Graduate Level Optimizers: It’s Tax Gain Harvest Season

Tax Gain Harvesting… What In The World Is It & Why Would I Care?

This article has to do with taxable investment accounts and the tax on your gains from them. If your employment income is low enough and you have a sizable taxable account then tax gain harvesting is a great strategy to ensure you are not taxed on your investments if you follow the rules. So let’s talk first about tax brackets and then we can talk more about invested income taxing.

Let’s assume for your 2017 taxes you are married filing jointly. Let’s say you have an adjusted gross income of roughly $60,000 between you and your spouse. You will be in the 15% tax bracket when it comes to the money you have made on your W2 (bonus question: Do you know how much you will pay in taxes?) Here is a list of the 2017 tax brackets. Great news! In 2018 you would only be taxed at 12% due to the Tax Cuts and Jobs Act. This saves you $1,800 in taxes if you are in this bracket!

Tax Brackets for Married Filing Jointly W2 income

Tax Rate Taxable Income Bracket Tax Owed
10% $0 to $18,650 10% of taxable income
15% $18,650 to $75,900 $1,865 + 15% of the excess over $18,650
25% $75,900 to $153,100 $10,452.50 + 25% of the excess over $75,900
28% $153,100 to $233,350 $29,752.50 + 28% of the excess over $153,100
33% $233,350 to $416,700 $52,222.50 + 33% of the excess over $233,350
35% $416,700 to $470,700 $112,728 + 35% of the excess over $416,700
39.6% $470,700+ $131,628 + 39.6% of the excess over $470,700

What is interesting is that your taxable investment income is taxed differently. They are taxed through dividends and capital gains. A dividend is a portion of the profit of the company you hold. These are paid out while you hold your stocks and a capital gain or loss is the difference in the cost of the stock when you bought it versus when you sold it. If that is positive then you made a profit! Uncle Sam wants his share and you should know how he determines what’s his and what’s yours so you can work to keep more of yours. He rewards savers and taxes spenders. Do you want a wealth building strategy? Learn to save. Let’s see how Uncle Sam determines what’s his.

Short Term & Long Term Capital Gains

This is where the buy and hold strategy comes into play with your taxable accounts. When you sell a stock the tax you will pay on your capital gains depend on how long you have owned that particular stock. If you have held that stock for over one year, great, that means that you will be taxed at a lower rate tax rate. This is considered a long-term gain. If however, you sell that stock after only owning it for less than a year then you are subject to being taxed at your current marginal tax rate, ouch! This is a short-term gain.

Tax Brackets for Married Filing Jointly Investment Income

Tax

Rate

Taxable Income

Brackets

Short-term

capital gains

Long-term

capital gains

10% $0 to $18,650 10% 0%
15% $18,650 to $75,900 15% 0%
25% $75,900 to $153,100 25% 15%
28% $153,100 to $233,350 28% 15%
33% $233,350 to $416,700 33% 15%
35% $416,700 to $470,700 35% 15%
39.6% $470,700+ 39.6% 20%

Did you notice that 0% tax rate on long-term capital gains if you are in the 10-15% tax bracket (making $0 to $75,900 married filing jointly)? Yeah seriously, scroll back up and look at that. What this means is that you are able to have all the income from your taxable account not taxed!!! In order to complete this “tax gain harvest” you need to sell and buy back your investments. This raises your cost basis on the investment and as long as you are in those low-income tax brackets and the investments have been held for one year you do not pay takes on your gains. I will talk about what a cost basis is soon, so keep reading.

Tax Gain Harvest Now Is To Tax Loss Harvest Later

This strategy of tax gain harvesting sets you up to be in a good position for tax loss harvesting should the market drop as it does from time to time. Lots of folks know about the defensive move of tax loss harvesting, but not too many know about the offensive move of tax gain harvesting. Let’s walk through an example.

So let’s say you are that same person who is married filing jointly with $60,000 of AGI putting you in the 15% tax bracket in 2017. Let’s also say you decided at least over one year ago to invest in a taxable account. You placed $7,000 in that taxable account years ago and it has now grown to $18,000. No, no investment would do this for you in one year, but over years it would. So in our example, you have $11,000 of gains and subsequent taxable income. You would be taxed $1,650 if these were short-term gains since the tax rate there is 15%, but you have held onto them for longer than one year so your tax rate is 0% and you pay zero dollars in taxes!

If the market were to crash later in the year you then have room for tax loss harvesting. This has to do with cost basis. Cost basis is the original value of a stock the day you bought it. When you tax gain harvest you raise your cost basis by selling and then buying back the same stock tax-free.

Said In Another Way

  • So say in 2010 you had $7000 to invest and bought 100 stocks for $70 a share.
  • In 2017 that same 100 shares of stock that you bought in 2010 appreciated to $180 per share.
  • You sell and buy back that stock through tax gain harvesting and now your new cost basis is $180 per share.
  • If the market were to then crash in the following year (which it does do) you could tax loss harvest by selling off that stock and purchasing a different stock. There are laws that govern tax loss harvesting so know about the “wash sale” rule when you conduct tax loss harvesting.
  • Wash sale rules do not apply to tax gain harvesting.

In Summary

I know that was a lot of jargon. Hopefully, you tracked with some of it. I certainly had some trepidation about many of these subjects until I took the time to learn more about them. I find myself sometimes wishing I had a really good stockbroker buddy and a really good tax preparer buddy so I could bounce all these topics off of all of them at once, but I don’t. Now you know why I write these posts!

