WCI #116: Fix the Car or Buy a New One?

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dali. This is White Coat Investor podcast number 116. When to get a New Car still not sure what to do with your student loans or overwhelmed with how to tackle that giant debt? In an ever changing political climate, the experts@studentloanadvice.com are here to help guide you through the best options to manage your loans. Our experienced staff have consulted on over $250 million in student loan debt and the average student loanadvice.com client has saved over $190,000. You will receive a customized student loan plan using the principles of the White Coat Investor. Get answers to all of your student loan questions, gain clarity about your financial future, and start down the right path toward financial freedom. Book a consult today@studentloanadvice.com you can do this and the White Coat Investor can help. All right, for those of you who have been waiting, the White Coat Investors Financial Boot Camp book is now available on Audible. Go check it out. If you like listening to podcasts, you'll like Audible Books. And so that's a great opportunity to listen to that and really get yourself up to speed with the rest of the white Coat investors. If you haven't had a chance to look through the website, you'll notice that we have a recommendations tab at the top and under that we have all kinds of financial professionals that can help you. You can get advice on your student loans. For instance, you're not sure what to do, which IDR program to be in, whether you should go for public service loan forgiveness, whether you should refinance. There are a number of firms there who are experts just in student loans and they'll help you decide which program to be in, how to file your taxes to maximize those benefits, which retirement account to use to maximize those benefits, et cetera. So check that out. Also, if you've got a new contract coming up, either a partnership contract or an employment contract, and want to find somebody to review that with you to go over it and explain to you what it means to even negotiate on your behalf, you can find people there as well under our contract advice and negotiation page. Of course we have recommendations for doctor Mortgages there. Hundreds of you have used those. And also refinancing your student loans with companies like our sponsor today, SoFi, you can go on there and see all the different companies that will give you cash back. If you go through the white coat investor links and refinance, it doesn't cost you any more. It just literally puts cash in your pocket. Thanks for what you do. Doctoring is not easy. Lawyering is not easy. Whatever you do, you're a high income professional and you're paid a high income because your job is difficult and because usually there's high liability and often a 24, 7, 365 component to it. So if you take call, thank you very much. Your sacrifices are appreciated. Today we're going to go over lots of questions from listeners. We're going to take them from the Speak pipe. If you haven't left a question on the Speak pipe before, it's super easy to do. You can record a question up to a minute and a half long. Try to keep them shorter though. And you do that@www.speakpipe.com whitecoatinvestor and you leave them there. We'll put them on the podcast. So far we haven't had a Speak Pipe question yet that we didn't put on the podcast. But a lot of the other ones that come in via social media or via email, I leave out because I want to have your voice on the podcast whenever possible. Today we're taking them from all kinds of places though. So our first question on the Speak pipe is Donnie. Hi Jim. I'm an ER physician in North Carolina. I have a question about my individual 401k. I decided to open up an individual 401k of E trade after I earned some income from 1099 work. I decided to place it in an ETF inside the individual 401k and I was just curious what your thoughts were on this approach. I've not really done much investing with ETFs and this is my first time with individual 401. So I thought I would give it a try. Any feedback would be great. Thanks for all the work that you do. Okay. Donnie's question is one that a lot of people wonder about until they really understand how investing works. He's got an E Trade individual 401 which is fine. I think that's a great, great place to have it. They have all kinds of features. I think you can take loans at E Trade. They have a Roth 401k option. They actually take IRA rollovers, unlike Vanguard. And of course you can buy any ETF you want for a low commission. So if you want to invest in Vanguard index funds and your individual 401k is at E Trade, you want to do it using the ETFs. Now an ETF is an exchange traded fund. So it's a little bit different from a traditional mutual fund. A traditional mutual fund, you basically trade at 4pm Eastern every day. You can't buy and sell it throughout the day as it goes up and down. An exchange traded fund, you can buy and sell throughout the day. And so it's really useful for people that are trying to time the market or trying to speculate that sort of a thing. For those of us who are long term investors, that's really not a particularly useful feature, but it is a feature of an exchange traded fund. The really nice feature at a place like E Trade is they usually charge a commission like 50 bucks to trade a traditional mutual fund, but an ETF, they usually charge about 5 bucks. So it's dramatically cheaper to trade in that respect. In a taxable account. ETFs can be more tax efficient because of their structure. Because of the way the ETF shares are made and the way they are dissolved, you can actually flush some of the capital gains out of the etf. And so in a taxable account, they're significantly more tax efficient. As far as Vanguard's funds go, that's not so much the case. Vanguard's funds are a little bit unique. We'll get into that a little bit later in this podcast. Maybe they're slightly more tax efficient than Vanguard's traditional mutual funds, but there's not much of a difference there if you're using Vanguard index funds. So should you use an ETF in your case? Almost surely, because E Trade doesn't offer low cost index funds commission free. You're going to need to pay a $5 commission every time you or sell those and so use the ETF versions in order to keep your costs down. I have a similar situation at Charles Schwab and at Fidelity with my accounts there, my individual 401s at Fidelity. And so I use the Vanguard ETFs because the commissions are cheaper. At Schwab in my 401 for my partnership, it's the same deal. I use the ETFs because the commissions are lower. All right, our next question comes from an Anonymous listener.

