Students in undergraduate and professional school usually have one thing on their minds: sleep!  The next thing is usually studying to do your best (or to just stay afloat) in your respective program.  Many times this requires a laser like focus where nothing else matters except the next test or practical.

But on the other side of that diploma or degree, real life is going to be waiting.  Which means you are going to have to make a lot of financial decisions which could potentially affect the rest of your life.  I would advise students to take a few minutes a week (that’s really all it takes) to read some good books and form some type of financial plan.

I’ve recommended four books for students to read while they’re in school.  Like I said, it just takes a few minutes a week and I know every student can find a few minutes between ping pong tournaments (and studying of course!)

These are light reads that are packed with great information to get you started on the right financial footing.

Good grades are important, but you’re only in school for a small part of your life.  Taking some time to plan the rest of your life is essential.

Here are the recommended books:

I Will Teach You to Be Rich by Ramit Sethi

This is the first book i read after graduating optometry school.  And I’m glad I did.  It touches on some theory when it comes to investing, but it is ultimately a very practical book and this is what I appreciated about it.  Ramit talks about what specific bank accounts he recommends, how to invest and even how to negotiate when buying a car.  The overarching theme from this book is to DO SOMETHING rather than not acting.  Getting 80% of the way there is a whole lot better than getting 0%.

The Millionaire Next Door by Thomas Stanley and William Danko

If there ever was a book out there that tells you what REAL wealth looks like, this is it.  MND is a light read that talks about the characteristics of real life millionaires.  Despite what society and the media tells us, millionaires don’t usually drive around in luxury cars and have gigantic houses.  More often than not they are hard working people who spend their money very wisely for a long time.  This book is especially important for those new grads looking to get a new car and/or house right away.  If you want to be a millionaire, this book will show you that’s just not the way to go.

Richest Man in Babylon by George Clason

I was fortunate to read this book while I was in optometry school, and I’m really glad I did.  It is a light and short read that can help establish a solid financial foundation.  The book consists of Biblical sounding parables that contain financial wisdom.  The main theme I got from this book is the biggest financial lesson of all: you will never get ahead unless you spend less than you earn.  Constantly spending 100% of your earnings is no life at all.

The White Coat Investor by James Dahle MD

This is a great book geared mainly to MD’s and other health professionals, but has some great advice for everyone.  The White Coat Investor is a fantastic blog that teaches professionals about student loans, investing and keeping more of your money.  Honestly, it is one of the blogs that inspired me to start blogging and trying to help my fellow broke professionals.  Great book for investors and a must have for anyone graduating from professional school.

Where have you been all my life??!!

It has been a long time since I wrote about net worth (2 years!!).

Looking back at that awkwardly written article, my views on net worth have changed a little since then and I started doing something big when it comes to my own net worth: actually tracking it!

Automatic or Manual?

Tracking your net worth is important because it gives you a look at how you’re doing with your finances over the long term.  Just like any business wants to see that profits chart trending upward over time, you want to see your net worth trending up too.

I’ve checked in on my net worth from time to time, but never as a regular exercise where I could actually gain some useful information from.  I started tracking it regularly a year or so ago.

Many bloggers recommend using websites like Mint and Personal Capital to track their expenses and net worth.  With these sites you link your accounts (checking, savings, loans etc) and they will give you one handy place to look at your income, expenses net worth.

While both of these websites are good in their own ways, they ultimately didn’t do it for me when it came to tracking net worth.

I gave up Mint a few years ago because it was becoming a chore to properly categorize all my transactions and it wouldn’t automatically update some of my student loan accounts.

I then switched to Personal Capital and have actually been using it for a couple of years to track my net worth and it worked great.  But again there was an issue with some accounts not updating and it wasn’t able to link to one of my student loan accounts.

So then I took the (relatively) drastic step of figuring out my net worth by hand.  Or by keyboard.  And it has made all the difference in the world.  While logging into my various accounts and noting down the net worth is more time consuming than just having a robot do it, I do find some advantages from manually calculating my net worth:

• It gives me a better overall impression of my financial situation.
• I can pick up any mistakes.  Since doing manual entry 3 months ago, I have found a checking to savings transfer I forgot to make and a transfer issue with my 401(k).
• I don’t feel compelled to check my net worth often.  Because it takes some time to do this, I simply dedicate one day per month to figuring out my net worth, which I feel gives me a good picture of my finances.  When I was doing my net worth with Personal Capital, I would find myself wanting to check it every week or so, which is an exercise in futility.
• It just feels satisfying typing numbers in a spreadsheet and seeing where you stand.  You should try it sometimes.

Another Change

So now that I have extolled the virtues of manually calculating my net worth, what’s all this about increasing my net worth by $70K with one click?  It’s pretty simple.

