Every now and again I succumb to sappier impulses. It must have been from watching too many reruns of When Harry Met Sally back in the day. Forgive the indulgence!
Makes 1 heaping serving of financial independence.
Cooking time: Approximately a decade and a half after residency, depending on student debt, specialty income, and spending.
1 jar of resident lifestyle preserves
1 strong work ethic
1 aggressive savings rate
2 helpings of delayed gratification
+/- 1 partner on board with financial goals
Whether this recipe turns out sweet will depend largely on the preserves of your resident lifestyle: continue to drive a beater, and rent an apartment instead of buying a house. Expose these preserves to extremely low expectations and minimal envy, as contact with the wrong peer ingredients can unexpectedly simmer to a boil, resulting in a bitter final product.
After whipping your debt briskly into submission with steady, even strokes over the first 5 years of earning attending level income, you’ll find your net worth transitioning from an alarming red negative value to a translucent broke intermediate stage and eventually into the black, a satisfying color that ultimately results from steadfastly blending your work ethic with your aggressive savings rate.
Set aside a small bowl of your net worth for your emergency fund, and chill for later use. Taking the remainder of your net worth, divide it among two large pots.
The first pot will be your retirement savings stew, a slow-cook component chemically altered by the invisible microorganisms of compound interest, which cause it to rise and expand. Although it will appear depressingly empty when you start cooking, adding to it in annual increments is likely to fill the pot completely over several decades. You may include a melange of ingredients such as 401k, profit-sharing, defined benefit (a.k.a. cash balance), health savings account, Roth, and backdoor Roth accounts. Don’t forget that a side hustle with a separate income may qualify you to add an additional 401k, filling the pot more rapidly for the motivated entrepreneurial chef.
In the second large pot, allocate assets into your taxable account. This pot will serve multiple purposes as it fills up. For the would-be homeowner, it will become the starter from which you will make the downpayment on a home (or better still, pay cash for one). For the parent, it will help to fund a 529 plan for a child’s education. For the early retiree, it will likely serve as the dough that feeds your family from youthful retirement until age 59.5, when you can start feeding at the hopefully overflowing pot of retirement stew.
Watch for the inflection point when the physical strain of stirring your financial pots changes from tar-like viscosity that hinders your movements to a liquid consistency that offers minimal resistance as your pots expand and fill rapidly. Thanks to compound interest, both pots will grow considerably faster than you might have imagined.
A savvy chef will utilize the same limited ingredients to yield more servings through efficient advance planning and waste reduction.
Ability and willingness to manage a portfolio without paying fees to a financial advisor; investing in extremely low-cost, passively-managed index funds; creating a reasonable asset allocation that properly reflects personal risk tolerance; and distributing assets tax-efficiently among taxable and retirement accounts will increase yield considerably.