This is my first “Finance Fridays” post so this is what I would consider an introduction and Talking the Talk.
A huge part of understanding any concept is understanding the vocabulary. In medicine, this concept holds true even as a medical student. You spend the first two years of medical student learning anatomy, biochemistry, and physiology. This continues into the higher level subjects of pharmacology and pathology. However, I would argue that a substantial portion of both Pathology and Pharmacology is simply expanding your vocabulary to understand medical jargon and “talk like a doctor”.
Thrombotic thrombocytopenic purpura (TTP) is a good example of a disease where its name pretty much tells you how the patient presents and you can even imply its complications. To anyone else off the street, they would think you are speaking a different language, unless they were avid watchers of House, MD (season 6, #609 if anyone is interested).
Learning some of the vocabulary is only part of it, because as you become more sub-specialized you will learn more terminology specific to your specialty that other specialists and generalists may not know. Then, through experience you will pick up more and more acronyms which are ubiquitous in medicine. For this reason, your colleagues in your own specialty can understand each other much easier than other specialists or generalists.
A good example of this is a normal physical examination note:
AAOx3, CN II-XII
S, NT, (+)BS
Not even one word is written out completely. However, to anyone in medicine, they can scan that and immediately see “negative physical exam” and move on. This is a basic note that any MS3 can write. However, specialists may have a completely different note with different acronyms that you simply learn with time. Good parody here.
All of this holds true for finance and investing. You need to understand the basic definitions. I will list the ones which I consider to be the “bare minimum” here.There are plenty of better ways to understand these terms, but I am a simple man, and so this how I see them. I will go into more depth on these definitions later, but consider this to be the primer.
401k/403b: Workplace savings plan where money comes out of your check before tax and is placed in a retirement account for you. Funded pre-tax. Some employers will match a portion of your contribution. Why the different numbers? They are based on tax codes and usually 403b are from non-profits and 401k are usually privately owned. Annual Limit: $18k/year (401k/403b combined cap, which why I listed them together)
457: Similar to a 401k/403b, but is only available to certain institutions (usually governmental). Funded pre-tax. Annual Limit: $18k/year (independent of a 401k/403b).
Traditional Individual Retirement Account (IRA): Opened by an individual, not by your employer. Funded pre-tax (possibly tax deductible) Annual Limit: $5.5k/year.
Roth IRA: Opened by an individual, not by your employer. Funded post-tax. Annual Limit $5.5k/year.
(Update: Traditional IRA versus Roth IRA discussed here.)
“Backdoor Roth IRA” will be discussed later. (Update: It’s here)
Mutual Fund: A registered investment company which pools capital for investment. Enables the investor to hold a portion of many different companies. (A common investment vehicle)
Exchange-Traded Fund (ETF): A registered investment company which pools capital for investment, similar to Mutual Funds, with some slight differences which may be beneficial to you depending on your portfolio and tax burden.
Index Fund: A fund designed to “track the market” with broad market exposure, low operating expenses and low turnover. Passive Investment.
Active Fund: A fund which attempts to “beat the market” by smaller market exposure, higher operating expenses and higher turnover. Active Investment.
Types of Funds
Load Funds: You pay a sales charge on purchase of the fund (ie. commission), or you pay a % annual charge, usually 1%. I don’t like to pay commission if I don’t have to… do you?
No-load Funds: You don’t pay a sales charge or % annual charge (usually). However, please note that a fund can be considered “no-load” and still have a 0.25% annual charge and/or maintenance fees and/or transaction fees. Be careful.
Expense Ratio (ER): The percentage you, the shareholder, pays to the fund or ETF. You want this number as low as possible. For example, Admiral Shares of Vanguard Total Stock Market (VTSAX) ER is 0.05%… THE DREAM.
Asset Allocation: How you divide your investment portfolio. The most common asset classes are: US Stocks, International Stocks, Real Estate, Bonds, Money Market. I will go into “Portfolio Types” in a future post. (Update, it’s here.)
Custodians of Retirement Plans
Thrift Savings Plan (TSP): A savings plan only available to federal employees, basically a 403b. It offers 5 funds: G, F, C, S, and I. Low expense ratios.
Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA-CREF): Also basically a 403b. I mention this organization specifically because a good amount of hospitals will probably use it. Low expense ratios. (Edit: TIAA-CREF recently changed their expense ratios and options… and they are kind of bad now. Buyer beware.)
Vanguard: An American investment management company, known mostly for its low expense ratio index funds. My company of choice, if possible. Other companies would include: Fidelity, Charles Schwab, T. Rowe Price, etc.
The key to it all
Compound Interest: Basically, the interest you make on your money makes interest, over and over. Basically, the earlier you put away money the longer it works for you. A whole post on this later. (Update: it’s here.)
529: “Qualified Tuition Plan” A savings plan to allow families to save money for undergraduate and graduate education efficiently. I think everyone should have one of these in some form and I will do a whole post dedicated to just this later. (Update, it’s here, and its followups here, here, and here.)
Flexible Savings Account (FSA): Tax-advantaged account usually used for out-of-pocket health cares expenses or dependent care (child care). I’ll write about this later in a dedicated post as well.
There are a ton of other things to learn, but I think this is the bare minimum to start talking about finance and investing. Not so scary right?
Future posts will go into a lot more detail. When I make the future posts that I allude to in this primer, I will edit this post to include the links for easy reference. After I go through many of the things listed above, I will create what I will call the “Simple Doctor Plan” or SDP for short. It will serve as a starting point for all young doctors which you can fine tune how you see fit.
You need to understand basic terminology before you can start thinking about your finances, investing, and retirement.
No shortcuts this time. Now scroll up a bit and read the definitions at least. Trust.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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