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Life Hacks post. She blogs at PracticeBalance.com about finding balance as a physician mom. She and her husband are financially independent. You can read her interview here. The other day, my 2 year old daughter asked, “Who gave us this house?” We both paused and looked at each other. “Um… No one. We bought it with our own money that we made ourselves.” This is the first time we had talked to her about anything related to money, and I’m sure it won’t be the last. As she grows up, she’ll no doubt deal with the marketing of products directly to her, comparisons to friends, cases of the “I wanna’s”… then ultimately management of her own earnings and debts.
Always creating and learning
Unlike some families where money is a taboo subject, we hope to have many money conversations with our daughter as she matures, because financial responsibility is very important in our family. We’ve worked hard over our adult years to become financially independent and free from any debt or mortgage, which has allowed us to both work part time. When I was a young girl, I never felt that my family was in a state of lack. But I also never grasped the mathematics side of money, the finiteness of it. That all changed when I became a mother. Although my husband had been equating money with life energy for many years at that point, I didn’t see it until I had this being in front of me that I wanted to spend all my time with. I had spent years, tears, money, and life energy to have her (due to infertility), yet she was priceless. Any time at work was suddenly time away from her.
One of the lessons I really want to teach my daughter is the idea of value. Value is relative and individual, as one person’s prized possession can be another’s throw-away item. Likewise, the way we prefer to spend our time (which ultimately equates to money) can vary drastically from person to person. I cringe when I hear people use the words, “We can’t afford it.” Kind of like saying, “I can’t eat that cupcake” or “I don’t have time to do ______”, it’s rarely true in a literal sense. You can if you want to, but you choose not to, for whatever reason. It’s a mistake made often by people in all financial situations, both wealthy and poor.
What harm is done in saying “we can’t”? It sets a tone of scarcity vs. abundance. The scarcity mindset keeps us from feeling we have choices or control over our financial situation. It places issues in a negative light, such that we make decisions out of fear and compare ourselves to others. On the flip side, being valueist means that we see the potential abundance in things. We make decisions from a place of optimism, because again, anyone can afford anything they inherently value.
Taking time to find the rainbows
Affording anything, however, must come with financial sacrifice in other areas of our lives. We’ve all seen examples of people driving around in very fancy cars despite meager earnings. I’ve been to third world countries where a family shack contains a large screen TV. Everything we buy is a choice and is conversely a choice in the opposite realm (against saving or spending on something else). How much is an extra hour a day with your child worth to you? Is it worth not having a cleaning lady, taking a 30% pay cut, moving to a smaller house? In addition, there are degrees of choice here; you can choose to NOT buy the nicest item you can afford. The common belief that everyone buys the nicest things “they can afford” leads to a false evaluation of success based on material goods.
Of all the things I value, time with my family sits at the top of the list. I hope someday my daughter will understand this concept when she wants me to buy her something that I choose not to buy. The best thing we can do is to live our lives in alignment with our respective values and provide an example for our children.
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if any, for your kid(s)'s education & life is a personal decision. There is no simple answer. I don't recommend doing any of these if your finances are not in order. Remember, there is no such thing as a loan for retirement. My 1 year old already has 3 accounts and about to open a 4th. Why? To take full advantage of time and compound interest of course. Here they are in order of when we opened them.
