The Broke Professional - Optimize Your Financial Life

Is the Market Going to Crash Soon? Who Cares!!??

This is going to be a quick public service announcement post.

Lately, I’ve been hearing a lot of talk in the media about how the market crash is coming and we need to panic.  The cover of the latest issue of Fortune magazine had a guy with a sign saying “The End is Near”.

I know these types of story lines and images are made to sell ad space and make publishers lots of money.  But here are two indisputable truths when it comes to long term investing:

The stock market WILL go down.

Most people, especially the financial media, look at a stock market decline as an abnormal event that requires you to make some snap investment decisions.  The fact is, market declines are expected and should be assumed when you make your investment plan.  Here is a chart of the historical performance of the S&P 500:

The starting value of the S&P was 250 in 1930.  The most recent valuation had the index at 2800.  That’s more than a 1,000% return.  Not too shabby.  But as you can see in the chart, there were many dips along the way.  It was a very bumpy ride and will most likely continue to be bumpy.

Corrections and recessions are to be expected.  Investors should not be surprised when they occur.

Indisputable truth #2:

For long term investors, market drops SHOULD NOT change behavior.

When there is a market drop or recession, you will see the pundits talk about where to “shelter” your investments.  The safety of bonds will be talked and written about.  And you will see people panic and do very stupid things with their money.  Especially with their retirement accounts.

Market drops should be expected during your investment journey.  If you’re investing in a 401K or IRA which you can’t touch until age 60, there is no reason a recession should spook you when you’re age 40.  If anything, a market drop might compel you to increase your contributions since stocks will be cheaper.

As long as you make a sound investment plan that takes market drops into account, your retirement accounts should be able to weather any recessions, which last 2 years on average.  Stay the course and keep contributing to increase your shares.

No, the end is not near after all.

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3 Steps From a Negative Net Worth to a Millionaire

Disclaimer:  This post contains affiliate links.

If you finish any kind of professional or graduate school, you’re most likely going to be worth less than you did before you started.  (Worth less, but not worthless!)

Unless you have very wealthy and generous parents who can afford to cover your tuition payments of $50-60K per year, you will probably have a negative net worth coming out of school.  Mainly because you will have student loan debt and not much else.

Getting out of undergrad without student loan debt is doable.  You can get some scholarships, go to an in state school and work a full time job along with your studies.  But graduate schools have much fewer scholarships, higher tuition and a large workload that will prevent most people from working full time.

A typical optometry school graduate will have about $150,000 in debt and minimal savings.  That’s a net worth of -$150,000 right out of school.   You are worth less than you were when you were a baby.

But all is not lost.  With a few critical moves, especially early on in your career, you can reach a net worth of a million dollars in a reasonable amount of time.  Why a million dollars?  I don’t know it just sounds awesome to say you have a million dollars.

Now that you have that shiny new degree, you have the ability to make consistent money and dig yourself out of that hole.  With tuition rates soaring and some industries paying less now than in the past, it can seem like a daunting task to become a millionaire.

But it can be done in a few easy steps.  Just like a Tastee recipe video.

Step 1:  DON’T go on a spending spree out of the gate!

This step is the most critical but also the easiest to forget.  Going from a monthly income of almost nothing to thousands of dollars almost instantaneously can be exhilarating.  You want to do so many things like go out to fancy dinners, get that car you’ve had your eye on for a year and finally get away from living with roommates.

Reigning in your spending after you graduate is absolutely key.  If you get a new car and house and go on a fancy vacation right out of school, you are setting yourself up for financial failure.  You will be getting used to a lifestyle in which you have to spend a certain amount instead of investing and paying off your student loans.

It’s also important to consider that right out of school, you are used to living pretty lean.  So it shouldn’t be a huge adjustment to not live like a baller.  I’m not saying don’t spend any of your newfound money.  Just don’t spend ALL of it.

You can give yourself a luxurious 20% pay raise from your student life and put the rest towards your student loans or investments.  If you do this for just a few years out of school, you will have built the financial muscles that will allow you to become a millionaire very quickly.

For doctors that finished school a few decades ago, this step probably wasn’t all that critical.  Student loan debt was manageable and you could afford to indulge in a few things out of school.  Getting a new luxury car right out of school was not a huge deal.

But times are different.  And unless you change you will become a paycheck to paycheck doctor.

Step 2:  Get your student loans in order.  And start getting rid of them.

I’ve written a lot about student loans and will continue to write about them as long as they continue to be a big problem for new graduates.  It can seem very overwhelming to see a 6 figure debt right out of school.  But the only way to get rid of it is to get your ducks in a row, find a strategy to attack them and just keep at it.

The first thing you want to do is refinance all of your private high rate student loans.  You probably have a decent credit score coming out of school (find out why here), so you should be able to get a better rate.

Click here to get refinance quotes with Credible.  If you end up getting approved by them, you will receive a $200 bonus.

Then you need to figure out if you need to refinance your federal loans as well.  Unless you’re aiming for public service loan forgiveness, you should probably refinance and get a lower interest rate.

After all this work refinancing your loans and getting great interest rates, you have actually done nothing to your debt.  Now comes the hard part: making the payments.  Decide when you want to be debt free.  I think 10 years is a reasonable amount of time since you also need to invest your money and let compounding interest do its thing.  But the bottom line is that making large and consistent payments is the only sure way to pay off student loans.  Refinancing and consolidating may sound nice, but debt payoff is the name of the game.

Some people hate debt and will want to be debt free in 5 years.  More power to you.  The key is to be aggressive and make consistently high payments.  This will also mean you probably will have to postpone that around the world vacation or the new house until you’re debt free.  So be it.  The longer debt has a hold on you the more it will squeeze out of your finances.  Getting rid of it sooner is almost always better.

Step 3:  Invest early and often.

One benefit of making a high income from a professional position such as a doctor or lawyer is that you can use your money to enjoy a very comfortable life.  But once you stop working, the money stops coming in.  And trouble will soon follow.  That’s why investing is important.  It allows you to make money work for you when you can’t, or have no desire, to work anymore

The other benefit of making a high professional income?  Being able to invest more than the average person.  This is important since most professionals don’t start working until a few years after the general population.  We’re already behind the curve when it comes to starting to invest so it’s extremely important to invest early in your career in order to let compound interest do its thing.

And please do not underestimate the effect of compounding interest.  The earlier you invest, the quicker your money will grow and the quicker you can retire.  Or make an around the world trip  Or whatever it is you want.  Investing gives you that choice.

Investing comes in many forms.  It can be buying mutual funds within an employer sponsored retirement account.  Or a Traditional or Roth IRA you open on your own and pick some stocks.  Or it can be in the form of rental properties that you buy and hold.  There are many options, so just pick the ones that interest you and pour your heart, soul and money into them.  Allow that money to grow so you’ll be able to handle anything life throws your way.  Or simply retire at age 50 if you feel like it.

Conclusion

So that’s really all it takes.  Live like a slightly richer student, start attacking your student loans and begin your investing career as early as possible.  It just comes down to these three steps.  Now there are nuances and details within these steps you will need to figure out on your own.

Things such as how much should you allocate to student loan payments and how much to investing?  How much house can you really afford?  When is a good time to have kids?  What is your risk tolerance when it comes to investing?

There is no one size fits all answer to these important questions.  But as long as you get the big things right, you can figure out the details along the way.

And then check your bank accounts to find you’re a millionaire!

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