My definition of net worth changed.

For the longest time, I never really considered home equity as part of a net worth calculation.  I strictly thought of net worth as the difference between money you have in any type of account and any outstanding debts.

I’m not really sure why I never factored in home equity.  I guess I thought because a home can be difficult to sell and equity is so illiquid, it doesn’t need to be part of my calculation.

But you could say my time as a homeowner has “matured” me.  I’ve been a homeowner for 3 years now, but only recently did I start including my home value and mortgage as part of my net worth.  To be honest, a home is more liquid than my 401(k), since I can’t really touch my retirement money until about age 60.

And once I included my home value as an asset and my outstanding mortgage as a debt, my net worth shot up by about $70,000 and finally brought it into the positive range.  Take that student loans!

Takeaways

-Tracking my net worth manually once a month has been a very enlightening and fulfilling task compared to having a computer calculate it.  I will keep up this practice for as long as I can to get a better idea of where my finances are going (hopefully up!!)

-Net worth is your assets minus liabilities.  I’ve decided to include my home value and outstanding mortgage in that equation, but you might not want to.

I’ve seen people include their cars and furniture in their net worth, but I don’t think I’d ever do that.  Technically, you can sell your body (and your soul) for a lot of money, so should you include that as well?  I’m satisfied with just including my house and mortgage at the moment.

-There are tons of great net worth programs and spreadsheets out there.  I got mine from a finance blog which I can’t remember for the life of me, but just search around and find a method that works for you.

-Net worth is an important number, but it’s not as important as making sure it’s trending up over time instead of down.

How’s that for some clickbait??

But in this case, it’s actually true.  And I have a study to back it up.

Fidelity conducted their annual Couples Study, which asked around 1,000 couples various questions regarding their finances.  And they concluded that there is indeed one thing that will give couples the best chance of financial success.

But before I make the big reveal, here are some interesting findings from the study:

• You make HOW much?!  Fidelity asked couples if they feel they communicate very well with each other when it comes to finances.  72% said they did.  But when asked the simple question of how much they think their partner actually makes, four in ten didn’t get it right.  And a good portion of them were way off.  It’s kind of like how everyone thinks they are an above average driver, which is literally impossible.
• Almost half of the couples questioned didn’t know how much money they would need to save in order to maintain their current lifestyle during retirement.  While this isn’t too surprising given that most people are clueless when it comes to their personal finances, what surprised me is that the majority of this uninformed group consists of Baby Boomers, many who are going to retire in a few years!  Now that’s dangerously ignorant.
• Worrywarts.  It seems we are a very anxious and worried populace.  About 75% of the respondents said they were worried about health care costs in retirement (did anybody say HSA?).  And over half said that they are worried about outliving their money.  So half of the people in the country are worried that they will die penniless.  That’s a problem.

That’s a lot of bad news.  But there is hope.  There ONE thing that can ensure a successful transition into retirement and produce less anxiety about the whole thing:

Drumroll please…….

Have a plan.

The study showed that those who had a plan for their retirement were way ahead of their counterparts with no plan, and felt a lot better about the whole idea of retirement.

Now while having a plan is indeed just one thing, it has a lot of different components.  Having a good plan will give you and your family the best chance to earn and grow money while keeping it safe along the way.  This requires a lot of moving parts.

Fidelity lists a few things to help get started with your plan, such as goal setting, starting your emergency fund and setting up an estate plan.  These are all great things, but here are what I think are the most important things to do when forming the financial roadmap for the rest of your life:

–Make a debt repayment plan.  To me, this means getting rid of all high interest debt (anything over a 10% interest rate) like credit cards ASAP, and then prioritize paying off your debt with the next highest interest rate.  This doesn’t mean focus on getting rid of all debt before you do anything else.  That would be a short sighted decision that will possibly cost you money at the end of the day.  Student loans and mortgage debt, for example, can have low interest rates along with potential tax deductions, so it may not be a priority to pay those off right away.

The fact is, being stuck in high interest debt will hamper all of your other financial goals.  So it’s important to get rid of those debts first and make a plan to pay off the rest.

–Get your spending in order.  I don’t currently use a formal budget, but I did before and it was very helpful in finding out where our money was exactly going.  It’s surprising when you see the transactions staring you right in the face.  We decided to cut down or get rid of the things we were spending our money on that we really didn’t want to, and that freed up a lot of money for investing and paying down debt.

There is always extra money to be found by using a budget.  This money can then be used to supercharge your other financial goals.  But it will never be found unless you track your spending, so it’s a good exercise to do every so often.