  • Your bonus question: okay so with an adjusted gross income of roughly $60,000 between you and your spouse do you know how much you will pay in taxes?
    • You are in the 15% tax bracket and you owe $1,865 plus 15% of the excess over $18,650.
    • 60,000 – 18,650 = 41,350
    • $1,865 plus .15*(41,350) = $ 8,067.50 of taxes!
    • It is no wonder that taxes are typically in the top three expenses found on an annual family budget. You don’t realize it because it comes right out of your check every time you get paid! What would you do if you could save an extra $8,000 per year? What are some ways you have learned to lower your taxes?

Thanks for the read 🙂

The Roth IRA Further Explained

The Roth IRA Further Explained
Who doesn’t love a little desert beauty to go along with financial topics?

Who is a Roth For?

Most everyone. If you have made income or your spouse has made income in a given year you are eligible to open a Roth IRA. The max amount of money you can contribute to a Roth IRA in a given tax year is $5,500. I say “given tax year” because you can contribute for any year from January 1st of that year up to tax day (mid April) of the following year giving you an actual 15 and 1/2 months to contribute. If you make more than $135,000 as an individual or $199,000 married filing jointly you are still eligible for a Roth, BUT you have to complete the backdoor Roth IRA. The Physician on FIRE has written an amazing step by step post for this so if you are in that camp follow his walk-through!

Do This Today!

Hopefully, you are busy working on completing your Step By Step and have already Set Up Your Roth IRA so you are now ready for this post! Either way, when you do decide for yourself that investing in a Roth is your next step, go with Vanguard. Let me tell you why I went with them.

As Jack Bogle says: “Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the difference.” What, what- that was Robert Frost wasn’t it?

Vanguard

Vanguard has some of the lowest fees across the industry. This is assessed by what is known as an “Expense Ratio” or “ER” for short on your mutual fund. How does Vanguard keep costs so low? It is brilliant really, they are the only mutual fund company in the world that is owned by its shareholders i.e. you and me. Pretty novel concept huh? I guess that is also why it is the largest mutual fund company in the world. It was founded by Jack Bogle, a pioneer of the mutual fund; you should look him up sometime, he is a class act.

Expense Ratios

Anyways, he remains to this day a strong voice for the average Joe investor looking to not get ripped off while walking on Wall Street. Expense Ratios on mutual funds at Vanguard are hard to beat! Always know your ERs. If you have any sort of account in the stock market right now call up and ask what you are paying in regards to your expense ratios. If you are above .16% you can easily have it lower so shop around. Now let’s talk mutual funds.

Mutual Funds

Oh, the mutual fund. I will describe a mutual fund in broad terms and then we will circle around and go into specifics. A mutual fund is less risky investment than investing in one stock or one bond or some other investment entity because mutual funds bring multiple stocks and/or bonds together to spread risk and offer investors an opportunity to invest in multiple companies at one time. It’s pretty sweet. So say you are interested in investing in Apple stock (after all you are probably reading this on an Apple device right now), but you are not sure about how risky it is to put a large sum of money into one stock on the stock market. To answer your question, IT’S RISKY!!! But how risky?

Prickly business and  risky business, both can really hurt

Risky Business

Let’s consider the risk to be a fluctuation from a mean. All stock investments on the market fluctuate, that is just what they do, but those investments that carry more risk of loss (and subsequently more opportunity for gain) fluctuate more- that is to say, one day you are up… a lot, and the next day you are down…a lot. For the beginning investor (even for a seasoned one) large fluctuation in whatever sum of money you have set aside to invest with does not sit well with most.

Millennials These Days

So then let’s say you are like most millennials, you have an upwards of at least 4 Apple products of some sort (iPhone, iPod, iPad, and an Apple watch) with which you impulse buy on Amazon.com all the time (I am totally guilty of this, no shame here), you drink Starbucks at least weekly (if not daily… me too) and you have been known to frequent Wal-Mart every so often, okay you are there all the time… just admit it. You want to invest in all of these companies, but to do so would take a lot of work and the stock market is a scary place where people lose money and you don’t know a ton about it so you stay away. You are like most Americans! How could you invest in all of these companies at once and save tons of headaches and time? I am glad the reaches of the internet brought you here. Let’s tackle this question together!

Mutual Funds!!! To Load Or Not To Load?

Mutual funds are the answer! They are a great investment tool in that they pool risk together inherent in the stock market and spreading it out through investing in multiple stocks, and by multiple, I mean hundreds to thousands of stocks. There are many different types of mutual funds and you should read more about them so you are informed, but I will give you a heads up here.

YOLO? No, No Load Bro

The very best type of mutual fund you can have is a “No Load Mutual Fund” Like VTSMX/VTSAX. No load simply means that you are not charged to invest whenever you want to invest. These “load funds” are nothing more than mutual funds with commissions for the salesman that sold them to you. Wave bye-bye to that load money that you will never see again… It’s a pretty sad really. My thoughts and prayers are with the investor hoping to create wealth in this manner. Why pay for something when you can have it absolutely free? Keep reading.

Bro, YOLO So No Load.

Mutual Funds!!! To Index Or Not To Index

What I mean by actively managed funds is this: many mutual funds have fund managers. These managers attempt to predict the market by coin flipping, palm reading, underwater basket weaving and all sorts of hoopla that aims to “beat the market” and get “better than market” returns. Hogwash! This is a futile exercise and study after study has shown that there’s no way to predict the market. However, it’s clear that there is money to be made in convincing people that you can do so. They make it look like meticulous study when indeed, it is just meretricious propagation. You have to be in the know to recognize it, now you are in the know. Now it’s time for a shameless bad dad joke.

Major Pointer: Index… dig it?

