WCI #218: How Much Car Can You Afford?

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 is your host, Dr. Jim Dahli. This is White Coat Investor podcast 218, the Truth About Cars and your finances. As a white coat, you have valuable knowledge, Val. Various companies want that knowledge and they're willing to pay you for it. That's why we've put together a list of recommendations for companies that pay you to take surveys. If you're looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. You can make extra money, start a Solo 401 and use your medical knowledge to impact new products. One of the WCI columnists makes an extra $30,000 a year just doing these surveys. Sign up today and use a fraction of your downtime to make extra cash. Go to whitecoatinvestor.com mdsurveys you can do this and the White Code Investor can help. All right, let's do our quote of the day today. Our quote of the day comes from Phil DeMuth who said the main advantage of self management is that it is much cheaper if you do the work yourself. Naturally, there is a price to self management as well. For one thing, your advisor might be an idiot, and that is certainly the truth. Thanks for what you do out there. Life's hard. Life is particularly hard for people who earn a lot of money. It turns out it's not all roses and fun. Usually if you're getting paid a lot, it's because you have a difficult job. A difficult job that involves interacting with people at hard times of their lives, thinking about hard things, and lots and lots of education and risk. Thanks for doing that. If you're on your way into work, way home, working out, nobody's told you. Thank you today for all that sacrifice. And you did. Let me be the first. 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We have a version of it now that is basically approved for cme. You get fire your financial advisor. In addition to it, you get another eight plus hours of cme. It's called Financial wellness and burnout prevention for medical Professionals. Okay, that's a great name, right? It qualifies for cme, but it's Fire your financial advisor plus some wellness content. Another big one this year is our continuing financial education 2021 course. If FIRE your financial advisor is your initial financial education, the CFE course is what you need to stay up to date each year. And we compile that mostly from wcicon, but it also often contains some additional material there. But any of our courses, they are 10% off through the 12th, and you can go check them out. Just go to whitecoatinvestor.teachable.com and use coupon code WCIJELY10. That's how you get the discount. WCI July 10. All right, today we're going to talk about cars. I've written a number of posts about cars over the years, and we recycle them from time to time on the blog, I think one that got recycled recently is called Drive a beater, get rich. And a lot of people, I think, take the wrong messages. When I'm talking and writing about cars, they're not quite getting the message I'm trying to get them. So today I'm going to talk a little bit about. About cars and what I really think about cars and what you ought to be doing with cars. But first, the first thing we need to talk about is that I don't actually own a Tesla. Okay, stop emailing me asking what I think about my new Tesla. Right? That post ran on April 1. April 1, right. April Fool's Day. So if you totally missed that, if it totally went over your head, now you understand. I do not at this time own a Tesla. But I am still getting questions from friends, friends, like real life friends asking me about my Tesla. And my parents thought I bought a Tesla. I didn't buy a Tesla. All right? It was kind of a funny April Fool's Day post. Cause I'm always making fun of Teslas, right? If you had read any further than the title, you would have read that I paid for that Tesla using borrowings from my whole life policy and speculating in bitcoin and trading options and individual stocks. So obviously if you got that far into the post, you probably wouldn't have believed it, but a surprising number of readers did. So no, I don't have a Tesla. The only thing true in that post is that my garage actually is wired for Tesla. So at some point in the future, maybe I'll get a Tesla or a Leaf or something and put it in the garage and be able to plug it in. So I like Teslas. I think they're a lot of fun to drive. I totally understand why people like them and enjoy driving them, but I don't own one. Next point. Average Joe, Average Joe out there is poor a lot of times because of his car. For most people, most middle class people, most middle class Americans, the reason they are not millionaires is sitting in the driveway. The difference between an inexpensive car and an expensive car, on an annual basis it can be up to $5,000 a year. Now you count everything in that, right? You count replacing parts, you count the cost of gassing it up, you count the cost of insuring it, you count depreciation, you count financing costs, you count everything in there. And the difference between a really expensive car and a cheap car might be about $5,000 a year. And if you take $5,000 a year starting at age 20 and go to age 65 and extrapolate it out at 8%, it's over a million dollars. Thus many people are not millionaires because of what they drive. And I think that's a really important concept to understand that we are wasting a lot of money in cars. We simply consume it and you don't have to do that. And I know a lot of people didn't grow up the same way I did. And maybe they don't understand that you can get around with a not very expensive car and do just fine. I was lucky that my parents showed me that when I was young. And so I completely