WCI #8: Passive Income

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.

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 much effort, getting paid for surveys could be the perfect solution for you. You can make extra money, start a solo 401k 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 Coat Investor can help.

Thank you for everything you do and for all the great feedback we're getting here at the WCI Podcast. Be sure to send any topics you want covered or questions you may have to editorwhitecoatinvestor.com or via Twitter Cinvestor. Today we're going to talk about passive income. Back when I started the White Coat Investor, I really had a threefold mission. It was actually twofold and then we added a third one later, but the first was what's under the banner on the website to help those who wear the white coat get a fair shake on Wall Street. And that is really a passion that underlies this whole enterprise. So much so that I basically did the who White Coat Investor thing almost for free for the first couple of years. But the second reason was to feed my entrepreneurial spirit. And what I mean by that is I wanted to both build something cool, but also to make money. And I was fascinated by the idea of making a passive income online. The third mission later came up which was basically to connect high income professionals with the good guys in the financial services industry as I gradually discovered them over the years. But going back to that second reason, I really was interested in this idea of a passive income coming in to supplement my regular earned income. And so that was a major driver for me to actually start a website. It's been for profit ever since the beginning. I mean, there were ads on it within a week of me starting it, even though they didn't make much for the first couple of years. But today we're going to be talking about this passive income. Despite this, I think the vast majority of doctors are going to make the vast majority of their income from doctoring. And I think that's perfectly fine. I mean, that is the point of this whole WCI enterprise, that you make enough money as a physician that if you couple some hard work with a reasonable savings rate and a reasonable investing plan, you're going to become wealthy eventually. And that is certainly a plan that works. I was on track to do that. I was a millionaire seven years out of residency and was on track to retire very early with nothing but my physician income. However, I think it's interesting to explore this idea of passive income and see if perhaps you do have a little bit of an entrepreneurial spirit inside you as well. Consider the benefits of passive income. I mean, they are extensive. You can do a lot of things with it. But before we get into it, let's talk a little bit about the IRS definition of active and passive. They basically break it down to earned income versus unearned income. And they look at earned income as anything that you're working for and unearned income as anything your money is earning. And I would add a few other things into the passive income category. For example, the IRS considers book royalties to be earned income, but after you initially write the book, it's very passive after that. And so I would also throw that into the passive income category, even though the IRS does not. There are really two ways to think about passive income. The first is what I call capitalism. Basically your capital working for you. Once you acquire enough dollars and put them to work for you, it can really add up to a substantial sum of income. I think I wrote a post a while back about how every dollar you have is like a little employee, but it's great because it's an employee that works 247 that you don't have to pay for any benefits for and that always shows up to work, never gets sick. They might not be a super productive employee. They might only contribute a nickel or a dime per year. But given that you don't have to put anything into it, that income becomes completely passive to you. The second form of passive income is when you put in some work up front that later provides a stream of revenue. And so while that may be earned income to the irs, it still becomes passive to you. Passive income is great because you can do anything you want with it. You can spend it, you can save it, you can give it, just like earned income. But in some ways it becomes a much more tax friendly way to earn money. For example, on unearned income, you don't pay payroll taxes. And in some types of passive income, such as real estate investing, you can shelter a fair amount of it with depreciation. And so there are lots of ways that it actually becomes more tax friendly. Other ways include long term capital gains are taxed at a lower rate than short term capital gains are. And dividends, qualified dividends anyway are taxed at a lower rate than your earned income is. But one of the greatest things about passive income is it makes the nest egg that you need to be financially independent much smaller. Now, obviously that assumes the passive income is fairly reliable. But for instance, if you decided that you needed $100,000 to be financially independent, and you are using a standard 4% safe withdrawal rate, you would need a portfolio of about $2.5 million in order to provide that sort of a reliable long term passive income. However, if you have some passive income source that provides you $20,000 a year, all of a sudden that portfolio can be significantly smaller. Now you only need 2 million. And so that is a great reason to have some passive income on the side. In addition, just like having additional wealth, that passive income allows you to cut back at work, retire early, and make different choices with your career will lead you to more happiness in your life. There are a lot of different types of passive income. Probably the easiest one to acquire is what you get from stocks, bonds