Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not about how much you have at the end; it’s how much you could have made.
What is The Plan?
Everyone needs one. It may change, but that’s the worst excuse in the known universe for you not to at least have a plan.
While that great philosopher of Western civilization, Mike Tyson, had a cogent point when he noted “Everyone has a plan ’till they get punched in the mouth”, you still shouldn’t enter the ring without knowing a few timeless classics from the sweet science:
hold your hands high, elbows low, and move your head when defending yourself,
don’t forget to hit him back,
and most important of all, don’t always wait for your opponent to finish punching before you start punching back
ANYWAY…there are way better boxing blogs than this one, so back to creating wealth for all who care to do so.
As the sainted Donald Westphall once opined (alliteration alert!; fair warning, this blog will be FILTHY with alliteration as it is my favorite literary device—also, fair warning, I rank everything—and, I mean, EVERYTHING) on St. Elsewhere, “diagnosis is less of a gamble if you start at the beginning.” The same is true of wealth creation.
Forget The Magic Number, that mystical net worth at which all your dreams, hopes, and goals are achieved, for a moment, but from then on…probably never forget it…probably.
Focus on this instead.
1.) What do you want?
That’s it.
It’s that simple…
And that mind numbingly complex.
Do you want to retire early? How early? Do you plan to do any work after you “retire”? What kind of work?
You want to get your kids through college debt free? How many? Grad schools also? State schools? Private?
Semi-retire and travel often?
The choices are dizzying which makes everyone’s Plan different than everyone else’s and should. How can you expect to have the same investment profile as someone else when your goal net worth is different because your post-retirement life goals are different?
Always keep that in mind when comparing notes with others.
2.) How much money realistically will it take to achieve #1?
3.) How long will it take realistically to get to that amount, ie The Magic Number?
4.) How will you invest to get to your Magic Number?
5.) How much risk realistically are you willing to tolerate to get to your Magic Number?
Is that safe? Does that even make sense?
Now on to my Rules of Finance…rules I live by…
Rules Of Finance
1.) No one cares about your money more than you do.
Sorry to alarm you, but here are some cold hard facts of your reality as an attending. You went into the field where you make a six figure salary.
So, whether you realize it or not, you’re now responsible for both protecting and growing all that money you earned. That’s your obligation to your spouse, your family, and yourself. That’s the other job (likely unwittingly) you signed up for when you signed your first contract.
So, you’ll hear this from this blog endlessly (I’m warning you now): DO YOUR JOB!
{REAL LIFE EXAMPLE/RLE 1: I’ve had a partner that have informed me that “Well, I just make the money. It’s my financial advisor’s job to take care of it and grow it.”
Let me put this delicately…that’s just stupid.
That’s akin to parents saying “Well, I just make the kids. It’s my pediatrician’s job to take care of them and grow them.”
No one (hopefully) cares about your kids more than you do. The same is true of your money.}
Yes, it’s in your financial advisor’s best interest to grow your money. Yes, he (likely—it’s quite a male dominated industry) is a nice guy, knows about your family, is a family man himself, and supposedly has the same interests as you.
{RLE 2: A colleague of mine once noted “I love my guy. He’s great. He talks about boats with me all the time. He has a great one up at the lake.”
All I wondered was “Gee, how did he afford that boat?”
More troubling was that he had no idea how much his “guy” was charging him for managing his retirement account and talking about boats every quarter. Hopefully for him, those boat talks were included in the fees. }
That’s all great.
And doesn’t matter one bit.
They’re all nice guys. They’re supposed to be. They’re salesmen.
What matters is only the following:
A.) How much does he charge you?
B.) How did he do for you last year vs. the S&P 500 (the broad US stock market) after you subtract out the fees of your financial advisor? (in other words, the famous phrase “net of fees” such as “What were your returns last year net of fees?” or in regular English “How much did you make last year with your investments after your financial advisor took out how much they charge?”)
C.) Is that better than you could do yourself?
Much, much more on all of this in a later post.
2.) It’s not how much you make, it’s how much you spend
Always remember that.
Live not within, but below your means. Easier said than done, but monumentally helpful as you move along in life.
Don’t short change yourself. Get that Starbucks every day if you enjoy it, go on vacations, build a pool if you and your family will use it often—enjoy your life as you go along. You’ll regret it in your later years if you don’t.
It’s not just the destination; it’s the journey too. And for some of us, it’s only the journey, especially if the destination changes.
But, get value for your money. That’s what is most important.
Be smart with your money.
Once it’s gone, it doesn’t come back—not even for food, laundry, or more money like your college age kids.