understand it and have been able to save the difference. I'm not a car guy, right? I like driving fast cars and fancy cars as much as anybody, but I'm not somebody who is going to rub a car with a diaper in my garage. It's just not what I'm into. So another thing I think is important to know And I saw this and put it on Twitter after I saw was someone who said this and let me quote directly from this, from this tweet that I screenshot here. All right, here it was said. I'm working on my master's and applying to medical school. A few years ago, I made the mistake of buying a BMW suv, which I could afford. At the time, I was working full time. I recently decided to pursue my dream of medical school. But the BMW is a curse. The payments are over $500 a month plus insurance. And since I paid for an extended warranty, I'm upside down on the vehicle. I can only sell it to take an 8k hit, which I don't have right now. I'm living on private loans while I do this masters and literally have 200 to 300amonth to eat on groceries and surprises. To make things worse, the car has had constant issues that the warranty never covers. Something is wrong with the steering column. It's $1,500 to fix, ET cetera, et cetera, et cetera. Is there any way out of this mess that I'm just not seeing? Oh, man. Talking about a curse in your life instead of a blessing. That's just the classic car, right? Here's the deal. This student thought he could afford this car because he could make the payments. I got news for you. That's not how you determine if you can afford a car. The way you determine if you can afford a car is you look at the cost of the car, and then you look at the amount of money in your checking account. If the amount of money in your checking account is more than the cost of the car, then you can afford it. If not, you can't afford the car. Okay? Making payments on a car does not mean that you can afford it. All right, here's the other truth that makes it very difficult for me to talk about this subject. And the truth of the matter is that most docs make enough money that they can drive a very nice car and still be financially successful. So despite the fact that this is kind of an important aspect of your financial life, if you're middle class, that it really does matter what you drive, and it really does affect how much you can save, and it will keep you from being a millionaire if you drive too much car, it doesn't matter nearly as much for doctors. And I hate to let you off the hook like that, but it's true. And if I don't acknowledge that that's true, none of the rest of this makes any sense whatsoever. What I tell attending physicians is that they need to save 20% of their gross income for retirement. Okay? So let's say we have a doc that's either making a lot of money by himself or herself or a two doc couple. Let's say they make $600,000 a year. Right. I want them to put 20% of that away toward retirement. That's $120,000. That still leaves them $480,000. Even if they're paying a whole bunch of money in taxes. Let's say they're paying $200,000 in taxes, which is a pretty high tax bill on 600,000. But let's say that's what they're paying. They've still got $280,000 to live on. So they could buy a brand new $60,000 car every year and still have $220,000 a year to live on. Right? Right. This is not going to keep them from building wealth. Right. It's just not a factor. Now, it's not quite the same story. If you're making $180,000 as a doc and you owe $400,000 in student loans, then obviously your car is going to matter a whole lot more. But for many doctors, this just isn't as big of a deal. So if you read my post that says drive a beater and get rich and go, I don't have to drive a beater to get rich. You're probably right. You're probably right. You don't. You make a lot of money, right. And you can spend some of it on cars and still be perfectly fine. So as long as you can afford the car by my criteria, right. That you can actually pay cash for it, go and buy the car. Enjoy it. It's nice having a great car. I much prefer driving a nice new car to driving a beater. I totally get that. Okay. All right. But let's talk about some of the reasons why docs justify getting new cars instead of driving something inexpensive. And what do I mean by inexpensive? Well, let's talk about inexpensive cars. First of all, the best way, the most economical way to pay for your transportation is to buy a used car. Let's say a car 5 to 10 years old, and drive it for 5 to 15 more years. Without a doubt, it's not even close. If you run the numbers, that is the best way to pay for your transportation. Buy used once most of the depreciation has happened and keep it till the wheels fall off. The second best way is probably to buy the car brand new and again, keep it for 10 to 20 years. The key is to avoid the turnover, right? So you're not eating the depreciation every few years. If you're buying a brand new car every three years, that's really not a great way to buy a car. It's a very expensive way to do it. Same thing with leasing, which is basically the same thing which some finance charges and added in. But when I'm talking about a beater, what I'm talking about is usually an economy car, okay? We're talking about a Honda Civic, we're talking about a Nissan Sentra, we're talking about a Mazda 3, or if you really want an upgrade, a Mazda 6 or a Nissan Altima, that sort of a thing. Okay, a Toyota Camry, maybe Geo Prism. I don't even know if they even still make those, but those are the sorts of beaters I'm talking about. And then you give them five or ten years. You give them five or ten years and these cars cost less than $10,000. Oftentimes they're about $5,000. And also I have