The truth is nobody can predict the market and that is exactly what an actively managed fund manager tries to do! You are better off with an index fund. Major pointer:  Index funds are mutual funds that follow a particular index of the stock market. There is no manager involved. They spread out assets of that index and the goal of these funds is to get you the identical returns of stock market for that particular index. They don’t sell you on the idea of trying to beat the market and play towards your greed, rather they sell you on the promise of meeting market returns and this should appeal to your logic and wisdom. Ah yes, logic, such a forgotten thing in today’s feel-good society. Indexing is a stellar way to start and finish your investment career.

Sometime it takes hours of slogging through boring landscape to come on that one reason for your journey. You have now reached that point in this write up. NOW GO START YOUR ROTH!!!

So Then Why VTSMX In Your Roth?

Because it is the combination of everything I have spoken of to this point! It is one of the cheapest and best  low cost no load index mutual fund. Additionally, if you are young like me, you can stand to start here- it is easy and simple. As you grow in knowledge you will find more conservative investors who might want you to consider adding some bonds to your set up which is totally fine. Do yourself the favor though, start today regardless!

Down The Road, You Can Switch

As the years go on and I continue to fund my Roth, I will consider allocating it differently, but this is an excellent starting point. Having a Personal Investing Statement is huge later on in your investing career. I started with this fund because it is absolutely hands down one of the best. I picked it prior to the White Coat Investor’s write up on it, but in reading his recent review of it, I knew I had done something’s right! I will let him (someone much smarter than me) explain it to you in this post: My Favorite Mutual Fund.

Start Early

Starting early in investing is a surefire way to developing passive income (i.e. money that makes you money while you do nothing). Passive income coupled with compound interest is an absolute true recipe for success in your financial journey, but it takes years so start early.

The Other Guys

You might not hear much about Vanguard on TV or the Internet, that is because other companies pay a lot of coin to market themselves to you. You represent hundreds, if not thousands, if not millions, of dollars of profit if you invest with them over your lifetime. At Vanguard, the extra money that would go to fees and advisors is reinvested into your portfolio. Do your future self a favor and invest at Vanguard. Tell them Life Of FI MD sent you, they will probably think you are crazy. I get NO financial compensation for this BTW.

A Word On Financial Advisors & Brokers

There are good guys out there. They are fee-only financial advisors. Otherwise, If you have made it this far down the list you are smart enough to do this yourself, I promise. Give yourself all the time that you need to crush a couple good books on the subject of finance and mutual funds (see setting up your Roth IRA. Part 1) and come out with some knowledge. Investing isn’t hard, but it is worth devoting some good time too. So think, read, compare, be critical and stay away from the pichi caca that salesmen known as financial advisors push on you as “sound financial advice.”

Questions To Ask Everytime

If you are dealing with financial advisors them ask every time what their compensation is with whatever fund/product they “recommend.”

  •  Ask them about the commission they make on the funds they recommend.
  •  Ask for the Expense Ratios on the funds they recommend
  • Ask for the load fees on the funds they recommend
  • Ask for every other extra hidden fees, and if all that weren’t enough
  • Ask them about the extra 1-2% off the top they then charge from your hard earned money after all those fees.

Finally, Ask if they are acting as a fiduciary on every line of product they recommend which means that which they recommend has your best interest in mind. As you might later find, many times their recommendations are not based on your best interest, but rather on theirs. Unless you here born with deep pockets caveat emptor.

I think you are ready.

START YOUR ROTH IRA RIGHT NOW!!!

I leave you with one more desert landscape photograph. Don’t worry, more below average dad jokes to come.

 Oh BTY, Sharing is caring.

PRN ROLOS

Medicine Reflections

PRN: short for “pro re nata.” Latin for “as needed.”  

Long, long ago in a hospital far away there resided a patient, a patient you could never identify, whose dementia was slowly overcoming him. This dementia left him with little memory of his past, his loved ones, his successes and even his reasons for being in the hospital in the first place. Luckily he still did have some aspects of his personality and preferences things that made him uniquely him. He knew the hospital staff that he liked, he knew the food that he enjoyed and he was happy when it came, and he even knew his favorite chocolate treat- the oddly shaped chewy caramel milk chocolate Rolo. Though this man had forgotten even how to feed himself, his fierce love for Rolos had yet to bid him adieu.

From a medical standpoint, this patient was tucked in. He was on an optimal medication regimen for his age and meeting all the goals of his hospital stay therapy. His diet was optimal for his comorbidities. He was cleared by psychiatry to be in the common area with other residents and not endanger himself or others. He had a great bed on a high floor with an even better view. In fact, his view made some of the medicine team members that would round on him in the morning jealous, because if you made it to his room and caught the sunrise at just the right time- though you were there in the hospital and minutes away from any exit, it felt like you were almost outside and breathing that fresh cool morning air seconds behind that dawning sun.

Maybe it was the view, or maybe it could have been the patient as well. He too was almost like a breath of fresh air. His problems were minimal and he was stable, he wasn’t one you were afraid of running a code on in the middle of the night. In addition to all this he was pleasant; pleasantly demented if there ever were such a thing. Rounds typically consisted of asking him how his day was, how his breakfast was, or even how he was, and every answer he gave to those questions was better than the last. He would even sometimes ask how you were as if his own mother were there reminding him when someone asks you how you are doing it is only right to reciprocate the favor back to them. Indeed, both he and his view were breaths of fresh air.

