MtoM #174: VA Physician Pays Off Student Loans and Becomes a Millionaire in 5 Years and Finance 101: False Diversification

This is the White Coat Investor podcast, Milestones to Millionaire. Celebrating stories of success along the journey to financial freedom. This is Milestones to Millionaire podcast number 174. VA physician pays off student loans and becomes a millionaire in five years. I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors. You can do this and the White Coat Investor can help. By the way, we have a free 12 week email course that we call Financial Bootcamp. You can sign up for it@whitecoatinvestor.com Financialbootcamp. Medical school. Forgot one subject. Personal finance. If you're like most doctors, nobody taught you anything about managing money or investing. Financial boot camp is the financial education you need to convert your high income to wealth. This free 12 week email course could be worth millions of dollars to you over your lifetime. All right, we got a great interview today. You're going to love Jeff. Let's get him on the line. Our guest today on the Milestones to Millionaire podcast is Jeff. Jeff, welcome to the podcast.

Thank you for having me.

Tell us what you do for a living in what part of the country you do it and how far you are out of training.

So I'm an emergency medicine physician and I am almost six years out of training, having finished training in 2018 and right now I'm in Texas.

All right. And we are celebrating a milestone with you. Tell us what milestone we're celebrating.

So I actually have two. I actually was able to pay off $370,000 of student loans and that was done in December of last year. And we just hit the millionaire mark as well.

Wow. Congratulations. Two great milestones to knock out in five years. Out of residency, basically. It's very cool. 370 grand in five years. I mean, that's. I'm not that good at math, but that's got to be what, 74,000 DOL. Something like that a year. That's not a small amount of money for lots of emergency docs. That's a quarter of your income that went towards student loans over the last five years.

Yes.

And if you're paying at Least a quarter of your income in taxes. It's a third of your take home. So a serious commitment. What made you want to do that.

For me, I had disregarded my student loans throughout all of residency. Hadn't looked at them. Like you have said in many of your podcasts and other media that didn't get a lot of financial education throughout medical school, thought mostly about medicine. And so when I finally finished residency and actually sat down and said, let's take a look at this, and how much do I owe? And how much is that? I saw how much I did owe. I saw that $40,000 of interest was going to be capitalized, and I broke it down to see how much interest I was going to be paying every day, and it really just turned my stomach. So I said, let's. Let's get this done.

Very cool. So how much do you think you owed when you came out of med school? Do you even know?

So I think it was. I'm pretty sure throughout residency it was an extra 40 that got capitalized. So it would have been 3.

3:30 or so at the end of med school.

Yeah.

All right. And did you do any moonlighting in residency, or you just have a typical 60 or $65,000 resident salary?

I just had a typical salary, actually. My wife and I were in two different cities, so trying to. And we have children, so trying to maintain some family normalcy meant I was doing a lot of traveling and didn't have a lot of extra time for moonlighting.

And not a lot of extra money either, it sounds like. Although because we had to pay for two different residencies, I assume your wife works as well, she's in a different city.

She does. She's a teacher.

She's a professor of history. Okay, so a significant contribution, but certainly not the lion's share of the family income. All right, so these are federal loans, These are private loans. What were these?

They were federal. So actually, my first job out of residency was at the VA, the VAER. And so in order to qualify for the VA's loan repayment, you cannot refinance your loans to private. You have to keep them federal. That actually benefited me, with the federal loan interest rate going down to zero. But that's why I didn't refinance them, although I had wanted to because the interest rates were relatively high at the time.

You were a VA employee? Yes. So how much did they give you toward your loans, if anything?

$40,000 a year for five years.

$40,000 a year for 5 years. So that's $200,000 of it. Yeah. That's a not an insignificant addition to your income.

And the other benefit is with the VA loan repayment, it's tax free, so it wasn't considered an income.

Yeah. What about pslf? I mean, as a VA employee, you're eligible for pslf. Did you consider that?

I did. When I had started trying to pay back my loans, I tried to do a lot of math to see if I try and minimize the payments and take these out towards the 10 years versus if I pay them off, how much interest am I going to pay versus how much am I going to save getting them forgiven later. And I ultimately made a decision to try and pay them off for earlier. And I also wasn't sure what would happen with PSLF either, so I took the sure route.

Okay, so you changed jobs what about the same time you finished paying off the loans?

Yes.

And is your job now a PSLF qualifying job Now?

I'm a fee basis employee at the VA in Texas, but I'm at a private hospital now in the er.

Okay, so your job now doesn't qualify for pslf. What was the difference in your income at the VA versus what you're making now at the private job?

The take home pay was different. The benefits of the VA I think get hidden in a lot of the long term benefits that you get through working there. I was actually the director of the er, so I was hiring people too into the er. And so I did all of this work to show how much these benefits actually get people over time. Like I qualify for a pension since I worked there for five years, which is very nice. But the take home pay at my new facility is definitely more in the short term, but they don't offer any benefits. So there's no retirement account, there's no payment for malpractice insurance, and there's not even any CME money. So the VA does offer a lot.