Dear Dr. Dale, I'm looking for your opinion regarding purchasing a home. First, a little background about myself. I'm finishing a competitive internal medicine subspecialty fellowship this year. I will be moving to an extensive suburb of metropolitan city in the northeast part of the US I have worked for One year as a hospitalist between residency and fellowship. My wife is currently a part time employee due to us having two very young children at home. And she will be going back to being a full time employee within a calendar year. She will be making about $100,000 per year. When she goes back to being full time, I will be making in the mid $300,000 range. We have currently our investments which are about $350,000. I have zero student debt and we have two 529 plans with $4,000 in each. The homes we are looking at range around 800,000 to $900,000 range. Wanted to get your opinion regarding if those pricing of the homes will make me house poor. Am I buying too much house? Thank you for all you do. Thank you.

Okay, basically the question is, should I buy a home? How much home should I buy? Sounds like they're going to an expensive place in the northeast expecting of income of about $450,000 and no student loans. Well, I'm a big fan of owning your home. I think once you are in a stable professional and a stable personal situation, you ought to buy a home. I think it's an important aspect of building wealth. Now that doesn't mean you can't build wealth if you're a lifelong renter. And in fact, there's a few areas in this country where that's not a crazy thing to do. Especially since buying costs so much more than renting, you know, in some places like the Bay Area. But in general, I think it's good for doctors to be able to buy their homes. If doctors can't buy a home, who can buy a home? Right? That said, that doesn't mean that everybody ought to buy a home all the time. There are times in your life when it's smarter to rent. For example, if you're only going to be someplace for a year or two, you know, if you're in the military and you're moving every three years, I think buying a home is dumb. Even if you hold it longer in the two or three or four years you'll be there, you're going to be a long distance landlord, which I assure you is no fun. And so I think, you know, in those situations where you're not going to be in a house for longer than five years or so, it's usually a mistake to buy. Obviously sometimes the market goes up quickly. You can't know that in advance. But maybe a third of the time, if you hold on to a house for three years, you still make money, but that means two thirds of the time you're not making money. So in this case, buy the house. If you guys both like your jobs, your jobs like you and your family stable, you know, the marriage is good, you're not expecting twins next week and you're not gonna have enough bedrooms for them, that sort of a thing, then go ahead and buy the house. My general rule is to keep your mortgage under two times your gross income. And so if you're making $450,000 a year, that would suggest a mortgage no larger than $900,000. So if you bought a buy a million dollar house, you put $100,000 down, your mortgage is 900,000. You stay within that rule. Now, in some really expensive areas, you know, maybe your DC and your Boston and your Manhattan and your Bay Area, sometimes you might have to stretch that rule a little bit. You might have to stretch this 2x gross income mortgage rule. But when I'm talking about stretching, I'm talking about 3x, maybe 4x, not 10x. That's just crazy. You're going to be totally house poor doing that. Even going to 3 to 4x. You got to realize that there are some significant financial sacrifices you are going to make. Buying a house that expensive, you're not going to accumulate wealth as quickly. You may have trouble maxing out your retirement accounts, you may not be able to travel as much, you might need to drive a dumpier car, et cetera. There are consequences to doing that and often that means a longer career and working longer. But if you're fine with that, it's not crazy if you're in San Francisco to get a 3x mortgage, right? In fact, you're probably going to have to be given the cost of housing related to the salaries of doctors there. Okay, our next question comes from Bill Yount. He's one of our Facebook group moderators and he tells me he's planning on coming to the White Coat Investor conference. So you may get a chance to meet him there if you're coming. But he asks if you get a chance on the podcast or elsewhere, I would very much appreciate it if you could explain to me and the audience the advantages to the individual investor of the unique and patented share class structure at Vanguard and how having traditional open ended mutual funds paired with ETF share classes keeps fees and taxes lower. And as a corollary to that, what, if any, impact will the expiration of Vanguard's patents have on the industry as a whole? Well, here's the deal. Vanguard patented this structure so they're the only mutual fund company with this structure. But the way they've set this up is they've set up a traditional index mutual fund and paired it with an exchange traded fund. They're two share classes of the same fund. And what that allows them to do is to take some of the capital gains out of the people who own the traditional mutual fund shares and move those into the exchange traded fund shares and eliminate them when the ETFs are dissolved. Now you have to look at how an exchange traded fund is created. They have these units that they create. They bring all the stocks that are in there together and create this unit. And then from time to time they dissolve these units. And when they do that, they can pass the shares with the low basis, you know, these high capital gains in there to these groups that, you know, basically that's what they do is form these ETF shares. And so because of that unique structure, it allows the Vanguard traditional index mutual funds to be more tax efficient than they otherwise would be. In fact, they are nearly as tax efficient as the Vanguard exchange traded fund share class. That doesn't, none of that matters, of course in a Roth IRA or 401 or other tax protected account, but in a taxable account it does matter. Now if you go to someplace like Fidelity and you look at their traditional index mutual funds and you compare them to, you know, iShares ETFs, what you will discover is for the similar stocks in the funds, the ETF is significantly more tax efficient. And so the benefit of Vanguard of