One of the best ways to achieve your desired net worth is to automate your finances. Few things go according to plan with so many moving parts in a physician’s life.
5 years can pass in the blink of an eye, and missing out on this time horizon could set your personal finances back quite a bit.
Automating finances means assuming that the money is no longer in your spending equation – it has a job, and a purpose and it’s going to go toward that goal.
Few things are as powerful as regularly contributing to your investment accounts regardless of what happens in your personal or professional life.
Time is one of the most powerful secrets of investing. A 5% annual compounding interest on an investment portfolio can result in massive wealth a couple of decades later.
My Personal Finance Journey
I started out with a lot of debt and terrible spending habits, but I turned it around in a short period of time. My net worth of -$150k in 2011 grew as follows:
- 12/2013 – $40k
- 5/2014 – $115k
- 12/2014 – $250k
- 7/2015 – $400k
- 9/2016 – $650k
- 7/2019 – $900k
- 12/2021 – $1.2m
From late 2012 until just a few months ago, I never once stopped contributing towards my investments. Even though I retired in in 2016
Automate Your Retirement Contributions
Back in the day when I was working for Kaiser Permanente, I spent like a rapper and squandered quite a bit of money on some amazing possessions and experiences.
Nevertheless, I always maxed out my retirement accounts.
This is the part where I shouldn’t tell you that I also cashed out my 401k’s on 2 different occasions – so, I guess, be smart and automate your finances but don’t be like Dr. Mo and raid them on the back-end.
401k’s & 403b’s
Automating your 401k or 403b contributions is a must early in your wealth accumulation years. Get this money out of your paycheck before you have a chance to of dreaming up ways to spend it.
The only exception to this would be if you have better uses for your money; if you are actively investing that money in things that will return far more than the lost taxes.
The 2016 maximum deferral limit was $18,000 – that’s $1,500 per month or $750 per paycheck that you should be setting aside. Now, in 2022, it’s $20,500.
POF talks about front-loading your retirement accounts which isn’t a bad idea. This might make you less likely to want to skip a month’s contribution.
457’s & Keogh’s
457’s are no different from 401k’s and 403b’s and you should attempt to max out such accounts. Even better since a 457 can be accessed without needing to hit age 60.
A Keogh plan is a more complicated beast and many plans are written in such a way that once you commit to your initial contribution amount, you cannot change it in the future.
The amounts your contribute to a Keogh and your workplace’s 401k cannot exceed $54,000 as of 2017 so opt-in to maximize your deferrals into the Keogh if given the option to do so.
After 5 years you could have $310k in these retirement accounts or $750k after 10 years – all for just maxing out these accounts year after year.
IRA’s, Roth’s, Backdoors
I know the Godfather is all about the backdoor Roth and IRA contributions. I don’t get it, maybe I’m missing something. The headache of doing this, the risk of double-taxation, and factoring in the pro-rata rule makes it way too inefficient for a healthcare professional who is earning $300k/year.
This would go against automating finances – it’s labor intensive and requires me to potentially always have a CPA and financial adviser on payroll to not mess it up.
It’s 2022 and I’m adding some thoughts to this article. I don’t regret avoiding the backdoor mess. I retired a few years ago and it’s been a good decision for me.
I’m happy foregoing $5,500/year worth of a hassle – simplification of finances is powerful. I won’t waste that money but I’d rather park it in a taxable account because I am of the early retiree mindset and want easy access to my money.
HSA’s
Why not! Easy to maintain and unlikely that I’ll access it anytime soon.
For a single doctor like myself it’s only $3,200/year as of 2017, but it’s easy to set that aside and it will lower my taxable income unlike the backdoor nightmare above.
Automate Your Investing
In the above section we talked about your contributions but now I want to talk about your investments.
Yes, I have heard that if you invest Real Estate Crowdfunding deals online you’ll earn a 1,001% return on your investment with no risk at all and you’ll be a billionaire by the time you retire. /s
For the rest of us there are good old index funds. I’m not telling you to invest in them but if you want to automate your investing then few things will beat this method.
