Home Sweet Home

In my post about basic investment options, I purposely did not mention a huge one, real estate. Besides the fact that it's a post in itself, I left it out because I don't think real estate should be a major financial goal for professionals who are just starting out. Here is why.

Recently, there has been much debate about whether home ownership is a right or privilege. Today, 68% of US households own their home, which is the highest in history. To give you some perspective, 50 years ago, the number was around 55%. Now why the increase? Sure, there's no doubt the nation and its citizens have become more prosperous. The gross domestic product, the ultimate measure of the economy, has tripled in the last 30 years. The median household income has increased 20% during that time (hmmm...why hasn't it tripled?...a topic perhaps for later.). But I argue that the main reason more people own homes these days is because homeownership is more accessible. We really have Franklin Roosevelt to thank for that. When FDR created the institutions Fannie Mae and the Federal Housing Administration, increasing home ownership was precisely his intent. Props for Franky. Anyway, as a result, owning a home is as close to being a right as it's ever been. It's the American dream. But just because everyone has a home, does it mean you should include it in your financial planning? Is it always the right financial decision?

Before we answer this question, let's go over some of the benefits and disadvantages of buying a home. In my book, the biggest benefit is just the fact that you get to say you own the house you live in. You can have as many people as you want living in it, have as many dogs or even kimono dragons if you like, change a bedroom into a pilates gym, another one into a recording studio...you get the point. It's yours and you can do whatever the heck you want. I guess if you were financially inclined, you could also rent part of it out to make some money.

Another benefit of homeownership is that your mortgage interest and property tax payments are tax deductible, which means for every dollar you spend on those payments, you get anywhere between 20-35 cents back from the government, depending on your income tax rate. This is a great benefit, because remember the concept, "Not negative is positive." This tax deduction means you're essentially getting a 20-35% yield on the money you put into your mortgage interest and property taxes. As you may then conclude, this benefits the wealthiest more, because they are in the highest income tax brackets.

Still another benefit is home equity, which is the value of the home minus the debt. Let's say one of my friends bought his house for about $175K in 1998, and now it's worth $450K. He still owes about $50K, so he has $400K of equity. He can either sell his house today for that amount (good luck with that in these difficult times), or take out an equity loan to use for whatever he wants. For instance, he could renovate to add more value to a home, use the sum to live on (not recommended since it's like living off a credit card), use it in an emergency situation (e.g. medical bills), or use it to invest in a business venture like starting a restaurant. Be aware that equity is really only a good thing if your house appreciates. If your house value stayed the same or depreciated, sure you'd still get equity, but it'd be just the money you've paid. It'll be like putting money under your pillow (plus paying the interest as well), and we know we don't want to do that.

But then you ask me, don't houses ALWAYS appreciate? This is a good segway to the downsides of real estate. I know that in the past 10 years, people have made a killing investing in homes. But take a look at this chart by Robert Shiller, one of our most preeminent modern economists, who did a study examining average home prices adjusted for inflation from 1890-2006. http://www.1stmillionat33.com/posts/06-09-12/house_his.gif

As you can see, the appreciation in home prices historically has just been a bit better than inflation, with the exception of the years 2000-2006 when, for lack of a better phrase, they just went nuts. Ummm...I am going out on a limb and saying this period is an outlier, a bubble for which we are currently going through the corrective phase. I've seen people on TV recommending now is the time to snap up "bargain homes." I would argue against that, because the current median home price is still over $200K, and if you believe in Shiller's chart, there clearly is more room for prices to decline. (I am generalizing somewhat, because real estate is regional, and there are some parts of the country where housing prices have indeed bottomed already.) You don't want to buy a place, have it rapidly depreciate, and consequently have to stick with it for 10-20 years, waiting to generate some meaningful equity. Compounding this predicament is that homes are not as liquid as, say stocks. If one of your stocks tanks, you can easily sell shares whenever you want, but finding a buyer for a depreciating house and then going through all the logistics of a sale are far more difficult.

