MtoM #192: Hospitalist Pays Off $380,000 of Student Loans and Finance 101: Target Date Funds

This is the White Coat Investor podcast, Milestones to Millionaire celebrating stories of success along the journey to financial freedom. Hey everybody, it's Megan, your podcast producer. I'm just here to remind you that Dr. Dali is still resting and recovering from his accident.

But don't worry, he will be back soon. He's doing well. Please enjoy this episode.

Welcome to Milestones to Millionaire. Episode number 192. Hospitalist pays off $380,000 of student loans. The sponsor today is Wellings. Many investors know about the historic returns, tax advantages and wealth building opportunities of commercial real estate investing. But they're confused about where to start or who to trust. Wellings Capital has created a diversified fund that offers investors an easy on ramp to access carefully vetted commercial real estate operators and opportunities. Their goal is to provide income growth and tax benefits with limited downside risk. With a minimum investment of $50,000, investors get a stake in a portfolio of self storage, manufactured housing, RV parks, industrial properties and more. To learn more, go to whitecoatinvestor.com Wellings that's W E L L I N G S Make sure to stick around after the interview today for another Finance 101 with Tyler. Okay, welcome back to the podcast. We are going to talk to a doc who remained anonymous but she is a hospitalist and she has a great story to tell. Welcome to the podcast.

Thank you.

Okay, so let's get down to brass tacks immediately. What is your profession? How far are you out of school and what part of the country are you in?

Okay, I'm a hospitalist trained in internal medicine. I graduated residency in 2021, so about three years out. And, and I live and practice in Southern California.

And what is the big milestone today?

Paying off all of my student loans which in total was about 380,000.

That is awesome. When you say that out loud, how does that feel? What do you think?

It makes me feel happy. It's pretty surreal at this point. It was about like a couple months ago so it sunk in. But yeah, it's pretty surreal.

Did you, what did you do to celebrate if anything?

Nothing so far actually. I don't know how to celebrate.

Yeah, when you graduate medical school and you, I mean that is a lot of debt to have and I know a lot of doctors who listen to the show certainly can relate to having, to having that much or more even. But when you're facing that mountain of debt, do you think you're ever going to be able to pay off or like how it seems like such a.

Mountain to Climb it is, I think when you're taking out the loans, you obviously don't fully realize it until like you're done and then the payments are due. But it's definitely doable, I would say.

Yeah. I mean, clearly you did it very quickly. You know, Jim talks a lot about living like a resident for the first time, two to five years at a school to pay down that debt. It sounds like kind of like that's what you did. How did you make this happen?

That is essentially what I did. I did take Dr. Daly's advice. It sounds very, kind of a little bit cliche, very simple, but if you implement it, it does work. So basically, like my sign on bonus, at least one paycheck per month and every subsequent bonus or windfall or et cetera, I would put like all of it into the loan, which really helped, you know, bring the balance down. Something that helped me a lot was like, I don't know if you remember, like during COVID the student loan freeze, the interest was frozen for like I think three and a half years. I'm not sure all the payments are frozen. So that really helped me because I didn't have any interest accruing every month. So I kind of tried to strategize that because I didn't know when the freeze would end.

I mean, I guess you could have paid not anything. You could have just taken a break. Right? And you didn't do that.

Yeah, break is. Break is not going to work for me. Break will not accomplish anything.

I mean, you could have, you could have gone on an overseas trip. But no, that was never a consideration. Then it was like, no, I'm going to keep paying. I'm going to take advantage of the 0% interest or this interest freeze and just keep going.

