WCI #33: Questions from Medical Students

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.

This is podcast number 33 that we're calling Questions from medical Students still not.

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Our quote of the day today comes from William Bernstein. If you began your investing journey after 2009 or haven't yet started, then you're an investment virgin. It's safest to assume that your true risk tolerance is low and you should start with a conservative stock bond allocation, say in the range of 50 50. If you find that you have a lower risk tolerance than you thought, at least you'll discover it relatively early and with a relatively small portfolio. So this is exciting. Today we're recording this for the first time on YouTube, and so this is going to be available either on YouTube or via the traditional podcast outlets. And in the show notes we'll include both, so you can choose how you like to watch it. But the YouTube version is going to be less polished because we're not going to edit it. So you actually get to see the making of episode number 33. Before we get started, I want to encourage you to talk to your colleagues about money. I had an interesting chat last night with a doctor that I've been admitting patients to for the last year and a half, and he said, hey, I'm reading your book, which I thought was great. He hasn't gotten through it yet, but it was pretty interesting to realize that maybe I could have helped him a lot more if I talked to him a year and a half ago about money. You see, he's got high student loans, he owes about $400,000, and he hasn't refinanced them at all. Most of them are at 6.8%, but he's got a third of them at 7.9%. Meanwhile, he's got somebody trying to sell him a whole life insurance policy as a lirp, a life insurance retirement plan. He has no idea what a backdoor Roth IRA is and really is still trying to sort his way through retirement accounts while carrying $400,000 in debt. And he was wondering if maybe he should carry that debt for a while so that he can make more investing. But in reality at 6.8% or 7.9% or he was talking about refinancing them to 5%. That's a pretty risky proposition to try to beat that with your investments. When I really got talking to him, he thought he could pay his loans off within three years, which means he could refinance them into a five year variable loan with very little risk. And he probably could get that at 3% or maybe even less. So I just want to emphasize how important it is to talk to your colleagues about money and let them know that there are resources out there. There are people that aren't trying to rip them off, rip you off. And really it's pretty impressive too. And I really dug into it with this guy. The person trying to sell him the whole life policy was another doctor trying to move into financial services. Please don't do that to your colleagues. They don't need to be hosed over any more than they already are. In today's episode, we're going to talk mostly just answering questions that people have sent in to me over the last couple of weeks. And the majority of these actually come from medical students. And so they're great questions. And there are people with all kinds of different financial situations. But I thought that was kind of a good theme to put all these together for today's episode. So the first question I got actually came in on the forum there at White coast codeinvestor.com forums said, I'm 24 and married. I work in research and my wife is a nurse. I will start medical school this coming July. And I've been trying desperately to pay off my student loans before I have to take out more. I have $21,000 remaining in my loans to pay off. Remember, this is a pre med student. I try to put 100% of my paycheck to my loans and we live off of my wife's paycheck. Constantly stressing about money and the ability to pay these loans is making both of us truly miserable. I get Aggravated anytime she goes shopping, because I feel like we need to just buckle down and pay our debt. She's 100% in on wanting to get my debt down before I start med school, but is beginning to wear on our marriage as I feel like we cannot enjoy ourselves at all. We spend very little money outside of rent and bills, and the constant stress of finances is starting to drive me crazy. I know I need to tone it down on being so strict with our finances, but how can I. How can I find some sort of balance so that we can actually enjoy our lives as well? Well, this is kind of a tough situation. I mean, they really both need to just step back and look at the big picture. Let me see if this helps. Your marriage matters more than this debt or even what you do with your finances this year. I mean, we're talking about $24,000 worth of debt. But my general rule is one house, one spouse. Those guys are at the beginning of a very long tunnel. There is a light at the end of it. And that light is what I call the good life, where you don't think about finances at all. And you can live your life exactly how you want. But that light at this point is this year, this last pre med year, plus four years of med school, plus three to seven years of residency or fellowship training, plus two to five years of living like a resident away. And so it's over a decade away. And they need to look at it from the long haul. Both of them need to be in it for the long haul. And on the same page, habits matter more than dollar figures. She can help you not be cheap. You can help her maybe be a little less spendy and find a careful balance. I mean, no