WCI #27: How To Get Rich Quickly

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 Dahli. Welcome to podcast number 27, how to Get Rich Quickly.

Did you know that the White Coat Investor not only has a podcast and a blog, but but several books that will help you on your way to financial independence. These books cover topics such as asset protection and minimizing your taxes to keep more of your hard earned money. They discuss plans for insurance, housing spending, student loan elimination, investing and estate planning. You can learn how to become a millionaire within five to 10 years of leaving residency and how to invest in a sensible, low cost and effective manner with or without the assistance of a financial advisor. There's even a book geared directly toward medical and dental students so you can start optimizing your finances or early in your professional journey. Find the book that is right for you at the WCI store, at shop.whitecoatinvestor.com or on Amazon. You can do this and the White Coat Investor can help.

Welcome back to the podcast. I'm glad you're here. I thank you for your sacrifices and the difficulties of your daily job. I know it's not always easy to be a doc or a lawyer or a pharmacist or any of these other high income professions that compose our audience. There are a lot of stresses at your job and the service you're doing to society is very real. And as most of you know, I'm a practicing physician. I'm an emergency physician. I am still working three quarters time on my practice as well as, geez, about three quarter time on this White Coat Investor empire as well. It makes for some busy days, but I'll tell you what, I like both jobs because they synergize well. About the time I'm getting feeling a little bit burned out in the er, I can go do something else. And about the time I'm sick of writing and doing podcasts and that kind of stuff, I can go back and remind myself of why I went into medicine in the first place. Our quote of the day today comes from Benjamin Graham. He said the true key to material happiness lays in a modest standard of living which could be achieved with little difficulty under almost all economic conditions. Today we're going to talk about how to get rich quick and before we get to that, we probably ought to talk a little bit about, you know, what maybe should be called the White Coat Investor Plan to get rich. This is kind of what I've been preaching for the last six years on the website and in the book. And there's just a few steps to it. The first is try to minimize your debt in medical school and choose a specialty wisely. You know you can minimize your debt in a lot of different ways. Choose a school that's not that expensive, live frugally during medical school, etc. If you have a spouse or partner, send them to work, that kind of stuff. And choosing a specialty wisely isn't just choosing the highest paying specialty. It's choosing a specialty where you're going to be happy and where you're going to be able to have a long career. Because if you choose something that you burn out in in five years, it doesn't matter what it pays, you're looking for something you're going to be able to do for 20 or 30 years and enjoy it. The next step is really during residency. Try to save something during residency. If you can't get it up to 20% of your income, I think that's perfectly fine. But try to save something. Get in that habit of saving. And the most important financial task during your residency years, aside from maybe buying life and disability insurance to prevent financial catastrophes, is, is to get ready for that most important year in your financial life. Your first year as an attending. If you have a written plan ready to go when that first attending paycheck hits your bank account, then you're going to be successful. Whereas if you don't, you're going to do what comes naturally. And what comes naturally is a couple of car payments and paying the minimum on your student loans and a house that's way too big, and waking up at mid career and realizing you're not accumulating any wealth at all. Then the next step as a young attendant is to live like a resident, or as close to it as you can for two to five years until your student loans are gone. That's a period of time in which you can save up a real emergency fund, in which you can pay off your student loans, in which you can save up a down payment on your dream house, and in which you can catch up to your college roommates and your retirement savings. It's a chance to take advantage of your greatest wealth, building tools, your income, and the difference between what you're used to living on as a resident and what you're earning as an attending that truly is the secret to becoming wealthy as a physician is just Living like a resident for a few years out of residency. Then from then on, I recommend you save about 20% of your gross income for retirement and invest it using retirement accounts as much as possible and in smart investments like index funds, where your costs are low, low and you gain the market return. If you do that plan in less