Yeah, I would say, you know, when I compare myself to like my colleagues and friends who didn't take this approach, you have to have a plan. Basically, like from the get go, I just had a plan, like a very set in stone in my mind plan. And I stuck to it versus a lot of people I know. You know, they start their jobs after residency one to two to three years in, they're like, oh, my loan balance hasn't really moved. I'm paying a couple grand a month and I don't know what to do. And I can tell like they didn't really have a plan from the get go. They didn't really. You have to like have a plan to attack it. Right. Such a high amount. So I would say, like having a plan sticking to it will be key. And, you know, you just have to make a decision once you don't like. It's not like every paycheck, you ask yourself, what do I. Do I want to pay the loan or do I want to do this? Because, you know, as Dr. Dali says, you have a lot of uses for your money, which is very true. But if you just make the decision once, don't look back, every other paycheck, you just put it to the loan, you don't think about it. It does start to disappear rather quickly, you know, since obviously physician paychecks, they're pretty big.

So you go to residency and then you get out and become an attending. So what's kind of the range of salaries you were making? Like, you could afford to take every other paycheck, I guess, and shovel it towards loans. How much were you making?

So the first year, it's half the resident salary. And then a couple months attending, it was about like 150,000. And then it's increased. Right now it's around, like, low 300,000.

It's always fascinating to me when I've come across somebody who actually, like you said, kind of had a plan of attack. I noticed that for me, coming out of school like that, I would not have necessarily been thinking about my future in finance as far as doing that kind of thing. Where did you learn? I mean, I don't know if it was how did you grow up with your family, or is it just you found the right website or how did you know? Or how did you think to do that immediately?

Well, during residency, I did have a friend who introduced me to the white coat investor. I think that was a very pivotal moment. I didn't really know much about finance before that. And then during, like, Covid the Pandemic, I started listening to podcasts. So I really built on my financial literacy slowly. And then I, you know, I realized, honestly, it was the interest freeze. I really realized. I was like, if I can pay this down, this is probably like 40 to 50,000 a year savings. And I just decided this is the best time. Now or never. Basically. I didn't want to drag it out for multiple years because the future is unknown. You never know what can happen and, like, how much my ability to work will be down the road.

And you didn't mind, you know, doing the living with roommates and working extra shifts and not going into credit card debt? Oh, that was fine by you? You were just happy to kind of plug along and live like a resident?

Yes, I would say that's the key. I mean, it's not easy, right? But if you're committed to your goals, I was still able to travel. I take like multiple international trips a year. Like honestly, anything I want to buy, I do buy. But you just have to keep your kind of your desires and lifestyle at like a manageable level. That's the key. Use like your short term versus your long term goals. You have to like assess what works best for you.

So now you've, you've certainly accomplished a big time, short term goal. What are you looking at in the future? What are, what are some of your long term goals with, with your, your finances?

That's a good question. I don't know if I have those exactly sorted out. I would say buying a house is inevitable. It's not like something I need in the next year or two, but eventually it's necessary. Like saving up the nest egg even more eventually, like financial, like financial independence. Retiring semi early, like in my 50s, that would be my goal.

And this whole, this whole thing was, you said it wasn't easy, but was it easier or harder than you thought.

It would be during the moment? It wasn't that easy. But looking back, it seems quite easy. Like the three years, it went by pretty quickly and it feels like such a large burden lifted off of you. And I see like my colleagues around me, they're all still having a mountain of debt. Whether they, you know, feel it or not, it just seems miserable. So I would say short term suffering for long term reward was kind of my strategy. And I think it's worked out for me personally, it's really been beneficial.

So I mean, so you went on some, some international trips and you kind of said you did what you wanted to do. Was there never any kind of like a FOMO situation where you thought, oh man, I really wish I could do what some of these friends are doing, not fomo.

But my behaviors are definitely different than a lot of people I know. Like most of my colleagues will buy like brand new cars, Tesla, you know, yada, yada, yada. But I like bought my car on Craigslist for like $6,000 cash. Like I just literally follow Dr. Dolly's advice, kind of.

What kind of car did you buy?

I bought like a Hyundai, like 10 years old.

And it runs.

It runs, yeah, it's totally fine. And then like at one point, my, before that, my car, it was like a whole thing. I got into an accident. I was like biking to work basically for a couple weeks. Like most people I know would not be doing that, they would think that's totally ridiculous.