1. 529 College Fund
529s are the king of college savings accounts. You contribute after-tax money in, it grows tax free, and you don't pay taxes on withdrawal. You may even get a state tax deduction for your contribution. You can also open one before your child is born! So if you know you're going to have children and get a decent state tax break like I did when I was living in NYC, it's not bad a idea to get one going. Where should you open one? Start with your own state's plan. If you get a state tax break you'll want to find out if you're limited to using your state's plan to qualify for a deduction or not. A few states, including my now home state of PA, allow you to use any state's plan. So, I've kept mine with NY which currently offers the lowest fee Vanguard funds. We currently invest it all in the Aggressive Growth Portfolio which consists of 70% Total Stock Market Index Fund and 30% Total International Stock Index Fund. If your state offers no tax deduction then I recommend NY, Utah, or Nevada's plan. Pick Nevada if you already invest in Vanguard and want to keep things clean. Don't overthink it, just pick one. And – make sure you select the direct plan and not the plan via a financial advisor which are loaded with extra fees. There is a penalty if you withdraw money for non-educational purposes. Because of this I recommend saving something like 70% in a 529 and the rest in either a UGMA/UTMA or your regular brokerage (aka taxable account). There is a special rule allowing parents to frontload 529s above the gift tax limits. You may frontload 5 years worth (5 x $15,000 or $30,000 = $75,000 or $150,000). For those that can swing this, this is a great way to get that money growing for college.2. UGMA (Uniform Gifts to Minors Act)
UGMA & UTMA are basically savings and/or investing accounts for your children. You own the account as a custodian until junior reaches the age of majority. This age is state dependent but usually ranges from ages 18-21. Once they reach this age the account belongs to them and you lose control. Since this is an asset your child owns it will be counted for college financial aid calculations. The money can be used for anything. On the flip side, interest, dividends & capital gains are taxed. The taxation recently changed with the new 2018 Tax Law and will be taxed like trusts (15% & 20% tax above $2,600 & $12,700 respectively). Previously, the first $2,100 of unearned income (interest, dividends & capital gains ) was not taxed.3. Coverdell ESA
Huh? That's the usual response I hear when I recommend this account for children. I already discussed how great ESAs and how you can fund one despite being over the income limit (kind of like the backdoor Roth IRA). You can only contribute $2,000 a year but over time (and compound interest) you can have a sizeable chunk of cash to use for either private school and college. Although there is a new ruling allowing up to $10,000 per year withdrawals from a 529 account for K-12, not all states have adopted this. I also don't recommend doing this unless 1) you get a nice state income tax deduction (like NY) and/or 2) you frontload your 529 at or near birth. Otherwise the money just won't have much time to grow if you keep withdrawing money from it. Unlike the 529 plan, you cannot open one before your child is born.4. Roth IRA
[caption id="attachment_2545" align="alignleft" width="351"]
Jack's Korean Dol outfit[/caption]
We haven’t opened a Roth IRA yet but will before the end of this year. Children can open a Roth IRA if they have earned income. Chores around the house do not count. Babysitting and working for your business do. In Eggy’s case, he’s a print model for this website.
What, you think he let me use this photo for free? Nope.
A Roth IRA for your children via a family business is a win-win situation. You pay your child for work, you get a business deduction, he/she gets earned income and can open a Roth IRA. Once inside the Roth IRA, the money is never taxed again! Better yet – until he makes a sizeable income through the family business he won't pay federal and likely no state income taxes as well!
Now, the key is to pay your child a reasonable wage for the work. It won't pass the snuff test if I paid Eggy $5,500 for a few photos on this website.
A quick reminder to stay under the gift tax limits for total contributions to your children's 529, ESA, and UGMA/UTMA accounts. Currently, the gift tax limits are $15,000 or $30,000 for married couples. So, in other words, don't contribute more than $30,000 across the 3 accounts in a year. An exception to this is the 5 year frontloading exception for 529s.
We opened and kept his 529 in NY. His UGMA and ESA accounts are at TD Ameritrade. We plan to open his Roth IRA at TD Ameritade since Vanguard does not allow minor Roth IRAs.
What do you think? Comment below!
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2018 is well underway. Last year, M and I had a good amount of tax advantaged retirement “pots” available to us along with some employer match and contributions:
- My 403(b) + generous employer match + contribution
- My 457(b)
- My cash balance plan
- My backdoor Roth IRA
- My solo-401(k)
- His 403(b)
- His Roth IRA
- His solo-401(k)
- My 401(k) + employer match
- My solo-401(k)
- My backdoor Roth IRA
- My HSA
- His 401(k) + employer match
- His Roth IRA (may need to backdoor it this year)
- His family HSA
- Our taxable account
- 68% US stocks
- 17% Large cap growth, 17% Large cap value
- 17% Small cap growth, 17% Small cap value
- 24% International stocks
- 12% Large cap developed countries
- 12% Diversified emerging markets
- 8% US REITs
We will be opening our taxable account at Vanguard.
What do you think? Comment below!]]>
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2017 was amazing year – personally and financially. In 2016, I ended with a negative net worth of -$92,000. Pretty typical for about a year after residency.
“I” became “We” in 2017 – We got engaged and had a baby. We also signed wills, power of attorneys, and health care proxies.
We ended 2017 with a positive net worth of > $500,000. This includes equity in a home. I still have those darn student loans – for now.
Our savings rate towards FI in 2017: 27% of gross income in the form of maxing out our retirement accounts, additional cash savings, extra payments towards my student loans and we paid off our car loan. I did not include employer match and contributions. Not too shabby!