than 30 years, you should be able to have a large enough nest egg that you can maintain your standard of living throughout retirement. And that is essentially the way that most physicians can and should become rich. There's no reason on a physician income where you're in the top 1, 2, 3% of this nation's incomes, the the most successful and wealthy nation in the entire history of the world, that you shouldn't be able to have a very comfortable retirement and be a multi millionaire by the time you retire. That plan was working just fine for us. You know, we became millionaires about seven years out of residency. And how'd we do it? Well, we just followed that plan. We gave ourselves a little raise coming out of residency, but for the most part, we kept our expenses very low. Our student loans were time, not money, but it was really the same thing. For four years, we basically paid off our debt with the military, and then we saved a large chunk of our income into retirement accounts, invested in index funds, and eventually, you know, bought a house and with appreciation of that and debt pay down and, you know, the savings we'd accumulated and our investment earnings seven years out of residency, we were millionaires. And that's despite having an average income of over those seven years of only about $180,000 a year. And so the plan works just fine. You know, a lot of people point to the financial success of the white coat investor, the business, not me personally, and say, well, that's why you're doing so well, is because the white coat investor makes a lot of money. Well, the white coat investor didn't make any money for like three years. And at that point we were well out of residency and we were already millionaires before this thing ever started making money. So the plan as described in the book, as described on the website, certainly works. Don't discount that. That is a very viable way to become wealthy as a physician and a relatively easily automated way. But what if you want to get rich quickly? What if 20 or 30 years is too long? What do you do then? Well, first you ought to have a very good reason for which you need to become rich quickly. Most of us don't have a need for that. You know, I mean, if you really hate your job and you want to punch out as quickly as possible. Well, there's lots of places you can go and learn more about that. For example, the Physician on Fire website, our partner site, where this anesthesiologist has figured out a way to basically be financially independent by the time he turned about 40. And how do you do that? Well, he kept his living expenses very low and saved a bunch of money, and it works out just fine. So if you want to get rich quickly, you really need a reason, whatever it might be. And maybe it's that you just started really, really late, but that reasons got to guide you in making these decisions. It's also important to remember what rich is. Rich is not an income, okay? Even if you make a million dollars a year, that's not rich. Rich is a net worth. It's what you have. Everything you own minus everything you owe is your net worth. And that's what determines how wealthy you are. For example, if you're a typical brand new attending physician and you owe $300,000 in student loans and you got 20 grand in the bank and $5,000 in home equity, well, you're not rich. You have a negative net worth. You might be one of the poorest people in the country. I mean, you're more poor than the bum hiding under the bridge down on the corner, right? He's got a net worth of zero. You've got a net worth of minus 2 or $300,000. So remember what rich is. So since rich is a net worth, you want to focus on building net worth, not necessarily income. And the way you do that is by converting income that you don't spend into net worth as soon as possible. So a high savings rate is pretty important. You know, if you're only putting 2% of your income toward building wealth, it really doesn't matter what you invested in or how much you're making. It's not going to happen very quickly. But one of the keys to becoming rich quickly is to work hard. You know, don't expect to get lucky. Do people get lucky out there? Sure. But of the people I know have really become rich quickly, they've worked very hard to do it. For example, there was a psychiatrist on the white coat investor forum the other day who talked about how he was making a million dollars a year as a psychiatrist. Now, he was shortly out of residency and really trying to, you know, get some debt taken care of and get started on his financial life. But how is he doing that? Well, he was working seven days a week 14 hours a day. That's how you make a million dollars as a psychiatrist. And so that's kind of a recipe for burnout. But can you do it for a short period of time? Probably. Especially if you're really motivated about your goals. So that's one way to really become rich quickly, especially if you combine that with a bare bones standard of living. I don't know how much you can spend when you're working 14 hours a day anyway. I mean, it's pretty hard to go on really expensive