Yeah, that's amazing. I mean, when Jim talks about living like a resident, I mean, I think he pictures somebody like you who doesn't worry about the potential trappings of making a lot of money as a doctor, and they can just get rid of the debt, and then you can kind of go on your merry way and start accumulating that big old nest egg.

Exactly.

So for someone who's coming out of school this year, who has 400, $500,000 with the student loan debt, what kind of advice would you give?

I would say, first of all, when you're taking out the loans, a lot of times, like, they'll offer you a range of loans, and a lot of people take the maximum out. If you can try to keep that on the lower side so the interest doesn't compound, maybe take out just the minimum amount you can. Then I would say, you know, you should try to get a job that pays similar to how much your loans are. If not, it might be almost impossible to pay off. But lifestyle plays a huge role. Like, your number one and two expense will be like your housing, your car, your food. You have to find a way to keep those low if you want to pay your loans off, you know, in like, three to five years.

Anything I'm missing, anything else that you want to talk about that I didn't ask about?

I guess I didn't mention just from the starting loan of 380,000, my parents did gift me like 30,000, so I had a little bit of help from that. So I paid the 350 off myself.

Okay. How helpful was that? I mean, in the grand, you know, percentage wise? It's not a huge amount of percentage, but just the fact they were being generous enough to do that. How was that for you?

Yes, I agree. It's like under 10%. And, you know, honestly, going forward, I wouldn't need it now. But in the beginning, when you're like, basically faced with a mountain, just to have that much to knock it down a little bit, the total balance, it really does help, like, mentally, it helps you realize, oh, this is something I can conquer, this debt. It's not impossible. So thank. I think psychologically it really helped me be more aggressive towards the debt.

That's amazing. What a great story. Very inspirational. And it can be done. You know, you've shown you can knock out a ton of debt in a very short amount of time if you have the right approach. Thank you so much for being here. It was really great And I appreciate you telling your story.

Thank you.

Okay, that was great. Really enjoyed talking with her. And it's really just a cut and dried kind of WCI inspired success story. You know, she lived like a resident even when, you know, some of her colleagues were getting the fancy cars and maybe buying the houses and doing all the things, you know, she was living like a resident and living with roommates and saving money and really being proactive about how she's going to pay off this big mountain of debt, you know, and her saying, you know, it's basically short term suffering for long term success. Yeah, that, that short term is going to be tough. Although she said it, it wasn't that tough. I mean, she still got to do the international flight. She still got to kind of buy what she wanted to buy for the most part. But that kind of, that's, that long term success is what she was focused on. And you know, we were talking after the, after the interview, it's kind of easy to follow what, what Jim Daly has talked about. Living like a resident and paying off your debt quickly. It's climbing a mountain, but it's not, you're not client K2. You know, it's just really great to hear from her and a great success story.