to kind of adjust this a little bit for the craziness in the car market in the last year, right? I mean, cars have gone up dramatically in price in the last year. The main issue is that you can't get a new car due to supply chain issues. You can't get the chips for them or whatever. So you literally can't go get new cars. You order them and they come in in three months maybe, if you're lucky. And so because of that, people go to the used car market, which has really pushed up the prices of used cars. And so in a lot of places, used cars cost 30% more than they did just a couple of years ago. So massive inflation in the used car market in the last couple of years. So be aware of that. So any post I wrote saying $5,000 seven years ago, you might have to adjust that up. That might now be a $7,000 car. But when I'm talking about a 5,000 or a $7,000 car, I'm talking about a 10 year old Civic. That's about what it costs. And about a year ago I bought one of these. It's the car Whitney drives to school. It's a 10 year old Civic, it's a 2009, I guess it's now 12 years old and it cost us 5200 bucks or something like that. It had 120,000 miles on it. It's had no problems since it Runs great. It's completely reliable. It's what I call a beater. And if that's the sort of car that you will drive, you will save a whole bunch of money that you can put toward paying off student loans or saving up a house down payment or maxing out your retirement accounts or whatever other financial priorities you may have. But that's the sort of car I'm talking about, a four door sedan economy car that's known to last a long time. And if you're not sure what cars last a long time, go look around for 20 year old cars. You will see that there are some brands that just aren't out there at 20 years old, but you're gonna see a whole lot of Toyotas and a whole lot of Hondas and those sorts of things. So keep that in mind. If you're going to be driving a car for another 15 years, you want a car that can actually go 20 years. All right? But here's the. Here's the things people say to me when they try to justify driving more car than maybe they ought to be driving. The first thing is I'm a doctor, I need something reliable. I gotta get to the hospital to save lives. Well, this is a little bit of a bogus thing, right? I'm an emergency physician, so I see the emergencies at the hospital. I know who I call in to take care of emergencies. And there are very few of you that come in rapidly to save a life. It's precious few specialties. So if you are not an obstetrician that's actually doing significant amount of ob, or perhaps a pediatrician that responds to resuscitations on L and D, maybe a trauma surgeon at a trauma center, you know, but even there, right, I work in a trauma center. Our surgeons get a half hour to get in, you know, those sorts of specialties. Maybe you can justify it everybody else, come on, who are you trying to kid, right? Whether you get to the hospital in the next half hour or an hour and a half, it doesn't make a difference to whether the patient is going to live or die. There's somebody there taking care of them, right? Somebody's running the code. I know because I'm running the code. I'm there. Even if you're an emergency physician, right, Your person that you're replacing on your shift is not leaving until you get there. You getting there absolutely on time every day, 365 days of the year is not going to result in somebody's life being saved that otherwise would die. Your Partner will take care of it if for whatever reason, you're a few minutes late. So don't overestimate the value of reliability. Now let's talk for a minute about what happens when your car breaks down. And maybe some of you, this has never actually happened. It's happened to me a number of times. Your car can break down. It doesn't happen all that often, even if you're driving these inexpensive cars. I honestly can only remember two cars that were regular things that I drove that had less than 100,000 miles on it. And I shared both of them with my wife. That was when we were a one car family. So obviously I'm driving older cars. Right? You got to think about it. When you sell these cars with 100,000 miles on it or 200,000 miles on it, somebody's buying it from you. Who is that person? It's me. I'm buying that car from you. I'm driving another 100,000 miles. And so I know what happens with those cars over the next 100,000 miles. So let's talk about the car I bought to commute in as a brand new attendant. I paid $1,850 for a Mazda 626. I think it was a 97 when I came out of training in 2006. Okay, so it was I guess nine years old at that time. It had 130 or 140 thousand miles on it. Something like that didn't cost me very much money at all. Obviously I bought it at an auction, but that only saved me a few hundred dollars. But I drove that to work for the next four years. How many times did it break down on me? One time. Broke down one time. And it was when I went out there on a cold morning to drive it home from work. Not on my way to work, it was on my way home from work and it wouldn't start. So the next person that came out to the hospital parking lot, I said, hey, can you give me a jump? They gave me a jump. I started the car. I drove over to an auto parts store and I bought a battery. The auto parts store guy put the battery in for me. He was real nice. And I drove home. Four years of driving a car that cost me less than $2,000. And that was my only breakdown. I've had some other breakdowns, right. I drove a Durango, which I'm not a super big fan of, and we were going down to Vegas. I think we're going rock climbing or something. But as we pulled onto the Freeway here in Salt Lake. It started not