And without fail on most occasions, the strangest thing would happen after the almost ritualistic exchange of courtesies. A pause would come… then maybe a gesture… one slight gesture made for the door, if not a gesture then maybe the mere thought of one, and like clockwork, he would look up in anticipation and say those five famous words: “Do you have my Rolos?” It was the strangest thing to experience. Convincing him you didn’t was beside the point and altogether a lost cause; an argument you weren’t going to win. Nothing from my medical training would prepare me for the conundrum I then faced. This pleasantly demented man, my patient, wanted his favorite snack- the caramel milk chocolate Rolo.

The candy itself had altogether long ago left the shallow recesses of my mind along with the likes of Sunday morning cartoons, super soaker fights, and Pogs… that’s right the overly priced cardboard coined cutouts called Pogs- you remember them if you’re an old enough millennial. What was funny about this man’s inquiry was as a child I loved Rolos too. I REALLY LOVED THEM- like, my favorite candy type of love.

Initially, when he brought up the question I flashed back to a time when all I wanted was Rolos too. Hardly tall enough to reach for the tabloids, knee-high to a grasshopper, and though wet behind the ears, I knew at a young age that every trip to the store held the potential to net me some Rolos. And just like this man- as the ritual of shopping came to an end and gestures were made towards the checkouts, I would pipe up with 5 similar words: “can I have my Rolos?” We shared a similar love and a similar want; and though it felt like I was regressing to a younger me, the message was clearly received. As his provider it was my medical duty to procure my patient his Rolos.

I hope by now you have gathered my playfulness around the subject. I do it for good reason. So much of medicine is hard- people die, sick people have to make horrible choices between bad and worse situations. Worse yet, families sometimes have to make these choices for their loved ones. Grey hairs have worked so hard their whole lives to retire and weeks later discover terminal cancer. A lot of medicine is not good news and things get missed all the time in diagnosis and treatment of disease, it is just the nature of this unperfected beast.

But, I don’t say these things with you because I am jaded to the system. Not at all, on the contrary, I say these things to you because so much of medicine is also wonderfully beautiful. Beautifully flawed. It is one career out of millions, I feel, that is fully able to encompass our whole and sometimes gratuitous humanity- and deal with it on a daily basis. What a privilege it is to experience this- to experience another person’s own humanity and to offer assistance. In every sense, it is awe-inspiring.

I write all this tonight for sheer enjoyment and as a prayer of thanksgiving. I thank God for giving me the opportunity to take part in this patient’s care and teaching me a lesson through it, one that can’t be learned anywhere but at the bedside. That man who stirred up a bit of my own humanity over the simple topic of Rolos might not remember me tomorrow, but man was he happy when I brought him Rolos today. We shared a brief bond over candy and I learned a lengthy lesson on humanity, one I will carry with me as I continue a long, beautiful, gratifying, and unperfected march through my medical training.

Thanks for the read 🙂

How To Set Up A Roth IRA: Step By Step

You Still Don’t Have A Roth?!?!

I promised I would show you how to set up a Roth IRA in my Quick & Dirty post, but first I have one request of you. Before you read any more of this, please, please, please promise to YOURSELF you will take the steps outlined below to set up this account in the next 48 hrs. Years later when you have retired, you can send me a thank you note (check is optional). Also, this is foolproof; I had to go through it myself.

The Best Multiplied Four Times Over!!!

After doing what I outline below for you, you can say that you own one of the best retirement accounts available (the Roth IRA) in one of the best no-load mutual fund indices available (The Vanguard Total Stock Market Index Fund: VTSMX) at one of the best, if not the best, mutual fund companies in the world (Vanguard) for one of the absolute best prices available to investors (a dirt cheap expense ratio)!!! Remember my one request of you, please do this now for yourself (don’t wait until five years from now). In an effort to keep this extremely high yield, I am outlining the steps in this post and my following post will have the reasons why.

Roth IRA Set Up. Vanguard. Step by Step.
The way is made my walking. One step at a time!

Your Step by Step Guide To Setting Up Your Roth IRA:

  1. Go to Vanguard.com
  2. Click “Open An Account”
  3. Click “Open A New Account”
  4. Click “Transfer From A Financial Institution” & “Continue.”
  5. Now set up your account with Vanguard. This will take a couple steps and you will need to fund your account at this time as well as determine the account type: choose the Roth IRA. The money you transfer will be placed in a money market account initially. This takes a couple of days to process. Next is where the magic happens!
  6. Once your account is opened & funded, you are ready to Roth, I mean ready to Rock…
  7. Now, on your new account homepage click the Menu icon at the top left.
  8. Click “My Accounts”
  9. Click “Buy & Sell”
  10. Click “Buy Vanguard Funds”
  11. Click “Add Another Vanguard Mutual Fund”
  12. In the dialogue box enter “VTSMX” and click “Continue.” See my second post as to why I chose this one for myself.
  13. Fund your new Roth by entering in your amount in the dialogue box and clicking “Continue.”

Now Go Read!!!

There really is no way around this. Read, read, read and read some more! You have to read about these topics now. You can’t just trust me on this one, unfortunately. I mean, I guess you can, but if you are like me you need the answers yourself or months later you are likely to think that the grass is greener. Without the knowledge of these topics, you are never going to know what is good or bad in terms of investments and that WILL set you up to fail.
You need to start learning now. Keep your eyes on the look out, my post “What Is A Roth IRA” is coming out soon. In that post I will outline why I set you up the way I did and why I set up my own Roth IRA the same way!

Have You Started Yet?

Starting early in investing is a surefire way to developing passive income (i.e. money that makes you money while you do nothing). Passive income coupled with compound interest is an absolute true recipe for success in your financial journey, but it takes years, so start early.