What were my goals in 2016 and how did I do?
- Cross over into positive net worth – check!
- Knock out 50K of student loans (this is in addition to the min. payments) – close! I paid about $42,000 towards student loans in 2017.
- Max out all available tax advantaged accounts ($47K, not including employer contributions) – check!
- Start a taxable account – This didn't happen. Although I did contribute about $8,000 as after-tax non-Roth contributions towards a Mega Backdoor Roth IRA – even better than a taxable account!
How did your net worth grow in 2017?
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I've estimated that these mistakes have cost me at least $350,000. Meaning that if I didn't make them, I'd have at least that much more money saved. Big sigh.
Here are the biggest financial mistakes I've made and survived to date:
#1. Cashing out my old work's 401(k) plan & selling company stock
I started a coveted job at Morgan Stanley in 1999 right after college. It was the height of the tech boom. My starting salary was $50,000 + a small guaranteed bonus. (I made the same as a resident in 2012!) My first 6 months was in London with all expenses paid.
I was an ex-pat there – meaning I was paid my U.S. salary but received free housing (picture beautiful 2 bedroom, 2 bath furnished apartment with marble bathtub, heated towel stand across the street from Hyde Park, neighboring the Grosvenor House) and a generous cash per diem. I did not have to spend any of my actual salary to live in London.
Now I don't totally regret this part – I was able to explore Europe on the weekends – weekend trips to Paris, Spain, Amsterdam. Priceless. Back then, friends and family from NYC could visit me in London for less than $400 roundtrip.
Plus, I had access to a 401(k) plan for the four years I worked there. I'm pretty sure I didn't max it out, but I still had a nice chunk in that account.
Still, I cashed it out in 2004. Yup, it gets worse. In addition to a company match, we also got free stock as part of our retirement plan. I sold it.
#2. Barely saving despite high earnings as a 22 year old
I listed my starting salary in mistake #1. About 1 year later, I got a $22,000 raise and a $25,000 bonus. This meant I hit 6 figures at the tender age of 23.
My only wish is that I had some savings to show for that! I lived paycheck to paycheck despite a high income. I guess I can blame NYC.
#3. Racking up $20,000 in credit card debt before starting dermatology residency
Yeah …. someone went a little nuts during intern year in NYC. I had awesome clothes, though. I paid it all off before graduating residency. Thankfully, I no longer carry any credit card debt and pay off cards in full every month.
#4. Not funding a Roth IRA until 2014
The Roth IRA was enacted in 1997. I've been earning money since at least 1992, so I'm not even counting opportunities to fund a regular IRA prior to that!
I actually never heard of the Roth IRA until sometime during residency so I feign ignorance prior to that. I couldn't imagine forking over $5,500 a year as a resident, but I totally could have. This is especially true because I moonlighted most of residency.
#5. Not paying off student loans during residency
Every year during internship and residency I meticulously applied for deferment or forbearance on my student loans. Isn't that what everyone does? Apparently not.
By the end of residency in 2015, I had almost $50,000 of interest capitalized onto my loans.
Surviving My Biggest Financial Mistakes
You can always earn more income, but you can't create more time. That's why some of these financial mistakes really sting.
Despite these awesome mistakes, I should be able to reach Financial Independence within 15-20 years and pre-Financial Independence within 10 years or less.
Feel free to share your mistakes below!]]>
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I am 1.33 years out of residency. Using White Coat Investor's net worth formula, I ended 2016 not up to par:
Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income X Years Since Training X 0.25
= + $93,100
or is it this equation from his actual book:
ENWD = Salary X Years in Practice X 0.3 – 200,000
= – $88,280
At the end of the day, Net Worth = Assets – Liabilities.
2016 ended with: – $92,000
But what that negative number doesn't reveal is that I had:
$10,000 cash savings
$85,000 retirement accounts
and of course, student loans, at $187,000. I finished residency with $200,000 in loans.
I did not count my very small 529 account.
My 2016 savings rate was 27.4%. I included retirement savings, cash savings, and extra payments towards student loans.
2017 Financial Goals:
- Cross over into positive net worth
- Knock out 50K of student loans (this is in addition to the min. payments)
- Max out all available tax advantaged accounts ($47K, not including employer contributions)
- Start a taxable account
M and I hired a financial planner just before the New Year and we are excited to start planning!
How did your net worth grow in 2016? Comment below!
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