this unique structure they have is they basically make the traditional mutual funds just as tax efficient as an exchange traded fund. Now that patent is going to expire eventually. I don't know exactly when. It is probably coming up soon I would imagine. And so when that expires, what I hope to see is all the other mutual fund companies doing the same thing. You know, your Fidelity and your schwab and your iShares and all these other companies that have these low cost index funds. Hopefully that will make them even more tax efficient by adding an ETF share class to them. So that's good for everybody. I don't see any downside there. Yes, it's not going to help Vanguard to raise money as quickly as it has, but geez, Vanguard's already the largest mutual fund company in the country, in the world. They don't need to get any bigger. It's okay if they have a little more competition there. All that does is drive down prices and make things more competitive. Which is good for all of us. Okay, our next question. This one is also via email and it's kind of an interesting one. When I started researching, I know there are very few people in this group who are 50 plus. I am turning 51 this year and would like to know if you can do a post or a podcast on AARP membership and its pros and cons. I read mixed reviews online. Okay. AARP is the American association of Retired Persons, right? So when you turn 50, you start getting these flyers in your mailbox and they're trying to advertise their services. But here's the deal with it, right? This is a, you know, an organization which is basically a discount organization. You pay them an annual fee and they take their big membership out there and they try to negotiate discounts for you. And so it's really a pretty simple mathematical calculation, right? You basically look at the discounts and see if you how much money you're going to save from the discounts. And you look at the price of membership and see how much that costs you. And if the discounts are larger than the price of membership, sure, why not? Right? You're going to come out ahead financially. But the truth is you don't need very many discounts for this to work out. Well, it costs $16 a year to be a member of the AARP. I mean, you basically need a discount on one hotel night and you're going to come out ahead. And so I think it's fine to join the aarp. The likelihood if you actually try to use some of these discounts of you not coming out ahead seems pretty low to me. I mean, it's $16 a year. I think if you renew automatically, the price is even lower. But look at all the companies you can get discounts with, right? There's some long term care options, a dental insurance plan, a vision plan, a Medicare supplemental plan, some Medicare RX plans. You can get insurance for your vehicle and life and property and business. You can get golf cart insurance, snowmobile insurance. They got all these health and wellness things, you know, hearing aids and LensCrafters offers discounts. There are travel discounts, Avis, Budget, Payless, Zipcar, all offer an AARP discount. Several cruise companies offer an AARP discount. There are flights and vacation packages that will give you a discount, like Big British Airways, for instance, hotels and resorts, right? I mean, these are people you know of, you hear of, right? Best Western, Econolodge, Comfort Suites, Days in Park Inn, La Quinta, Howard Johnson Hilton, the Roadway Inn, Travelodge, Right. These are not companies you've never heard of. Wyndham, Right. If you travel at all, you can probably get an AARP discount at some point during the year. That is going to make up for your $16 membership. Restaurants, right? Bubba Gump, Shrimp Company, Joe's, Crab Shack, Denny's, Outback. You know, a lot of these chains have AARP discounts, and even if they don't, you can ask for one. You'd be surprised how often you get a discount when you ask for one. I know a lot of you know this because asking me to discount the stuff I sell, and so I know it must work or you guys wouldn't keep asking. Ticketmaster offers discounts. You know, there's all these things you can do 1-800-Flowers.com it's a big organization, and so they've got all these organizations that you can use for discounts. And so, yeah, I think there's probably. It's probably worth joining as long as you'll use it. You know, if you get to the end of the year and you're like, wow, I didn't use this once. So what, you're out 16 bucks? I mean, that's just a movie these days. If you're going out to a premium complex, it's just not that expensive. Expensive. But here's an interesting secret about the AARP. You don't actually have to be 50. You can join the AARP anytime you like. There's not actually an age restriction. At 50, you get a regular membership, but prior to 50, the way it used to be, you would get an associate membership. Those were actually cheaper. They were 1250. I think the way they've done this now is they've just standardized it so it's $16 for everybody. You don't have to be 50. You don't have to be retired. You don't have to have gray hair. You want to be a member of the AARP, knock yourself out. Go join the AARP and get your 10% or 15% discounts or whatever off these hotels and restaurants. So, yeah, go for it. Nothing wrong with the aarp. Well, I mean, there might be something wrong with the AARP, but $16? Come on, you can. You can come up with something that'll save you $16 during the year. Okay, our next email comes from a dentist. This is lengthy, but I think it's worth going over because I think there's important lessons learning here. After having spent the past couple of months reading through some articles, listen to your podcast. Learning a lot of basics I've been determined to get on track with a better plan. I get that you focus on your MD brethren. A lot of them are what seems like extreme situations. But what about people that are in more lower to middle situations? Not every high income professional is making 300, $700,000. Isn't that the truth? I mean the average physician only makes 275. A lot of us are making 100 to 200,000. That's why the averages are where they are. I'm throwing my post into your hat to see what you recommend Regular Joe's can do with limited resources. I that we get so skewed sometimes that we think 100 to $200,000 is a regular Joe. Regular Joe these days guys is about a household income of $60,000. That's the average. So even if you're a dentist making $150,000 or a pediatrician making $170,000, you are still doing much better than Regular Joe. Alright, he says. I'm a general dentist married to a psychologist. We both have moderate amounts of student loans. I