Albert Einstein considered compound interest the 8th wonder of the world. He said of it, “He who understands it, earns it … he who doesn’t … pays it.”

Welcome

Glad you are here.

Life of FI MD exists to get as many people as possible interested in pursuing Financial Independence and to get those who are already on the path there a little faster. As a young physician FI is a far away and lofty goal, but it is not about the destination, around here on this site it is all about the journey.

If you are one who has felt like your financial situation has limited your life options, you should join the blog as you are in good company. Financial independence is a completely obtainable goal no matter where you are at, but the journey needs to begin now because it boils down to two simple things: an understanding of the math behind financial independence and a lifestyle supporting the math.

Truthfully, whether or not you follow the blog is irrelevant, what is more, important is what you will do with the information contained here within. I invite you to pursue a Life Of FI with me.

Welcome to The Life Of FI MD.

2018: The Year Of The Side Hustle.

The Side Hustle 

What are you doing these days to grow the side hustle? I am sure you are maxing out those tax sheltered retirement accounts, I love it! I know you are working extra shifts, get ’em!  I believe you are cutting monthly costs left and right, good for you! But I am talking in terms of what you’re doing to bring in that extra cash to add to your bottom line on a monthly basis outside of your careers; what are you doing these days to develop your side hustle?!?! Well, you better get to work because it is already January 12, 2018 and 2018 is officially The Year Of The Side Hustle.

2018: Year Of The Side Hustle
2018: Year Of The Side Hustle

Welcome To The Year Of The Side Hustle: 2018

I wish I could take credit for this one. It sounds so nice, it rolls of the tongue really, but I can’t.  It was actually Accidental FIRE in a comment section somewhere who  coining the phrase. I am not sure if he did it accidentally or not, but I liked it so I ran with it! I will say though, he can’t take all the credit for my inspiration, I have been particularly inspired to jump into the side hustle game this year after discovering and devouring The Financial Panther‘sBlog andThis Post in particular. After reading about all the ways he is pursuing FI through several side hustles, I had to get into the game!

Side Hustle Camping and Adventure
Now… If I could just turn camping into a side hustle…

“Everyday I’m Hustling”

So, you are new to this? Maybe start slow. Empty out your closets and attics, garages and storage units. Sell that which you have not touched for over 6 months. I found a stereo receiver, a microphone, a set of headphones,  an old IPad, a bike and several other items to sell! You would be surprised at how good it feels to declutter.  Take a picture, write-up a brief description, figure out the going rate for your items and sell, sell, sell! “Make the kids think you are going to sell them next!” says Dave Ramsey.

The Side Hustle Runner
If the side hustling was akin to running, I would still have set absolutely no records. Not a single one.

Get Techy

You can do a garage sale sure. But gosh there are so many other ways to sell your junk! Craigslist, OfferUp, eBay, Facebook, Amazon, Etsy, Bonanza, eBid! Place your items on these platforms and put some cash in your pocket.

What Will You Do This Year To Hustle?

Maybe you don’t have things to sell. Or maybe you like that passive income. That’s right, that cash that comes in while you do nothing. I have a couple of side hustles here and I am playing with others.  I will play all my cards soon for you to see, but first I want to hear from you! What’s your side hustle ideas, plans, actions and work for the year of  2018? Place them in the comments below!

A Beginner’s Guide: A Quick & Dirty.

The Quick & Dirty Financial Flow Sheet

It is quick and it is dirty financial flow sheet. Okay, so it isn’t even a flow sheet, but whatever. I stopped liking flowsheets back in second year of medical school while trying to figure out renal physiology so forgive me. This post is by no means exhaustive, but I think if JUST ONE PERSON actually does something with it, my day will be tremendously made. The key is starting today so please enjoy!

Save For Retirement!

Are you working, you better be! If not, get a job! And then get your employer’s match in your 401k, or 403b, etc. Never leave free money offered to you on the table. EVER. If you do not have a 401K option, then Open a Roth IRA. Differences between a Roth and a Traditional IRA stem from when you want to be taxed. If you want to be taxed now (before your money has the opportunity to grow in your investment vehicle, which is a very good idea) choose the Roth, if you want to be taxed later (after your money has grown and you have a lot more of it to be taxed) choose the Traditional. Anyone can open them, and I am of the camp that everyone should open a Roth, even high-income earners. The Roth gives you the opportunity to watch your money grow tax-free since you have already paid taxes on it when you invested it (this is called post-tax dollars). Have you started a Roth IRA? If so, pat yourself on the back. Do you need to start one? Read on, there are actually some steps that are prerequisites to step one… That was mean of me I know, but I did tell you it wasn’t a flow sheet, the rest should flow logically. I will show you how to set a Roth up I promise, but not in this post- you have some work to do first!

Adventures in budgeting, savings, and living a life of FI
All good things need to start at some point right? Can you remember a day your life became extremely better?

Start To Budget Or At Least Know Where Your Money Goes Monthly!

Put together a budget and figure out where your money is going. Mint is an excellent tool for this, it’s very secure, free, and it tracks your spending, savings, checkings, and investments. It automatically categorizes your spending so you can look back over the last however to see how much you have spent on whatever. Did I mention that it is free? I have used it for 7+ years and I have never had an issue with it, it’s great. Personal Capital is just as good and I would say even better on the investment front, but you should start first with simple budgeting and savings. Say you don’t like to budget or maybe you never have and you have vowed you never will… Well, how is that working for you? At least do this: get your credit card statement from last month and figure out where all your money goes. If you are like most Americans, you have been hemorrhaging money like crazy! Cut ties with the things that want you to cut ties with your money- the other option is for you to remain broke, many of us choose this route. It is time for you to figure out where your money is going, I can’t stress this enough, it is so important.