If you remember in my first post, I mentioned that I almost bought a house last year. I was fresh out of residency, had just landed a nice job, and was caught up with the idea that every semi-successful person should own a house. I found a property close to work. The selling price was $480K, my offer was $450K, and the owners rejected it. After 6 months, I was curious and looked up the house again, and to my relief, it was worth $370K. Adding to my relief was that I had left my job and moved like 100 miles away! Thank baby Jesus, with his fleece diapers and all. (Name that movie reference!) If I had bought that house, I would've been left with a huge debt, on a rapidly depreciating property, in a location where I didn't want to be. So you see, buying a house is not meant for those who are still unsettled and unsure about their career specifics, people who don't know for sure where they want to be and how the next good chunk of their life is going to turn out. Hey, isn't that the majority of professionals who are just starting out?

Now you see why I don't recommend real estate as a major investment goal for beginning professionals. It is a huge investment, requiring not only enormous capital but deep life commitments as well. In addition, the return you'll get, even with the tax deductions, is inferior over the long run compared to stocks. And if you are unlucky enough to run into a housing downturn, a house would be more difficult to unload. I'm not saying never think about real estate, but it should be at a later point where you are more sure of your life situation, and are ready to own where you live. When you are at that point, you can make financial goals to save more money for a down payment, and the money in your savings account should be a good start towards that.

A side advantage I haven't mentioned is that real estate does diversify your investments, making sure that you'll still be ok, say if the stock market crashes. But this is a small benefit, because the stock market will recover over the long run, and you are already diversified through your savings accounts and your bonds.

And what about the money you'll save or would otherwise "give away" to your landlord if you rent? Well, unless you're living in a luxury apartment, you'll always have to pay more in the long term for a house than if you rented. So really, think of homeownership as more of a life upgrade.

I know that there will be some people who'll disagree with my perspective on real estate investing. I have friends who have done really well buying properties, selling them a couple of years later, and earning handsome profits. I don't know about you, but that sounds like Donald Trump. Just like we shouldn't try to be bankers and take on every great loan that comes our way, I don't think we should be real estate businessmen when we're not. Especially given how housing has declined in the last 2 years, you could potentially lose a lot of money trying to be the Donald...and he probably can afford to lose more money than you.

Until next time, may you make some moolah, just not on real estate...at least not yet.

GOOAAAAAALLLLLL!!!!!

Hi there. If you're reading this, you're probably curious about the title or are somehow interested in better managing your finances in some way. Let me start off by saying that I'm not a financial advisor in occupation. In fact, I'm as far from that as you get. I'm a physician, and no, medical school did not have economics electives...I guess memorizing all of the muscles, nerves, and bones in the body took the bulk of our school time.

So then why am I starting this blog? Well, obviously I have some interest in personal finance, and I think I can help people like me who aren't in business and were never really introduced through their education or training how to manage their money. I certainly have many friends and family who are like that. I've had to learn through trial and error many of the topics I'm going to talk about, and I wished that someone could have told me beforehand, so that I didn't waste the money and time. Well, actually some of it was kind of fun, so I guess the money went to something.

So I myself am a baby professional, my term for those young professionals who are just starting out. I've been out of residency (that's the 'training period' for doctors...for those who don't watch Grey's Anatomy) for about a year. As a resident, I still got paid, but I don't think that period counted, since I was much too preoccupied with averaging at least 4 hrs of sleep a night, and was also paid less than minimum wage, if you did the calculation. Anyway, after residency (and after taking a month off to hibernate and catch up on my sleep debt) I found myself with some actual income and savings potential, which then led to the logical question--what should i do with this money? I did buy a nice car, which is probably the worst financial thing you can do, but hey, that's what I meant by trial and error. I do like my car though....

Since the end of my residency, I've played the stock market, started a business, switched jobs twice, and almost bought a house which would certainly have lost half of its value by now. I've made a lot of mistakes this year, but the good thing is that I've learned from them, and I hope to impart to you some of what I've learned.

So I know you're dying to ask, "What's up with the title?" It's a reference to those brilliant mexican soccer broadcasters. To be entertaining, they really don't have to say anything besides, "GOOOOOAAAALLLL!". Well, maybe if I understood a bit more spanish, I would think differently. Anyway, the title also refers to the subject of this first post, which is the importance of setting goals, financial goals.

