$100 a Month Can Radically Change Your Life.

Evidence based insights into physician compensation, RVUs, contracts, healthcare economics, and personal finances. For residents, fellows, and early-career attendings.

Life and Finances, in Medicine.

Bruno F. Casanova, MD
Founder, MD&D: Medicine, Dollars & Decisions

What Is This?

When you are in medical school or residency, retirement seems light years away. You may be studying, working long hours, paying rent, and most probably trying to figure out how to pay your student loans. In other words, you are young. So, the last thing on your mind may be investing for retirement.

But what if I told you that if you start investing just $100 a month at age 25, you could have more than $550,000 by age 65? Just $100 a month. The same amount a person may spend in one night, on dinner and drinks, in this crazy city that I call home, New York.

Why Does This Matter To You?

This is what I wish I knew. One of the beauties of capitalism is the system's rewarding of investing early in life. As you can tell, I did not say investing a lot of money (if you can do it, good for you, all the better), but investing even small amounts early, regularly, and consistently, for years. In investing, time is one of the greatest financial advantages.

But how do you invest? This is where exchange-traded funds, or ETFs, can be of great help.

Let's assume you take your $100 and, instead of investing in an individual company like Nvidia or Apple, you invest in an ETF. Think of an ETF as a basket of investments. Rather than buying stock in just one company, you can buy shares in a fund that holds stocks from hundreds of companies. For example, an ETF that tracks the S&P 500 gives you exposure to approximately 500 of the leading companies in the United States. Historically, the S&P 500 has generated an average annual return of about 10% over the long term, including dividends. Of course, returns vary from year to year, and there is no guarantee that future returns will be the same.

Now, let's assume a 10% annual return, before taxes and fees. If you invest $100 a month, every month, starting at age 25, and you don't touch that money, you may reach approximately $71,826 at age 45 (20 years later) and more than $555,000 at age 65 (40 years later). You contributed only $48,000 over those 40 years. The rest came from investment growth.

Now, let's assume that you can't invest $100 a month because you get paid weekly, and instead you decide to invest $30 a week. That is roughly $130 a month. You are just contributing $30 extra a month, which is about the price of pizza in New York. Then, you could have approximately $93,374 at age 45 and $721,545 at age 65. Thirty dollars extra translated into almost $21,548 extra at age 45, and more than $166,500 extra at age 65, compared to contributing $100 a month.

And if instead you put $100 a month in a savings account earning a constant 0.38% annual interest rate, without investing, you would have only approximately $51,824 by age 65, before taxes.

Why the difference? Because of compounding. Investments generate returns, and those returns generate additional returns. Savings accounts also compound, but at a much lower interest rate.

Many doctors, like me, postpone investing because we expect our income to increase dramatically after training. And then we convince ourselves that we will use the extra money we will make to invest. This theory holds water, but it overlooks an important advantage: an early start. Even if it is with a very small amount.

For example, let's assume I delay investing and start doing it at age 40, hoping to reach the same $555,000 at age 65 that you could achieve by investing $100 a month starting at age 25. Just to catch up with you, I would have to contribute approximately $450 a month. That is four and a half times your monthly contribution. And we are talking about hundreds of dollars. When it comes to thousands of dollars, this comparison becomes even more dramatic.

All these calculations, nonetheless, rely on you contributing regularly and consistently, and on your commitment not to pull the money out when the market goes down. Because it will go down at some point. Historically, the stock market has recovered from downturns, although recovery can take years, and recoveries are not guaranteed.

Panicking and selling your investments during a downturn may be one of the fastest ways to sabotage your own financial plans. For example, when I invest for my retirement, I forget that money exists. And I check my returns perhaps every six months. Because I know I am still far from retirement.

If time is still one of your biggest assets, use it. That's one of the reasons why I opened an investment account for my little daughter as soon as I could.

The Bottom Line

Start with whatever amount your budget permits. If you have a retirement account, and your employer offers matching contributions, take advantage of that offer.

As your income increases, increase your contributions before you spend the money. The more money we have, the more we tend to spend.

Three Takeaways

Start early. Even $50 a month, starting early, can grow into a substantial amount of money. You don't need to be wealthy to invest.
Make regularity and consistency your priority.
Do not panic and pull your money out when the market goes down.

"Our favorite holding period is forever."

Warren Buffett

MD&D Quote of the Day

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