have $100,000 left. My wife has $120,000 all at 6.5 to 6.7%. I graduated seven years ago, been treading along with IBR and repay. I joined my father who is also a dentist with goals of taking over his practice. I thought it would be only a few years but it's dragged out a lot longer than expected. I'm still working for him and thus my income hasn't increased much. I currently work part time with him and part time at a community clinic that I started a couple of years ago and earned somewhere around 120,000 to $130,000. Bought a condo about five years ago for $185,000 and fortunately it's increased in value to about $420,000. Congratulations on that. That was a great buy. It's on a 30 year fixed 4% mortgage. My wife just graduated a couple of years ago. In this past year started a group private practice with two other psychologists. She'll make just under $100,000 in 2018. So that's a household income there. Looks like about $230,000. In terms of retirement we don't have much started. I have 403 that the community clinic started for me when I started with them. That has about $8,000 in it. I started a Roth IRA last year, managed to put $5,500 in there. My wife doesn't have anything. I'm 33. She's 32. We're hoping to start a family soon and we're in a high cost of living area. I would love to increase our income, but between my wife's new business and how my income has stagnated the past several years, we aren't sure when it's going to go up. I will have several questions for you. Should we refinance our loans or keep repay to keep the payments low if we want to move to a bigger home in five years? I'm not sure why those issues have been put together, but I guess there are two questions in there. Should you stay in repay or should you and should you move to a bigger home in five years? I heard about mortgage acceleration on one of your podcasts. Do you think I'm in a situation where that would work well for me? Well, I'm not a big fan of mortgage acceleration. You guys can who have heard all the podcasts. We had an entire podcast on mortgage acceleration and it's mostly a scam. Although there's a little bit of a free lunch there, it's pretty small. I opened my Roth IRA with Schwab and have started with their index funds. I understand I could buy the Vanguard funds there, but would have to pay their expense ratio. You mean commissions? At what point do you start looking at opening other retirement accounts at other firms? This may be a funny question, but you're only allowed one Roth IRA per person, right? No, you can actually have as many Roth IRAs as you want. You just can only contribute a total of $6,000 a year in 2019 to a Roth IRA. Any other general advice for someone in my position? Moderate loan, average income, married and trying to move forward in life? Okay, well, there's a few things I think that are worth diving into in this email. That's why I read the whole long thing. First of all, I've written lots of things aimed directly at low income docs. I'll have got three links to posts that we'll put in the show, notes that talk all about issues and how to deal with them when you're making 100 to $200,000 a year. But about your situation specifically, the first thought that came into my head is, man, if you keep doing what you're doing, you're going to keep getting what you're getting. I mean, here you are seven years out of training, you're living in a condo, you still have a mortgage, you still have student loans, your income is still low, and you have essentially nothing in retirement savings. So if you stay on the path you're on, your financial life is not going to look much different seven years from now. So something has to change. Now, I'm not meaning to be critical there. That's just math, right? You don't get a pass on math because you're a doctor. I wonder if the reason your dad is still working is because he hasn't yet discovered what you now appear to be discovering. That this plan does not lead to financial freedom. So what are you going to change? Right? The income here is not terrible. You guys are making 220, $230,000 a year. Katie and I became millionaires in seven years. With an average annual income lower than that, it's not a terrible income. It is certainly possible to build wealth on that type of income. But that said, more income does make things easier. Let's not kid ourselves. So that's probably the logical place to start this process. If there's a way for your wife to get a job that pays more, or get a raise at her job, or work more hours or start a side gig, that's a great thing to do. But I think the main thing here is to address your career honestly. It's time to have a frank talk with your father, right? Something like, dad, I love working with you. It's been fun to follow in your footsteps. But financial reality has hit me in the face. I'm seven years out of school, I still owe student loans, I'm still stuck in a rinky dink condo, and I still have a below average income. When I joined the practice, I kind of had the idea that you were on your way out, but it looks like you really aren't. At least not for a while. I need to get my income up to take care of business for my family. That means I either need to find a job that pays more, open my own practice, or really get on some kind of set plan in the next few years to inherit yours. I might even need to move to a lower cost of living area. So I thought I'd start by talking to you about your career plans before I start making changes with mine. So I think that's kind of how my conversation would go. You need to solve that issue first and then move on to the other issues. The next issue is likely to get your spending down. That's tough to do in a high cost of living area. Despite being in an area with low income taxes due to the cost of living. If you move somewhere else, that will likely have a major effect on your living expenses and probably not affect your earning or maybe even affect it positively. It may affect your spouse's earning, of course, so you have to take that into account. But I suspect if you're only putting $14,000 away in seven years on a $200,000 plus income, that you're just not living on a budget. You know, you got to learn how to live on a budget. You are pissing away all kinds of money that you don't realize is going away because you are not watching where it's going. And if you actually write down where your money's going, I bet you'll be surprised how much you're wasting on stuff that you don't even care about. So Doctors need to budget too. I have a post that that's the title, Doctors need to Budget Too. And it's true. Until you figured out how to save 20% of your