In that regards, not counting any of the benefits. What was your take home over the five years you were paying off the student loans?

So take home for me when I started at the VA was about 300 and then actually this last year it was a bit more because I had a bunch of leave built up. And so when I left that VA they just paid it out in all one lump sum. So this past year was actually just over 400.

So five or six years ago you and your wife got together and had some sort of a conversation at the end of residency that kind of put you on this pathway. Can you tell me about that conversation.

Absolutely. We had an earlier conversation when I started medical school about how we were going to handle debt. And we saw this type of debt as important because it was necessary to build the skills in order to get the type of income we would want later in our lives. But when we sat down and looked at how much we actually owed, it was sort of a no brainer between the two of us that it would be something that we both cared about trying to. Trying to tackle together. And we actually do our finances what I thought was a little bit differently than most people. But as I talk to other people my age, it seems like other married couples do this as well. We actually have two separate accounts completely. And so when we take our monthly money together, we decide what we're going to pay bills on. And then whatever left over is we just split between the two of us and between our two separate accounts. But paying off the loans was a priority between the both of us.

Very cool. You know what's pretty impressive here is not just that you paid off your student loans, right? I mean, you made $300,000. You got $40,000 a year toward them in addition to that. I guess I'm not super surprised to see you paid it all off in five years. What I am surprised at is that you paid it off in five years and became a millionaire. So you weren't just putting money toward loans. There was a lot of money going toward investments as well. And presumably you bought a house and probably had a little bit of appreciation in that. Tell us about your assets. Now that's about your assets and your debts.

Most of our assets are in our retirement accounts. So we have roughly 600, I would say, across our various retirement accounts. I've got the tsp and my wife has a 401k. She had one from her job before Texas and also now in Texas. And we also have brokerage accounts between the two of us as well. My wife has built up a CD ladder, so she's a little bit more risk averse than I am with her investments. So she has invested in CDs on a monthly basis and then once those come in, she just kind of reinvests them into another one, which in this interest rate environment has gotten a little bit better. I would say she has about 300 in those types of investments. We also have some money in 529 plans for our children as well, which I actually didn't include that in the net worth calculation.

Is there a house as well?

We had a house in Iowa because We were in Iowa before Texas, but we sold that house. And since we didn't know the area in Texas where we would be, we're renting right now.

Very cool. Any debt? Still no debt. All completely gone. 100% debt free.

Debt free.

Pretty awesome. Pretty awesome.

Feels good.

Debt free. Student loans gone. Millionaires only five years out of residency. The world is your oyster.

Yes.

Very cool.

It feels that way.

It took us seven years. I was in the military for four of them, obviously, to become millionaires. So I'm always impressed that anybody does it faster than that. So good job. Congratulations on that. How does it feel to be debt free, to have the student loans gone?

Absolutely wonderful. I think it's difficult to overstate how good it feels. When I first sat down and looked at the loans after residency, it almost felt like I had dug myself into a hole. And working felt a little bit worse because I felt like I was just working to pay back all of this debt. And now that I've paid it all off, the actual practice of even medicine feels better because I'm no longer working for repayment of something that I had gotten years ago. Now I'm working to build towards the future. So psychologically it feels so much better.

Either of you come from money? Did either of you know, millionaires when you were growing up.

Sacrificed everything they could for our education at the their own retirement accounts. They didn't really help build up themselves. They were just, they put all their money towards us. So I saw the sacrifices that they made. And it also kind of lights a fire under me to make sure that I, I don't disappoint and make the most of it as well, you know.

Might be worth saving a little extra in case you end up helping them later.

That's what I hope. Yeah.

Very cool. Well, what advice do you have for somebody that's just like you kind of maybe just ignored everything during residency and is just now having a financial awakening as they're leaving residency? What advice do you have for that person?

That is the advice that I really wanted to impart is that make sure that you understand exactly what it is that the debt is and kind of what it represents. I actually played football in college too, and one of the lasting lessons I learned from one of our coaches was that you don't dream about things, you visualize things. And the difference is that when you're dreaming, you're just thinking about the end point, but when you visualize, you actually see all of the little details that you're going to have to do to get to that endpoint. And so when I finished residency and looked at how much loans I had, I actually made a large Excel spreadsheet with each loan, how much principal, how much interest, how much daily interest it was costing me and how much monthly interest was costing me. So it was costing me fifty dollars every day, up to fifteen hundred dollars a month just in interest. And that's money that's just wasted. And so that really gave me the motivation. And then I could see each loan and what I had to do first. So I tried to attack them in order of the highest interest down to the lower. And as I took each one out, then I could recalculate and say, hey, now I'm only paying $25 a day interest. Now I'm only paying 10. And so it just made it even more, even fun almost to get rid of them.

Cool. Sounds like you built some momentum and carried it through to the end. So congratulations to you. Thank you. You're a great doc, great father, great husband, great American. You should be proud of what you've accomplished together with your wife. And I wish you continued financial success as well as success in your career. Thanks again also for serving at the va.

Thank you. I appreciate it.