and mutual funds. They kick out dividends and they kick out distributions. All of which is completely passive to you, since it's just your money earning the money. Interest at a bank or from a CD is also a form of passive income. Real estate investing is probably the most commonly touted form of passive income. However, the amount of passivity varies pretty highly. You know, it can be extremely passive if you're just investing in a REIT index fund, for instance, becomes a little bit less passive if you're starting to invest in syndicated real estate offerings such as you might find through some of the crowdfunded real estate sites. Whereas if you're going and buying the house across the street, there's a fair amount of work you're going to have to put in buying and selling. And unless you hire a management company managing that property. And so while some of that income will be passive, you're having to put in some active labor to get a significant amount of it. Books can also be a form of a passive income. When you write a book, if people buy it, you get royalties. And granted, it's a lot of work upfront to write a book. But that royalty stream in the future becomes passive income to you. You might also have something like a podcast or a website that provides income for you. Many physicians have gotten involved in designing a product such as a surgical implant of some type that they can then sell. And while there's a lot of work up front getting that ready in the future, it becomes a passive income stream to them. Lots of other entrepreneurial ventures are available out there. You can buy a franchise, you can buy a car wash, you can buy a gas station, you can even buy UPS routes and invest in those. It's probably more likely, however, for a physician to do something that's more healthcare related, and that might be a surgical center or a radiology center, or a freestanding emergency department or urgent care, or maybe purchasing shares in their hospital via syndication. You need to be careful with these deals. Of course. These sorts of investments often have high fees and often have, you know, disguised risks that you may not be so aware of. So don't be so desperate to get passive income that you fall into a dumb doctor deal. But realize that these sorts of deals have really increased the financial security of a great many of your peers. When you're looking for passive income, you want something that scales. That's one of the real downsides of earned income. No matter how much you get paid to do a surgery, or how much you get paid to see a patient, or how much you get paid to prepare a contract, or whatever your high income profession is, you have to work and there's a limit on how much you can earn. Whereas once you develop something that scales, and perhaps the classic example is a website, if you go from having 50,000 people visiting the website to having 500,000 people visit the website, well, your income just went up by 10 for the same amount of work. So it's wonderful to have something that can scale. You also, if you are putting in some work to develop a revenue stream, you want that revenue stream to be as long as possible. A revenue stream that lasts six months is not nearly as valuable as one that lasts six years. You also, since this is supposed to be passive income, is you want to do something that minimizes the ongoing amount of work. Now, this is one of the funny things about this whole white coat investor empire we have here is it turned out to be not nearly as passive as I thought it was, and we actually put in a lot of ongoing work. At this point, I'm probably putting in more time each month doing WCI stuff than I am in my practice. But you know, when you're looking for a source of passive income, you want to minimize that ongoing work. Remember that there's no formula for entrepreneurship. I occasionally get emails with people asking, hey, how do you do this? You know, And I think it's the mindset we get from medicine when we're used to if we just put our head down and do the pre med stuff and check the pre med boxes, you know, we've got some research experience and leadership experience and service experience and healthcare experience and we knock out the MCAT and we knock out, you know, a good science gpa, then we can get into med school. And then if you just put your head down in med school and you truck along through the pipeline, you get through med school and match into residency and you do what you're told in residency and by the time you come out of that pipeline, you're eligible for a pretty good job that pays pretty well. Entrepreneurship doesn't work like that at all. There really is no formula. Remember what an entrepreneur is, right? A successful entrepreneur is either doing something that has never been done before, or they're doing it better or cheaper than the existing companies are doing it. So there is no formula to follow. You've got to come up with a lot of it on your own. You know, this isn't flying a plane, it's not even taking out a gallbladder where you may be able to go step by step to make sure you get everything done. You just can't go down a checklist like this and assume that because you followed all the steps, you'll get where you want to go. Entrepreneurship is risky, is turbulent. And the truth is most people fail. And they fail for lots of different reasons. Maybe the idea wasn't a very good one in the first place. Maybe they ran out of money before they could start making money. Maybe they didn't have any sales skills, or maybe they just found a better use for their time. Whether it was earning money in a different way or whether it was, you know, something they enjoy a little bit more, there's just no guarantee. And that's part of the fun in entrepreneurship. So I have a few recommendations for you if you want to maybe explore your entrepreneurial side. The first is don't quit your day job as a physician or other high