Start To Save 15% Of Your Income.

Maybe you don’t think retirement is for you. Well then save for a house, a car, a college degree, or a future expense. Save to pay off your debt! You won’t get there without a plan so start planning for something! On that note, income and wealth are two separate things. Learning the difference is easy, making the difference is hard. You probably think you could become rich if you just made enough money, but the honest to God truth is you have enough money, you just don’t use it right. Likely. you already allocate 15% of your paycheck off to something right now whether it is a car loan, a credit card payment, or a membership to that club you never use.  I will say it again: cut ties with the things that want you to cut ties with your money.  Sell your expensive car that lost thousands of dollars the day you drove it off the lot, remove from your billfold that pathetic piece of plastic that perpetually and almost prophetically places you penitent, drop that membership to that club that you frequent twice a year! Get a beater, a pair of scissors, and a good pair of running shoes and voila! Your future self-thanks you. Get savvy about paying yourself now and start doing it! 15% of your paycheck, let it belong to you. Put it in a savings account and don’t touch it!

Adventures in budgeting, savings, and living a life of FI
If you can’t save 15% of your income then please do this for me: at least save Saturday mornings for free outdoor adventures!

Fund Your Emergency Fund

Congrats! You are now becoming your own bank. 3 to 6-months of living expenses is a good number to reach for and you won’t know this if you don’t figure out your budget! Don’t put this in your local .02% interest bank account. Open up an Ally Online Banking Account where they offer you a whopping 1.25% interest rate on their savings account! Hey, it’s about 50 times better than .02% and you will feel pretty smart and you will literally be 50 times richer (at least when it comes to the interest that your bank is willing to offer you on your money)!

A cord of three strands is not easily broken, nor is an individual with an emergency fund.

Run Towards Your Creditors With Some, But Not All Cash In Hand

After saving for a time, after you have saved up an Emergency Fund- If you have crazy amounts of credit card debt, this is what you do: save up 2/3 of what you owe on each card, call the company and barter 2/3 what you owe as a onetime payment requesting they cancel the rest of the debt. If they say no, speak to the manager. If they say no, tell them you are paying off the next credit card on the list. Call back in a couple of days and try again. Persistence my friend. Some money is better than no money and they get that, many do accept one-time payments of a smaller amount. When you have negotiated properly send them a check. NEVER give them access to your checking account. If you have credit card problems, stop using them.

Pay Down Student Loan/Mortgage Debt Vs. Investing

There are lots of things to consider here and it is not a one size fits all solution. It is possible to do both, see my post of What I Did With My Med School Debt and How I Invest In a Roth IRA.  A good rule of thumb is that if you have debt that has an interest rate of greater than 5%, you should be paying off your debt. Never invest prior to completing steps one through five or if you have high-interest loans still yet to pay down. Also, understand, and this is crucial you are not going to get rich quickly by investing. No, not by smart investing. Your investment goal should be long-term (10+ years). When you think investment, you should think retirement and funding your bucket list, not Boiler Room or the Wolf of Wall Street. These steps will take a lot of time to work and complete so start early and begin learning now about finance. More to come on investing in a future post, but if I were to sum it up in a sentence it would look like this: Start with whatever income you currently have right now, with that income start to save, and with those savings, after a time, and after you have learned more about investing, start to invest.

That’s it. I guess it wasn’t all that quick, nor was it dirty… Sorry if I let you down, at least I hope you learned something! What are you going to do with this information today?

Thanks for the read and click the like button if you liked this :).

$10,000 to Bitcoin or VTSAX??? Please Help Me Decide.

News Flash: Stocks Are At All-Time Highs!

This is true, but Bitcoin is also crazy hot right now. Should I invest now or later and in which? What if the answer was yes and yes and yes? Yes to now, yes to later, and yes to Bitcoin hooray!!! But please for the love of all things holy less than 5% to Bitcoin… Keep reading to learn why.

Invest now, invest later, and invest in Bitcoin? 

Investing Bitcoin VTSAX Financial Independence What Should I Do
Chill Bro, You can invest in Bitcoin, but how much is too much?

I guess the above approach would leave everyone winners in the short term, but I don’t think it is a long term winning strategy. Why? Stocks are at all-time highs, this is true; stocks also have been at all-time highs for the past five years. There are people out there still holding onto lump sums of money from the crash of 2008 waiting for the next crash to reinvest. They are losing money thanks to inflation. If they were one of the few to have left their money in the market during that scary time, not only would they have received back all of their money by this point in time, but it also would have doubled. In the last year alone the Vanguard Total Stock Market Index Fund has returned investors roughly 20% back on their invested cash. If you are invested in a Roth that interest is tax-free!

VTSMX or Bitcoin? Hhhhmmmmmm….

The Vanguard Total Stock Market Index Fund (VTSMX for short) is one of the best investing funds available. It is also one of the cheapest. I share that with you to encourage you to start your road to a better future of freedom sooner rather than later. Like… RIGHT NOW… rather than later sooner…   If I were given a windfall of 10K I would put it right into VTSAX and let it sit. I would sit it and forget it! But Bitcoin is crazy hot right now, why am I not invested in it? There is just no track record for it, if you must invest in it use your play money (<5% of your portfolio). Just don’t leverage your house for bitcoin investments. But now lets talk stocks.

Should I Invest Now Or Later?

“I know I need to invest, I know stocks are at an all-time high, when should I invest and how should I invest? What would you do?” The answer is not a concrete one and no one should tell you “Oh, invest when the market drops this many or that many points,” or “You know, wait until next year when things smooth out.” They might as well be palm readers.

