As a newly minted optometrist, it is important to properly manage each paycheck early on. Because of your high income, you have the unique opportunity to build wealth and achieve your financial goals.
Whether you’re looking to have a comfortable retirement or save for your kids’ future, understanding the fundamentals of investing is critical on your journey to financial success.
In this guide, we will cover general investment basics tailored to the unique circumstances of new optometrists.
Should I pay off debt first?
It may be challenging to know what to prioritize, especially if you have thousands of dollars of debt from your education.
There is no one-size answer for everyone, but here are some things to consider:
- If the debt has a very high interest rate (typically in private loans), then it is most likely advantageous to get rid of this debt sooner as the high rate will cost you more money with time. Mathematically, it is optimal to pay off the debt with the highest interest rate.
- On the flip side, if you have debt with a low interest rate, mathematically it may make more sense to invest the money instead and pay off the debt later.
- You may want to look into refinancing the high interest loans if the math makes sense.
- It is not a bad idea to simultaneously invest toward your retirement accounts while also paying off your debt.1
Although paying off student loans may feel like you’re missing out on investing opportunities, it builds toward your net worth as compound interest from debt can cause you to fall deeper in the negative direction.
Establishing an emergency fund
The first task you should prioritize upon graduation is creating an emergency fund. Regardless of how stable your job may be, nobody can predict the future. Having a financial security blanket offers peace of mind to cover unexpected expenses, whether it is a medical emergency, home repair, or job termination.
Without this fund, you may unexpectedly be forced to accrue further debt and financial stress. Depending on your risk tolerance, I recommend an emergency fund that can cover 3 to 12 months of expenses.2
Understanding investing basics
Short- vs. long-term investments
Short-term goals, such as purchasing a car or home, should be funneled through low-risk vehicles, such as a high-yield savings account (HYSA) or bonds.3 Primary residences and vehicles should not be classified as an investment.
The decision to allocate funds toward these short-term goals should be driven by personal needs in life. Long-term goals, such as retirement for your child’s college expenses, should be initially invested in riskier securities, such as stocks, to take advantage of compound interest to make your money grow and work for you passively over time.
Can I wait a few years before starting to invest?
As the famous quote goes, “The best time to invest was yesterday. The second best time is today.”
Every delayed year in investing impacts your financial well-being long term because of the following reasons:
- Compound interest: The driver behind accruing significant financial wealth. The earlier you invest, the sooner you will experience exponential growth.4 Even a delay of 1 year can have a significant impact.
- Time length: When you invest over a long period of time, the turbulence and fluctuations in the stock market become less relevant. By principle, over the long-term, your investments will increase in the positive direction.
- The average stock market return is ~10% before inflation.5 If you invest when you’re in your 40s or even 50s, then either you have to gamble your money with riskier investments or take safer investments and see minimal growth in comparison.
- Risk: For the same reason as above, because you have decades ahead of you, you can afford to take on higher risk in your investment portfolio.
Investing lingo
Just like medicine, the field of finance has its own set of technical jargon that may cause non-experts to feel uncomfortable. Not to worry, we will go over some basic terminology you may come across in simple terms.
- Compound interest: An exponential function that leads to significant growth over time if invested. It can also lead to significant debt if left unpaid.
- Risk/Return: The chance of losing money with the potential for making money when investing. Higher risk can have higher returns but also higher potential losses.
- Diversification: Spreading your investments reduces risk.
- Expense ratio: The cost of owning a mutual fund or exchange-traded fund (ETF). The lower the ratio, the less it costs, which means more money is retained in your funds.
- Asset classes: Different types of investments (i.e. stocks, bonds, real estate investment trust).
- Asset allocation: Where you invest your money.