The expression “Easy come, easy go” regarding money couldn’t be further from the truth. Remember that this saying comes from Vegas gamblers as they walk away from the table…after they lost…and are trying to make themselves feel better…after they lost…
3.) Pay yourself first and early and often.
Be charitable. Spend what you have to and on what you need, even on what you want (within reason—no Lamborghinis though), but make sure you’re investing consistently.
Saving a little makes a massive difference later on in life.
Even saving $10 a day at a 9% rate of return (9% may sound high; it’s not, if invested solely in stocks—much much more on this in a later post) for 35 years (from age 30 to age 65) yields over$850,000.
Saving $1,000/month (i.e., $33.33/day) at a 9% rate of return for 35 years (from age 30 to age 65) yields over $2.8 million.
Now we’re cooking with Wesson!
Assuming the same above rate of return for the same length of time and saving $100/day (ie, $3,000/month), you’ll wind up with over $8.5 million.
Even a 5% rate of return with the same savings amount and same length of time, your final bounty at age 65 would be $3.6 million.
Therefore, more conservative investing, mistakes, big downturns in the market, etc. would still yield a very comfortable retirement…as long as you start early.
Let’s do the exact same calculations with 25 years of investing (i.e., age 40 to age 65) rather than 35 years (which are listed below in parentheses).
$10/day after 25 years of investing—-> just under $337,000 (vs. >$850,000)
$33.33/day after 25 years of investing—-> ~$1.1 million (vs. >$2.8 million)
$100/day after 25 years of investing—-> just under $3.37 million (vs. >$8.5 million)
And $100/day after 25 years of investing with 5% rate of return—>$1.83 million (vs. $3.6 million)
[All the above calculations are based on putting it into an investment account as one lump sum at the start of each year. Doing the same at the end of each year does affect the returns over the decades. Do the calculations and see the difference yourselves on this great compound calculator by a great, user friendly site called Moneychimp that has a lot of great calculators among other things there.]
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
4.) Eliminate debt first or evenly with investing.
Also, do not get into more debt except for your primary home and necessary car(s).
Easier said than done, but focus on the small stuff first.
Rid yourself of all credit card debt immediately/as soon as humanly possible.
Pay all credit cards monthly in full before any late fees occur or any interest is charged.
The Rent-A-Center Rule:
Don’t finance for what you can pay for in full if you can just wait and save for the amount you need.
{RLE 3: Another physician I know lusted after having a home theater as he was building his new home. I advised him to have the basement wired for it, save some money up after the house was built, and then build out his home theater when he could. Instead, he had the whole thing built out as his home was constructed. So, in other words, he is now paying for his home theater…over thirty years…at a slightly over 4% interest/mortgage rate translating into tens of thousands of dollars beyond what the home theater actually costs.
Another way to think of this is you’re still paying for your original home theater while getting it re-done. With a thirty year time span, there’s no chance you’re not getting your home theater re-done—at least for the technology alone.
Bad, bad idea.
And totally avoidable.}
We all will make mistakes in investing, spending, etc.
All of us.
The key then is twofold in my mind:
To learn from your errors and take corrective action after recognizing said errors
To not make unforced errors like in RLE 3
Like in tennis, unforced errors in investing and especially in spending will kill you in the end.
5.) Remember this: Luck is the residue of design.
Hit singles or doubles.
Home runs will happen.
Just don’t try to hit them or you certainly won’t.
The lottery is not a financial plan. It’s a tax on the poor and uninformed (which are not mutually exclusive).
When used improperly, the stock market is a horror house and is worse than a tax on the uninformed.
DON’T TIME THE MARKET.
You won’t ever be able to sell high and buy low for many assets in the long term.
Please don’t try.
You’re far too busy taking care of your patients and then your family.
Save yourself a lot of stress and grief by putting together the Plan, sticking to it regardless of what the market is doing, re-assessing your returns each and every year, re-calibrating as needed, and then enjoying your life immensely stress free while sleeping heartily every night.
Don’t fret about the blowhard bragging about his “guy” or algorithm or the hot stock he’s riding to a yacht purchase or even the hotter stock tip he has. He’s probably lying or even if not misremembering his actual gains vs. the costs against those gains.
I’ve always said that the single worst place for financial advice in the world is the physicians’ lounge at your hospital.
When you run into that guy (and, let’s be honest, it’s always a guy, not a woman in my experience) and he is sounding off, just smile, nod, and say “Sure”. It’ll drive him crazy like nothing else you can say or do.
6.) Be disciplined, but know yourself.
Doctors are data driven in their professional careers and are well aware of where the gaps in that data are except in one area: their finances.
Don’t rely on yourself or spouse to make weekly, monthly, etc. contributions to your investment account.