When you ask the question “When should I invest and how should I invest?” you are asking what you should do with your money, fair enough? But the reason you ask is because investing requires a stock market and you don’t know what the heck that thing is, or how it works, or when to invest, or what to invest in, but you know you don’t want to get burnt, and you are pretty sure you would like to make money and not lose it. And probably you are reading this article now because it had the work Bitcoin in the title and you thought it would make you rich! Well, let you and I talk long term 15-20 year wealth with track record and I think we will be on to something in this post.

You Need To Ask Yourself Some Harder Questions First Before You Bitcoin Power Up!

The truth is you need to tell your money where you want it to go and how it is going to get there. No one else can do that for you. Writing up a plan is the best thing you can do for yourself and your future. It helps you learn about these interesting topics and also steady the course for you in the future. Putting pen to paper and determining what is the best route of action for your invested dollar is just a smart thing to do. Some people call it an Investment Policy Statement, others have named it an Investing Policy Statement, or even an Investor Policy Statement. I have named mine something different because I can.

Investing Bitcoin VTSAX Financial Independence What Should I Do
My Very Best Bitcoin Power Up!!!

Please enjoy Thy Investment Personal Statement (IPS for short.) I have named it that for several reasons. First off, I have written lots of personal statements throughout the years (probably somewhere north of a 100) while applying to scholarships, medicals schools, residencies and so on, so a personal statement just feels like home to me, and loads better than a policy statement. The word policy makes me think of meetings, and I loathe meetings.

The Intern’s Investment Personal Statement

Philosophy:

  • Keep costs low, be happy accepting market returns.
  • Invest in Vanguard low-cost passive index mutual funds.
  • Lifelong buy & hold strategy with a fixed asset allocation.
  • Invest monthly; separate and automate accounts.

Goals:

  • Be financially independent as soon as possible. 10 years outside of residency Lord willing. This includes student debt, house payments, and sizable nest egg retirement savings while Traveling Wisely and seeking New Experiences as a couple.
  • At this point in our lives, our risk tolerance is quite high and can remain so until post-residency at which time we will reassess.

Fixed Asset Allocation:

  • 90/10 Stocks/Bond & REIT ratio
  • 90 % Stock (75% US and 15% International)
  • 5 % REIT & 5 % Bonds (3% US and 2% International)

Specifics:

  • Separate and automate savings and retirement accounts.
  • Early IRA contributions for longer market appreciation.
  • Maximize tax deductions in IRA, 401, 457, & HSA if possible.
  • Invest monthly & over the long-term. Never react to the market.

Expectations:

  • Expect a 20% drop bear market approximately every 3 years.
  • Expect a 10% drop correction approximately every year.
  • Expect these drops to scare you, but be faithful and don’t react.
  • When assets drop, it is a great time to buy.

Within my IPS you find several elements of who I am. I am quite cheap, I am very comfortable with long commitments, and I am pathologically passive, or at least I have been told so. Just playing, I am not passive, I am actually quite active with these things. Passive people get herded into actively managed funds with crazy fees by financial advisors.

My IPS Dictates My Investments Decisions…  Sorry Bitcoin…

My IPS tells you about my life and my comfort concerning risk: I like to travel and place a high value on experience over stuff. I am young and am comfortable with a more aggressive asset allocation, which I have determined as a fixed asset allocation. This means I don’t time or react to the market. I don’t buy or sell based on the market conditions. I invest monthly and have determined my stock to bond ratio to be 90% stock and 10% bond.

Investing Bitcoin VTSAX Financial Independence What Should I Do
Myself and several colleagues analyzing recent Bitcoin trends, as you can tell meticulous work in a very heated environment.

Within them there bullet points you see that I am serious about my financial independence and that I don’t pass the buck to tomorrow, or next year, or to when the market drops, or to when that smart guy tells me to invest. Rather, I have established where I want to be in X amount of years (set some sort and long term goals for yourself,) I have told my money where I want it to go (separate your investing cash from your day to day checking and saving accounts so it’s out of your hands as soon as the check clears,) I have told it when to get there (set up monthly automation,) and through asset allocation I have even set guidelines for how it behaves (If you are risk averse, increase your bonds. Like a wild ride? Go stocks).

Please feel free to take it and use it for yourself if you like. Send me a message or leave a reply if you have questions. This seems like complicated stuff, but it really isn’t that bad. Start learning about it now and start using the tools that God has given you. Remember all these things are on loan, aren’t they?

Everything should be made as simple as possible, but not simpler.

-Einstein

Thanks for the read 🙂

Your Medical School Debt & What I Did With Mine While Pursuing Financial Independence.

A Caveat.

Not all of our situations are the same so please weigh out your own situation before taking my advice as gospel, but that being said after you have done so, please do give the following some deep thought as I do want to save you some coin, especially when you’re a broke resident! I believe the loan repayment option I am about to outline for you is one of the best options available to us as future physicians who are currently in training and still making a resident’s salary. Enjoy the following, share, and please subscribe if you are interested in financial independence!

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The face of a happy man.

Congratulations on Graduation!!!

Ah, breathe a sigh of relief. You have graduated medical school, you have matched into your specialty and you are about to start residency. Breath in and relax… Wait what? Residency? Relax? Are you serious? We thought medical school was hard with all that we had to learn. Now we find out that all that learning amounts to all this responsibility! But don’t fret, medical school has taught us to be adaptable if nothing else. We have excelled in different rotations, worked all sorts of work schedules, pulled more all-nighters than most, and I won’t even mention the grit required in tackling the grueling months of studying for our 3 national board exams.