income professional. You have a great day job. And even if your entrepreneurial venture never works out, if you just continue to save a significant percentage of your professional income and invest it in a wise manner, you're going to be Very wealthy eventually. So don't give that up in hope of a dream. Try to do the dream on the side. You know, it's interesting because the reason most investors fail is they run out of time and money. And you can get yourself a lot more time and money when you have a successful professional practice on the side. Second tip I have for you is try to minimize your cash outlay. There are some entrepreneurial ventures that are very expensive, but a surprising amount of them can be bootstrapped. And you can really minimize how much money you put into it. And the less money you need to come up with, the more likely you are to stick with it for a long time and reach success with it. Time is money in many ways, so also try to minimize your time outlay. You know, there are other valuable things you can do with your time, even if it's just vacation or going and having some fun with your family. So be sure that you are not pouring some ridiculous amount of time into your venture that doesn't look like it's going to pay off. For example, when I started the White Coat Investor, I said, if I'm not making $1,000 a month within two years, I'm going to quit. And that was kind of the guideline I gave myself and I barely made it. To be honest with you, I was kind of embarrassed those first few years to say how much time I was putting into this enterprise because, you know, I really wasn't seeing much of a financial reward from it anyway. It was very rewarding to help a lot of people and I could see things building financially, but it was pretty ridiculously low rate of pay those first couple of years. So try to minimize your cash layout and your time layout. There are a lot of resources out there for entrepreneurs. In fact, many states have a branch of the Society of Physician Entrepreneurs. You can actually meet with other doctors who are doing entrepreneurial exercise exercises. Enterprises all over the country. Many towns also have what are called incubators where you can get free office space or low cost office space and mentors that will help you succeed. Angel investors provide not only money, but also experience and expertise. The business world, much more so than medicine, is about connections, so be sure you start making some. Finally, I think it's important to realize that a lot of entrepreneurship, throwing stuff against the wall and seeing what sticks, you know, sometimes that's phrased run it up the flag pole and see who salutes or throw it in the well and see how big a splash it makes. Sometimes you just have to try things and we're always trying all kinds of interesting things here at wci. And some things work. Maybe about once a year we find something that works really well. But the truth of the matter is, most stuff doesn't work and it turns out terribly. But don't be afraid to try something new. If nothing else, you'll gain some new skills and every now and then you'll hit a home run, for example. You know, we're really kind of building a little bit of a white coat investor empire here. We drew out a diagram of it the other day. I figured we had three or four different things going, but once I diagrammed it out, I realized I had 22 different spokes on this wheel that we are either in the process of developing or that are currently out there and functioning. For example, we've got the blog, which most of you know about. We now have this podcast. We've got a forum working on developing a YouTube channel. We've got a social media presence, we've got an email list. Many of you are signed up to get the free monthly newsletter. We've got live events that we run. We're thinking about running a conference. And this just goes on and on and on and on. And so it's important to try a lot of different things, see what will work, and then you spend your time on what works and you ditch the stuff that doesn't. All right, let's move on to some questions today. This one comes in via email. It says, I'm about to open an account at HSA bank and I'm watching out for fees. From my understanding, when you open an account, you will have a cash account and an investment account. It seems there is a 250 monthly maintenance fee on the cash account and a three dollar monthly investing fee. This comes out to a $30 and a $36 yearly fee, respectively. I understand these fees can be waived if $5,000 is kept in the cash account at all times. Feel free to correct me if I'm wrong. My question is, with your personal account, do you keep $5,000 in your cash account to avoid these fees, or do you invest it immediately and pay the $66 yearly fee in exchange for the potential growth? Well, I think it's important in situations like these to do the math. HSA bank, where I do have my HSA requires you to keep $5,000 in the account or else you have to pay these fees that add up to $66 a year. However, if you divide $66 by $5,000, that works out to 1.3%. If you then add on the 0.15% a year that HSA bank pays on that cash in that account, your benchmark is a total of 1.45% per year. So if you do better than 1.45% a year on your investments, you're going to come out ahead paying the fees and investing that money. That assumes of course, that you're not planning on spending it this year, in which case you're probably going to want to keep a little bit in cash. So I think the right answer, assuming that you're getting some sort of return on your investment, which seems silly to invest at all if you're not going to beat 1.45%, is to, is to invest as much of it as possible. Maybe leave 100 bucks behind to pay those fees. I got another question. This one came via a forum. Got a private message on it from someone who wanted to ask an IRA question. It says I max out my 401k. I also have a Roth