Podcast #98 Show Notes: Financial Advice for Medical Students and Residents

We have two guests on this episode, a resident and a medical student. For a resident, the most important financial advice I can give is to develop good saving habits, take advantage of some retirement accounts, manage your student loans well, get insurance in place that would take care of a financial catastrophe, and to have a written plan for your first 12 paychecks as an attending. In reality, the most important year of your financial life is your first year as an attending. But mistakes you make and bad habits you develop as a medical student and resident can really set you back. Your goal as a medical student and resident is to learn medicine, to learn to be a good doctor. You don’t want to get so caught up in trying to get ahead financially that you fail in your primary job. It is good to pay a little bit of attention to finances and borrow as little as you can, managing those loans wisely, and developing good budgeting and saving habits. I’m sure many of you have similar questions as these two readers so let’s get into it.

Sponsor

This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President, Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients. Because of the volume and exceptional reputation of Set for Life Insurance, as well as the relationships they have developed over the years, Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender neutral policies (saving women significantly), priority underwriting handling and on some occasions exceptions in the underwriting process. For more information, visit Set For Life Insurance.

Quote of the Day

Our quote of the day today comes from Jeff Acheson, who said,

“Hidden fees are a little bit like high blood pressure. You don’t really feel it, and you don’t necessarily see it, but it’ll eventually kill you.”

I think that is so true. You really do have to be cognizant of your fees.

Financial Advice for Residents

Student Loan Management for Married Residents

This resident has $175,000 in student loans. He is currently making payments of $0 a month, based on his prior year tax returns. But he is newly married and his wife has student loans. And now he is unsure how to file taxes and whether he should be in the PAYE or REPAYE program.

This is one of the most complex questions out there. His wife is a nurse with $25,000 to $30,000 still in loans with a higher interest rate than his. Both of them are employed by a 501(c)(3). He is planning to do a fellowship, so at least six to seven years of training, making a typical resident and then fellow salary. She makes a very similar salary as well. If he ends up doing the fellowship he is planning on doing those three or four more years of academic medicine or a 501(c)(3) until he receives public service loan forgiveness.

He sounds like a great candidate for public service loan forgiveness. He will spend a long time in training, making these tiny payments. Of course, going for PSLF comes with all the usual caveats.

• Keep a copy of every certification form.
• Get your employee certification form done every year.
• Keep a copy of every payment you have made.
• When you finish your training, you need to be saving up a side fund in case something happens to this program

In the end, you’ll have a big stack of paperwork where you can literally prove you made 120 payments while employed full-time, and making on-time payments in an eligible program for the entire ten years.

The only real question for this resident is what can he do to maximize that forgiveness, and is it worth it to do those things?

For example, one of the things you can do that will increase the amount forgiven is to file your taxes married filing separately. What that does, essentially, is it takes the wife’s income away from his income on his $175,000 in loans. This gives him a lower payment and the lower the payments you make during your training, the more that’s left to be forgiven in the end.

The downside of that is that it almost surely increases your tax bill. This will be a little bit of a year to year decision for them. Every year, literally, they have to run the numbers and see if it makes sense for them to be doing married filing separately or not. You look at your taxes and run the numbers on what the payments are going to be. It doesn’t do you any good to lower your payments past zero. Paying additional money in taxes in order to lower them further isn’t going to help you get anything more forgiven.

The other thing you can do to lower that income is to make tax-deferred contributions to your retirement accounts. The downside is you are taking these relatively low earnings years that you have and not using them to make Roth contributions. So again, there’s a tax cost to this strategy.

I suggested that he hire professional help. I have a list of four people under the recommendation tab for student loan advice. The tricky thing is you can’t just go to any financial advisor and ask these questions because they don’t understand the programs. It really is very complex interplay between the payments and your taxes. All the people on that list do is give advice on your student loans and help you run the numbers year to year. They usually charge a few hundred dollars, but in this case, it is going to be money very well spent because he is literally going to have to do it over and over and over again for the next seven or eight years. But it would not surprise me at all that the right answer for him could be being in the Pay As You Earn program, not the Revised Pay As You Earn program, because you cannot do married filing separately under that program. And then, of course, filing his taxes married filing separately. And over the next few years, perhaps also decreasing his income by contributing to a 401(k) or 403(b) his residency may offer.

Roth Accounts for Residents

The right answer for most residents is Roth accounts. But this resident asked me would I recommend contributing to Roth accounts and paying the taxes now, or would I contribute to tax deferred accounts and try to decrease your income to lower your payments? It is a hard question. It comes down to how much faith you have in the PSLF program. If you are trying to lower your payments in order to get more forgiven it makes sense to contribute to tax deferred retirement accounts at least in some amount.  As a general rule, you want to make sure you get your match. If there’s a match from the employer, put enough in there to get that. Not getting that is like leaving part of your salary on the table. Then after that, you will have to run the numbers and see if makes sense to contribute more to the tax deferred or the Roth accounts.

