WCI #28: What Matters Most in Personal Finance

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 Gollum.

Welcome to podcast number 28. We've titled this one what Matters Most.

If you are finding our podcasts informative and helpful, check out our website. Since 2011, we've been working hard to provide valuable personal finance and investing information. Through thousands of blog posts written by an array of authors, you can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate, and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and and interact with other WCI readers through our online forum. Head on over to whitecoatinvestor.com to start learning today. You can do this and the White Coat Investor can help.

Welcome back to the podcast. I'm glad you're here. Thank you for what you do, both for your patience and for each other. I love hearing about your success stories, but I love it even more when they're a result of another one of my readers or listeners reaching out to you and giving you the help you need. Seeing that happen is just awesome because it is basically exponential growth in physicians becoming more financially literate and becoming more financially successful. And that's better for everybody, both the physician, the physician's family, the physician's patients. Our quote of the day today comes from Jack Bogle, who said, I spend half my time worrying about why I have so much in stocks and half worrying about why I have so little. That's really the truth. You want to be someplace where your worries are equal, that you're not being as aggressive as you should be, and also that you're being too aggressive. And when those are equal, you know you're at the right asset allocation for you. Today we're going to talk a little bit about what really matters most in personal finance. A few years ago I wrote a blog post on this subject and we're going to talk a little bit about that today. I mean, the truth is we spend a lot of our time talking about and worrying about the minutia of personal finance and investing a few basis points in expense ratios on a mutual fund, for instance, or whether you should use a Roth 401K or a traditional 401K, or how you should use your HSA, whether you should spend it now or spend it later. And all of that is really kind of minutiae compared to the big things that you should be worrying about. People who are having financial difficulties aren't worried about those kinds of issues. Those of us who read financial blogs tend to be maximizers, whereas sometimes it's okay to just be a satisficer. You know, a maximizer will pay every penny of tax he owes to the IRS, but refuses to leave even a $0.01 tip. A satisficer isn't going to keep track of charitable miles just to knock 50 bucks off his tax bill. So you really got to realize that there are some things that matter far more than other things. So let's talk about them kind of in order of how much they matter. So let's talk about the first one. Get married and stay that way. Really, the very worst thing you can do for your finances is to get divorced. Not only do you lose your half of your assets, but if you're a physician or other high income professional, you're probably going to be paying some alimony and maybe some child support for quite a long time. And that has a serious drag on your ability to build wealth. You've heard it before, but I'll say it again. One house, one spouse, one job. That's what really can make a huge difference in your finances. All right, item number two, that makes a big difference. Have a high salary. Making a lot of money is a huge factor in whether or not you build wealth. You know, it's tough to become a millionaire when you're only making 20 or $30,000 a year. It's pretty darn tough. But you know what? Most of us, there's something we can do to increase our income and oftentimes increase it significantly. Too many people downplay the impact of a high salary on your personal finances. While it's obviously true that you can be broke as a high earner, it's far more difficult as a high earner than as a low earner to be broke. And those that have high salaries are just far more likely to build wealth. Even a modestly paid physician has a significant advantage over the average American household. The average American household only makes about $55,000 a year. Even a relatively poorly paid pediatrician may be making $150,000 a year, three times as much. And so that has a huge impact on, on your personal finances. All right, item number three is your career longevity. Burnout is all too real. And in fact, when they do surveys of physicians, oftentimes 50% of the physicians surveyed have some aspect of burnout affecting them. My specialty is actually the worst in the surveys. I think it's 33% of emergency docs at any given time have some aspect of burnout. Although I believe the actual severity of the burnout is worse for intensivists than it is for emergency doctors. But the truth of the matter is that if you can extend your career, you're better off making less money for more years. And the reason for that is because it allows more time for your money to compound. It allows you to pay more money into Social Security, increasing your Social Security benefit, and it gives you more money after tax. Earning a smaller amount of money over more years results in less tax paid than earning a lot of money in just a few years. Due to the progressive nature of our tax code. You also need to make sure that you're insuring against catastrophe. That's a seriously important factor in building wealth. And the reason why is not only are you protected in the event that something happens to you, which something almost surely will over the few decades of your financial career, but also because