For some medical professionals investing can seem daunting. Even if someone has a healthy investment portfolio they may not consider themselves to be an investor. It’s a mix of not wanting to jinx our gains and being too humble to admit that we know what we’re doing.
There are daily reports of investors who lose millions of dollars because they invest in dumbass shit. They get swindled because they invest in Ponzi Schemes or in highly speculative investments. But investing doesn’t have to be that complicated. A simple index fund, a CD, or peer-to-peer lending can all be rather viable investment options.
In this post I want to empower you to think of yourself as an investor once you have a sizable investment portfolio. By sizable I mean anything over $50,000 which might seem like a pittance but that’s a lot of money. As an investor you can decide what you want your investments to do. Maybe you want to have a massive nest egg to leave for heirs. Or you want to focus on the cash flow from investments.
When your money is parked in an investment and going up and down with the market, it’s hard to appreciate its income potential. That’s exactly what an investment can be, a source of income. Cash flow is a little easier to conceptualize so I’ll talk about investing for cash flow as a way to invest for steady income.
Investing for Cash flow
Not all investing is meant for cash flow. Some investments are meant to grow in value over a long time horizon. Other investments are meant to protect against inflation. Some investors add bonds to their stock portfolio to even out the returns.
But we can invest purely for cash flow. Dividend investing is such an example. Investing in a CD is also a cash flow investment. Except for the most speculative of investments, many can be used for cash flow.
By cash flow I mean a steady income stream. My old CPA told me that his rental income properties matched his income as a CPA dollar-for-dollar. He had a lot of properties all over San Diego.
An fixed income example is a Certificate of Deposit (CD). If you investment $100k in a CD at a 3% APY then you can expect $3,000 a year of cash flow from that investment. That’s $250/month. Maybe enough to pay for your utilities, indefinitely, as long as you keep rolling the CD over into a new one.
Our jobs also offer a cash flow. You have to show up to work every day to earn your income. Your “cash flow” from working is contingent on your work performance, licensing, recertifying, and a few other fun stuff which we deal with as physicians.
Cash flow from an investment takes a little bit of upfront work but once that’s done it keeps on flowing. The toughest part is coming up with the initial investment needed to get the cash flow. After that you need a little diversification and you’re ready to turn on the spigot.
Cash Flow Investment
There are a lot of cash flow investments out there and I will touch up on a few. I am rather conservative when it comes to my investing so I’m not the right person to reference for the newest and sexiest investments.
1. Certificate of Deposit
CD’s are perhaps the simplest cash flow investments to understand. There is a set yield on your CD account and so you know how much passive income you’ll earn based on how much money you have parked in that account.
A CD is a great way to build a base. If you have $250,000 in a CD at 3% then you’ll have $625 coming in every month. It’s not a ton of money but you can spend that money without depleting your initial investment.
2. Index Funds
Whether you use an ETF such as VTI or an index fund like VTSAX, these are classic examples of passively managed funds which track a market index. There is some predictability to this, though you’re still playing with stocks, so….
As of 2019 we can enjoy a 2% dividend income from an index fund portfolio. But that’s not all; the investment will also likely continue to grow even if you’re taking 2% off the top since the underlying asset appreciates in value.
A $950,000 index fund portfolio of mostly stocks should have a dividend yield every year of around $19,000. That’s $1,600/month. As your investment portfolio grows then your annual yield grows proportionally.
3. Social Security
You have to pay into Social Security in order to qualify for this future cash flow investment. The fact that you are living in America, the fact that you are banking on SS being around when you retire, and the fact that you are paying your payroll taxes, all these are signs that you’re investing into the social security system of the US.
Even if ‘investing’ is a bit of a stretch when it comes to Social Security, it’s one which will have a decent passive cash flow if it all works out for our generation. The current maximum payout for Social Security is a little over $3,000 which I wrote about in a previous post.
If you’re planning on staying with your employer for a number of years then you are also hedging your bets that they will one day hold up their end of the bargain and pay you a pension. You vest in the pension and once you hit a certain age, depending on your years of employment, you’ll get a set amount every month until you die.
Kaiser Permanente offers a legit pension to physicians in a few of their territories. A Cash Balance Plan isn’t a real pension but if you work at SCPMG then you can get up to 45% of your employment income paid out to you in retirement, indefinitely.
5. Fixed Annuity
Cash flow can also come from a fixed annuity. A Single Premium Immediate Annuity (SPIA) will offer you a fixed monthly payment in return for a sum of cash. It’s guaranteed and, much like a CD, it offers you a very stable base.
The difference between an Annuity and a CD is that you give up the money you put down for the annuity.
6. Rental Income Properties
Cash flow can come from physical real estate investing. You own a duplex and you rent out the other side. Or you build an granny flat in your backyard and rent it out to a student.
Rental income properties are ideal for the long-career physician. We have a high income and we tend to work until we drop. This is the perfect combination for buying multiple rental income properties. Banks will readily lend to you and you can afford the payments based on your income.
Once the properties are paid off there is still an asset of value attached to this cash flow. You can borrow against it or you can cash it out. Or you can just keep collecting the income from the rental income properties and pass the real estate down to the next generation.
You can lend money to businesses, to individuals, or groups which invest in various projects, including real estate. Crowdfunded investments and crowdlending can be cash flow investments. As of 2019 it’s a very popular investment option.Though it hasn’t yet been tested against a major market crash.
8. Private Equity
If you start getting into healthcare consulting then you can ask for an equity share in the healthcare startups you consult for. This equity can be paid quarterly or annually based on your equity level.
Alternatively, you can invest in your local community. Maybe you know an entrepreneur who needs money to expand their business. They will take your cash investment and pay you a fixed interest on that money or you can purchase an equity piece in their business and get a payout when they profit.
Cash Flow in Retirement
Cash flow is especially useful when you’re retired. As long as you’re willing to trade your time for money, i.e. employment, you don’t have to worry about having other cash flows. Once you decided to call it quits with work you need a steady income.
Cash flow from retirement accounts generally comes in the form of dividends and sales from appreciated assets. Take 10 individuals funds of VTI which might be worth $150 each, $1,500 total. 2% of this is paid out in the form of dividends, $30. You could then sell one of the funds for another $150 that year and have a total cash flow of $180 that year.
Don’t assume that you have to have all of your cash flows ready before retiring. You will encounter many opportunities over your lifetime. As long as you have access to some cash to invest or are able to borrow the money somehow, you will be able to capitalize on future cash flow investments.
Feeling Financially Secure
I’m harping on the topic of cash flow because, among other things, it helps you feel financially secure. I can’t stress the feeling of financial security enough. If you’ve ever felt financially insecure, you’ll know the value of protecting against it.
Maybe your cash flow investments won’t ever fully replace your household spending. But if you know that your basic spending is covered then what is there to really worry about? If you housing, food, and transportation is covered then you know that you can continue to look for a job, live securely, and have future opportunities.
We think that as physicians we won’t have to suffer financial insecurity. There are many physicians who have gotten divorced. There are many single physician mothers. Those who battle substance abuse problems. Some have gotten in trouble with the medical boards. And some who are dealing with malpractice suits.