gross income for retirement, you will benefit from being on a budget. Once you've figured that out, it's time to really look at those student loans. You gotta have a plan there. You got $220,000 in student loans on an income of $220,000. That's only a 1x ratio. That should be easily paid off in five years. By living like a residential, you know, living like the average household income, you should be able to pay off 1x ratio in 5 years pretty easily. I mean, it'll help if you refinance them, but what's the alternative? Are you planning on dragging these out for another 18 years and then paying taxes on the forgiven amount for an IDR program? That's really not a winning strategy. I mean, you don't want to have student loans when you're in your mid-50s. I might even move those loans up ahead of retirement savings in priority. After that, of course, you can focus on your investments, but at this point, it's all about reducing your payments and your lifestyle spending so you can put more money toward building wealth. Whether that goes to paying down debt or whether that goes toward investing, it really doesn't matter all that much. But the point is, more of your income needs to be going toward building wealth or you're not going to build wealth. So I hope that's helpful. I think there's probably a lot of docs in that situation that thought they were going to get their father's practice and then are disappointed to find out that dad can't retire, or dad works longer than you think, or the practice isn't work isn't worth as much as you think, or it's not a very profitable practice and you don't want to be there anyway or your spouse doesn't want to be anywhere near your dad or whatever. And I suspect there's been a lot of disappointments among doctors over the years in that sort of a situation. Okay, next question also comes from a dentist. Here's a little background info. I'm 31, a general dentist, graduated from dental school six years ago, wife is a nurse. We paid off all our school loans. Good job. We have a three year old child, six month old child live in California make $240,000. My wife makes $100,000. We're putting 17% of our paychecks in Vanguard Index funds to max out our 401 and Roth IRA, our HSA and $30,000 toward my SEP IRA. We have a $657,000 mortgage at 3.875. I have a dental loan, a 10 year loan of $625,000 at 5%. I'd like to pay both these off quicker by making extra payments and right now I rent my dental building, would like to purchase a building to practice out of in five to 10 years. I believe you recommend paying down the highest interest rate loan first. However, a 5% loan is a lesser total dollar amount and has to be paid off in a much shorter amount of time, 10 years. Also, all the interest paid on my practice loan can be written off as a business expense versus the mortgage interest property taxes of 9,000 each year on our home. I'm curious if any of these factors matter or should we still focus on paying off the dental practice first due to a higher interest rate? Well, there's no right answer there necessarily. What should be paid off either is fine. Remember that your property taxes don't go away when you pay off your mortgage, so that's a total non factor. Also be sure you're comparing rates after tax. The mortgage interest may not be deductible for you or may only be partially deductible. But the real problem with this doc is there's a ton of debt despite not having student loans and you're looking at taking on more. So I'm much more concerned about the total amount of debt than I am the interest rates or what order you pay them off in buying a 3x income mortgage when you have a huge practice loan. Looking into buying a practice building was maybe not the best move, but at least you got rid of the student loans first, right? Otherwise it'd feel like you have four mortgages at once. I guess if you really want to build wealth quickly consider downsizing the house. But otherwise it's really just a matter of buckling down, working hard and pounding on the debt. Obviously, if you pay off the practice loan first, you might feel like you're making more progress. It's a higher interest rate and will be paid off sooner. So I think that's probably where I would start with this one. All right, this next question comes from Twitter. Hi doctor, I have a question. There's an agent contacting me regarding disability insurance. In his email he says if you reject a disability insurance or denied, you may not qualify in the future. I don't know anything about this type of insurance. Well, that's a partial truth. Right? You can reject disability insurance anytime you want. That's not going to affect your ability to get disability insurance down the road. You know, they make you an offer and you say, I don't want it. That doesn't mean you can't buy it the next day or the next week or the next year. But if you're denied, that can affect your ability to get disability insurance down the road. One of my WCI Network partners, the physician philosopher, got denied on his disability insurance and I think he still doesn't have disability insurance to this day. So what a good agent will do is they will shop you around informally to the companies and say, hey, I got somebody here with diabetes or I got somebody here with hypertension, or I got somebody with a long history of low back pain. What's his option going to be? You know, is he going to be able to get insurance for you? And they do this informally so you're not technically denied coverage because when you apply for coverage again, one of the questions they ask you is have you ever been denied coverage? And if they only shopped you around informally, you can say no. If you actually applied formally and got rejected, then you have to say yes. And that's going to make it more difficult to get coverage. Hope that's helpful. All right, another question from the Facebook group. I'm finally getting wise to the fact that our retirement accounts, around $250,000 at UBS for the past five years, are making minimal progress and have big fees. Yep, we all come to that realization someday, don't we? I'm looking into moving everything elsewhere and simplifying. I can roll over some into my employer based 401k. My husband is currently not employed and doesn't have that option. We are looking at fidelity and betterment. Any other ideas or recommendations? Any timing or tax concerns? What about 529 plans. Okay, well, here's the deal. Fees matter. If you can get lower fees, that's a good thing to do. My general default answer for where to invest is Vanguard. They're the only mutual mutual fund company and they operate at cost. And so as a general