In a recent post that gained a lot of steam, I made a list of physician side gigs that will make you passive money. But, as some pointed out, I did miss something in the post. Can passive income be a reality in training as a resident? If so, is it a smart idea?
But if I could go back, I would do things differently
I’m firmly focused on my future. I know that I can’t change the past so there’s no point in wishing that I had handled my financial life better…or at all for that matter.
What I would like to do, however, is to look back at my missed opportunities, emphasizing what I could have done. That way, if you are in a situation similar to what mine was, you can learn from me!
The main focus of residency and fellowship is and should be to learnt o be the best doctor possible. But, that does not have to be the sole focus. That was my mistake. I neglected family, friends, self-care, and, yes, financial well-being to varying degrees.
So I do not think that pursuing passive income as a resident is stupid.
I wish I knew about passive income as a trainee
Passive income was a completely foreign concept to me as a trainee. I made my resident salary and that was it. Expanded beyond training, I didn’t even really understand that passive income was an option.
People worked at a job, made money, spent money and that was it. I was going to be a physician and so I would become a high-income earner. Wasn’t that enough?
Well, what we have all seen is that a physician’s salary is not as secure as we thought that it was. Innumerable doctors without sufficient savings or alternative sources of income are now confronting unexpected pay decreases.
There are two ways that this should be addressed:
- Increase your savings (also known as decreasing your expenses)
- Increase your earnings (AKA passive income, baby!)
Increasing savings is the first step
It may seem like tricky semantics, but honestly, increasing savings is passive income. The easiest dollar to make is a dollar that you save. No effort at all.
This is something that I didn’t understand at all as a resident or fellow. I spent up to my paycheck even though I had a ton (literally one ton) of loans. I had a savings rate of 0%.
Thankfully, I pulled my head out of the ground right before graduating fellowship and before I started my attending job with a huge pay increase. My wife and I designed a budget based on my new pay. We now have a savings rate of 41%.
Work with your partner. Create a monthly budget. Build in a savings rate. Pay this money to yourself first. Then spend the rest on your monthly needs and wants. Need a written financial plan…use mine!
Ok, but can a resident really make passive income?
The answer is a big, resounding YES!
I really wish that I had done this as a trainee. I am doing it now. But starting earlier would have allowed compound interest to work its magic for 7 whole years. I would be in a much better financial position if I did this.
Here’s 3 ways I should have made passive income as a trainee
1. Invest in the stock market – the smart way
Stock market investing can be a scary proposition for a lot of people, let alone residents.
You hear a cacophony of talking heads always talking about this trend or that hot tip. It seems terribly confusing and risky. You don’t make much money to begin with and you’re not inclined to lose it in a risky market.
But there is a reliable and (relatively) safe way to invest in the stock market. A way that will yield you passive dividends and gains in the long term.
This strategy is called index fund investing
An index funds is a collection of stocks put together to approximate an index, like the S&P 500. This manner of investing is a whole post on its own so I will limit the discussion here.
However, index funds are tax efficient, minimize fees, and over the long run are quite safe since they follow the overall stock market. The overall stock market has always increased over the long run (any ten year period in its history). Thus, if you take money that you don’t need for at least 20 years and stick it in an index fund, you will reliably make passive income.
As a side note, as a resident you are able to open and invest in index funds through a Roth Individual Retirement Account (IRA). This type of account will tax your contributions now and then let your money grow tax free. You can then withdraw it when you are 59 ½ years old with no penalty and no taxes.
Your current tax bracket as a trainee is much lower than it will be when you retire. So, this option will minimize your taxes and maximize your gains. Once you start making more money as an attending, you will phase out of the tax benefits of a Roth IRA so contribute now when you can. I talk more about this in my post about 10 finance moves you need to make as a resident.
(Note that you can contribute to a Roth IRA through the backdoor as an attending, but this is a bit more complicated.)
2. Invest in cash-flowing real estate
This is a bit of a controversial idea and is not right for everyone. However, I wish that I had done it as a medical student.