All right. What I love most about that interview is that Jeff was clearly putting a big percentage of their income toward building wealth, right? To get to a million dollars in five years, right? Think about what you got to be putting away. You get growth, right? You get appreciation. But basically you gotta be putting, I don't know, $150,000 or something toward building wealth. Plus the money that was going toward paying off student loans, right. For a doc making $300,000, that's a big chunk of your income, right? You pay taxes, you live like a resident. Everything else is going toward building wealth, whether it's paying down debt or whether it's going toward investments, right? That's a lot of discipline for five years. But look how well it's paid off. They are in a fantastic place. They've got a great start. Frankly, financial independence is probably only five more years away for them, and then they'll have the ability to do whatever they want the rest of their lives. Front load your financial work in your life. You will be very grateful. Trust me. 40s, 50s is not that old, Right? You can still enjoy your money at that point. Yes, a few very unlucky people have something terrible happen to them in their 30s and don't get to experience their 40s and 50s. But the vast majority of people Will. And Trust me, your 40s are way better when you're not putting your nose to the grindstone like you did when you were 32 and being able to step back a little bit and drop the work you don't like and maybe go part time and maybe one of you can be home with the kids and you can coach their hockey team, whatever. Trust me, you're going to want something by mid career that's a little different and just nose to the grindstone, work all the time. By taking care of your finances early on, you'll be able to do that. It's not that it's impossible to reach financial independence by the end of your career without living like a resident for a few years. I'll tell you what, it's way easier if you just kind of front load some of that work. Today I wanted to spend a little bit of time talking with you about what I call false diversification. Now, there are plenty of arguments out there among intelligent, sophisticated investors about what diversification actually means, right? You've got the total market crowd. They argue that the more investments, right? The more companies you're invested in, the more diversified you are. Thousands of them. Great. Right. They'll often argue that capitalization weighting is ideal since it's the way the market allocates capital. It's the most diversified way for you to do so. Others will argue that you want to diversify your risks instead of just taking on market risk. Maybe take on some small company risk and some value risk and some leverage risk. Others will argue for more of an equal weighted approach instead of capitalization weighting like you see with something like the Vanguard Total Stock market fund, where 27% of your investment is invested in only 10 companies. You could spread your money across dozens, hundreds or even thousands of stocks equally. So you have equal amounts into each investment. And then of course, there's diversifying between asset classes, putting some money into bonds, real estate and international stocks and precious metals or crypto or whatever. Right. And diversifying across different asset classes. All of those people are right. Right? Sophisticated investors are going to continue to argue the merits of each of these approaches to diversification until the cows come home. But there's one thing that all sophisticated investors are going to agree on, but that many unsophisticated investors, and frankly, a bunch of people who call themselves advisors, are still getting wrong about diversification. It's called false diversification. And what is false diversification? Well, I saw a good example of it this week on the Bogleheads forum and this poster said my brother had his advisor tell him that The S&P 500 is too concentrated and he needed to diversify better. The advisor had him in six different mutual funds. He sent me the sheet that showed the funds and allocations. I ran it through an analysis and saw the three of the six funds had significant investment in various Fang stocks, even though they weren't in that category. For example, the international and emerging markets funds had both Amazon and Google in them. In one of the US funds, FAANG stocks represented over 45% of the fund. I showed my brother that his top 10 stocks represented a larger percentage of his full portfolio than The S&P 500 did. And that's just a classic example, right? False diversification is when you invest your money across different funds or managers, but the underlying investments are all the same. For example, a novice investor might feel good to be invested in five different tech funds, but at the end of the day, those managers are all investing in the same stocks. The investor has added cost and complexity, but has not gotten any benefit for doing so. When those stocks go down, all the funds are going to go down. When those stocks go up, all the funds are going to go up in value. It seems like diversification, but when you actually look under the hood, it isn't. Some advisors out there put their clients into dozens of different mutual funds and individual stocks. I prefer to think they're doing this out of ignorance, but it's entirely possible they are doing it on purpose to make that work seem too hard and complex for the individual investor to take on as a do it yourself project. Every time I see it, though, it's kind of a sign. It's obvious to me that that advisor needs to be fired. There's no reason for anybody to own 30 different mutual funds. There are very few good reasons for anyone to own individual stocks. Throw both of them into a portfolio and it's frankly the mark of an incompetent advisor or do it yourself investor. So don't go for false diversification, right? You probably don't need that many mutual funds in your portfolio. Lots of people have three, four, five funds. That's it. That's the whole portfolio. They own all the securities in the world. You can even add a tilt to small or value stocks or real estate or whatever you want to in your portfolio and still have fewer than four or five or six funds in the portfolio. You don't need 20 or 30. You certainly don't need 20 or 30 that are investing in the same investments. That's just false diversification. More cost, more complexity, no benefit. Don't do that. I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there's no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors. You can do this and the White Coat Investor can help. If you'd like to be on the Milestones to Millionaire podcast, you can sign up whitecoatinvestor.com Milestones. We'd love to have you. Until next week, keep your head up, shoulders back. You've got this. The entire WCI community is behind you. Keep going. You will reach your goals. See you next week. The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.