Now if this resident decides that filing taxes married filing separately is best, he cannot contribute directly to a Roth IRA. He will have to do the backdoor Roth IRA.

Insurance for Residents

Residents should get disability insurance from an independent insurance agent and life insurance if someone is depending on their income. This resident asked about getting life and disability insurance for his wife.

The real question you should ask in this situation is what is the plan? What’s the plan if you die? What’s the plan if she dies? What’s the plan if you get disabled? What’s the plan if she gets disabled? What’s the plan if you both get disabled? What’s the plan if both of you die? Work through each of these scenarios and ask how big of a deal is this financially? Is this something we need to insure against?

I think once you arrive at that, then you go, “Well, this is what we’d like to happen in the event of my death,” and you look at how much money you have, and you look at how much money you would need to make happen what you would like to happen if you died, and take the difference and buy enough life insurance to cover that. Same thing with disability insurance, it’s basically the same procedure. If it would cause significant financial difficulty to your lives, it’s worth buying disability insurance.

Same with life insurance. A lot of people, even with the stay at home parent, choose to insure the stay at home parent, because of the value there. There’s a real economic value to the things that stay at home parents do. It is easy to calculate how much child care costs, but other things like meal preparation, shopping, home maintenance, those kinds of things all have an economic value, and you can add all that up and put a number on it for how much life insurance to have. It is not uncommon at all for even a stay at home mom or a stay at home dad to have half a million dollars of life insurance on them, just to cover those kinds of costs in the event of their death.

Some people have life insurance through their employer. Typically insurance through an employer is a tiny amount. When I talk to doctors about buying life insurance on them, I tell them it’s a seven figure amount. Term life insurance is very cheap. If you’re going to err, err on the side of buying too much. It just won’t cost you that much money. It is nice to have something from the employer, but chances are, if there’s actually a need for life insurance, it’s not going to be enough money.

Budgeting as a Resident

Residents make a lot more money than they did in medical school. This resident noticed every month they had a little bit of money left over after all the bills were paid and wanted to know what I thought they should do with it. Pay off his wife’s student loans or save for a house downpayment after training?

A house downpayment that is potentially 5-8 years away isn’t a big priority for me but loans at 6% certainly are. Now, do I put money toward those before I’ve maxed out Roth IRAs? That is a hard decision. But certainly, I would do that before saving up a down payment, before getting a really big emergency fund, before investing in a taxable account. I think it’s a no-brainer to pay off those loans. It will improve your cash flow a little bit to not have that payment going out every month. People just make better decisions in their lives when they get rid of debts like that. So I think that would be a pretty high priority for me. I mean, a six or six and a half percent guaranteed return? Boy, I wish I had an investment like that available to me.

Financial Habits

This resident mentioned that his goal is financial independence in the next 15-20 years and wanted to know some specifics he should be doing to get started on the right path, to get good habits going forward. It really is about good habits, because nothing you do financially as a resident is really going to move the needle a lot. If you pay a little extra on your loans, that’s not going to make a huge difference compared to what you can do as an attending. If you put a little money away from retirement, that’s not going to make a huge difference. In reality, the most important year of your financial life is your first year as an attending. Hitting the ground running with a written financial plan when you become an attending is really what makes a difference. All of a sudden, you’ve got 200, 300, $400,000 a year coming in the door, and you can really do some cool stuff with it, if you can just avoid using it to buy two Teslas and a two million dollar house. So I think that’s really it, just being conscious of what makes a difference in the financial life of a physician.

Your most important things now are developing some good saving habits, taking advantage of some retirement accounts, managing your student loans well, getting insurance in place that would take care of a financial catastrophe, and having a written plan for your first 12 paychecks as an attending, because that’s really what’s going to move the needle.

Just remember not to try to do too much as a resident. I mean, your goal as a resident is to learn medicine, to learn to be a good doctor. And you don’t want to get so caught up in trying to get ahead financially, moonlighting and tweaking all this financial stuff, that you fail in your primary job right now, which is to become a good doctor. The finances will take care of themselves. It’s good to pay a little bit of attention to it and make sure you take care of business, but this isn’t where your primary focus should be for the next three to six years. You need to be learning how to be a good doctor, how to take care of people, and ensuring that you do get, eventually, that high attending pay.

Financial Advice for Medical Students

Family Responsibilities

We discussed having a family as a medical student. I know many have experienced this. We didn’t have our first child until residency but many of my classmates in medical school had children. I think it is good to have cash on hand when you are expecting because there can be a lot of expenses that come up. Obviously, you can spend gazillions on baby stuff. But a lot of it can be had for pretty cheap, used, and through these baby to baby exchange kind of places. But some stuff can come up. I mean, pregnancy is a high-risk time for medical problems. It’s not unusual at all for people to end up in the hospital with problems. You need to have some kind of insurance, preferably with a relatively low deductible. But the truth is, most of the time in medical school, most of your living expenses are probably borrowed money anyway. It is just a question of how much you borrow, and the idea is to borrow as little as you can.