vacations or anything. But it's also another good way to become rich quickly is to become an entrepreneur. I think it's a good idea for everybody to always own a business of some kind. When you own a business, it's got unlimited upside. Now, it doesn't mean you're going to have some huge upside. You may not, but if you never take a chance on that, you can't have an unlimited upside. And this is really how the white coat investor as a business has worked out for us, right? I mean, we were already millionaires by the time the white coat investor really got off the ground. But it has dramatically accelerated our net worth and dramatically accelerated our path to wealth, such that it really cut almost 10 years off the amount of time it was going to take us under the standard white coat investor plan to become wealthy. I don't know that we needed to cut that 10 years off. I still like my job. I enjoy practicing medicine. But shoot, who's going to turn that sort of result down? Nobody is. And so that's what I'm suggesting. If you are interested in becoming wealthy quickly, the secret is not in an employed job, even one that pays two or three or $400,000 a year. The secret is in entrepreneurship and owning a business. Because the really cool thing about a business, for example, you know, a website, is that not only is the website paying you something, but as it pays you more each year, it becomes more valuable. For example, websites are typically valued at about three times their income in the last 12 months. So if a website has made $100,000 in the last 12 months, it's worth about $300,000. So if you can take that website and turn its income from $100,000 a year to $200,000 a year, not only do you get that extra $100,000 a year, you know, you've now got 200,000 in your pocket that you've earned, but, but you've also added $300,000 in value to the business. So really that year paid you what, half a million dollars, which is a pretty darn good return. And so that's the way all businesses work. As you turn them into something that generates more income, not only do you get the income, but the business also becomes more valuable. Another way in which you can get rich quickly is to use leverage. The problem with leverage is that it works both ways. So you borrow a whole bunch of money and then something goes wrong. Well, that's a good way to go bankrupt fast. You know, I think one of the more famous examples of going bankrupt is Dave Ramsey, right? He came out all full of fire, came out of college all ready to go, and bought up all these investment properties on high leverage, and eventually it all collapsed on them, as it often does when you have these highly leveraged rental properties. And so, you know, you want to be very careful using this method to build wealth. But there's no doubt that leverage works. If you can borrow money at 2 or 3% and earn money at 10 or 20 or 50%, you're going to come out ahead. And so if getting rich quickly is really important to you, you might consider using leverage in as safe a way as you can to boost your returns. But I think one of the most important ways to get rich quickly is to realize that you kind of need higher returns. You need to consider investments that have higher expected returns. You know, if you want to invest in all CDs, you're not going to become rich very quickly. These days, you can expect your bond, your bond investments to return something like 2 or 3%. You know, that's about what they yield, and that's probably the best predictor of future bond returns. Obviously, if rates fall, your returns will be higher. If rates rise, your returns will be a little bit lower, at least in the short term. The long term, you actually end up coming out ahead from higher rates. But instead of investing in bonds that pay you 2 or 3%, if you need to get rich quickly, maybe you need to take more risk. Maybe you need to be doing some hard money loans where the expected return might be 8 or 10%. Now, the difference between 8 or 10% and 2 or 3% is pretty significant, especially when it's on a whole bunch of money. Same thing with stocks. You know, some real pessimists expect we're only going to get 3% a year out of stocks going forward over the next decade. Now, I have no idea if they're right or wrong, but even the optimists are probably not projecting much more than 10% a year. But if you are investing in leveraged real estate, it's not unreasonable to expect a total return, you know, including your income and the property appreciation and the value of any tax breaks to be in the 12 to 15% range. And obviously there's a big difference between compounding money at 10% versus 3%. I mean, basically over 30 years, if you can get your money to compound at 10% instead of three, you end up with three and a half times as much money. I mean, it's a huge difference. So boosting returns can really do a lot. Now I'm talking about increasing this by a much larger difference than just using a small value tilt in your portfolio or maybe increasing your stock to bond ratio by 5 or 10%. Will those increase your expected returns? Sure, but