running very well. Felt like a transmission issue. So we turned around the next exit, started headed toward our mechanic and didn't quite make it. Ended up stranded on an off ramp of i15 here in Salt Lake City. So what did I do in that moment? Well, I called a tow truck, right? I have a policy, an auto insurance policy with usaa, which includes free towing. So I called a tow truck, and guess what? 40 minutes later, a tow truck pulled up, loaded my car up, and took it to our mechanic. We got a ride back to the house, right? I think we called a friend. But if that hadn't been available, we would have just ubered. It would have cost us 15 bucks. We went back to the house, we put our stuff in the other car and went to Vegas, and we had a great trip. It's not that big a deal to have a car breakdown. Let's say we didn't have another car. What would we have done? We would have gone over and rented a car and gone on our trip. Not that big a deal. You're a doctor. You can afford to rent a car when your car breaks down. It's not that big of a deal. Okay, so another breakdown, this one happened not that long ago with my Sequoia, which just went over 260,000 miles. My sequoia, it ended up having the fan pulled into the radiator. And so obviously I couldn't drive it at that point. So. So what did I do? Well, I called a tow truck and they towed it to my mechanic. And my sister came by, picked me up, ran me back to my house. Actually, she took me down someplace else first. We tried to fix it ourselves. That didn't really work. But at the end of the day, we got home and it wasn't a big deal. Right? How long did I wait for the tow truck? Oh, about 40 minutes. A more recent breakdown I had was coming back from the Grand Canyon. We were towing a trailer with that old Sequoia. We'd been out in the heat. It was 93 degrees, and we ended up in a traffic jam. There was an accident just outside of Las Vegas, between Las Vegas and Mesquite. We sat in traffic with the AC going full bore at 93 degrees for two hours, waiting for traffic to clear. Then we pulled that trailer up that big hill up towards St. George, and then continued on up the next hill above St. George. And you know what? About halfway up that hill, the car broke down. It started not running really well, so we pulled off Pulled it into the shade underneath the overpass and we sat there for a while and tried to decide what to do. Well, we were caravanning, so there are other cars with us. We put the trailer on another one of the trucks and decided we were going to call a tow truck. But as we were in that process, I drove around a little bit and it started working again just fine. I think it had a vapor lock or something in it. So I drove it for a couple hours. It seemed to be working fine. We put the trailer back on it and drove it home. And it hasn't had any problems since. These are what breakdowns actually look like and what actually happens in those situations. So let's say you're on your way into clinic and your car poops out, right? What's going to happen? Well, you're going to call a tow truck, right? You don't even have to stay there with the car when you call a tow truck. You can just call them and say, here's where the car is, come pick it up, take it to the mechanic. And then your next call is an uber. And for 15 bucks or 20 bucks or whatever it is, the Uber takes you into work. And you can even Uber from there over to the mechanic after work or Uber home, which whatever, right, costs you a few bucks and a few minutes of inconvenience. But it's not the end of the world to have your car break down. So this fear of having an unreliable car that breaks down all the time, you gotta get over. It's just not that big of a deal, okay? New cars break down too, by the way. Not as often, but they do break down. So get over that fear when you're trying to justify your new car. You want a new car, you can afford a new car, go get a new car. But don't use this crappy justification to justify borrowing 80 grand for a new car. All right? The second thing that comes up is safety issues, right? They say, oh, no way would I put myself into a car that's not safe. And old cars aren't safe. You can use this to justify just about anything, anything you want as far as cars go, you know, and you would be surprised what you can justify. And it is true that a brand new car is safer than a car that is 10 years old. No doubt about it. There have been some new safety features over those last 10 years, and it is safer. But if you look at the actual amount that it's safer, it's actually a trivial amount, right? Because not only do you have to get in an accident. But that's multiplied by the likelihood. Whatever the new safety feature was makes a difference in either preventing or reducing injury in that accident. And it's just a tiny percentage that you're multiplying by. So the likelihood of it actually making a difference is very, very low. So let's talk a little bit about safety features, okay? And you can go back through history. There's lots of history of all this sort of stuff that people have done, right? You know, you go back to 1899. That was when the first recorded traffic death occurred, right? There was a guy hit and killed by a motorized carriage in New York city. Ford Model Ts. In 1908, they started putting in safety glass. 1918, they put in stoplights. 1914, they put in a stop sign. They put in turn signals in 1939, seatbelts. 1950, it was a Nash Ramblin. Right? Shoulder belts went in Volvos. Right. They still have this great safety reputation. 1959, standard feature driver's ed was required in 1955 in Michigan. In 1966, the National Traffic and Motor Vehicle Safety act was passed and that resulted in changes to both highways and vehicles. Airbags came out in 1974. That was GM. 1984 was the first year that seatbelts were required to be worn. 1985, anti lock brakes showed up. Right? 