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How to Choose Where to Invest 'Extra' Money Once You've Maxed Out Tax Advantaged Options

Sep 18
9 min read

In the first few years of attending life, choosing where to invest your money is relatively straightforward for most doctors. Between paying off student loans, down payments needed for a house or money needed for practice buyins, and finally having enough money to max out retirement accounts, there’s often not much left over to invest. However, as you pass these milestones, many doctors find themselves with money left over. Eventually that money can accumulate to substantial amounts, and we get questions posted in our online communities for doctors about where to next invest money now that all the ‘boring’ options are done. We’ll go over one approach to deciding where to invest that hard earned 'extra' money, depending on your personal goals.


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How to approach the question of where to invest 'extra' money after you've funded the basics like retirement, emergency funds, and taxable accounts


Where should I invest my extra money once I’ve finally got excess money building up in my savings account?


Before we get into your options for investing your extra money, let’s make sure you’ve really checked off all the obvious boxes on our basic personal finance checklist:


  • Do you have an emergency fund?

  • Do you have life insurance and disability insurance plans to protect yourself and your loved ones if you lose the ability to earn?

  • Have you paid off high interest debt such as personal loans and credit card debt (and when at a high interest rate, student loans or mortgages)?

  • Have you funded your retirement accounts?

  • Do you have enough liquid cash or investments for upcoming expenses in the near term (practice buy-in, down payment on a house, home renovation, etc)?


These are the first steps in our checklist on the personal finance primer for doctors, and ones that you should make sure you’ve taken care of.




The next step for most physicians is creating a taxable account 


And, for a lot of physicians, this may be the only next step. While it’s boring, investing in the stock market in diversified (and low cost) index funds over many years is a tried and true way to achieve substantial wealth for physicians. 


The thing is, with a six figure salary that’s earned over decades, and following basic rules of thumb of how much of your salary to save (many say ~20% for physicians), and dollar cost averaging investing into the stock market, you are almost guaranteed to set yourself up for a very comfortable retirement. If you’re happy living off of the rest of the money and knowing the rest of the money is growing in the background to be ready for you when you retire in your mid to late 60s, you can probably stop here and be just fine.




But, what if I want to do more to build my wealth, diversify my investments, and get tax advantages?


This is where thinking about personal finance really goes from the 101 to the 201 or 301 level for most doctors. There are obviously many different options for investments that doctors in our community often mention. These include (but are certainly not limited to):



If you’re just starting with diversification, the options can be overwhelming. There’s likely no shortage of people looking to pitch you on these options, in classes to learn about how to invest in these assets, or on the tax benefits of these. Each of these investments have their place for some physicians, but it’s very important to understand both the risk profiles of each investment and how they fit into your longer term goals.


The various investment types and what they potentially add to diversification in your portfolio in terms of pros and cons, risks, tax benefits, cash flow, and return potential


Ask yourself, what do these investments provide me with that my other investments don’t provide me with (tax benefits, cashflow, the chance for returns that beat the stock market, diversification and excitement)?


It’s very important to understand why you’re looking to get away from the boring things and dipping into a new arena of investments. Is it just because you’re bored, or is there a real purpose behind it? Answering this question for yourself will help you narrow down your options significantly.



Tax benefits


Not all of the options above provide tax benefits - in fact, some are horribly tax inefficient (day trading, investments that trigger ordinary income tax on large dividends, etc). Others open up significant potential benefits in the tax code, including real estate and oil, mineral, and gas investing. Note that some of these are not only riskier than others, but also potentially under high scrutiny by the IRS.




Potential for outsized returns


Many of these investments will be pitched to you as providing the opportunity for double digit returns (or more!). Remember the risk-reward tradeoff - more risk means more potential for outsized returns, but also more risk for loss (potentially even total loss). While investing in a boring index fund may not give you crazy returns in the long term, it’s historically steady with annual returns ranging from 7-10% depending on the time period you study it over. It’s also unlikely that the stock market (and thus the value of your index fund) goes to 0.


Meanwhile, while angel or venture investments could pay off in multiples if a company does really well, cryptocurrency could in theory go “to the moon,” NVIDIA could go up disproportionately to the market, and your real estate could appreciate dramatically in the right market, it’s not guaranteed that these things will happen, and in fact, market forces beyond your control could take them to zero. 