I think that active real estate investing is an amazing way to make passive income and grow net worth. It offers cash flow, equity build-up, and many great tax benefits. It does require work and a lot of due diligence to properly select properties. But done the right way, which anyone is capable of doing, it offers incredible and unique benefits.
However, to buy an investment property usually requires a 25% down payment. This may make it too steep of an investment for medical students or trainees. If it’s not, heck this is a great option and congrats. I certainly wasn’t in the position to put a down payment like that on the table.
There is another option. It’s called house hacking.
In this strategy, you buy a single or multifamily residence. You live in one unit or one room of the house. You then rent out the remaining units or rooms.
The rent you charge pays your mortgage, taxes, insurance, maintenance, and the like. You live for free. Then when you are ready to move, you buy another property and rent out the room or unit that you lived in to make a profit in addition to your mortgage being paid off.
The best part, because you are living in the property at first, it is not considered an investment property. The down payment needed can be as low as 3.5% using an FHA loan. That is certainly within reach for many trainees.
In medical school, I paid rent for one room in a duplex property in a neighborhood that was popular for many medical students. I should have saved up to buy a similar property, live in one room and rent the other room and unit out to other medical students. Then I would have lived for free and would still have a cash flowing asset putting passive money in my pocket each month.
The key to this strategy is that you have to choose your property wisely. You have to evaluate it as an investment. It has to be unemotional, well-analyzed, and based on the numbers. Otherwise, it will not work. If you are considering this, seek out a mentor who has done it before or find some resources online. Or, here is a great guide to analyzing properties the right way.
3. Invest in the margins of your budget
It’s funny how you won’t really miss money that you didn’t know was there.
For instance, if someone took $20 out of every paycheck, you probably would never notice. You would live your life and intuitively just spend $20 less each time. Maybe you would order out one less night.
Take this phenomenon further and put some saving money aside with each purchase that you make.
I just started using an app called Acorns. Basically, the way it works is that for every purchase you make, Acorns will round up to the nearest whole number and save the change. Example, you buy a sandwich for $4.75. Acorns will set aside $0.25 from your account. This extra “change” is then placed in a broad, low-cost index fund portfolio of your choice and invested for you.
It might seem like this doesn’t add up. But it does. Go back in your last month’s bank statement. Add up all the spare change. You’re a high income earner. I bet it was a decent amount. Now combine that with a $20 weekly recurring withdrawal to your Acorns account and a multiplier (2x, 3x, your choice) for each spare change withdrawal and your investment account will build up quickly.
I just started mine a little bit ago and already have about $900 in my investment account (I use a 2x multiplier and weekly $20 recurring withdrawal). At this rate with a modest 6% yearly interest, my spare change fund will grow to above $110,000 in twenty years. Likely it will be much higher. Not bad for something that I don’t even notice is gone from my bank account.
Now imagine if I had started 7 years ago?
The best day to start is yesterday. The second best day is today
Too many of us view passive income as this elusive thing that only a lucky few can ever figure out how to achieve.
This is just not the reality.
As I’ve shown above, passive income is something that we all can and should pursue. If we pursue it, we WILL achieve it. It will help us attain financial well-being. Financial well-being will enhance our personal well-being.
A few months ago, I had no passive income as a resident. Now I have passive income from these three streams and will hopefully have more soon.
Nothing changed since I was a trainee. In fact, when I started these passive streams, I had not even made my first attending paycheck yet.
Ok, to summarize:
- Passive income is not stupid as a resident or even medical student
- Passive income is not impossible as a resident (or medical student)
So, get started today!
- Study the 10 finance moves you need to make as a resident, or
- The 5 steps to get financially started as a medical student
- Learn how to invest wisely and simply in the stock market
- Learn about asset allocation and rebalancing
- Find out why real estate investing is such a wealth builder
Before you know it, you will be teaching others your tricks!
What do you think? Is pursuing passive income as a trainee a mistake? Would it take away from your primary job of learning to be a doctor? Let me know in the comments below!
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