1985. So you buy a car that's less than, you know, 37 years old, you should be able to get some anti lock brakes on there. It's not exactly a new development. Airbags became standard in Mercedes in 1985. Anti lock brakes became standard in Cadillac in 1991. In 1998, dual front airbags became required in all vehicles. In the 2000s, you saw automatic braking systems, adaptive cruise control, lane keeping and lane departure warning systems. In 2015, you start seeing Google's first self driving cars being tested. And in the 2010s, you see some other new developments, right? Blind spot and forward collision warning, pedestrian detection, some adaptive lighting, some parking sensors, rear view backup, which is super convenient by the way, if you have a trailer, it's worth it just for that. And even night vision cameras that you can get on them. So yes, there are new developments in the 2010s and there will continue to be new developments. But you got to give yourself a reality check here. What is the difference in a five year old car versus a new car today? What are you really missing there? Maybe some sort of lane change, safety thing. That's it. What are the odds that that is the one thing that saves your life. They're infinitesimal. Okay, if you really want bang for your buck on safety while you're on the road, look at reducing exposure. Move closer to work, shorten your commute, go on fewer road trips, have your kids go to a school that's closer to your house. Those sorts of things have far more bang for your buck than any of this little lane change crap that you put in your car. All right, Most of us aren't even driving as safe as maybe we ought to be. Why don't you start there if you're really worried about automobile safety. But let's be real about it and not justify whatever we want just because there's some new safety feature. Because those automobile manufacturers know this. They put in a new safety feature every year for people like you to get you to buy a brand new car so they can make money off you. So you don't have to have every single safety feature that's ever come out with, including ones that barely make a difference at all. All right, Next thing I hear is I have to have all wheel drive, right? I'll never be able to get to work in a snowstorm or I won't be able to get home in a snowstorm. And so obviously an all wheel drive car is going to cost a lot more than the beaters I mentioned earlier, right? Your Civics and your Camrys and those sorts of things. And maybe you do need an all wheel drive. Maybe you live someplace where it really is mandatory. But I'm a little bit skeptical and I'll tell you why. Because I grew up in Alaska driving a two wheel drive car. And guess how often I needed a four wheel drive? Five, maybe ten days a year. It's interesting to drive down the highway. The first snowstorm in Anchorage and what you see in the ditch is a whole bunch of cars. And almost every one of them will be a four wheel drive car. The reason why is that four wheel drive helps you go fast. It doesn't help you slow down quickly. All it does is help you get up to speed that maybe you shouldn't be at in the first place. Whereas a two wheel drive car, most of the time you've got to accelerate a little bit slower when you're driving on ice. I now live in Utah, right? Greatest snow on earth. I live at the base of a canyon known for getting 600 plus inches of snow a year. You cannot get to my house without going up a hill that is at least 11, 12, 13% on every side. No matter how you come to the house, you have to be able to go up to a hill like that to get home. So how many days a year do I need to engage the four wheel drive to get home? Less than five. Less than five days a year. Okay, so let's not justify having a car for 365 days a year that you need five days a year. Especially if you don't live in someplace where you need it as much as I do, which you probably don't. I saw someone moving to Salt Lake recently. They were going to live in Salt Lake City and they thought they needed four wheel drive. We have plows that are out there plowing the main roads so quickly that I rarely use four wheel drive. You know, I go up to the canyons most of the time if it's not snowing, you're not even required to have four wheel drive. Go on up there and you can go up to the ski resort and back in two wheel drive. 90% of the time, no problem. The other days, what do you do? You ride the bus, right? You park at the base of the canyon, you ride the bus up, no big deal. You don't need all wheel drive. If you want all wheel drive and you can afford it, go buy an all wheel drive car. I like them. I have a four wheel drive car. I'm perfectly fine with you getting one. But if you are trying to save money, if you have a negative net worth, you probably ought to give some real thought into what you're driving. Okay? Next thing, people talk about it being this awesome tax break, right? That you can write this off as a business expense. Most of those people that tell you that are cheating on their taxes, probably unknowingly, but they're probably cheating on their taxes. If you're writing off your entire car expense and you're a doctor, you're cheating, okay? That's fraudulent. What is deductible? Business expenses are deductible. Your commute is not a business expense, much less your trip to the ski resort and your trip to the grocery store and that sort of stuff. That is not a business expense. You cannot write that off, okay? Even if you have your business purchase the car. Those are personal use miles, all