Go to your Vanguard or Fidelity or Charles Schwab account and set your automatic investing so that every paycheck you send in a couple thousand dollars towards a broad index fund such as VTSAX or it’s sister ETF, VTI.
Don’t like a broad US stock market index fund or ETF? Invest in a fund-of-funds, a target retirement fund. I wrote about it in this post about single-fund investing strategies.
Automate Your Debt Payoff
Should I invest or should I pay off debt?
Pay off debt. That worked for me and unless you are using debt to leverage an investment it often makes sense to automate your debt payoff.
Paying off your debt early is the secret to early retirement and financial independence. I don’t know anyone who regrets being financially independent nor debt-free.
Work backwards from your debt and decide what year you want it paid off. It’s all simple math – channel your inner autism.
If you have $300k in student loan debt and you want it paid off in 3 years then you need to make $100k in payments towards your debt.
That’s $8,300/month. Or $2,000 a week. That’s $280/day. If you’re doing telemedicine work then that’s 1.25 hours of telemedicine work a day.
Credit cards, auto loans, and mortgages are a big no-no in my book. Once you’re financially independent, it doesn’t matter what you do. Go and mortgage a $5M house as long as you’re willing to work enough to pay it off.
Debt payoff is one of the key steps towards financial independence and automating your payments towards your loan balance is a guaranteed return on investment.
Automate the Math
How much should you be saving and investing?
Work backward from when you want to retire. And the kind of lifestyle you’d like to have at different ages in your life.
When do you want to be financially independent?
I’ve written about immediate & sudden retirement not as a joke but I think for some healthcare professionals it’s a necessary option.
For the rest of us who still got some juice left in us to hustle for early retirement then the math is simple – you need a ballpark figure if your spending in retirement. This is fairly easy to figure out if you are already budgeting.
I only needed $500k for my retirement because of my low monthly spending.
In order to achieve this $500k goal in investments I needed to save $90k on average a year for about 5 years since there is often some interest compounding as well.
If you know that you can set aside $60,000 a year into retirement accounts, then you can automate the math setting aside the appropriate monthly amount.
Use Your Brokerage Software
Or if you want to have $500k in 10 years in your private brokerage accounts which is averaging 6% of annual investment returns then you need to set aside around $3,000 every month.
Your brokerage house will allow you to set up automatic investments as I mentioned above. You can choose which specific fund you want to invest in and how much you want to invest into it.
You can even use your brokerage account’s routing number and deduct a portion of your paycheck to get deposited directly into it.
Automation Decreases Investing Bias
I wrote this article on March 23rd, 2018, and was getting a few texts and emails regarding the stock market drop at that time. It’s hardly on my mind now as I update this article in August 2022.
Some physicians might be emotionally hard hit but such a market drops, and if they received their paycheck on such a day they might be reluctant to invest in their low-performing fund.
When you automate your finances then you are one more step removed from these biases and perhaps fears. You know that the fund you’re investing is a sound investment option so why cut your contributions based on its performance?
Automate Your Finances When Budgeting
A physician can automate their finances when budgeting by using an application such as YNAB. This web-based and mobile application allows you to set your budget limits in each category.
Once you have this done then your spending decisions are automated.
Looking at my YNAB categories right now I see that I have another $32 left to spend in my dining-out budget category.
When I’m asked by a friend if I want to get some awesome vegan ramen then I can politely decline because it’s not in my budget. Or I can go and spend up to $32 limit.
Prioritizing vs Automation
The difference between prioritizing and automating is that the former varies from day-to-day and is affected by our moods. Sure, I prioritize healthy eating and exercise but not when I’m lazy.
When you build your schedule with Mon/Wed/Fri’s dedicated to going to the gym then you are automating a process.
Less Mental Energy
You automate your finances also to expend less mental and emotional energy. When you get a windfall or you run into a financial trouble, you know where your money has to go.
When we have to make hundreds of decisions regarding finances in a given month we can get fatigued. I recommend that you automate your finances so that you have one less decision to make and can look back a few years from now and appreciate what this process did for you.