have paid off all high-interest debt first. As soon as your business’s cash flow allows, start back on the checklist’s steps where you left off.
Fine Tune Your Finances & Give Back
Steps 8-10 do not have to be followed in this exact order and can be modified based on your circumstances and preferences. You have protected yourself, scored some easy points, secured your retirement, and are on the path to becoming wealthy. You’ve earned the ability to confidently make your own choices!
Prepay Future Expenses
College Savings
Perhaps the most common prepaid expense is college tuition for your children. No matter how much you want to, you shouldn’t worry about this before step 8. We learn in emergency medicine that when dealing with a critically ill or injured pregnant woman, the mother’s health must take priority – If the mother dies, the baby dies, too. Once you have stabilized the mother, you can move on to assess the fetus.
There is also an order that must be followed when dealing with your finances. You can only worry about college savings for your children once you have taken care of yourself. Your children can always get scholarships, financial aid, or loans, but there is no loan for your retirement. You transfer that responsibility to your offspring if you don’t secure your retirement first. As someone who supported my mother when she was elderly and who currently helps support my mother-in-law, this is not a burden you want to leave to your children.
There are several options when it comes to saving for your children’s higher education. You can create a separate account to save money for college, investing the money in a target date retirement fund with the target date being their expected graduation from high school. You can save and invest using a 529 Plan (college savings plan or prepaid tuition plan). You could purchase a rental property on a 15-year mortgage, timing it to be paid off when your child reaches college age. You can spend time and effort preparing your child to receive merit scholarships or other financial aid. You can consider junior college, which saves a tremendous amount of money and allows you two additional years to save/invest. A good resource for examining some of these options is www.savingforcollege.com.
529 Plan
A 529 plan is a federally recognized state-sponsored college savings plan. A family member can set up a 529 for a minor child to save and invest money for future higher education expenses. These are custodial accounts where the control remains with the account owner (parent, grandparent). Contributions made to the plan are tax-free at the state level only, but any investment returns in the plan grow tax-free and can be distributed tax-free as long as they are used for qualified expenses. Plan specifics vary by state, including contribution limits, investment options, and fees.
You do not have to use your home state’s plan, nor must your child attend college in the state that sponsors your chosen plan. However, you only receive a tax deduction using a plan in your home state. 529 plans are especially advantageous for those who live in a high-tax state or have young children when they reach step 8. Because there is such variability from state to state, I suggest further researching 529 plans before opening one.
9. Pay Off Low-Interest Debt
At this stage, you should pay off any intermediate-interest debt (5-8%) you have not previously retired. You then have the option to work your way down to the low-interest debt (<5%). Examples include personal mortgages, rental real estate mortgages, student loans, personal loans, or consumer debt. The decision to pay off low-interest debt depends on your feelings about optimization, security, and convenience.
Traditionally, the stock market has returned 9-10% over time. Many real estate investments will have returns in this range or higher. Even savings accounts and money market funds currently pay around 5% interest. Mathematically, keeping low-interest debt and investing your money is optimal, as your return should be higher over time. Note that the previous sentence included investing your money, should, and over time.
First, you actually have to invest your money. You need to automate your finances so that you invest regularly. Even if you are okay with a 5% interest rate, most banks aren’t paying that. You must actively seek out the ones that do. Also, spending money sitting around in a savings account is tempting, and once you spend it, it can no longer be invested. Next, just because the market has had a historically high return does not mean that it will continue in the future. These average returns are usually calculated over 30-year periods, and any shorter time frame may have different results. As you age and approach retirement, your time horizon may no longer match with “over time,” and your risk tolerance may no longer handle “should.”
We have discussed that paying off a debt is akin to securing a guaranteed rate of return equal to the interest rate. As you approach retirement, this guaranteed return may become more appealing to you. There is security in not having a mortgage payment. There is freedom in being student loan-free. These concepts can’t easily be measured, but they are real, and you must decide how valuable they are to you.
Personal Mortgage
Any decision regarding your personal residence can be emotionally charged as many people have a deep connection with their home. I understand the feeling, but since a primary home is the largest asset most people own, I encourage rationality. When you are in the fine-tuning stage of your financial journey, it is perfectly acceptable to pay off your personal mortgage, whether it is mathematically optimal or not. A deep sense of security can be obtained when you are mortgage-free. Plus, your monthly expenses decrease dramatically when you no longer pay a monthly mortgage. Remember that you will still be responsible for insurance, taxes, and repairs, even if the mortgage is paid off.
My only recommendation is to pay off your house by the time you retire. If you have been following the Financial Vitals Checklist, you will be financially secure by retirement, so you can manage a mortgage payment even if you are no longer working. But why deal with the additional stress, risk, and hassle of debt when it isn’t necessary? I am financially independent, yet I still have a mortgage. This is because I have a 2.99% mortgage rate and enough cash in the bank to pay it off at any time. The current 2% spread between what I am earning on my savings (5%) and my mortgage is why I have yet to pay off my house. However, I plan to pay off the mortgage if and when I choose to retire.
10. Be Charitable
We have reached the last and most personal step in the Financial Vitals Checklist – Be charitable. I am not suggesting you wait until you reach step 10 to be charitable. I encourage being generous with your time, money, and attention throughout your life. Before step 10, if you are tithing or regularly donating money, it should be in your budget as an expense, and it does not count towards your savings rate. You should feel it in the present as charitable giving takes away from the money you spend each month, not the money you save/invest. This forced austerity is kind of the point of tithing anyway.
Once you have reached step 10 though, we are discussing legacy giving. As a high-income earner, if you follow this checklist throughout your career, you will become wealthy – it is simply a matter of time. One of the things you may choose to do with that wealth is give it away.
Unfortunately, philanthropy can be more complicated than it would seem. Charitable gifts are tax-deductible, but like personal mortgage interest, the deduction goes away if you take the standard deduction. Even if you itemize, there is a limit on how much you can deduct per year. For a discussion on the Myth of The Tax Write-Off, click here.
You can currently deduct donations to public charities, including donor-advised funds (DAFs), up to 50% of your adjusted gross income (AGI). If you are donating appreciated non-cash assets, the limit is 30% of AGI. If you exceed these limits, you can carry it over for up to five subsequent tax years. While this may not sound like a problem now, if you have amassed a large amount of wealth in non-income-producing assets, your AGI will be quite low when you retire, especially if you retire early and are not drawing from pretax retirement accounts. These tax-planning concerns are why you should plan your future charitable giving while fine-tuning your finances.
Final Thoughts
This concludes our discussion of the Financial Vitals Checklist. You can download a PDF version of the checklist here. If you follow the principles outlined in the first two Lessons of this series and the financial order of operations in Lessons 3-5, you will be wealthy and primed for a safe, secure, and prosperous retirement. However, there are still a few questions that remain. How much money do you need for retirement? When can you or should you retire? We will address these questions in Lesson Six, the final installment of The Basics of Personal Finance, available here.