We are indeed mostly prepared, believe it or not, to deal with at least the stresses that residency will bring our way, but what we have not been prepared for is what we plan to do with our looming student debt. Don’t blame this one on your financial aid office, no, you have to do this work yourself, or at least you did until you stumbled across this post! I have done a lot of reading on this subject so you’re golden! Sit back and relax.

Grace Period???

I will give you an outline and then go into detail, as these are some complicated topics. Truthfully, they really aren’t too complicated after you understand them (much like medicine), but they are scary nonetheless when first trying to figure them out. Right now, if it is June through December and you are fresh out of medical school and starting residency like me, you are not even worried about your loans most likely, you are still in that “6 month grace period”-correct? I don’t consider it much of a grace period honestly as your loans are still accruing interest this very moment.

What would you do if I told you that you could cut your interest in half and let the government forgive you for the other half of your interest starting ASAP? That grace period is costing you thousands of dollars when you could be starting to save money right now. Not only that, but you could also keep your interest halved all throughout your residency, i.e. I want to save you a number north of $20,000 over the next 3-4 years. Sound good to you? For me and my 4-year residency program that accounts for a total savings of $28,800 of interest that I won’t have to pay on my loans under my plan. Here is what I did.

A Simple Plan.

It really is a simple plan. By consolidating all of my federal loans with Fedloan servicing the day that I graduated medical school, I skipped out on my grace period and subsequently entered right into the REPAYE plan. Thereafter, I signed up for direct debit to shave off a little extra percentage of my interest for the rest of the term of my beefy loans. That’s all, but it actually has much bigger implications that you think and my reasoning behind it with more detail follows. It’s time to get savvy about being on top of your loans while in residency. If you are sold already on the idea then your to-do list follows.

*** Before you get too excited though I should tell you that if your spouse makes a good income then the REPAYE plan and all I have to say DOES NOT apply to you. You should consider the PAYE plan and file your taxes separately if not already doing so. The complicated thing about REPAYE is that it takes your spouses income into consideration when figuring out your payments amounts. If, however; you have no (working) spouse and are crazy broke and are looking to lower your interest rate like crazy then you are in luck, my friend!

  1. Consolidate your federal loans with Fedloan servicing ASAP. I think I consolidated my loans over the internet on my phone while in a parking lot somewhere random. An In-and-Out Burger I believe. It was that easy. In between a double-double and some animal fries I submitted my application to consolidate all of my federal student loans and washed it down with a coke. I had already researched all my options and I knew this was the best choice for me. I felt completely confident in doing it. Most likely it is the best option for you too, but the trip to in-and-out is optional.
  2. Sign up for REPAYE if you and your spouse don’t make a ton of money.
  3. Finally, sign up for direct debit. This takes additional .025 off of your interest rate and it is a no brainer.

Calling On Fedloan Servicing For Help.

You will find after a couple conversations with the representatives at Fedloans servicing that some know what they are talking about and are great, but many of them don’t. Call several times asking the same questions and chances are you are going to get different answers, unfortunately. It has happened to me plenty of times. Continue to call until you connect with someone who’s been working there for awhile and knows the ins and outs of these loan options, they are your friends and this stuff is super important to get right. Let us now talk numbers.

My Hypothetical Situation.

Let’s say I owe about $250,000 with an average interest rate of 5.8%. How much interest is that per month you ask? ($250,000)*(0.058) = $14,500 / 12 months = $1,208 per month of interest. Ouch, that’s a lot of money each month. Is there anything I can do to lower that crazy high-interest rate and subsequent interest payment? Yes, there is!

Forget the grace period, I am consolidating and jumping onto REPAYE so that the government is subsidizing me what I can’t pay monthly! With a monthly payment of $0 (since I only made grades and not dollars last year), the government will forgive half of my interest which is $604 and the remaining $604 will be added to my principle. I have effectively just taken my large 5.8% loans and cut them to a 2.9% loan AND with direct debit added onto my account, it is now 2.875% of an interest rate.

I have never had a loan interest rate so low! In fact, I am kinda jazzed about the prospects of starting to pay down my loans under this repayment plan while in residency! They ask for 10% of my discretionary income, which is equal to 10% of my Adjusted Gross Income. There are plenty of great ways to lower your AGI on your taxes to make this payment lower, but that’s another discussion for another time. Let’s talk consolidations and what it means.

In Residency Consolidation.

I was at 5.8% interest prior to consolidation and I am at 5.8% interest after consolidation, the only difference is now my loans have been bundled into two simple subsidized and unsubsidized loans. That is literally the only difference. Why did the government do this? Well, on the small amount of subsidized loans I have the government will subsidize 100% of that accruing interest on them for the first three years in my REPAYE plan. Thereafter they will subsidize 50% of the interest as they have been doing with my unsubsidized loans since day one of my REPAYE plan. When I get out of residency and start to make more money, my payments will go through the roof. I am not trying to pay down on loans for 20-25 years people, that just does not sit well with me. I want these things gone and I am not hoping the government will “forgive” me of them either.

After Residency Consolidation.

What I plan to do outside of residency after my income creeps is to not let my lifestyle do the same. I’ll shop around for some solid terms with a private lender to consolidate with and live for 3-5 years in the slums like a resident and get this monkey off my back! Okay, it won’t be the slums, but you won’t see me keeping up with the Joneses. It will feel so good to be debt free. I am thinking about these things now and I am making conscious decisions to start that process as a resident. You should be doing the same.

Did You Find This Helpful?

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