IRA from residency. Now that I have some large debt paid off, I'd like to start saving more. I know I can put 5,500 per year into a traditional IRA and then transfer it to my Roth. Someone recently told me that I can also do it for my wife even though she is not working, allowing us to put $11,000 per year into the Roth. Is this correct? Yes. It's a wonderful benefit that even if one spouse is not working, there can be a contribution made to the non working spouse's IRA of $5,500 per year if under 50 or $6,500 per year if over 50 from the working spouse's earned income. And that applies to a traditional ira, to a direct Roth IRA contribution or to an indirect or backdoor Roth IRA contribution. Alright. Another question comes from a resident, a first year resident. He says I obviously have student loan debt, both federal and private. I recently consolidated all my federal student loans last year. The issue is I have a lot of bills that I've fallen behind on. I have around $50,000 in lines of credit and credit card debt that I've fallen behind. In about two months I started a debt renegotiation through a law firm. One of my creditors has initiated a lawsuit. The debt renegotiation program offers legal defense. My question is, is it better for my long term finances to go through with the rest of the negotiation and pay it off over time and show the debts of settled or would it just be in my best interest to file Chapter 13 bankruptcy and move on from there. Well, that's really a terrible story to hear. I don't like hearing physicians having so many financial problems, especially during residency when you're supposed to be concentrating on learning medicine. A few things to keep in mind here. First, the student loans don't go away in bankruptcy and your non student loan debt is only $50,000. It seems a bit silly to me for a physician to declare bankruptcy for just $50,000. I mean, I suppose if your creditors forced you into a judgment that garnished your paycheck, you might have no other choice but to go through bankruptcy in order to keep the lights on, but otherwise I think I'd probably try to avoid it. The first thing to do when you realize you're in a big hole is to stop digging, cut up the credit cards, close the lines of credit, etc. Stop borrowing money for anything. And the next thing to do is to get really motivated about getting out of debt. You may not like Dave Ramsey's investing advice. I certainly have a few bones to pick with it, but he's extremely good at getting you out of debt. I think this is a great opportunity to go to a library and and get Dave Ramsey's the Total Money Makeover and read it. Or go to his Financial Peace University course, which might be tough as a resident to attend, but at a minimum you can download his radio show as a podcast and listen to it on your commute. If that won't motivate you to get out of debt, I don't know what will. Third, realize that you're likely judgment proof somebody sues you for what you owe them. And guess what? You don't have anything. You probably have a net worth of minus $400,000. If you're like a lot of residents, what the heck are they going to take from you? When someone owes you $100, they have a problem. When someone owes you $400,000, you have a problem. Your creditors have a problem. In this situation, their problem is bigger than your problem. Believe it or not, they've got someone that owes them a whole bunch of money and they're worried that they're not going to get paid. Fourth, remember your priorities for your money. First, you pay for food. You don't get very far in life if you're not eating. Then you got to pay for the roof over your head and the utilities to keep the place heated and keep the lights on. And then you got to pay for your transportation to get to your job. After that, if you have money Left over, you can start paying your creditors. If not, you just don't pay your creditors. Fifth, I'm not sure you need a law firm. Debt renegotiation or debt negotiation works basically like if you can make the minimum payments on your debts, then do it. If you can't, then you don't. But once you pay the minimums, you start saving up a block of money. Then you call somebody up that you owe money to and offer them a fraction of what you owe as a settlement. Make sure you get it in writing before you give them a check. And never give them access to your checking account or they'll clean you out. If you've already given them access to your checking account, close it and open another one. So if you owe someone $3,000, you call them up and say, I have $1,800 cash that I will pay you today if you accept it as payment in full. They say, no. You tell them, okay, I'll go to another one of my creditors and I'll get back to you in a few years when I have more money. And a lot of the time, especially if much of that debt was bought for pennies on the dollar by a, you know, a debt firm, they may very well be more than interested in getting 1800 bucks from you and writing off the rest of the debt. Remember also, as a resident, you're probably not going to be able to dig out of debt before you become an attending. So the most important thing for you as a resident with this nasty debt load is to make sure you become an attending. And once you do, make sure you live like a resident when you do. Until you can clean up this mess, then you can enjoy the rest of your financially awesome life. There really is light at the end of the tunnel, and the light comes from the difference in your resident income and your attending income. So don't blow that. Make sure you live like a resident when you become an attending, and you can get rid of $50,000 in credit card debt surprisingly quickly on an attending income. Living a resident lifestyle 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. 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 Coat Investor can help.

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