Realistically, what should be everyone's ultimate financial goal? To be a millionaire, right? Ok, good luck, you could keep buying lottery tickets every day and maybe you could have a 0.1% chance of winning. Actually, let me backtrack. I feel like Dr. Evil in Austin Powers..."I am holding you ransom for....a BILLION dollars, woohahahaha." Because in reality, a million dollars isn't that much money these days. For most people, you need at least a million probably to retire comfortably. Ok, I just gave away the answer to the ultimate financial goal. The ultimate goal should be to save enough that you can retire comfortably. Depending on your lifestyle, for some it may be a million, for others ten million. You have to figure that for yourself.

Alright, so we've come up with our ultimate goal. How do we get there? So you figure that you have about 40 years before retirement, and let's say you decide you need a million bucks by then. You would then need to save about $25K a year...great, looks like you have to eat Ramen every meal for the next 40 years. But don't despair, because you forget that your investments grow and compound year after year. You don't have to put in quite as much as $25K. So don't get caught up too much with the ultimate goal. Basically, focus more on making good financial decisions. And perhaps more importantly, you should think about mini-goals.

Financial mini-goals are endpoints you want to meet every year, month, week, or even day. You've probably heard that it's important to budget. Well, the reason is because when you budget, you're actually setting mini-goals of how much you can spend. And the more closely you budget, the better. If you set a mini-goal of not exceeding $20 for food every day, those times when you go over, you'll be aware of it and can try to make up for it the next day. If you had only made a mini-goal of checking your expenses once a month and you found that you spent an extra $500, that's harder to make up.

Ok, I think that's it for the first post. The lesson to take home is that it is important to set financial goals, the ultimate being an adequate retirement sum, but more practically along the way, to have mini-goals. One of the most important mini-goals is to just check your finances periodically, the more often the better. I would recommend that you at least do it once a month.

Alright, until next time, may you make some moolah.

Do you know where your money is?

Too often I've asked my friends and family the question, "Do you know where your money is?" I guess that's not exactly a popular cocktail party question, but that's why they are my friends and family. They love me no matter what...awww...ok, so too often I ask that question, and too often I get the answer, "You know, in the bank and in a mutual fund...I don't know, I'm gonna have to check with my financial advisor."


This answer bothers me in a couple ways. Take my friend who does fairly well. I don't know how much she has saved up, but it has to be in the thousands. So based on that answer, she has several thousands of dollars invested in something, evidently called a "fund", and she is entrusting the management of this "fund" to somebody who claims to be an expert because they say they are. I don't know about you, but wouldn't you feel better if YOU took care of your own money? I'm not trying to knock financial advisors. I'm sure there are a lot of terrific ones out there, and it may be useful to have someone to discuss ideas with from time to time. But I think it's important to have some clue of where your money is. So in this blog, I'm gonna go over some basic investment options.

So you have some money in your piggy bank. What should you do with it? Well, one option is nothing (leave it in the piggy), which is always the wrong answer, because money depreciates due to inflation. That's why it costs more to buy a soda today then it did ten years ago. So please, never put your money under your pillow.

Before you decide where to put your money, you have to separate your savings into two pots. In one pot is your retirement savings, money you do not anticipate needing until you are 59 1/2 years old. In the other pot is money you want still to grow, but may need to use in the next 40 years. This distinction is important, because if you put all your savings into an Investment Retirement Account (IRA), and you want to withdraw some of it before 59 1/2 years old, you will have to pay hefty early withdrawal fees. First, we'll talk about your non-retirement savings.

The simplest way to save your non-retirement money is probably your good ole savings account. These are straight forward accounts set up by banks which allow you to deposit or withdraw at anytime, without any fees. The problem with these accounts is that their interest rates are usually the lowest of any investment options, often between 0.1%-5%. These rates are dependent on the borrowing rates set by the Federal Reserve, the government institution which oversees all banks. The rates are higher usually in good economic times, and lower in poor times. One pearl is that online savings accounts usually have higher rates, since they require no maintenance costs for the banks, so check them out. A similar entity to a savings account is a money market account. For our purposes, they are the same.