right? They are not a business expense that you can write off. So stop cheating on your taxes. What is business mileage? It is from one place of business to another place, place of business. So you drive into the hospital, okay? That's commuting. You go from the hospital to your clinic. That's business mileage. You go from your clinic back to the hospital. That's business mileage. You come home from the hospital. That is personal mileage. That's commuting. It's not deductible whether you're using actual expenses of operating your car or whether you're just claiming the standard mileage rate. That's the way the system works. So don't convince yourself that it's some awesome tax break to lease your car. It probably is not. It's probably just a really expensive way to drive a car. So overall, here's the basic principles. Remember that you aren't what you drive and nobody cares what you're driving. You don't care what anybody else is driving, do you? Not really. Right. So why do you think anybody cares about what you're driving? They don't. Your patients don't care. And if they do, park around back. Transportation costs keep a lot of people from building significant wealth. It might not be as big of an obstacle for doctors as it is for the average Joe middle class, but it can certainly hold doctors back and how quickly they accumulate wealth. Basic transportation is cheap. You can get basic transportation for a couple $thousand dollars, maybe $3,000 now with all the inflation we've had in the last year, but it's very cheap now. That's not reliable transportation. If you want reliable transportation, you're probably going to be spending 5 to $7,000. So what does that tell you? Well, if you need to borrow for a car, you should probably never be borrowing more than about five or $10,000 because you can get reliable transportation for that price. Do you want to buy something nicer than that? I do not blame you. I like driving something nicer than that. But you ought to save up the money and pay cash for it, okay? In fact, get used to paying cash. You know, that is the mindset you want to be in to build wealth is that you buy things with money you saved, not money you borrowed. If you stay in that mindset you were in in medical school and you were living on all that borrowed money, you're never going to build much wealth. And then of course, if you do this, you will build wealth. You will become rich. You will at that point then be able to reward yourself and do it. If you're a car person, go buy the car of your dreams and enjoy it. Rub it with a diaper in the garage, whatever you want to do with that car, and have the safest, most reliable, fastest, whatever car that you want. But if you're actually Trying to save money. Don't kid yourself that there's a fair amount of money going out the door toward your transportation costs. All right, rant over about cars. Let's take some of your questions. This one's about a 457 contribution from Keith. Let's take a listen.

Hi Dr. Dali. Thanks for what you do. I am finishing up fellowship and will take up an attending position this summer. My new employer offers a 457B plan and I understand that the maximum pre tax deferral is $19,500 for the year 2021. As I will be in this job for around six months this calendar year, would this contribution be related to the length of time I am with my employer? Say that I will be working for six months this year. Is my max deferral $9,750 or can I defer the total maximum of $19,500 for this calendar year? Thank you.

Great question, Keith, and you're going to like this answer. The answer is even if you've only been there for a month, you can put in $19,500. Now that's assuming the employer lets you, right? You got to read the plan documents. Sometimes they make you be there for six months or 12 months before you're eligible to participate in the plan. And in that case you wouldn't be able to contribute a thing this year. Remember, the 457 contribution is totally separate from your 401403 contribution. So no matter what you put in the 401, you can still put 19,500 into the 457. Remember, there's governmental and non governmental plans. The governmental ones are generally better, usually a better employer less worried about it going bankrupt and you can roll it into an IRA when you're done. Unlike a non governmental one. You also want to make sure that the fees are reasonable, that the investments are reasonable, and that the withdrawal options, the distribution options are also reasonable before using a 457. Good question though. Let's take this one from Adam.

Hi Jim, thanks for everything you do. I recently talked with a financial advisor and I wanted to run something they said by you for context. I'm talking about my investments in a taxable account at Vanguard. The advisor said it would be better to invest in vti, the ETF share class over vtsax, the mutual fund share class of the total Stock Market index. I know that they're the same investment, just different share classes. Their explanation was that I might incur capital gains taxes if others that are invested in vtsax, sell their shares and then incur their own capital gains that are then passed on to current owners of VTS X. But this wouldn't be a risk with the ETF share class. I was under the impression that there was low turnover for starters, and that capital gains were flushed out of the mutual fund. But he said this was a concern. When people sell their shares of vtsax, the advisor said this problem doesn't apply to the ETF share class. Is this true? Should I change my VTSAX holdings to vti? I guess I'm not quite sure that I understand the implications or consequences of holding one over the other. Thanks for your help.

