3 Ideas For Passive Income for college students, med students, dental students & beyond from a recently trained plastic surgeon.
[Editor’s Note: Today’s article is a guest post from Dr. Jordan Frey who blogs at The Prudent Plastic Surgeon. He recently completed his training and is now practicing in Buffalo, NY. He’s married with two kids and decided to start his site to share information regarding financial well being and independence.]
Take it away Dr. Jordan……….
For those who are not familiar with my story, I’ll give a brief review.
I am a plastic surgeon in Buffalo, NY and just completed my 7 year training in plastic surgery and microsurgery in New York City as of June 2020.
Before my training, I obviously had 4 years of undergraduate school and 4 years of medical school. I paid for all of that education (except for some scholarships and work study) with loans. Every dollar. Every cent. As you can imagine, I built up a pretty nice bit of debt.
And what did I do in training? I…deferred…all…of…it.
Why I Deferred Student Loans
Why in the world did I decide on deferring the student loans that had accrued? The answer is quite simple. I was financially clueless. My strategy could best be summed up as sticking my head as far in the sand as I could and hoping for the best.
I knew I was messing up but was scared to see just how bad things were and was intimidated to start my financial education.
But then a funny thing happened.
I picked up a financial book for physicians and read the first chapter. I had owned the book for about a year but had just let it collect dust until now. After the first chapter, I just kept reading and learning…and reading and learning. And I haven’t stopped since.
The weird thing was that once I committed myself to my financial education and set a goal of achieving financial well-being, I wasn’t scared of my mistakes anymore. By looking them in the face, I finally had power over them and could start climbing out of the hole instead of digging it further.
I also found that my overall well-being improved along with my financial well-being. I also became a better doctor.
If I Could Go Back, I’d Do Things Differently
I’m now 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. If you are in a situation similar to what mine was, learn from me!
Start your financial education. Look any financial faux pas in the face. Make positive changes in your life. If I can do it from the huge hole that I dug for myself, so can you!Join the Passive Investors Circle
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:
#1 Increase your savings (also known as decreasing your expenses)
#2 Increase your earnings (AKA passive income, baby!)
Increasing savings is the first step
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 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%.
- 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!
Can a Trainee Generate Passive Income?
The answer is a big, resounding YES!
I really wish that I’d done this as a trainee but luckily I’m doing it now. But starting earlier would have allowed compound interest to work its magic for 7 years. If so then I’d be in a much better financial position.
3 Ways I Could’ve Made Passive Income During Training
#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 fund 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.
(Note that you can contribute to a Roth IRA through the backdoor as an attending, but this is a bit more complicated.)
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#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.
It does require work and a lot of due diligence to properly select properties. But done well, which anyone is capable of doing, it offers incredible and unique benefits.
However, to buy an investment property usually requires a 20% 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 called house hacking
In this strategy, you buy a single or multifamily residence and live in one unit or 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, is it’s 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 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.
#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’d probably 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 $500 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?Join the Passive Investors Circle
The Best Day To Start Is Yesterday. The Second Best Is Today.
Passive income for college students or any other professional student is the key to start down the path to financial freedom.
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. 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.
- Learn how to invest wisely and simply in the stock market.
- Learn about asset allocation and rebalancing.
- Learn why real estate investing is such a wealth builder.
Before you know it, you will be teaching others your tricks!