–Find ways to increase income.  Once your debt repayment and spending are in place, focus on finding ways to increase income.  Cutting expenses is important but it doesn’t require much imagination and can only go so far.  The main ways to increase your income are getting a raise at your current job, start some side jobs/businesses or work hard to grow a full time business.  Within these three methods, however, you can get very creative.

Creating new streams of income takes some work building a foundation which won’t make you much money initially, but hopefully will provide solid income in the future.

Finding new avenues of income also serves as a form of financial protection.  If someone just relied on their primary job for their income and happened to lose that job, they would be in a very tough spot.  But if you lose your job while having other streams of income, you can just ramp up work on those streams and maybe even eclipse your previous income.

I agree 100% that having a plan is the path to financial success for couples and everybody else.  It will allow you to optimize your financial goals by making sure money is going where it needs to be.  How you get that plan is different for everybody.

Fidelity is obviously looking for customers to sign up for a plan with them, and many people would feel more comfortable working with a financial adviser to set up a blueprint.  But I believe anyone can do some research and figure out most of their plan and talk to an adviser to fill in some gaps if needed.

The vital thing is to set up a plan, because if you don’t, you’ll likely end up somewhere you don’t want to be.

Fidelity Couples Study

What debt can do to your life.

During the first week of optometry school, in between classes we had a parade of administrators coming in and out giving various pieces of information.  We were briefed on how to read our class and clinical schedules, studying tips and the various clubs that were available.  A guy from the financial aid department also came in and talked about some housekeeping stuff when it came to our loans.  Before he began his talk, he put a slide up that said the following:

Live like no one else will today, so you can live like no one else can tomorrow.

I’m pretty sure only half the people in the class were even listening to the guy since we were all worried about the next test, but the half that saw the slide thought it was good but mostly kind of cheesy.  He didn’t really go into much detail about the saying, but maybe he should have.  Because that little slide gives you everything you need to know about debt: avoid it in the first place

Debt can Destroy

I’ve written about accumulating debt and the best way to pay off your student loans.  It can become a long and protracted battle that can take decades to win.  And there lots of casualties along the way.  People put off getting married, buying a house and starting businesses because of debt.  People also get divorced, lose their homes and have to shut down their businesses because of debt.  It can destroy dreams and prevent them from happening in the first place.

What that slide tells me is that avoiding debt means going against the grain of society’s expectations.  It is pretty normal for college students to go to bars, eat out a lot, spend spring break in the Caribbean and spend summer break in Europe.  These are common stereotypes and no one would bat an eye hearing a college student do these things.  But these stereotypes are also very expensive and can destroy dreams.

Going to a restaurant for dinner and drinks is a fun and normal thing to do, but if you pay for it with a credit card and are not able to pay the bill in full and on time, that dinner has just damaged your future.  If you got a little more student loan money than you needed, spending it on a vacation to the Bahamas will make the banks very, very happy since you will be paying them interest for a long time.  Just like investing early on in life will put time on your side and let you get some big returns, accumulating debt early in life will get time working against you.

Live like no one else will

We are constantly at the mercy of marketers, and marketers are very smart people.  They want us to give them our money and they want it now.  Being in debt is normal in today’s day and age, so it takes some willpower to be debt free.  An effective way to do this is to first see how much you’re spending and what you’re spending it on.  This can be as simple as recording it on the notes app of your phone or using a sophisticated website like Mint to automate it.  Look at all of your non essential spending and aim to cut it in half next month.  Take the other half and invest it or just park it in a savings account.  This can get money working for you instead of against you.

Once you start living how no one else chooses to as a student, you will be accustomed to saving money.  It will become like breathing.  Once you get out of school and start making the big bucks, you will have more money than you’ll know what to do with.

That’s my son there. The one with the mustache and low student loan debt.

It feels amazing finding new ways to save money on taxes.  Tax deductions and credits are the government’s way of kinda rewarding us for doing things that are beneficial for society.  The government believes that saving for retirement is important, so they allow for 401k and some Traditional IRA contributions to be deducted from your income.  They think having children is generally good for society, so they will give you a tax credit for bringing a child into the world.  And if you have a business, you can get a tax break for having lavish steak dinners!  Because you know, they help your business grow, thus helping society.

Besides those federal tax benefits, there are also some state tax benefits.  And one of the big ones is the deduction you receive from contributing to a state college savings account, also called a 529 plan.  Some states feel it’s beneficial to have college educated citizens, so they will allow a state tax deduction for 529 contributions.  Not all states allow this deduction (I guess they don’t like education), but luckily I live in one that does so I take advantage of it.  But it wasn’t always like this….

Rewind to November of 2012, about 6 weeks before my son was born (little bugger came two weeks early and messed up my FSA strategy but that’s a story for another day).  I read that you could start a 529 plan for an unborn child, which sounds weird but is cool because I was itching to get all the tax benefits a child offered.  So I signed up for Maryland’s 529 plan before he was even born and started contributing.  Pretty cool that I could contribute towards his college costs while he was still a fetus.