Great question, Adam. You know, when you're starting to ask questions like this, a question I have for you is do you really need a financial advisor? I mean, you're really talking about how many angels are dancing on the head of a pin here. This is a pretty high level question question that doesn't have a lot of relevance to your financial life. If this makes the difference between when you become financially independent, I'd be incredibly surprised. But unfortunately, the advisor is wrong. He's only wrong for Vanguard, though. With most mutual fund and ETF companies, this is actually the correct advice. In a taxable account, an ETF is a little more tax efficient, even among index funds than a traditional mutual fund share class. And the reason why is that as those ETF units are created and destroyed and broken down into their individual stock holdings by these companies that do this ETF creation and destruction process, you're able to pass on those appreciated shares out of the fund to these companies and thus the fund holders don't get stuck with those capital gains. The benefit of Vanguard and their special proprietary, I think this is even trademarked, this structure they have is that the ETF is a share class of the traditional mutual fund. So what do they do when they need to flush capital gains out of the traditional mutual fund? They just do it with the etf. Right. So they're very, very, very, very tax efficient. They're very tax efficient even without this. With this, they're even more tax efficient. But the truth is that VTI is not more tax efficient than vtsax, not in any significant way. And that's what you would expect to happen with the way they run this fund. Now you want to put VTI in there, fine. It's a great holding. I own vti. I've owned VTS X at times I think I own some. Now in some of my accounts they're Both great holdings in a taxable account and so I would not worry about this question one bit. But I think the advisor is wrong on this very esoteric point. All right, let's take our next question. This one I believe is anonymous, so let's take a listen. Hey Jim, this is William from the Lone Star State. Should I consider 457 investing a no brainer? I'm in the 35% tax bracket, so anything I invest is almost like an automatic 35% return. The distribution would be over five years after separation from my employer. So that gives me a good Runway if I decide to retire early. Thanks for taking my question. All right, William from Texas, welcome to the podcast. Good question. I think I have at least one more 457 question coming as well. This one is, is it a no brainer? Well, it's not a no brainer, but it's something that many doctors should be using. How do you decide if it's a no brainer? Well, first of all, it's not a 35% return, right? The actual return you get on it is only the difference between what you're saving money on now and what you take the money out at later. So if you take it out at 20% later and you're saving 35% now, that's 15% difference plus the benefit of that money growing tax protected between now and when you withdraw the money. Those are the benefits of using this tax protected account. With the 457 though, you have to remember this is not your money, it's your employer's money. It's deferred compensation. And so you got to look at the stability of the employer. If the employer does not look so financially stable, you might not want to put a thing into this account even if it's otherwise a great account and something that's really beneficial in your life if that employer looks like they're going under. Remember, the 457 is subject to their creditors, not your creditors. Because of that, it provides great asset protection to you. Of course, because it's not your money yet, but it is subject to the employer's creditors. You also want to make sure you have a reasonable distribution plan. Yours sounds okay over five years after you leave the employer unless you leave the employer at age 39 and you don't want to retire until 55. Well then it's not such a great distribution option, is it? Now you're taking that money out of there during your peak earnings years. And maybe that's not awesome, but a lot of people use 457 as one of their first sources of funding of an early retirement. Right. Because you don't have to. There's no age 55 rule. There's no age 59 and a half rule. It's usually once you leave the employer, you can start taking the money out without any penalties. You'd have to pay the taxes, obviously, if it's a tax deferred, $457,000. If it's a Roth, $457,000, you don't. But you want to. Distribution options are going to work for your financial plan. Then of course you want to make sure the fees aren't outrageous and you want to make sure the investment options are reasonable. If all that is in place, then yes, go ahead and use it. It's a great option. Also, another question about a 457 plan from email. This one says, I work for a university that offers the 457 plan. I believe the university has a B credit rating, so there's some credit risk to holding it here. Though I don't think bankruptcy would be a likely event. Nevertheless, their policy is that at termination I either need to roll it to another 457 or I need to set a date of distribution within 60 days. This sounds reasonable. The date can be set anytime up to 70.5 years. In terms of the distribution options, they give me four single lump sum, single life annuity, a joint life annuity, or fixed period payments. Not less than five years, not more than 30 years. That sounds pretty reasonable. Do you agree? As such, I plan on continuing to max it. Yeah, I think this is okay to use. I don't know if it's a private university. If it's a government university, it's probably a governmental 457. It's probably backed by taxpayers of the state. I wouldn't worry a whole lot about that. Even if the state has a B credit rating, I wouldn't worry too much about it. But those are reasonable distribution options. I think. I think I could probably come up with something there that would work in my financial plan, and I'll bet you can too. And so I'd go ahead and use that 457,000 hundred five plan. All right. Here's another question about ETFs and mutual funds. Popular topic today.