knowing you're protected allows you to take significant risks with your career. So make sure you have malpractice and umbrella policy and disability insurance, and if someone else is dependent on you life insurance. The next factor is really the cardinal rule of personal finance, and I call it live well below your means. Not just live below your means, but live well below your means. When you live below your means, you build wealth. If you live just a little bit below your means, you build a little bit of wealth. If you live well below your means, you build a lot of wealth. I throw out that number 20% to attending physicians. I recommend you save 20% of your gross income for retirement. If you got to save for college or a boat you want or another house or whatever, that's above and beyond the 20% you know. If you're in that range, 15%, 18%, whatever, you're probably okay. But the fact of the matter is, a 5% savings rate isn't going to get you where you want to be. I know a lot of wealthy people, but you know what? I don't know any who didn't follow this rule. It's really an important rule and it matters a lot for your personal finances. It turns out for doctors, the biggest culprit is usually that big fat doctor house. Limiting your mortgage to two times your gross income will make a Huge difference. Just this week I was conversing with a doc who was. He has a seven figure salary, he's making plenty of money, but already owes a couple million dollars in debt and is considering building his dream house on a lot he already purchased and owes half a million dollars on. But this dream house is going to cost another million dollars to construct and it's just too much debt in total. You can't be spending all your money on this house that you think is going to bring you this great amount of happiness, when in reality six months or 12 months or two years after you move in is just going to be like your old house. You're going to go there and you're going to do the things you do in your house and it's not going to bring you some magical amount of bliss. Certainly not enough to justify spending massive quantities of your income on it. Okay, Factor number six is don't sell low. This is a major problem among physicians. They don't have good investing behavior. When the value of an asset goes down, they sell it. And that is not the time to sell something. Buying high and selling low is a recipe for disaster. And, and that was particularly poignant during the 2008 global financial crisis. Three of my partners in my emergency medicine group basically sold low at that time, either because they were nervous or their spouse was nervous about all the money they'd lost. And what did that result in? Well, if you're near the end of your career that resulted in more years work, sometimes five, sometimes as many as 10, you cannot be selling low. You've got to learn how to be an investor. And, and part of being an investor is staying the course even when things aren't going well. You need to have a written plan and you need to follow it. Speaking of which, let's move on to number seven, which is buy and hold a reasonable portfolio. I'm continually surprised to see how many people hold a completely unreasonable portfolio. There's a poster on the white Coat investor forums who's very conservative, shall we say? All of his money is basically tied up in cash and cash equivalents and gold and precious metal mining stocks and that's it. He's basically ignored the entire rest of the investable universe. That is not a reasonable portfolio most of the time. People who have unreasonable portfolios, however, have just been investment collectors. They've got a few individual stocks here and a few mutual funds there and a few privately traded REITs in corner the without really a written plan or any, you know, four mentioned asset allocation you know, there's no written plan that they're following. Or they may be investing in hedge funds or penny stocks, or maybe just a handful of individual stocks. It's so easy to have a reasonable portfolio, it just seems silly not to have one. If you don't know what a reasonable portfolio looks like, check out my post called 150 portfolios better than yours. Any one of those is better than all the unreasonable portfolios I run into all the time. The next factor that really matters for building wealth is to be uncomfortable with debt. This one's actually a little bit of a pet peeve of mine. I keep getting contacted by people who just have incredible amounts of debt that don't even seem bothered by it. They don't realize that they've already given away several years worth of their labor, and they don't feel it as an emergency in any way, shape or form. It might be a resident who owes 400 or $500,000 in loans, but more often it's somebody who has all kinds of different debts, from car debts to credit card debts, to student loans, to mortgages. You know, it's pretty amazing to me just how comfortable some doctors become with debt. And they're entirely too comfortable with it. A little leverage can be helpful at times. There are some things in life, like your medical education, like your primary house, where it's pretty difficult most of the time to buy it without any debt at all. But you know what? You ought to try to minimize it and keep it to a reasonable amount and pay it off in some reasonably rapid fashion. It's not okay to buy cars on the installment plan. You're a doctor. You can pay cash for your cars, and certainly not for stuff like appliances. And credit cards aren't for credit, they're for convenience. If you're using them for credit, you need to cut them up and quit using them at all. If you can get uncomfortable with debt, you are far more likely to become wealthy. This idea of borrowing