rule, you'll find lower fees and expenses there. Now, in some ways, you get what you pay for. And the customer service of Vanguard often is not as good as you might find at Fidelity or Charles Schwab. And so you have to kind of weigh those two factors. It helps at Fidelity in Charles Schwab and places like Betterment that use Vanguard funds, that they have low cost index funds available of their own. And it's perfectly fine to use the low cost Fidelity index funds. Remember, they have two types of Fidelity, so you got to be careful. They use their low cost ones. That's fine. Same at Schwab. You know, the important thing is you keep your costs low and you get the market return and you can do those at both those places. Having Vanguard in the name doesn't necessarily mean you're going to perform better. Although that's not a bad screen when you're picking mutual funds out of your 401. If it starts with Vanguard, chances are it's pretty good fund. So what should you do in this situation? Well, you can roll yours into your 401k. That's fine. If your husband has retirement plans and he's not employed, well, his only option is to put it into a traditional ira. So if you do that, you probably can't do backdoor Roth IRAs for him going forward. So you're really weighing that opportunity versus the higher costs you have at ubs. It's hard to say what the right answer is. I guess if it's a lot of money, I would, you know, maybe leave it at ub. Maybe I'd just bring it over and get lower costs and all that money if it was a small amount of money. And maybe I'd look at just paying the taxes and Roth converting the whole thing into your Roth IRA. So you keep doing backdoor Roth IRAs. If it's somewhere in between, maybe you roll it over to a traditional IRA and you stop doing backdoor Roth IRAs for him. You can still do them for yourself, but those are the main issues. As far as 529 plans go, you know, you can roll stuff you've already contributed to a low cost plan like the Utah plan or the Nevada plan, the California plan, the New York plan. Those are all very low cost plans. I'm kind of partial to Utah, but those other ones are fine too. And then of course, going forward, you want to look at your own state and see if you get a tax break for your state. And if you do, use that plan for your contributions. If you don't, again, go to the low cost plans that offer good funds. These are Utah and Nevada and California, New York. Occasionally you'll see some other ones in that list, but those are always in the top five or 10. So I'd go to one of those plans with your 529 money. I would not leave it someplace where you're paying high fees because that does slow down how quickly things grow. It really does make a difference in the long term. Okay, the next couple of questions both come from the Facebook group, and I read them within a few minutes of each other and I thought it was really interesting to kind of compare and contrast them. They're all about cars and I called this podcast when to Get a New Car based on these two questions. Here's the first one. I left my current car worth $2,000 on the east coast with plans to ship it to the West Coast. That'll cost me about $1,500 where I'm doing residency. I had it inspected and our mechanic friend quoted repairs as being greater than $2,000 for everything, but my dad can do some minor things himself like the control arms and engine mounts to get it to better running conditions for just a few hundred dollars for parts. Do I look into buying a used car on the west coast or do the minimal repairs and bring it over here for residency? I'm not sure how the car will sell if I don't do the minimal repairs, though. I think I'm leaning towards buying a car over here, but wanted more knowledgeable opinions. The car would probably be worth 1k before repairs and 2k ish after repairs. Okay, at a certain point you got to go. The car's totaled. All right? If it costs more than $2,000 to repair and it's only going to be worth $2,000 when you repair it, it's total. It's time to get rid of it. Get whatever you can out of it. If you can sell it for $1,000, that's wonderful. If you can take it down and get $300 from the junkyard, that's great too. If it's still drivable and you're not going all the way across the United States, maybe you can drive it around for a couple of months until it formally dies. But At a certain point you got to go, okay, that's it. This one dies, this one died. When you're at a very low cost car, that happens a lot, right? If you're driving a fifteen hundred dollar car, you know, the clutch goes out, the engine goes out, the transmission goes out, the car's totaled, you're done with it. So it's time to get a new car. Now in this, there's actually another factor here. It's going to cost $1,500 to ship it. No way would I pay $1,500 to ship a $2,000 car. I for sure would sell, sell it, get your thousand dollars out of it, go across the country and buy a new $2,000 car or buy a $5,000 car, whatever, right? Get yourself some transportation so you can get around at residency. Don't go buy a $25,000 car on credit, but it's okay to get a little bit of, a little bit more car than a $2,000 call while you're over there. So you can make it when you're on call. But come on, you know, this one's dead, you're done. You know, if you're not comfortable driving it across without making these repairs and you are talking about paying to ship it, I mean, it's time to get rid of it. Now compare that to the next question I read on the Facebook group. Advice needed. I'm expecting a baby in July. I want to buy a new car with the third row. Okay, you're expecting one baby and now you need a third row. That's interesting. I'm assuming there's some other kids here, but maybe not. I'm planning to buy a Nissan Armada, but the current lease is not up until February 2020. Holy smokes. So you're in a year into a lease and you're talking about buying another car with three rows. Would you buy a 2018 Nissan? Now that is exactly what you want with less than $10,000 for $20,000 cheaper than brand new, I would still have to pay for my current leased luxury car until February, about $7,000. Or would you wait until the old lease is up in February 2020 and buy a brand new 2019 that qualifies for $10,000 in rebates? Or would you wait until the old lease is up in February 2020 and buy a brand new 2020 at full price? Okay, well, that is pretty interesting, right? To compare these two, One person is talking about swapping a luxury car that was leased a year ago for another Brand new car. The other one's trying to figure out how to drive around a $2,000 car even longer. I mean, there is