it's a relatively small increase. If you really need to get rich quickly, you need to be looking at small businesses like real estate and that sort of thing if you need to get those double digit returns in order to reach your financial goals. So all this kind of brings up a question that was brought up by Robert Kiyosaki in his famous book, Rich Dad, Poor Dad. Now that book has all kinds of issues. It turns out there probably wasn't ever a rich dad. It was all made up. It's pretty interesting actually to read John T. Reed's expose on Robert Kiyosaki. But just looking at the ideas in the book for what they're worth, one of the claims he makes is that high net worth investors, accredited investors, essentially have access to better investments. Well, that certainly isn't the case with hedge funds. Hedge funds have been pretty conclusively shown to not have better returns than just standard run of the mill index mutual funds. But with respect to some of the real estate and other small business type of investments, it's not entirely clear whether that's right or wrong. The jury's really still out in a lot of ways. But for me, I'm willing to bet about 15% of my portfolio on those returns coming in higher than what I could expect with the standard stock and bond portfolio. So I put about 5% of my portfolio into hard money loans and the yields on These loans are 8 to 10%, sometimes a little more. And the default rates are in the 1 to 2% range. And you know, I expect that money to compound it much more than what my, you know, treasury bond fund returns are going to be. Same thing with some of the real estate investments I've made. I dedicate about 10% of my portfolio to non REIT real estate investments. Now some of those are small businesses. For example, I own a portion of Physician on Fire's website and some of them are businesses I have some influence over, such as, you know, the building I have that my partnership office staff works out of. And, you know, so there's various investments that I put in this category. But a lot of it is also just real estate investing that I don't have any control over that I've been able to buy because I'm an accredited investor. And so we'll see how that works out. But the appeal of being able to compound your money at 10, 12, 15% instead of compounding at 3, 4, 5, 6% is obviously significant. And so that's something if you need your, you know, if you need, have a need to get rich quickly, that's something else to consider. Now, quickly might still mean five, 10 years, but it's not 20 or 30. And so I think those are some things to consider. Obviously, maximizing the value of your practice is also a great way to become wealthy faster. Right? There are, I'm always amazed, you know, you see these salary surveys and they point out, yeah, orthopedists make a lot more than pediatricians. But what's really impressive to me is when I see single specialty salary surveys and see what some pediatricians are making compared to other pediatricians or some emergency docs are making to other emergency docs. There are emergency docs in this country that are working for $120,000 a year. I know because I was one of them. It was when I was in the military. Likewise, there are other emergency docs out there working for 500, 600, $700,000 a year. That variation is huge. And so take a look at your practice and see what can be done about your practice to maybe put you in the above average category as far as that goes. So that's really my thoughts on how to get rich quickly. You know, I'm not talking about going to buy lottery tickets. I'm not talking about taking a winger on some crazy investment or not being diversified. But there's a few things you can do if you find you have a need in your life to reach, you know, financial independence in five or 10 years rather than in the more typical 20 to 30, 30 years that a more standard plan would get you there. Alright, let's take a couple of questions that I've been seeing discussed on the forum. Our resident perma bear on the forum is a guy who calls himself Craixis. I don't actually know him in real life. But he posted kind of a bragging post recently about how his I bonds have beaten the S&P 500 since 2000. Now remember, I bonds are a type of treasury bond. You can buy 5000 of them a year and you're spending can buy 5000 of them a year. You can actually double that if you buy some of them using your tax return. But basically they're an inflation indexed loan to the government, kind of a savings bond with inflation adjustment. Now in 2000 they were really a great deal. They were paying 3 or 4% real, meaning 3 or 4% in addition to whatever inflation is. And so that was a great time to buy them. It turns out 2000 was also a very lousy time to buy stocks in the S&P 500. Not only were you heading into the 2000-2002 debacle, you know, the tech crash, but you also were only a few years away from the global financial crisis, which also gave stocks a pretty big hit. And so a cherry picked time period like this one starting in 2000, you shouldn't be surprised that something that's done as well as I bonds has