money at a low interest rate and investing it at a high interest rate obviously works mathematically, but that's not what I see people doing. The people I see that are actually investing healthy sums of money are also getting rid of their debt quickly. Number nine is to minimize your educational sites and your educational costs. I'm pretty amazed at what some people spend on education, not just to send their kids to college, but also to send their kids to high school. And in many ways it involves them taking on even additional debt. But you got to realize that these costs are pretty significant you know, I don't know how the public school system might be in the area you live. Maybe it is really terrible, but chances are it's not as bad as you think. In a lot of ways, you'd be better off moving to a slightly better school district and spending that money on a mortgage than you would living in the other school district and spending it on private high school. So keep that in mind. Same thing with college. I mean, if you look at these college rankings on the U.S. news & World Report, you may see schools that are ranked about the same, but cost six or eight or ten times as much as, for example, one year. George Washington University was ranked 5252 on that list and had a tuition of something like $47,000 a year. Trinity University was also charging $47,000 a year and was ranked 36 on that list. But if you go down the list a little bit, you see places like Brigham Young for $5,000 a year and Berea College for $1,000 a year. You know, I mean, there's no way that George Washington University is 47 times better than Berea College. It just isn't the case. So you need to actually look at the value when you pay for education. And finally, I recommend you pursue inexpensive hobbies, at least until you're wealthy. If you're already wealthy, spend your money on whatever you want. But if you're not wealthy, you might want to think twice before you start taking up hobbies like boating. And trust me, I know I've got a post coming up on this in a few months. But also things like flying and antique cars and horse racing and things like that, they're just a huge drain on resources that could be going toward retiring debt, investing and otherwise building wealth. All right, let's leave that subject for a minute and let's move on a little bit to a more current issue. TD Ameritrade announced recently that they are going to remove Vanguard ETFs from their no Commission fund list. Basically, up until this month, you were allowed to go to TD Ameritrade, open a brokerage account and trade any van you know, the Vanguard ETFs on their list without having to pay any commission whatsoever. And this was very helpful for those of us with an HSA at HSA bank because you could tie that HSA account into a TD Ameritrade Investing account and invest most of your HSA. But other people have their 401k through TD Ameritrade, and this actually affects a lot of people. But you Got to keep in mind that this isn't a massive effect. I mean, you're going from zero dollars commissions to seven dollar commissions. So every time you buy and sell an ETF, sure, you got to pay seven bucks. Now if you're trading $100 worth of ETFs, that adds up in a hurry. But if you're trading tens of thousands of dollars each time you trade an etf, it just doesn't matter that much. For me, I basically do one purchase a year in my hsa. You know, six or seven thousand dollars I put in there and you know, and now I'm going to have to pay a $7 commission every time I do that. So it's not that big of a deal. It's only seven bucks a year. I mean, I can save that much just by not stopping by McDonald's one day. So I don't know that some of the drastic things I see, some do it yourselfers talking about doing because of this minor change are really warranted. I see people talking about using ETFs that are very thinly traded and have bid ask spreads that are going to be larger than that seven dollar commission. And so I wouldn't necessarily make a huge change in your plans because of this, although I think it's a really dirty trick by TD Ameritrade. I mean, they increased that list from the hundred or so funds they had on it to 300, but they took all the good ones off and added a bunch of crappy ones. And so it's really kind of pretty lousy to see them do that because that was a pretty good free lunch for a while. I saw an article recently from Physicians Practice. It talked about the best states for physicians to practice in. I was appalled, however, when I looked at the top five, which included states such as Mississippi, Texas, Alaska, California and Arkansas. Well, one of those things is not like the others. It's California. I couldn't believe they put California on the list of best places for physicians to practice. I especially couldn't believe it when the first two factors they included in the study were cost of living and and the tax climate. If California isn't the worst for those two things, it's certainly within the top three. They looked at some other things. They looked at physician density and the Medicare Geographic Practice cost index. But even all that shouldn't be able to overcome those two big whammies on California. It's not that California is a bad place. I like California. There's a lot of fun stuff to do there. I get that a lot of people are very connected to it, but I would not count it living there as a good financial decision for most physicians. Many physicians not only get paid less there, but they pay far more in taxes and far more in living costs and discover that their payer mixes due to the poor rates that Medi Cal pays are really not that great. I hope those of you in California have found a situation where it makes sense for you to be