Hi, Jim. I had a question regarding ETFs versus mutual funds. In particular, I have some mutual funds at Charles Schwab's, and my question was do ETFs, specifically those in Charles Schwab charge more fees than the mutual funds. I asked is because in order to qualify for Charles Schwab's Intelligent Advisor Premium, that's the one where they charge you $30 a year for unlimited access to certified financial planner. In that program, you're required to have your funds in ETFs. I'm in a situation now that I have the money in mutual funds, and I figured there must be some catch. I figured they wanted to push clients into ETFs and then give them this CFP services for low cost because they're making up this money somewhere else. The first place I thought was more fees associated with the ETFs than with the mutual funds. If this was not the case, then why not let me use minimum balance in my mutual funds for the Schwab Intelligent Advisor Premium services? I tried looking on the website to dissect out what the FEES are between ETFs and mutual funds, but it's not very easy to find. Thank you so much, and I appreciate your help.

Okay. Good question, Ricardo. Now, I'm not super familiar with this particular program from Schwab. Sounds very reasonable. 30 bucks a year is obviously a very good price for financial advice. Might be a little too low. I don't know what kind of advice I'd expect for 30 bucks a year. But Schwab is generally considered one of the good guys. You think about the good guys out there in the mutual fund space and the brokerage space, and you think about people like Vanguard and Charles Schwab and Fidelity and those kinds of places. That doesn't mean every product offered by every one of these companies is a good product. It doesn't even mean it's being offered at a fair price. But as a general rule, you're not going to go wrong at these companies. You're not going to be totally ripped off there. And so I think that's reasonable to use if you want to do that. Are there extra fees? Well, these are ETFs and mutual funds, right? They're regulated by the SEC. They have rules and they have prospectuses. And they have to put certain things in there, including the fees and costs, Right? So these are not undiscoverable things. You can look them up. You can look up the expense ratio of your mutual funds. If you can't find it on the website of Schwab or Vanguard or whoever, you can go to Morningstar and look them up. Same thing with ETFs now at Schwab, my recollection is Schwab Etf's are traded totally commission free. If not, the commissions can't be more than a few dollars, right? Five, six, seven dollars, something like that, I think was their commissions last time that I looked. But I'm pretty sure that their ETFs and probably many others are traded commission free. Now Schwab mutual funds are probably also traded commission free there. But I'll bet if you want to buy a Vanguard mutual fund at Schwab, you're gonna pay like 50 bucks. That's just the way it is. When you go to another brokerage and you try to buy somebody else's mutual funds, the ETFs are fine cause they trade on the stock market just like stocks. But the mutual funds, they usually nail you with a pretty good commission, both when you buy and when you sell. So as a general rule, if your 401k or your taxable account's at Schwab and you want to own Vanguard funds, you buy the ETFs. It's just cheaper. And so why Schwab has that particular rule, I have no idea. Maybe it makes it easier for them to manage. Certainly at $30 a year, they got to look for ways to keep it as easy. But that would not be a deal stopper for me. If it's not in a taxable account, it's probably no big deal at all to swap from mutual fund to an etf, right? No cost there. But if you had to change from one holding to another and realize capital gains, well, maybe you might not want to do that. Remember, with Vanguard funds and ETFs, you can change from one share class to another by converting the shares rather than actually realizing a capital gain. So you might want to take that option. If we're talking about Vanguard ETFs, maybe Schwab offers the same thing for their ETFs. If you're in a taxable account, you might want to ask about that. But for the most part here, this is not a bad thing to swap into ETFs. It's fine to use ETFs. I use both in my investing accounts, whichever one seems more convenient. And sometimes it's a little bit cheaper to use one over the other. But you don't need to lose any sleep over whether you're using an ETF or a traditional mutual fund share class. Just don't get suckered into the stupid ETFs. These are the ones that Jack Bogle was always ranting about, right? Some goofy index that was put together and is really just an excuse for active management. They charge you high fees and encourage you to churn it. Those sorts of narrowly focused ETFs, stay away from those. But when you're trading Total Stock Market and Total international stock market ETFs, it really doesn't matter if you're in the mutual Fund or the ETF. All right, I think we've talked about 457s enough. We've talked about ETFs enough. We've certainly talked about cars enough. I hope there was something useful enlightening in this podcast for you. Remember a few things. Don't forget about that course sale. The code is WCI July 10th. If you've been waiting for a discount to take a WCI course, get a T shirt. You get 10% off. You gotta buy it by the 12th. As a white coat, you have valuable knowledge. Various companies want that knowledge and they're willing to pay you for it. That's why we put together a list of recommendations for companies that pay you to take surveys. If you're looking for a profitable side gig for not too much effort, getting paid for surveys could be the perfect solution for you. 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We'll see you next time on the White Coat Investor podcast. My dad, your host, Dr. Dalla, 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. It.