Then I started reading about 529 plans a little more in detail.  There is a pretty large camp of personal finance bloggers and gurus that are dead set against it.  I was kind of surprised at this because I always thought of saving for your kid’s college education as a good thing, but it seems it’s not for everyone.  The standard response against contributing to a 529 plan I read was that you should only do it AFTER you have built up a good emergency fund (which makes sense to me), AFTER you get rid of all of your debt and AFTER you are able to save for retirement.

Basically, your kids college education costs are last on the totem pole.  Besides, they can get scholarships or student loans to pay for school.  This started to make a lot of sense to me so I halted all contributions to the 529 plan and shifted it elsewhere.  This felt good for a while, but I did some soul searching and realized that I do in fact want to contribute to my child’s education. I feel it will help my family and even the world (I’ll explain this later).  Contributing to a 529 plan seems like an old school thing to do, and I realized that I am kind of old school.  Here’s why I decided to change course and start contributing to a 529 once again:

• I never had one.  All parents want their kids to be better off than themselves.  It’s just a natural inclination.  I feel the same way and I would do anything I can, within reason, to make sure my son has the best opportunity to succeed.  And I believe contributing some money once a month until he goes to college is a very reasonable thing to do.  I got through college by working and taking out student loans, which was fine but it would have been nice to get a $20,000 boost or so from the get go.  I would like to provide this for my son, and it makes me feel content that he will be able to get a head start that I never really had.

• I HATE student loans.  I make my distaste for student loans pretty clear on this blog, as I have written about the best way to pay them off and the correct mindset you need to pay them off.  The interest rates for student loans keeps going up and up, and all they do is decrease your purchase power and really hamper your ability to invest early on in life.  Genes are pretty powerful, so I have a feeling my son will come to hate them alongside with me.  By being able to contribute to his college costs and lessen his student loan debt, I will be doing him a great service.  And I will be helping the economy (and thus the world) too since having a society with too much student loan debt hurts every economic sector.  Except banking of course.

• Tax break.  As I mentioned earlier, Maryland provides a state tax deduction for contributions to the state 529 plan.  I look at a 529 plan as basically a Roth IRA for education expenses.  You contribute with after tax funds, and your earnings and contributions grow tax free.  Then when you withdraw for qualified education expenses, you don’t pay taxes either.  Pretty good deal.  Add on the additional state tax deduction, and it becomes an even sweeter deal.

• It’s pretty painless.  The aforementioned state tax deduction for Maryland is capped at $2500 for the year.  So that’s my contribution goal.  Divide that by 12 months, and it comes to a $208.33 monthly contribution.  Definitely swingable.  If I keep that up until he’s 18 and don’t even count any earnings, that will be $45,000 towards college.  A nice chunk of change that will not strain my monthly budget too much.  Any future disposable income I get will likely go towards my own student loans, so I don’t see myself adjusting this unless they raise the tax deduction cap.

• It increases net worth.  If you’re looking to improve your long term financial standing, you need to keep your net worth going up.  It’s a lot more fun to think of decisions in terms of net worth rather than how much money you have in your checking account.  Contributing to a 529 plan will help my net worth tremendously by increasing my investments along with getting the yearly tax break.

Some would argue that one of the main purposes of existence is to make more people.  Keep the human race going kind of thing.  Just giving birth to a child is a big sacrifice for the mother, and there will be a lot of sacrifices to come for the parents as the child develops.  The conventional wisdom is to make sure your retirement is secure before you start contributing to a 529, but that leaves a whole lot of unanswered questions.

How much money do you want to live on during retirement?  When do you want to retire?  Will you be willing to work part time during retirement?  Do you want to retire at all?  Does this mean you can’t contribute anything to a 529 plan until you reach your retirement “number”?  I went through these questions, and in the end I realized that I would sacrifice a lot for my son.  While I certainly don’t want to be a “burden” for my son by being an old and poor man, I feel my personal situation makes it okay to contribute a little bit each month to help my son financially when he’s transitioning into adulthood.

I know I’m going way back here, but writing this post reminds me of a scene from the movie I Robot with Will Smith, who plays a guy named Del (thank you IMDB).  In the scene, Del is trying to save a drowning child.  They both end up getting in trouble, and the rescue robot then arrives.  Through cold and heartless calculations, the robot determines that there is a much greater chance of saving Del’s life compared to the child.  He then proceeds to rescue Del, and the child is left to die.  While deciding whether or not to contribute to a 529 plan isn’t nearly as dramatic, I’d like to say that there was a little bit of self sacrificing Will Smith in me that guided my decision.