The only other way to save your non-retirement money and have it available at any time is the stock market. Now, the stock market is so complex that I'm going to devote several posts to it. Suffice to say for now that it's not really meant for frequent deposits and withdrawals...that would be called DAY TRADING, which is only a little bit better than gambling. Actually, gambling probably has better odds, since about 90% of day traders lose money. Investing in the stock market should be viewed as a long term strategy, because stocks can be very volatile in the short run.

Another option for your non-retirement money includes certificates of deposit (CDs) and bonds. CDs and bonds are money you lend to a bank or the government, respectively, but there is a specified period of time, anywhere from 6 months to years, before you can take the money out. They have unique interest rates to them, which are usually higher than interest rates of savings accounts. For example, currently a ten year bond yields about 4%, whereas an average savings account these days gives you 1%.

OK, on to your retirement savings. There is no question when it comes to retirement savings, IRAs are the way to go. The reason is that the returns you get are not taxed, and hence they will give you the best yield of any of your investments. For instance, if you put $1000 in a one year CD with a 3% interest rate, at the end of the year you expect to earn $30, right? Wrong, because you are forgetting that you'll be taxed on that $30, so what you're really gonna make is around $20. But if you had put that CD in the form of an IRA, you would be able to keep that full $30. This example also brings up another point. You can't just dump money into an IRA and leave it there. You have to specify to the financial institution managing your IRA what investment vehicle you want the money in. In my example, I used a CD. You could use anything really, even a savings account, but that would be oxymoronical as savings accounts are meant to give you the capability of moving money in and out whenver you want.

There are different types of IRAs, but for all intents and purposes, if you're a beginning professional, you need only be concerned with the Roth and the Traditional IRAs.

If you are single and making less than six figures, the Roth IRA should be your first choice. You can't open one if you're making more than $116K, and there is a maximum contribution of $5000 a year if you're making less than $101K. If your income is between $101-$116K, you can make a partial contribution, and there is a chart from the Internal Revenue Service (IRS) on those limits. These income limits are higher if you have a spouse. The best thing about a Roth is that you can withdraw your money tax free, at the age of 59 1/2, of course. A disadvantage is that your contributions are not tax deductible, so essentially you're taxed in the front end, which if you think, is better than being taxed in the back end. For instance if you put in $5000, you're really putting in $1000-$2000 more, because the $5000 is post-tax. But in 40 years, when your $5000 grows into $25K, taxes on that would be approximately $7000-$8000. So you don't want to be taxed then.

For a traditional IRA, there are no income limits. Contribution limits are based on age. If you're younger than 50, than the limit is $5,000. The advantage of the traditional IRA is that your contributions are tax deductible...but only for certain incomes, e.g. <$62K for a single person. Withdrawals are subject to income tax, so not as good as a Roth. There are other subtleties to IRAs, but I've given you the basics. If you want to read more about them, go to the website of the IRS.

There are several investment vehicles I haven't mentioned. One is the popular mutual fund. A mutual fund is simply a portfolio of stocks and bonds that investment managers have created. They are for investors who don't really want to spend the time to create their own portfolios. An important point is that when it comes down to your retirement savings, mutual funds should not be relevant when you are starting out. When you are a beginning professional, you want to put your retirement savings in stocks, because they will give you the best return in 40 years. But as you age, more of your retirement pot should be shifted to bonds, which give you less return, but are less risky. So you could potentially use mutual funds to adjust your stock/bond ratio. A good rule of thumb is that every ten years, you should shift about 25-30% of your retirement savings into bonds.

Another investment vehicle is the employer sponsored plans, and these are basically 401Ks and Keoghs. 401Ks and Keoghs are similar to IRAs, but come from your employer, so that you can elect to reserve a portion of your paycheck for your retirement. The tax implications can vary like IRAs, and in fact there is a Roth 401K, which allows for tax free withdrawals. There are even 401Ks where your employer will match dollar for dollar, your contributions. In terms of Keoghs, they are generally unique in that they have the highest contribution limits of all the investment vehicles. Different employers will offer different 401Ks and Keoghs, so make sure to inquire about them!