a huge range between these two things that is entirely reasonable. Leasing a car is not a great move. When you lease a car, you are renting the car. You are renting it for three years. Usually it's usually a 36 or 42 month lease. And you've got to look at the numbers here, because when you are leasing a car, you are renting a car, and the person renting it to you wants to make a profit, they have their own business expenses above and beyond the cost of that car. So they have to charge you enough to cover the cost of the car, they have to charge you enough to cover their expenses, and they have to charge you enough to make a profit. Now obviously that's going to cost more than just the cost of the car. So even if you want to, you know, swap your cars every three years, which has got to be the most expensive way to, to drive a car, you know, buying it is probably still the best move, right? I mean, it's not that expensive to sell a car. And so leasing very rarely is going to make sense. Now, if for some reason your crazy employment contract says, you know, we'll cover a lease or something, well, you may be stuck in some sort of weird situation like that. But in general, even if you're writing the car off for a business, you can do that owning it just as easily as you can leasing it. So leasing is not a great move. And you can see why you get into situations like this where you're stuck holding onto a car you don't want for another year and a half, you know, another, I guess less than a year and a half for another nine months anyway, instead of buying what you want now. It's just kind of crazy to be doing that with cars. Now. Doctors can afford to make lots of mistakes because of their high income, but habits like this kill the average household in America. They just cannot do this on an income of 60 or 70 or $80,000 of churning these cars like this. And the truth is, even some doctors that do this, it really retards their financial progress. So what should you do in this situation? Well, I would probably quit leasing. No matter which one you do, by nine months from now, just be done with the leasing game. Stop leasing cars. If you don't have the cash to buy the car, buy a less expensive car. If you don't have the cash to buy a less expensive car, buy. Well you got to borrow for it. It ought to be a $5,000 car or less. Cindy and I were just looking at each other and talking before this podcast came on, and she's like, dude, I drove a Honda Civic until I had my fourth kid. You know, we both drive Sequoias now. That's fine. We can afford to do it. But the truth of the matter is, people are buying cars because they have one kid. They're like, I'm having a kid. I got to get a minivan. What are you going to carry around for that kid? One kid? You can do just fine in a sedan. In fact, two kids works just fine in the sedan. Now, if you got three kids in car seats, they might not fit across the back row of a sedan. You may have to get a third row at that point, or at least something that's a little bit wider so you can put in three car seats. But come on, for the first and second kid, you don't need to buy a special car for that. Okay, let's go on to our next question. This one, also in the Facebook group, we recently received a notice from that the USAA S&P 500 index fund is going to change around July 1st. It will no longer track the S and p, but the Victory US Large Cap 500 index, a custom index. Have any of you received this? Do you plan to accept the changes and leave the money as it is or switch to a different account that will allow you to continue to attract the s and P500? I would love to hear any thoughts on this. Well, understanding this, you've got to understand how these index funds are made and put together. Now, a typical index fund follows an index. Now, if it's that company's own index, it's very cheap. Otherwise, if you're using somebody else's index, you've got to pay them some licensing fees. And that can be kind of expensive. And you'll notice because of this, every few years Vanguard changes what indexes they're following. It doesn't make a huge difference because the correlation between all these indexes is usually 0.999. So it really doesn't matter all that much. But getting low costs does matter. And so the cheaper the index, the lower it costs. So this is a good thing for usaa, right? Instead of paying Standard and Poor's all this money to license the s and P500, they're basically using their own index. That's going to be much cheaper for them. So that's a good thing for the Investors, I wouldn't worry much about that. However, I wouldn't invest at USAA in the first place. And I say that as a loyal USAA customer for decades. I've got my insurance, I've still got a checking account at usaa. We use them for all kinds of things, but I do not use them for investing. And so if you ask people that have been in the investing world for long about usaa, they will tell you in general that, yes, use them for insurance and go to Vanguard for your investments. The USAA expense ratios are not terribly high, but they're still 0.3, 0.4. And if you go to Vanguard, you can often get.03 or.04 for those same types of mutual funds. And so in general, as loyal as you may be to usaa, thank you for your service for our country. Now go invest at Vanguard. That's my tip for military folks today. Okay, next question. I have a question about 401k transfers. I want to transfer my 401k to a company with lower fees and a better selection of funds. My problem is if I transfer my 401k, I will have to liquidate it and buy new funds at market highs. All of my dollar cost averaging by regular buying funds in my 401k over the past 10 years will be for nothing. Is there a way around this without market timing? I think we're not understanding exactly what is going on here. If you are transferring your 401k from one company to another, you often cannot transfer in kind. Often you have to liquidate in one account, move it over and rebuy mutual funds in the other account. That's not that big a deal, right? Because let's say the market is at 20,000 today. You sell your funds, you move it over to the other company and you buy the same funds or similar funds. Again, the market's at $20,000 or 20,000 points or whatever it is. But the point is, you're not somehow all of a sudden screwing up all the dollar cost averaging you did over the last 10 or 20 years. Those effects still take place just like they would have otherwise. Now you can get burned in that situation. If the market rises dramatically in the week or two while your money's being transferred from one company to the other, you could miss out on those