Essentially, if you want to go for these returns, you should be equally comfortable with the chance that they lose money - perhaps even all of it.



Cashflow that could replace or significantly supplement your clinical income


If you’re looking to retire early, or if you’re looking to cut back clinically (or at least have the option), one thing you may be eager for is another substantial income stream. Certain investments do generate cashflow (assuming all is going well), such as real estate, businesses, or funds that regularly generate dividends for their investors. 


Whereas your money that goes into your taxable accounts will likely just continue to grow in the background (it’s generally tax inefficient to cash out of these for cashflow because of short term capital gains or ordinary income tax generated), the investments above could give you money that helps you live a better life now, instead of in retirement.


Remember that if you’re doing something like active real estate investing or owning a franchise or other business, you’re also going to be putting in related work, and have to learn new skills. The same goes for options trading or other more active investments that require a high degree of attention.



Diversification and/or excitement


It is completely valid to say you don’t want to have all your eggs in one basket, and you want to ensure that you have another bucket of money in case the stock market goes down and it’s hard to access those investments without substantial losses. For example, during the early days of the COVID pandemic, many who saw their investment portfolios demonstrate significant swings and their clinical income take a hit were happy to have steady income from their real estate rental properties.


In these cases, the money generated from alternative income streams may not necessarily exceed returns from the stock market over time, but give you another basket of money that may perform differently during various economic cycles compared to the stock market. If you’re fortunate to be in a position where you have lots of money to invest, you may appreciate the comfort of knowing that when one of your investments is down, another may be up.



So, how do I actually decide which of these alternative investments to explore first?


This is a complicated question with lots of nuances, but here’s a framework by which to start thinking about them.



When do I need access to this money, if ever?


This is important. If you need access to this money in the near future (5 years or less), it’s going to limit your options, and you’ll generally want to go with ‘safer’ investment vehicles such as high yield cash or savings accounts, money market funds, or CDs. These are lower volatility even when compared to your stock market options.



On the other hand, if you don’t think you’ll need to access this money for a long time, or ever, you have many more options. One note in particular - if you’re thinking about early retirement, it’s likely a good time to start investing in non-retirement accounts or cash flowing investments that can buffer you until you have access to the retirement accounts without paying a penalty.



Am I willing to learn a new skill, and do I have the time?


Unlike the stock market, where there are many ‘lazy’ options for investing, investing in other sectors will likely require a lot of learning. Depending on what you pick, you’ll have to learn how to underwrite risk in real estate or venture capital investments, how to trade options, what determines when commodities markets do well, how to store crypto assets, or how to run a business. Decide whether you have the appetite to do this.


If you don’t have the time or energy to spend to learn how to invest in these areas responsibly, you should probably stay away from them. Taking somebody else’s word about an investment opportunity has led to a lot of regret amongst physicians in our communities.



What’s the worst case scenario if I lose this money, and what’s my risk tolerance?


This is one of the most important things to consider - we’ve mentioned it several times already, but generally speaking, higher reward investments come with higher risks. All of these alternative investments have some success stories that are widely spread or advertised that can give you FOMO, but you also have to understand that you may not be hearing the other side - the people that have lost a lot of money, or regret not just keeping their money in the market.


If you won’t be able to sleep at night if you lose a large amount of money, you’ll want to consider carefully your risk appetite for higher risk or speculative investments.



I’m still confused. How do I pick?


If stratifying the investments into the buckets above hasn’t given you a sense of what you should and shouldn’t explore for your personal situation, it’s probably time to have a more detailed discussion about your goals with an expert such as a financial planner. They can help you come up with a financial plan that creates an personalized algorithm for where to invest your money so that you’re both hitting your long term financial goals while dabbling into other investments that could check off some of the other buckets we mentioned earlier.




Conclusion


The decision to invest in something new can be very daunting, and lead to a lot of analysis paralysis. Make sure you’re clear on your objectives for moving beyond ‘boring’ but tried and true investing in the market, and understand the risk profiles of each investment you consider. This will help you assess how deeply you should dive into exploring each of the plethora of options available to you. When in doubt, talk to a financial advisor to get clear on how each investment fits into your long term financial plan.



Related investment resources for physicians 


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