couple has the exact same spending balance. Everybody's a little bit different. And most of the time, you will help each other to moderate your positions. And the truth is, for this couple, what they do with their spending now really doesn't matter that much. What really matters in a physician's financial life is that first year out of residency. So even as a pre med and a medical student and a resident, your planning should be all focused on those first 12 paychecks as an attending physician, because that is the key to building wealth. As a physician, you want to be able to hit the ground running when you come out of your training. So congratulations to this pre med student on getting into medical school. That's not an easy accomplishment, but there's not a lot you can do about finances in medical school. If your wife works, that's Going to help a ton because it'll mean you can take out less loans if she works at the hospital and that gives you a tuition discount. That's awesome. A of lot. A lot of my classmates had that benefit. If you can minimize how much new debt you take out, that will help. You want to choose a specialty, mostly with longevity considerations. You want to do something you're interested in that you will be interested in for another 30 years. And that matters more than how much the specialty pays or anything else. Because if you're burned out in five years in a high paying specialty, that's not going to help you much compared to being able to make less money over 30 years. But for heaven's sake, if you like orthopedics and pediatrics equally, do ortho. There's really nothing magic about paying off your current debt before starting school, which is this couple's goal. And it's great, but you know, don't go donating plasma to do it. The truth is, 15 years from now, you can make more in an hour than you spend on groceries in a month. Now you'll be able to pay off the debt if you combine an attending income with a resident license lifestyle for a few years after residency. I look back sometimes on some of the cheapskate things I did in college and medical school and even afterward and wonder why I was so friggin cheap. It seems so silly now. I mean, habits are good, they're important, but keep moderation in all things. So those guys are doing great. But you know the, the old adage of happy wife, happy life, and I haven't found one that rhymes with husband yet. So don't write in and say I'm sexist. But happy wife, happy life is a pretty good motto because if you preserve that relationship, it's going to allow you to concentrate on your career and your finances and you're going to do better financially by following that. But I think this couple is probably pushing a little too hard. The key to making progress toward your financial goals is to avoid feeling deprived. You want to spend as little as possible, but as little as possible without feeling deprived. Because as soon as you start feeling deprived, you start fighting about money, you start feeling tired, terrible. You feel like there's no light at the end of the tunnel. So sometimes you got to bump up spending a little bit to avoid having the whole plan collapse. And just the fact that this pre med is already on the white coat investor forum, I mean, they're going to do fine, right? He's probably going to be a millionaire. Three years out of residency. All right, our next question is from a fourth year medical student. He says, I'm planning to go into a five year general surgery residency program. I'm in a stable place in my life. That's interesting. Going into residency program and feels like he's in a stable place. But anyway, says, I'm not married, have no kids. I have about $80,000 at 5.8 interest in student loans and I've already started to pay back my loan amount as I did not use or need all the loan money that I received. Well, that's pretty impressive. Only 80,000 and already paying it back. I have a large sum of gift money coming my way. That's great too. And I'd like to invest that in a home purchase. I'm not sure invest is the right word to use there, but okay. I know that you recommend residents don't buy a home during residency. What are your thoughts on investing in real estate versus paying back the remainder of my loans with the incoming gift money? Also, if I pursue a home purchase, would I qualify for a conventional 20% down mortgage with the resident salary if I'm able to put down the 20% with the gift money, or would I be restricted to the physician loan? You know, it's interesting, this burning desire to buy a home among medical students and residents. Usually I think it's just the spouse that wants to buy that home, but it's the students too. I mean, he's got some gift money. He's got all this student loan debt. He could wipe it out. And yet what's he thinking about doing with it? Buying a home? My general rule is don't buy a home as a resident. That's because the break even period on buying a home is really three to five years. You have to come up with enough appreciation of the home to account for the transaction costs. And the round trip transaction costs for buying a home are about 15%. And so a five year residency is probably going to work out better than a three year residency. So if he chooses to buy, I hope that works out well for him. But I think my general rule of renting as a resident should be the default position. Personally, if I had the money to pay off those $80,000 in loans, I'd just pay them off. I mean, there's no way anybody's going for public service loan forgiveness on a physician's salary with