Investing is a key component of growing your net worth. In short, investing is the practice of spending money with the expectation that your purchase will grow in value. The most common form of investing is through stock and bond markets; however, many other types of investments exist. We will discuss investing for residents in three parts:
Part 1: Should I be investing during residency?
Part 2: The language of investing
Part 3: Practical applications
Should I be investing during residency?
If you (1) don't have any student loans, (2) have only low-interest (less than 4%) student loans, or (3) are pursuing Public Service Loan Forgiveness, then answer is probably yes. If you do have student loans—particularly if they are high-interest loans—and you are not pursuing Public Service Loan Forgiveness, the answer is more likely to be no, assuming you use leftover money to make extra payments on your loans instead.
The language of investing
Investments can be held in different types of accounts. The type of account determines how the investment is taxed. The most relevant types of accounts for residents are Roth IRA accounts, where you pay tax now and avoid tax later (which is good if you expect your income to go up in the future), and 401(k)/403(b) accounts, where you typically avoid tax now but pay tax later.
The most relevant investments for residents are index funds (large collections of individual investments that aim to follow an index, such as the total US stock market) and target date funds (large collections of individual investments that are automatically adjusted over time to decrease risk as you get closer to retirement). Index funds and target date funds are the most relevant investments for residents because they are diversified (i.e., they contain many different investments, which helps mitigate risk) and they are usually low-cost (i.e., the fees associated with buying, maintaining, and selling these types of investments tend to be low).
An algorithm to help residents decide which initial investment account to choose is provided here. Simple and reasonable investment options for residents include a total US stock market index fund or a target date fund (the one with the year closest to your anticipated retirement year in the name).