You also may have heard of an investment vehicle called an annuity. Essentially, this is a contract between an individual and an insurance company, where initially the person pays the company a sum of money, and agrees on an interest rate which can be fixed or variable, until a specified time upon which then the company starts paying the individual an agreed amount periodically. Annuities are attractive, because they give individuals a "steady income" after they retire, sort of like a pension plan. Also, there are annuities, in which their returns are tax free. There's nothing that's a free lunch though, because the knock on annuities is that they often have expensive management fees attached to them. A good rule is that for your retirement money, you should maximize your contributions to your IRAs first, then if you have money left over, a tax-sheltered annuity would be reasonable. However, if you do have a 401K which does not have a contribution limit, there is no reason to set up an annuity.

Whew! So many choices, right? Well, let's see if we can't simplify things.

Back to the money in your piggy bank. So, remember the ultimate goal is to save for retirement. But at the same time, it's not a good idea to put all your money into retirement accounts, again because you can't use it until 40 years later. You want an emergency fund you can access anytime, just in case you need it. If you have enough savings to maximize your IRA account(s) (you could potentially have BOTH a Roth and a traditional IRA), and still have some money left over, you should maximize those accounts. The left over money, you can then use to put a portion in your 401K if you have one, and the rest into a savings account. I personally am not a big fan of CDs and bonds for your nonretirement money, because their yields are usually not that much higher than online savings accounts, and also you have to wait these certain time periods to take your money out. If you don't have enough to maximize your IRAs and have some money left over, just split what you have. Put 3/4 into the IRAs and 1/4 into a savings account.

So that's it really, a portion in your retirement accounts, and the rest in a savings account...all you really need! If you are more risk averse, you can reserve some money to play the stock market. I don't recommend doing that if you can instead maximize the IRAs.

Alright, until next time, may you make some moolah.

Not Negative is Positive

No doubt you've heard a lot about the current "credit crisis." For those who haven't watched TV, picked up a newspaper, or opened a website in the last 2 years, the current credit crisis briefly refers to the fact that many borrowers today aren't able to make their loan payments, and consequently the lenders are losing money, which causes them to be more hesitant in lending. You see that this is a potentially vicious cycle, which is why everybody is worried that it is going to just cripple our economy. I don't want to make this blog into a Wall Street Journal article, but I think that we can all take away some lessons from this current crisis. First of all, let's go back and examine the origins of credit.



Did you know that about 40% of Americans are in debt, 75% of households have at least one credit card, and 70% of homeowners have a mortgage? Now most personal finance books will tell you that a core principle is to not spend what you don't have. That seems like intuitively prudent advice, but why then do most people not follow it? Why is there even credit to begin with? The answer is that credit generates business. Credit is a concept engendered by businessmen, because they can make make money lending, through the interest they charge. But it is not just the fault of the lenders. Borrowers generally welcome credit (hence the high number of people in debt), because there are 2 types of borrowers. One is other businessmen who feel that they can make money borrowing at a low interest rate, and then using the money to make profits that are more than their interest payments. And then there's the type of borrower who thinks that this is a chance for them to own something they really want but can't afford at the moment...ummm, if that's not the classic spend-more-than-what-you-have, I don't know what is. This latter type of borrower unfortunately is your average consumer...yes, come out from behind the tree, you know who we're talking about.



Debt gets a bad rap...I mean, it kind of sounds like "death," (and feels like it sometimes) but not all debt is bad...just most of it. You've heard people say student loans are good debt. Why? Because usually they have very low interest rates. But be careful to generalize, because I've taken out some loans during my schooling with interest rates as high as 10%. When you look at debt, you are confronted with two scenarios: 1) what do you do with your current debt, and 2) when should you take out new debt?