only $80,000 in loans. I mean, even without the inheritance, with only $80,000, you should be out of debt. By Halloween, the year you finish residency, so you might as well get started. But if he doesn't pay them off, refinancing them and putting whatever he can toward them during residency is a good idea. As far as whether to use a doctor loan or not, I don't think you're required to. I mean, if you want to put a 20% down payment, you could do that. Bear in mind, a doctor loan doesn't allow you to buy a bigger house than you otherwise could. It just allows you to buy a house with less than 20% down and not pay private mortgage insurance. That comes at a cost of slightly higher fees and usually a slightly higher interest rate. But you know, it's hard to know really how to recommend somebody what you do in this situation without knowing how big the inheritance was and how much the house costs and so on and so forth. So there's really no right or wrong answer to that. But this guy's so far ahead of his peers, it doesn't really matter what he does with a house during residency. If he wants to buy it and he loses 50 grand, he's still way ahead of all those docs that owe $400,000. But again, here's a medical student paying attention to finances before he even gets out of medical school. He's going to do just fine. All right, here's another medical student writing in says I'm a fourth year medical student that was introduced to your book a few months ago and I've been following the podcast since and catching up on the earlier episodes. This is my first venture onto the website in search of some advice. I've also been introduced to a few of what I would consider alternative investment strategies that I do not believe I've heard a mention of yet and wanted to hear your thoughts. I'm not sure if they're just newer and less popular, or if there are innate concerns about these strategies to be wary about. He's got my interest piqued. Now I'm wondering what alternatives he's talking about. The first is Socially responsible investing, or sri. To my knowledge, there is little different in this and other forms of investing, except that these companies have gone through some sort of vetting process and are more environmentally conscious. Are there SRI funds out there? Are there any concerns with this type of investment philosophy? The second question is less about investing and more on the charity side, which you do mention in your book and podcasts Effective Altruism, which I was only recently introduced to by randomly checking out the most good you can do from the Library seems to be an ethical and efficient way to donate. For those individuals that do this. They point out that some companies, like GiveWell Rate Charities by their efficiency. As investing is often about being the most efficient with your income, I thought being the most efficient with your donations is also something to take take into consideration. Okay, let's hit the first question first. Socially responsible investing is a good idea. Is it a bad idea? Well, basically, what these companies or mutual funds tend to do is they have screens. And if a company sells tobacco or if they sell alcohol or if they make firearms or whatever, the thing is that they feel is not socially responsible, they don't put money in those funds and instead invest in the other funds. And that's perfectly reasonable to do. I mean, everybody's allowed to invest wherever they want. But the problem is, one man socially responsible is not another man socially responsible. For example, you might not feel like alcohol is really that bad, or you might not feel like a particular business practice is that bad and somebody else does. And so the likelihood of your values lining up perfectly with those of a mutual fund manager seems very low to me. The other problem with these funds is they're higher cost than a traditional index fund. Instead of paying four or five basis points, maybe you're now paying 60. And so I really don't think it's worth that extra cost. Because of those higher costs, you end up getting lower returns. And in effect, the way I look at this is because you're not having much of an effect with your investments now. You can donate less to charity, and you're doing less good overall in the world. And so I'm not a big fan of socially responsible investing. I think you're far better off just investing to get the highest return and then giving to those charities that you most support. And the other thing to keep in mind is where your money goes when you invest it, right? When you buy a share of stock, assuming you're not buying it as part of an IPO or, you know, when it first goes on the stock market, you are just giving your money to another investor who is selling. You're not doing anything to the company. The company doesn't get any of that money. So whether you own it or not, they don't care. It doesn't affect their business practices one bit. And in fact, if people avoid stocks because they're felt to be socially irresponsible, those stocks will actually have a higher return because you'll be able to buy them at a lower price. And so in that sense, buying sin stocks, you may be able to come out ahead a little bit more. And so a lot of people actually do that. There are mutual funds out there that focus on socially irresponsible companies and buy those preferentially. And the returns actually aren't too bad. And so bear that in mind. If you're really willing to give up good returns in order to feel a little bit better about yourself, you're probably going to get markedly worse