gains. If the market went up 2 or 3%, you basically missed out you had an opportunity cost or 2 or 3%. But the market can also go down and you can get a windfall there. You know, if you pull your money out of the market, it falls 3% and then you reinvest in the new 401k. You just saved a 3% loss. That's just like a 3% gain. And so it can go both ways. I wouldn't worry about it too much. If you've got a good reason to be changing from one provider to another, just make the change. Try not to calculate how much money you lost or gained by doing so. It'll drive you nuts. But I think you got to also just understand what's going on here. You know, when you change from one provider to another and you're buying the same percentage of stocks in your account, you are not buying high. Somehow you know this is all the same stuff you've been putting money in over decades. Okay, next question. Do you have to become an S Corp to contribute the employer portion $19,000 to a Solo 401 or can it be done as a sole proprietorship? Well, first of all, the 19,000 portion is not the employer portion, it's the employee portion. And the way 401k rules are set up is the employee can make a $19,000 a year contribution to a 401k. If you're over 50 you get an extra $6,000 catch up contribution there. The additional portion, the match or the profit sharing that is the employer portion of the 401. And the total of employee and employer contributions can be $56,000 per year. Now you don't have to be an S Corp to use an individual 401k. A sole proprietorship can do it just fine. A partnership can do it. An LLC taxed as a sole proprietorship partnership or S Corp can do it. You don't need an S Corp just for that. What you use an S Corp for is to divide your income into salary and distribution. The benefit of calling some of your income distribution is that you don't have to pay payroll taxes on it. Primarily Medicare taxes for doctors. The benefit of calling it salary is you can use it to contribute to retirement accounts. Obviously you got to pay the payroll taxes and so there's a balance there in how much you call salary and how much you call distribution. You also have to stay within the IRS guidelines for how much you got to pay as a salary. And basically that is a reasonable salary for the work being done. Next question. Also from the Facebook group, I'm hearing some financial advisors offer a cash value life insurance AKA whole life insurance to build up enough dollars for the eventual income driven repayment. Tax bombs. I smell BS from A mile away. Given that, I can make much higher returns with Vanguard with much less fees. My friends think the cash value returns are guaranteed at 5%. What do you guys think? Holy crap, somebody is doing a lot of selling here. First of all, you do not get 5% guaranteed returns on cash value life insurance. If you look at the guarantees, what you will find is you will have negative returns for the first five to 15 years and then typically, typically low returns up to about year 20 or 30 and then moderate returns. The guaranteed returns, if you hold on to a whole life policy bought Today from age 30 to age 80 or 85 or so, you will see that they are guaranteed at about 2% a year. They are projected at about 5% a year. And until you've held onto that thing for 30 years or so, you're not even going to be close to that 5%. And so there certainly is not a guaranteed 5% return. You'll be doing well if you get 5%. I'd expect 3% or 4% on a policy held for 50 years starting today. But you know, this is not a great place to put money that you're going to need for an IDR tax bomb in five or 10 or 15 or 20 years. You know, you can definitely make higher returns in more traditional investments. Well, I guess I can't say definitely, right? There's no guarantee. Maybe the market melts down and we have a 1930s kind of situation. But boy, I'll tell you which way I would bet on that one for money that I need in a relatively short period of time. So, no, I don't think a cash value life insurance plan is a great place to save up money for an IDR tax bomb. Bear in mind, I don't think IDR forgiveness is a very great option for most doctors. I mean, this is like a desperation option for people who have, you know, student loans that are 3x4x their income. You know, this is really, you're in a terrible debt to income ratio when you're starting to consider getting the IDR forgiveness. And the reason why is that, you know, it takes 20 to 25 years of payments to get IBR pay, repay, forgiveness. And that forgiveness, unlike public service loan forgiveness, is fully taxable. So what would typically happen is you make payments for 25 years and then you end up owing a tax bill that's about the same amount as the debt was originally. So this just isn't a great way to go unless you're in a pretty desperate situation. All right, we're getting toward the end here, so we better start wrapping this up. Remember to check out our recommendation pages at the White Coat Investor website. We've got recommendations for student loan advice. We've got recommendations for contract advice and negotiation, doctor mortgages, student loan refinancing, recommended books, for instance. I see questions all the time. Hey, what books should I be reading? I put together a whole list for you of what I think are the best books for personal finance, investing, real estate investing, advanced investing, mortgages. You know all these categories of books that I think are worth reading. So if you are looking for book recommendations, check that out as well. Still not sure what to do with your student loans? Overwhelmed with how to tackle that giant debt in an ever changing political climate, the experts@studentloanadvice.com are here to help guide you through the best options to manage your loans. Our experienced staff have consulted on over $250 million in student loan debt and the averagestudentloanadvice.com client has saved over $190,000. You will receive a customized student loan plan using the principles of the White Coat Investor. Get answers to all of your student loan questions, gain clarity about your financial future, and start down the right path toward financial freedom. Book a consult today@studentloanadvice.com you can do this and the White Coat Investor can help. All right, head up, shoulders back. You've got this. We can help. We'll see you next time on the White Coat Investor Podcast. My dad your host, Dr. Dahl, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney, or financial advisor, so this podcast is for your entertainment and information only and should not be considered official personalized financial advice.