there, but I sure run into a lot of you who are considering moving elsewhere, whether it be Idaho or Arizona or Texas in order to improve your financial situation. Speaking of California, I saw a Note from a California 2 physician couple recently. I believe it was on the Bogleheads forum. They had hit their seven figure mark. They'd become millionaires and were just basically writing to say thank you to the forum. They said, I feel like this is a pretty significant milestone for us, but outside of Bogleheads there are probably not a lot of venues to really share the news and be excited about it. Also, since there are certainly no more commas to come, it seems worth commemorating in some small way at least. Anyhow, much thanks to Bogleheads as well as White Coat Investor we went from graduating med school with no idea of even what a high yield savings account was to hitting this milestone in less than 10 years at the age of 34. My wife and I are both physicians, so that certainly helped, but we also had a combined $250,000 in student loans to pay off and have only had a combined four years of attending salaries between the two of us. So millionaires four years out of residency? That's pretty awesome. I think they attribute it to frugal living. He says. I still drive my 11 year old car. Oh my goodness, can physicians drive an 11 year old car? I had no idea. You know, mine is 12 years old this year. He says he did a lot of moonlighting on the side and enjoyed of course, the bull market the last few years. Now he just says another he's got to grow his money two more times or so before he can actually afford to buy a home in the Bay Area where they live. At any rate, he told me, thank you. Your blog, book and generous advice via email, these forums, et cetera have all been incredibly influential in our financial and thereby general lives. I thought that was very nice of him to say that. You know, it's interesting even they thought about despite the fact that they became millionaires in four years, even they thought about the geographical arbitrage. He says. Yes, after sorting out housing out here. Geographical arbitrage is appealing, but so is the Luria family. And familiarity. Figuring out how to use money effectively will be the two next challenges for them to look forward to. All right, speaking of forums, let's talk about a question that I saw on the White Coat Investor forum recently and that I see similar questions to a lot of Basically, this is a doc who asked if he could deduct his personal trainer, you know, as some sort of a medical expense. And my reply was that that's not necessarily the right question. The right question isn't whether it's deductible, it's whether deducting is going to do you any good whatsoever. He basically said, my understanding is that you need a physician to write you a prescription for a personal trainer for a specific illness to improve, like obesity, hypertension, high cholesterol, etc. And he wants to know, what documentation would I need for the IRS other than, say, the prescription or a letter from the physician? Well, here's the deal. Where do you deduct medical costs? You deduct them on schedule A. They're part of your itemized deductions. So if you're not itemizing, it's not deductible. If you also, if you are itemizing, you, it's subject to a 10% of adjusted gross income floor. So if your adjusted gross income, that line at the bottom of your first page of your 1040 is $200,000, you've got to spend $20,000 that year on medical costs before any of it is deductible. And even if somehow you go over that $20,000 limit, only the part over the 20,000 is deductible. So for the most part, for a physician, no medical costs are going to be deductible. You just can't rack up that much in a single year because the maximum out of pocket for your health insurance is likely only in the 5 to $13,000 range. So I wouldn't count on being able to deduct a lot of medical expenses while you're a practicing physician. But returning to the question he actually asked of whether it's deductible or not, you actually need to look at publication files 502 from the IRS where it tells you how the IRS defines medical expenses. It says medical expenses are the costs of diagnosis, cure, mitigation, treatment or prevention of disease and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. Purposes Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They don't include expenses that are merely beneficial to general health, such as vitamins or a vacation and, I would add, or a personal trainer. In fact, it specifically talks about health club dues. You can't include in your medical expenses health club dues or amounts paid to improve one's general health or to relieve physical or mental discomfort not related to a particular medical condition. So you need to be careful when you go to deduct things we're all looking for ways to lower our taxes. We're all looking for more deductions. But you got to keep in mind, just because something's deductible doesn't mean it's actually going to save you a bit on your taxes. Concentrate on the big deductions out there, and the big deductions for most positions are maxing out their retirement account accounts.

If you are finding our podcast informative and helpful, check out our website. Since 2011, we've been working hard to provide valuable personal finance and investing information. Through thousands of blog posts written by an array of authors. You can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate, and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and interact with other WCI readers through our online forum. Head on over to whitecoatinvestor.com to start learning today. 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 next. SA.