Let's examine the first scenario--what to do with your current debt. Is it as simple as, "Pay it off!?" Well, it could be that simple, but if you followed that rule, you wouldn't be maximizing your investment returns. Let's look at an example. Let's say you have a student loan debt of $1000 at a 2% interest rate. You have just received your latest paycheck, and you've been paying attention to the previous blogs, setting a mini-goal of saving $400 a month. You plan to put $300 in your retirement account and $100 in a savings account. Your retirement account is invested in the stock market, and that generates on average a 9% annual return. Your savings account gives you 2%. So, given this situation, should you use some of your savings to pay off your student debt? (I have to interject here and clarify that you should always pay at least the monthly minimum, if you want to have a semi-decent credit score. What we are talking about here are payments on top of the minimum, so you can actually pay off the debt.)




One can make an argument that instead of putting $100 into your savings account, you should use it to pay off your debt. The reason is that your savings account return will be taxed, and so you're going to really earn about 1.5%, and then it's a queston of owing 2% more vs. gaining 1.5%. However, my recommendation would be to not touch your savings account, since that is your emergency fund. What about your IRA? That's a no brainer--owing 2% more or gaining 9%. Contributing to your IRA will give you a net result of gaining 7% of your savings at the end of the year, and paying off your debt will cost you a potential gain of 7%. So you see, paying off debt is not always the right move.



Let's change the example. Let's say instead of a student loan debt, you had a credit card debt at an interest rate of 15%. Again, in my book, your savings account should be hands off for emergency purposes. Should you pay off your credit card debt or contribute to your IRA? And the answer is pay off your credit card debt. Think about it, it's a question of owing 15% more vs. gaining 9%. The end result would be you owing 6% more in a year. Not negative is positive--sometimes not owing more is as good as gaining. The take home point is, if you have any debt that has an interest rate>9%, paying that off takes priority over saving.




OK, now you know how to deal with your current debt. What about situations where you're thinking about borrowing more? Let's say you're interested in buying a TV, and these days it's gotta be a flatscreen, right? OK, a flat screen it is, which will set you back anywhere from $500-$2000. Let's just pick an easy number, $1000. You have $500 in the bank, so there's no way you're getting the TV, right? The salesman sees a moment of hesitation in you, and offers you a way to finance it. He/she says the store will lend you $500 at a 10% interest rate. Sound like a good deal? Yes...to the salesman. Not only will he/she profit from your purchase of the TV, he/she reaps the interest from this loan. This is clearly not a situation where you should borrow money.




You tell the salesman that you refuse. Then he/she comes back to you with a deal where you can borrow money at an introductory 0% annual percentage rate for the first 12 months. That means you won't have to make any payments for a year, plus there is no interest added to your loan during that time. They run your credit score, and you're approved for a $1000 loan. What now?




Being this is a personal finance blog, the best thing obviously is to not to buy anything you don't really need, but you've already heard that one. Hopefully, we're past the stage where we seriously shop for things we don't really want.



So I say you take the TV home, but at what cost to your bank account? The correct answer is zero, because think about it. Someone is giving you a free sum of money for a year. Why are they doing this? Because they're betting on the fact that you won't have the $1000 after a year to pay them back, in which case, they can then charge you a gagillion percent interest. But we won't be that negligent, and we are checking our finances at least once a month, setting the mini-goal of paying back the $1000 after a year. Plus, we're going to set this free money to use, putting it in a savings account throughout the year and generating a profit for ourselves!



See, there are times when it's actually OK to borrow. But don't go out and agree to every great loan that comes your way, because accumulation of debt leads to a bad credit score, and plus, you're not a banker who actually has the time to manage all these loans. The credit score is a weird thing...too much debt is bad, but moderated debt that you pay off consistently increases your score. Anyway, that could be a topic in itself.




So let's go full circle back to the current credit crisis. Many people blame the lenders, the banks, for offering all these aggressive "subprime" loans, ones which borrowers would unlikely be able to pay in the long run. But from our credit discussion, credit is embraced by both lenders and borrowers. Borrowers also had a responsibility to make sure they could afford the loan. That is the main lesson for us. Credit has become an essential in personal finance, and managing your money not only includes how you deal with what's in the bank, but how you manage your debt as well.




Until next time, may you make some moolah.

How much are you worth?