Now, let’s start investing
Below is a simple table that breaks down the different asset classes you may want to consider investing in. Generally, it is recommended to diversify your portfolio and choose ETFs/mutual funds over individual stocks to reduce risk.
| Asset Class | Definition | Pros vs. Cons |
|---|---|---|
| Stocks | Own a small portion of a company | High risk/reward |
| Bonds | Lend money to a company or government, and they pay you interest in return | Lower risk/reward |
| Mutual Funds | A “package” of stocks, bonds, or other investments | Can be higher risk than bonds but lower risk than individual stocks |
| Exchange-Traded Funds (ETFs) | Similar to mutual funds but can be traded like individual stocks | See mutual funds |
| Index Funds | A type of mutual fund or ETF that matches the performance of a specific market index (a portfolio that represents a segment of the market) | Depends on the market index |
| Businesses | Own a percentage of a business | Typically, the smaller the company, the higher the risk but the less costly it is to own a higher portion of the company |
| Real Estate | Owning property or land | Can be lucrative and have lots of tax advantages but also highly dependent on location and market |
| Commodities | Physical valuable items, such as metals | Value fluctuates and are typically used to hedge against inflation |
Table 1: Courtesy of Richard Wan, OD, MS, FAAO.
How to choose your asset class
Every situation is different, but your portfolio should take into consideration your age, time from desired retirement age, financial goals, and risk tolerance. Remember, your goal is not necessarily to accrue the highest amount of wealth as you possibly can. Rather, it should revolve around what you want to achieve in life; your level of risk should be adjusted to match whatever your goal may be.
Stocks typically make up a sizable portion of an investment portfolio in order to gain substantial wealth. I recommend mutual funds/index funds/ETFs that capture broad sectors or even the total stock market, rather than individual stocks. If you are risk-averse or are nearing retirement, your bond portion should be higher to help balance the risk of stocks.
Consider a package approach
There are life-cycle funds that allocate a variety of asset classes in one simple “package” and adjust to lower the risk (i.e., higher portion of bonds) as your target retirement year approaches.6
This is often times not the most optimized strategy, but it is an excellent option if you are not finance savvy and want a simple solution. Otherwise, another simple strategy is having a portfolio that includes the total US stock market with bonds to help balance the risk.
Because the US stock market is unlikely to crumble and it captures a broad index, there is less volatility making this a relatively safe stock investment.7
Tax-advantaged investments
At minimum, you should invest at least up to the employer match, otherwise you are leaving free money on the table. Typically, 401(k)s are offered under traditional taxation rules, where you can invest into this account tax-free from your paycheck and are taxed upon withdrawal.
Occasionally, employers may offer Roth 401(k)s, where you invest taxed dollars initially but have no taxation upon withdrawal. After that, you can consider splitting additional funds toward your loans and other accounts listed in this section.
Health Savings Accounts (HSAs) are excellent investment vehicles as you can avoid being taxed upon investing and withdrawal in certain cases. Consider maxing out a Roth IRA as well as an additional tax-advantaged account to supplement your retirement.8
You may be surprised to find that the average 401(k) amount saved for those in the age group from 20 to 29 years is only $10,500. This is very low and indicates a significant loss in potential in retirement funds due to low contributions early on.9
Don’t panic over market fluctuations
The stock market went down 5% today! When this happens, which it inevitably will, stay calm. I do not worry about any changes in the stock market on a daily basis because frankly it does not matter.
If you are in your 20s or 30s, you will not be retiring for several decades so the large up or downswing on any particular day has no relevance. I check my financial status once per month and really only pay close attention once per year to monitor my financial performance.
As you approach retirement, it may be appropriate to transition your account to less risky asset classes to prevent any large downswing too close to retirement.
Conclusion
This article serves to provide a general introduction to investing basics for new optometrists to equip you with the knowledge to get started. Although not necessary in most cases, you can always seek tailored advice from a professional.
I have worked with fiduciary financial advisors before and they can be very helpful for specific questions, especially if you have a unique or complicated case. Regardless, it is critical to know what the appropriate steps are to set yourself up to meet your financial goals.