actually beaten stocks since then. It turns out if you actually look up the data, stocks as measured by The S&P 500 from 2000 first of 2000 to the end of 2016 on an annualized basis have returned about 4.47% per year. And I bonds that were paying, you know, 3 or 4% real have beat that over that time period. And so that shouldn't be a surprise to you, but you don't want to choose your investments looking in a rear view mirror. You know, you don't, you can't predict that in advance and you can't decide what is successful based on what turns out to have a success in the end. You want to build your portfolio a priority looking forward rather than just what has done well in the past. Because you really can't buy past returns. I mean, if we want to look at something you should have bought in 2000, they there's almost surely something much, much better than I bonds. Maybe buying Apple or something. I'll bet Apple returns since 2000 have been spectacular, right? So if you're going to cherry pick an investment and cherry pick a time period, you might as well pick the thing that's done the very best. It's also important to keep in mind what else was available on a low risk basis at that time. We're all stuck in this period of time in which yields are Quite low and we think wow, a fixed income investment paying 5 or 6%, that's awesome. Well, in 2000 you could buy treasuries yielding 6.6%. Right? If you bought a 30 year treasury in 2000, you could have gotten something that guaranteed you 6.6% for the next 30 years. So you got to compare investments with what else was available at the time they were bought. My next question is where are you locating your tips? I know there is some discussion over whether or not to put bonds in a tax deferred account or a taxable account since they are not tax efficient but have low returns. Does the same difference of opinion apply to tips? As I am building my ideal portfolio, I am just wondering if it is advisable to place these in the 401 and or Roth IRA, 457B, 401A, etc. Or my taxable account. Also for a 10% bond allocation, does it make sense to do 50% total bond and 50% tips? I know many people have municipal bonds and they're taxable as well. Should I split them all 33% between the three? I'm trying to keep it simple and not sure about adding in muni bonds yet. Well, there's a lot of information packed into that question. One thing about tips, although they do their income is state tax free if you keep them in a taxable account. The problem with putting TIPS in a taxable account that you can get some phantom income. You know, basically you have to pay taxes on the increase in value in the TIPS due to the inflation adjustments and you don't necessarily want to pay taxes on income you never received. And so given the complexity of tips, I think you're far better off owning them in a tax protected account whether It's a Roth IRA or whether it's a 401K or whatever. But I think that's where you ought to put tips. If you want to buy an inflation protected bond in your taxable account, I think what you should buy is our I bonds. They're a lot more tax efficient in a taxable account. The second question is how to set up your bond allocation. And there's, you know, many roads to Dublin where it comes to this. Certainly it's reasonable to put 50% into total bond market and 50% into a TIPS fund. It's also reasonable to put 33% into muni bonds. But the bottom line is if you're going to be holding your bonds in taxable, which is right for a lot of people at these low interest rates we have, then you generally if you're a high income professional, you want to use a muni bond fund. If you are going to be investing primarily in tax protected accounts, then you might want to use something like the Total Bond Market fund for your nominal bond allocation. So a lot of ways to split that. Certainly you want to find something reasonable and stick with it. That's far more important than what exact allocation you pick up. Whether it's 10% tips or 90% tips or whatever you want it to be, pick something reasonable and stick with it. And that's how you're going to find success in bond investing.

Did you know that the White Coat Investor not only has a podcast and a blog, but several books that will help you on your way to financial independence? These books cover topics such as asset protection and minimizing your taxes to keep more of your hard earned money. They discuss plans for insurance, housing spending, student loan elimination, investing and estate planning. You can learn how to become a millionaire within five to 10 years of leaving residency and how to invest in a sensible, low cost and effective manner with or without the assistance of a financial advisor. There's even a book geared directly toward medical and dental students so you can start optimizing your finances early in your professional journey. Find the book that is right for you at the wci store@shop.whitecoatinvestor.com or or on Amazon. You can do this and the White Coat Investor can help.

Head up, shoulders back. You can do this and we can help. See you with the next podcast.