3 Steps From a Negative Net Worth to a Millionaire - The Broke Professional

3 Steps From a Negative Net Worth to a Millionaire

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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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Comments

  1. Solid! The negative net worth should be treated as an investment itself, in education. Treat is as firepower to generate that high income. I’d like to add that in addition to investing, taking advantage of free money such as a company match in retirement plans if it’s offered by your employer. This is a great way to leverage on an already great savings tool.

    • You’re right it’s definitely an investment. But being in a negative net worth state is still a precarious situation and getting into debt and overspending can make it even worse. The company match is a great thing I just wish my company offered one!

  2. Darrius Croal says:

    Very Informative sir.

  3. I’d just add to the conversation a bit here by saying that you’ll want to invest early and often AND consistently for a period of thirty or forty years.

    It just takes that long before your wealth really starts to take off.

    • You’re exactly right. Much of the growth in retirement accounts will happen in the last 10% of that 30 year span. You just have to stick with it!

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