Hello friends, and welcome to another Finance 101 lesson with me, Tyler Scott standing in again for Jim as he continues to heal up from his adventures in the Tetons. Today we're going to talk about target date funds. Target date funds are the ultimate in set it and forget it investing because they do three really useful things for us that require no additional work or management on our part. First, they give us an appropriate asset allocation for our age. By asset allocation, I mean our mix of stocks and bonds. For example, I am 40 years old, so I invest in the 2050 Target Date Fund in my Vanguard 401. The year 2050 is about the year that I will turn 65. So the fund knows I'm roughly 40 years old and thus it gives me an asset allocation of about 90% stocks and 10% bonds. About 2/3 of the stock are US, the other third are international. So I get a very reasonable, highly diversified, low cost mix of US and international stocks and bonds that is appropriate for my age. The second thing target date funds do is they adjust our asset allocation automatically as we age. It's one thing to have a 90% stock, 10% bond portfolio at age 40. It's an entirely different thing to roll with that aggressive of a portfolio into my 60s. At age 40, I don't really care at all if the stock market loses half of its value tomorrow morning because I'm more than 20 years away from needing those assets. In fact, perversely and selfishly, I kind of want the stock market to do bad so that all those juicy stocks I want to buy anyway go on sale. A stock market crash for a young person is synonymous with Black Friday after Thanksgiving. It's the sale we've all been dreaming of. However, I do not want to wake up on my 65th birthday to see that half of my lifetime savings has disappeared in a housing crisis or pandemic stock market crash. In order to mitigate against this, we want to shift our asset allocation slowly and deliberately as we age so we drop from holding 90% of highly volatile stocks to no more than 50 or 60% with a corresponding increase of 40 to 50% of more stably priced bonds. That way, if a market crash occurs in my 60s, I might see a 10% decrease in my portfolio, not a 30 or 40% decrease. Well, you can adjust your asset allocation manually over the years if you're confident in managing your own portfolio. Or you can just choose a target date fund to do it for you. Each year I get closer to the year 2050, the fund slowly ratchets up the percentage of bonds that I own. I don't have to do anything. This concept of adjusting your asset allocation over time is known as a glide path. We glide from a 9010 portfolio to a 6040 portfolio as we age. A target date fund will follow the glide path for you. The final way a target date fund aids us in setting it and forgetting it is that it automatically rebalances itself throughout the year. What I mean by rebalancing is that we want to maintain our desired percentages of assets at all times. Let's say that desired percentage is 60% US stock, 30% international stock and 10% US bonds. If you purchased three individual index funds in those relative percentages, they would stay at your desired ratio for a pretty short period of time in most cases. That is because the US Bond market and international stock market do not have a perfect correlation with one another. They rise and fall at different rates. And that's a good thing. That's the diversification we want. The problem is that if the international economy goes on a tear and the US Bond market has a terrible year, then you don't have a 30% international stock and 10% US bond ratio anymore. You have something like a 35% international stock and 5% bond ratio. That's not the asset allocation you want. That's the wrong balance for your funds. So you have to go into the account and rebalance by selling the overperforming asset and buying the underperforming one until you achieve your desired balance again. Well, a target date fund rebalances itself regularly every month or every quarter. You don't have to go into the account and buy and sell anything. That's what makes target date funds awesome. They give you a rational asset allocation, they follow a rational glide path, and they rebalance at a rational interval. Now that I've got you hopefully pumped up on the glory of the targeted fund, let's talk about some important nuances. First, there can be a terminology trap. These funds are known also as target retirement funds because the date you are often picking is allegedly your retirement. But I actually hate the term target retirement funds and do not recommend thinking of your retirement timeline at all when choosing which target date fund to use. The reason for that is some people will retire at age 45, some at 55, some at 75. This retirement timeline should not really be our primary concern when it comes to the longevity of our nest egg. Rather, the point of quote unquote retirement savings is to make sure we don't run out of money before we die. When we die has nothing to do with when we retire. In financial planning, we do our math to create a nest egg to support us until age 95. I may very well retire in the year 2040, but I will always use a 2050 target date fund because the year 2050 is when I turn 65. I think these funds should be called target 65th birthday funds. That would be more clear and more aligned with their intended purpose. This brings up another question I see clients wrestle with. Let's say One spouse is 40 and the other is 30. Which target date fund should the household use? I think the answer is to take the average age of the couple. In our example, the couple should think of themselves as 35 years old and use the 2055 Target Date Fund. I think that's the simplest way to think about this. Otherwise it becomes very difficult to know and manage the overall asset allocation of the family. If one spouse has X dollars