So who's the richest person in the world today?  Sorry Bill Gates, it's Warren Buffet, the CEO of the investment firm, Berkshire Hathaway.  I don't think Bill Gates is that sorry, actually.  He's still the third richest in the world.  Anyway, these guys' fortunes are measured by their financial capital, how much is in the bank and in their investments.  Accordingly, Warren Buffet's net worth is estimated at 62 billion dollars.  When I started residency, my net worth was negative six figures due to all my school loans...sigh.  But there's one thing I have over Warren Buffet, and that is, I may have more human capital than he does...maybe. 

Let's examine the concept of capital. According to dictionary.com, capital is defined as "the wealth, whether in money or property, owned or employed in business by an individual, firm, corporation, etc." I don't think this definition is entirely accurate. It leaves out a very important type of capital, that is, human capital. I would add to the definition, "the wealth, whether in money, property, or earning potential..."

You see, there are really two types of capital, financial and human capital. There's the money you have in your wallet, your checking/savings account, or that invested in your house/stocks/bonds. Then there's the money you can potentially generate every day with your time--your human capital. Let's say you wanted to buy something...oh, I don't know, maybe a Guitar Hero video game set, as that seems to be the rage these days. You could take out a wad of cash to pay for it, or you could whip out your credit card. Either way, you're purchasing something with your capital, because you'll eventually pay off the credit card later (hopefully) with what you've earned at your job. This distinction of capital is important, because to set financial goals you have to know what you have to work with.  

[Before I go further, I have to disclose that I did not coin the term "human capital," not by a long shot. In fact, the father of economics, Adam Smith himself, has used the term, in addition to subsequent other economists, the names of whom I'm sure you're dying to know for the next Jeopardy round. OK, back to the real blog...]

It is especially important for beginning professionals to realize the concept of human capital, because when you are starting out, you have vastly more human than financial capital...unless you've inherited a fortune from your parents. In that case, this discussion is less relevant to you, but not to say that wealthy people don't need financial advice. I would argue that they need MORE savvy financial management, as they have more to lose. Just look at Ed McMahon, Evander Holyfield....anyway, back to us folks who don't have huge sums in the bank. 

Let's delve into a hypothetical. Let's say you make $20/hr. A work year is 52 weeks, and if we assume a 40 hour week, your annual salary would be about $42K. You decide that you want to save at least $5,000 a year to put into your IRA.  To save $5,000 a year, you would need to put away about $415 a month. 

So how are you going to come up with $415 per month? Most people think the only way to save is to spend less, but I submit to you that as a beginning professional, another great way to save is to utilize your human capital. When you are young, you have the stamina, the health, and if you aren't married yet, the freedom and lack of family responsibilities, to make the most of your human capital. In our example, if you were to work an extra 5 hours a week, you would make your financial mini-goal of saving $415 a month. To some, that may sound like a lot of extra work, but think about the fact that there are 168 hours in a week, and most people work 40. True, we also sleep about 40-60 hours on average, but that still leaves 60-80 hours for potential human capital. Of course, you need a balance between work and a social life. I'm not saying you should be a workoholic and neglect your family and friends, but my point is that there is not a surer thing (besides death and taxes) than human capital. If you have the capability to maximize your human capital, it is better than knowing which mutual funds, stocks, or pieces of real estate to buy. You don't know if your investments will generate you money tomorrow or even in ten years. Did you know the stock market today is essentially at the same level it was in 2000? But work, or human capital=money, instantaneously...well, until it shows up in your next paycheck.

Being young is the time to work hard. To be successful, one has to leverage their unique strengths and opportunities, and a universal one for beginning professionals is that they are able to work more than say, someone twenty years older. I said earlier that when we start out, we have vastly more human than financial capital, so we need to take advantage of that. Because as we age, our human capital will decline. In fact, when we retire, our human capital, assuming we stop working entirely, will be zero. But that's ok, because if you manage your finances well, it's a mere matter of shifting the pendulum to your financial capital. Your investments grow, and the yield from them will eventually provide for you in the future.

Warren Buffet, you have nothing on me!  Until next time, may you make some moolah.