Set up regularly scheduled contributions to your investment account right out of your checking and/or savings account, so that it happens and not as a function of any whim or current spending habits. Don’t let that vacation trip or other big ticket item disrupt your investing for the future. It’s too easy to stop payments to yourself “temporarily” and then restart them six months later.
Think of it this way.
Every time you stop contributions to your investment account, you decided to pay someone else rather than yourself and your family.
If you always approach it that way, you’ll guard those payments carefully.
Don’t get me wrong.
Enjoy your life.
Go ahead and spend—my wife and I love traveling and eating at great restaurants— but remember to get value for your money.
And don’t ever forget RULE # 3.
PAY YOURSELF EARLY AND OFTEN!
7.) One house, one spouse
The wisest financial advice my father ever gave me.
The easiest and quickest (and most likely most brutal) way to halve your money overnight is to get divorced.
If you both are making roughly the same amount of money (AND don’t have children AND it’s amicable), you might walk away with what you had before being divorced…and that’s with a lot of if’s with all of them going your way. (How often in life does that happen?)
If not…then things get expensive.
In addition, you may have alimony, child support, etc. as ongoing costs. And if you remarry (especially to someone with kids of their own), then the costs could easily double. Don’t get me wrong, financial considerations should never be the reason for keeping a marriage going.
But it might be consideration for you as you find a spouse.
If the person you are with is your financial polar opposite while you’re dating, you either need to have a potentially painful heart to heart talk about money (which I find never happens) or walk away as you two will fight constantly about money (a frequent source of arguments in young couples which is not ever solved by just a higher income level).
Let me be clear about one of my biases:
I’m not a second home guy—for any reason.
They contain many hidden costs that go unaccounted for when doing your analysis (assuming one was even done), aren’t used as much as we think they will be, and are not investments in any real sense of the word. (Real estate investing is an entirely different endeavor.)
Also, divorce is yet another reason (and by far the worst) that multiple homes are being paid for.
Much, much more on all of this in a later post.
8.) Understand what fees you are paying.
How much is your financial advisor charging you? Don’t know?
What are the expense ratios for mutual funds you own? Don’t know what that is?
Do you have load or no load mutual funds? Don’t know what that is?
There’s a lot more.
Much, much more on this in a later post.
Fees eat away at your gains. You must know precisely what they are or you’ll much more likely be victimized.
9.) Calculate how much you’ve earned only after accounting for taxes and fees and inflation.
Don’t look at how much you made last month, last quarter, or last year without subtracting out how much you have to pay your financial advisor, mutual fund, etc. and how much tax you have to pay.
If you’re comparing returns from five years ago or beyond, and assuming you’re not too depressed already, you need to factor in inflation in your returns.
The US Bureau of Labor Statistics has a slick inflation calculator where you can put in your amount of money from whatever month and year and see what amount of money that would have to be in the current month and year to be equivalent in today’s prices.
https://www.bls.gov/data/inflation_calculator.htm
Of note, the average US inflation rate in the past century (1913-2013) is 3.22%.
Then, once you have your figure, compare that amount/percent return to the appropriate benchmark.
If it’s all stocks, the appropriate benchmark is the S&P 500.
There are many resources to look up the annual performance of the S&P 500.
Ycharts is one of them.
https://ycharts.com/indicators/sandp_500_total_return_annual
Each mutual fund has its own appropriate benchmark which will be listed with every monthly, quarterly, or yearly report you get. Pay attention to them!
Much, much more on this in a later post.
10.) Always be ruthlessly pessimistic in your calculations of future earnings or future
net worth.
Don’t use an up year in the stock market as what your annual gains will be year after year in perpetuity.
That’s not just unrealistic, but even dangerous thinking.
It will seduce you into reckless action like altering when you will retire, convincing you how much will you be worth or “should be” worth upon retirement, and, worst of all, altering how much and/or how often you pay yourself because you’ve falsely convinced yourself how rich you’re going to be even if you don’t keep paying yourself.
Much, much more on this in a later post.
11.) Enjoy the journey, not just the destination.
Consider this a repeat reminder.
You’re working hard, you’ve budgeted, you’re making good financial decisions now, and you’re checking your accounts regularly.
But you’ve got a long way to go.
It’s inevitable for some to tip the other way and become monomaniacal about saving, investing, and hitting The Magic Number faster than expected.
In the immortal words of the best QB in the NFL today (sorry Tom Brady), Aaron Rodgers, “RELAX…R-E-L-A-X”.
You’re doing fine and will keep doing fine. Just stick to The Plan and allow yourself to enjoy your pursuits, your family, and your life in general.