in one target date fund and the other spouse has Y dollars in a different target date fund. Another wrinkle with target date funds relates to risk tolerance. Occasionally I get a client that says, yeah, Tyler, totally get it, but I want to take more or less risk than this glide path will take me on. So maybe a target date fund is not for me. To that I say just pick a slightly different fund. If you are 40 years old and want to take more risk, don't pick the 2050 fund. Pick the 2055 or 2060 fund, which will keep more of your assets in stocks for a longer period of time. If you want to take less risk, pick the 2045 or 2040 fund. That'll have more bonds today and it'll shift you away from stocks faster in the years ahead. One thing to be mindful of with target date funds is that they are not all created equal. Some are awesome and some are awful. You really have to look under the hood to understand which funds the target date fund is purchasing in order to create the underlying asset allocation and most importantly, what the fees are. The fees are often expressed in a term known as an expense ratio. I described expense ratios in a previous Finance 101, so go back and check that out for more details if you want. Basically, an expense ratio is a fee you pay to the firm that created the investment. It is expressed as a percentage of your total dollar amount in that investment. If the expense ratio is 1%, you must pay 1% of your total holdings to the investment company each year. So expense ratios are important to pay attention to. They erode your wealth and you want to keep them low. Some target date funds like the ones at Vanguard have very low expense ratios. The 2050 fund I use has an annual fee of 0.08%. That is awesome. If I have $100,000 in the fund, I pay 80 bucks a year for those three benefits we talked about earlier. That is a dang good deal for a fund that guarantees a good asset allocation, follows a glide path and automatically rebalances. Some target date funds have terrible expense ratios like 0.75% up to 2% at 1.5%. If you have $100,000 in the fund, you have to pay $1,500 a year for those benefits. Have a million dollars in the fund and you're paying $15,000 every year. That is not a good deal. Don't do that. Find lower cost individual funds and manage the account yourself or find a non gross financial planner to help you. I do this all the time with clients. I get them to stop using really awful target date funds and just teach them how to adjust the asset allocation themselves so they don't waste thousands of dollars in these crappy funds every year. The big brokerages like Vanguard, Fidelity and Schwab have great low cost target date funds, but you do have to Watch out for Fidelity a little bit. They offer three target date funds for each target year. One of them is super cheap and awesome, one of them is a little worse and one of them is pretty bad. You have to make sure you are buying the index fund investor class shares to get the low cost version at Fidelity. Another thing I like about target date funds is the ease they bring to estate planning. I could follow my own glide path and rebalance my own accounts. I'm a finance nerd. I love this stuff. My wife, she is not a finance nerd and she barely tolerates this type of conversation. She decidedly does not want to create and follow a glide path with quarterly rebalancing. So even though this is my professional field, I use target date funds in almost all of our accounts because if I die, no one needs to do anything. Nothing needs to be changed. The investments will just roll forward on a good track into the future forever. My closing thought after all that hype about targeted funds is don't use them in your taxable brokerage accounts for myriad technical reasons that transcend this 101 lesson. Just know that they are not typically a smart choice in your taxable brokerage account. Target date funds are awesome in tax protected accounts like 401ks, 403, 457hsa and your IRAs. Also in 529s as so called target enrollment funds with the target year being the year the child finishes high school or starts college. Just don't use them in your taxable account. They have become nearly ubiquitous in employer retirement accounts these days, which is good except for the ones that are awful. So watch out for those. They are almost always available in your HSAs and they are definitely available in your IRAs as long as you're with Vanguard, Fidelity, Schwab, et cetera. If you have some horrendous IRA with Wells Fargo or Edward Jones, you probably don't have access to good target date funds. But in that case you have bigger problems anyway. Target date funds are pretty cool. You guys give them a long look. If you are into maximum simplicity and low stress, they are the ultimate in set it and forget it investing. Thanks so much for listening and have a fantastic rest of your day.

Wellings Capital hears from many white coat professionals who spend most of their free time lunch breaks, evenings, weekends, even vacations, chasing elusive deals or doing their own labor on real estate properties. They're often disappointed with the returns they get for the time and money they invest. Other passive investors have been burned because they didn't do the due diligence necessary before writing a check. It's hard to know who to trust and you could get burned. Wellings Capital is your professional due diligence partner helping you invest in private real estate with projected mid double digit returns. They take an extreme approach to vetting each operator, visiting their offices and properties in person, doing in depth background checks, analyzing their debt structure and much more. To learn more, go to whitecoatinvestor.com Wellings that's W E L L I N G S and we'll see you next week on the Milestones Podcast.

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.