returns doing it. You're far better off either donating to charities that you support or boycotting the products of the company because that will actually affect the earnings of the company and what they do. So rather than boycotting owning it, boycott buying from it. And that will make a much larger difference. Okay, this question comes in from a doc who just started working at a multi specialty practice. Says I do very rare surveys from which I get about 20 to 50 bucks at my job. They wouldn't let me start contributing to a 401k until January 2019. I'm wondering if I could use my survey income as reason to start my own personal 401k or any other means of saving in addition to my backdoor Roth ira. Also, if I'm able to do this now, how will it affect me starting my company sponsored 401 next January? Well, what he's really asking about is an individual 401. And so anytime you have self employment income, you can use another 401 other than the one your employer offers. But in general, because you're using the employee contribution at the hospital or your practices 401k, you don't get to use that in your individual 401k, you just get to use the employer contribution which is about 20% of what you're earning in your self employment income. And so if you do that and you're not earning much like this person is talking about making 50 bucks doing surveys. So if he makes $250 during the year, he's only going to be able to put $50 into that individual 401k. So it's not like if you're not earning much in self employment income that you're going to be able to stash away all this money. It doesn't work that way. It's variable depending on how much you make as a self employed person in your business, which is what you're doing when you're self employed. However, that can be a great way if you're trying to get around the pro rata rule with your backdoor Roth IRA and you need a 401 to roll some huge traditional IRA or SEP IRA into doing a few surveys and getting an employer identification number from the IRS and opening up an individual 401k, even if you're only contributing 50 bucks to it allows you to roll that IRA in there. So that can be a useful strategy. But if you're not making much as a self employed person, it might not be worth the hassle to open an individual 401 for you. Alright, our next question comes from a third year EM resident graduating in June says I've contributed $5500 a year presumably to his Roth IRA for 2015 through 2017 and I'm trying to figure out if I will be able to in 2018 as well. I make about $70,000 this year as a resident in New York City. Man, I wish I'd done my residency in New York City. I made about half that. I will start working as an attending in Pennsylvania on August 1st. I'm assuming that I will be over the $118,000 limit for 2018. He's talking about the Roth IRA contribution limit since I'm guessing I won't be able to contribute. Unless you know a loophole. Where would you recommend I start contributing? During the last six months of my residency I have $6,000 saved up that I was going to put in my Roth IRA before I came to this realization. I also have a mutual funds account of about $5,000 that I could contribute more to, but it obviously doesn't have the same tax benefits. Would love to hear your ideas. Well, I certainly do have an idea. It's called the backdoor Roth IRA and I'm amazed that there are still people listening to this podcast and reading my blog and out there in Dr. Land that don't know about the backdoor Roth IRA. Just as a refresher, even if your income is above the income limit, you can still contribute to a Roth IRA each year, but you have to do it through the back door. Now this is totally legal, but it is basically an indirect contribution. First you put it in a traditional form, traditional ira. And usually because you have a work plan available to you, you're not allowed to make a deduction for that contribution. And then the next day or the next week or whenever you move it from the traditional IRA into the Roth ira. Perfectly legal as long as you don't have another SEP IRA or traditional IRA or simple ira or rollover Ira. You can do this no matter what. 401s or 403s or 457s you have those don't impede the process. And so you put it in a traditional IRA and you move it to a Roth ira and boom, there's your loophole, there's your way around that income contribution limit. And you can keep doing a Roth IRA for your entire career. You can keep doing one for your spouse as well from your own earnings. And so that's a great way to get that tax diversification in retirement by doing backdoor Roth IRAs throughout your career.

Still not sure what to do with your student loans? Overwhelmed with how to tackle that giant debt in an ever changing political climate, the experts@studentloanadvice.com are here to help guide you through the best options to manage your loans. Our experienced staff have consulted on over $250 million in student loan debt, and the averagestudentloanadvice.com client has saved over $190,000. You will receive a customized student loan plan using the principles of the White Coat Investor. Get answers to all of your student loan questions, gain clarity about your and start down the right path toward financial freedom. Book a consult today@studentloanadvice.com you can do this and the White Coat Investor can help.

Keep your head up, your shoulders back. This financial stuff is not that hard to figure out, and you can do it. Check out the resources@whitecoatinvestor.com make sure you're following us on Twitter and Facebook. See you next time. Sam.