Don’t torture yourself or your family now and for years/decades in hopes to knock off a year or two to get to The Magic Number, especially when it may not even happen any earlier (life’s funny like that) than originally anticipated. Besides, you’re getting to exact same spot just a little later.
Giving up those morning lattes won’t buy you a Mediterranean villa even at your income level, so don’t sweat the small stuff. Just make sure your pleasure is not disrupting your cash flow to your investment account. But also ensure that your savings aren’t disrupting your pleasure.
Remember: Don’t pay others when you could be paying yourself instead.
12.) Trust yourself and stick to The Plan. But, check where you’re at once year every year (at least) to ensure that you’re still on target.
I check every account statement monthly, see what went up, what went down, how much of each, how the dividends are doing, and then still do a very rigorous assessment where I am yearly.
Call me a nerd, but I actually enjoy it.
I’m not asking anyone else to do that.
But, you should not be a stranger to your investment accounts. It’s not a great aunt by marriage that your parents force you to drop in on every few years and you’re left wondering “How much longer is this lady going to be around?”(but I digress); it’s the entire sum of when you can retire and how you will live once you retire.
Certainly, there are more important things in life, but the list of things above ensuring your investment accounts are in good shape is frightfully short.
13.) Understand the Rule of 72. And 114. And 144.
I know. I know. Rules within rules. Not fair. Who does this guy think he is?
Most people are familiar with the Rule of 72, the simple formula that can be used to estimate how long it takes to double your money based a certain expected interest rate. For example, you expect to get an 9% rate of return on your money. How long will it take to double your money at that rate of compound interest?
To calculate this, simply divide 72 by 9 to get 8 years.
This formula is fine for estimating how long it takes to double your money. But what about tripling your money?
Here’s the Rule of 114 to help you with that.
To estimate how long it takes to triple your money, divide 114 by your expected interest rate (or rate of return). Using the 9% return figure from the first example, the formula would look like this:
114 ÷ 9 = 12.67 years
Now for the Rule of 144
To estimate how long it will take to quadruple your money, substitute the number 144 for 114 or 72.
144 ÷ 9= 16
It should be noted that the higher the expected rate of return, the less accurate the formula is for any of these Rules.
And above all else, realize that these are estimates, not precision calculations. They’re just to provide you with ballpark figures to get a rough idea of where you’re at, nothing more.
14.) We all pay invisible taxes. All of us.
Your job is to make as many of them as visible as possible…and then understand their costs…and make sure you’re fine with paying for them…and why you’re paying for them.
You live in a non-major metro area and pat yourself on the back for all the money you’re saving, but every time you fly, you have to connect through other hubs to get to your final destination. Thus, just by virtue of where you live, you have increased your chances of missing your flight(s) and will always have to spend more time to get to where your vacation, conference, etc. is. There’s nothing worse in our day-to-day lives than wasted time.
Don’t have children?
You’re saving tons of money over the next few decades, but let’s not pretend there aren’t costs to that later in life.
Who will take care of you once you’re old and feeble?
And that’s not to mention the joy that children bring you every day of your life (I can practically hear the eyes rolling of my friends with kids right now).
These are just two examples of the invisible taxes we all may pay, but there are many, many more.
What are your invisible taxes?
Do you understand their costs?
Are you fine with paying them?
Perhaps, most importantly…Are you fine with why you’re paying for them?
15.) Above all else…have fun. If you don’t, then what’s the point of it all?
Don’t let the ups and downs of the market get you down.
You’re betting on the US economy and probably the broader global economy.
In the short term, it’s always a risk. In the long term, it’s a great bet.
You’re in a 25-35 year marathon.
Think of each year as a mile. If you’re behind your expected time in mile three of a marathon, you shouldn’t freak out. You still have over twenty miles to go.
Another thought exercise:
When the market is down, you’re buying great companies cheap. It’s like a big sale is going on.
When the market is up, you’re richer.
Be a Patty Positive, not a Debbie Downer, not even a Nancy Neutral.
17.) Approach all of life as investing and then invest in at least one thing other than money.
Invest in yourself also.
Whatever is most important to you that makes you a better person, do it.
Family, friends, church, personal fitness, reading, learning a new language, learning (or re-learning) an instrument, painting, volunteering…it doesn’t matter what it is.
It just matters that it matters to you and, most of all, that you dedicate it yourself to it and do it with the great passion you know you’re capable of.
I’m warning you now that you will hear all of these axioms (clichés?) again and again…endlessly?
Thank you for checking out my blog.
I’m honored and greatly appreciate it as I know from firsthand experience how limited and precious your time is.
I’m thrilled to start this journey together with you and look forward to learning from one another.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Talk to you soon.