Choosing a Residency Program

“As a fourth year medical student looking into residencies, how much would you say to students should they prioritize a rank list based on, not only cost of living, but benefits, salary, when making our list? Because obviously, the specialty and the fit with the residents and the program is important, but how much do you think should weigh in on that in terms of the financial aspect of being a resident?”

I think benefits and salary are probably at the bottom of the list. My number one choice and the place I went to residency paid the least of all 21 places I interviewed at. That really isn’t a high priority. Number one is, are you going to get the education you need? The strength of the training has got to be your number one priority. Number two, what’s your fit there? Do you fit in with these people? Are these people that do the same stuff as you on their time off? Are these people you want to work with? Are these people that you can see yourself hanging out with? That sort of a fit is super, super important in choosing your residency. Item number three is probably location, and that’s for lots of different reasons. If you have family there that can be a support. Is it some place your partner wants to live, is it some place you want to live? Can you pursue your recreational pursuits on your limited time off there, because if you can’t do it in half a day, you’re probably not going to do it during residency.

And then, of course, cost of living is also in there. But I think you will generally find, if you’re married with children, you’re looking for more of a family kind of atmosphere, you’re probably not going to be in the highest cost of living areas anyway. The fit is not there, as the residents tend to be single.  If you’re married with children, you’re probably somewhere else, in the Midwest or something, where the cost of living is naturally lower. I think that often takes care of itself. But you have to be a little bit careful. Matching into a residency on Manhattan with a stay at home spouse and two kids, you will not feel very wealthy as a resident in that scenario.

I think cost of living should be taken into account, maybe as the third item, as part of your location. But not the benefits, they’re just not dramatically different enough from one residency to another that it should sway your opinion or your rank list.

Benefit of an MPH or MBA

This medical student asked if I see a need for an MPH or MBA for advantages in executive positions or working in health care policy.

We, as doctors, love education. We love fellowships, we love certifications and degrees. We are always thinking about getting another one. But the truth of the matter is, most of the time it’s probably not necessary. You have a terminal degree with a MD or a DO. And that is going to open most of the doors you need to open.  So before really committing the cash or the time and effort to get an MPH or an MBA, I think you really need to ask yourself, “Do I really have a need for this?” Because if you don’t have a need for it, if it’s not going to advance your career, if it’s not going to get you some place that you couldn’t get without that degree, it’s really a luxury. Then you have to ask yourself, “Can I afford this? Do I have 75 or $100,000 sitting around to buy this degree?”

If the answer is no maybe you ought to pass on it. I think there are very few physicians who end up in a position where they go, “I really need an MPH to do this.” I think a lot of them got it during medical school because it seemed interesting. I mean, it’s fine, life isn’t all about money. Certainly, if you have an interest, you have enough time as a physician to make up for taking a year or two to get a degree or to do an extra fellowship or something. It’s not like you’re going to be poor because of it. But there is a cost to it. There is an opportunity cost to spending time in education rather than being out working.

Private Practice

We have this trend in medicine right now, where the entire industry is consolidating. Doctors are much more likely to be employed now than they were five or ten years ago. Practices are being bought out by private equity groups. I think a lot of this is contributing to the burnout rates in medicine. I’m not a big fan of it. I really like doctors being able to own their practices, for a couple of reasons. One, they feel like they’re in control, and I think that helps with burnout quite a bit. But also, because I think they take better care of patients that way. And the reason why is that they’re not accountable to anyone but themselves for how they take care of patients. There’s no corporation pushing you to order more tests or pushing you to see patients faster than you should be seeing them, or do procedures that you maybe shouldn’t be doing. I think it actually results in better patient care.

That said, I think it’s getting harder and harder to find those jobs, and oftentimes, there’s a real financial sacrifice upfront with them. If you’re not in a financial position, because you borrowed $600,000 to pay for medical school, I think it’s a little bit harder to take those jobs. You’re much more incentivized to get the quick money, which oftentimes is an employee job with a contract management organization or with a hospital. I think it’s good to keep your options open. I’ve certainly enjoyed being in private practice, but it’s not for everybody. A lot of people don’t want to deal with that stuff, and they just want to punch the clock and take care of their patients, and not deal with any of the administrative hassles of ownership. There is not necessarily a right answer to that question.

Marijuana Investments

“My state recently legalized medical marijuana, and I had some friends who were trying to tell me to buy ETFs or something with dispensaries and all those start-ups because of their ability to grow.”

It is kind of a hot new industry. I hear this question a lot, actually. But in reality, this is like any other business. If somebody called me up and said, “Should I invest in the companies that make toilet paper?” I’d say, “Well, why don’t you just buy all the companies?” Because you’re not really sure that toilet paper is going to do better than marijuana, or oil and gas, or real estate, etc.

My usual inclination, any time I’m asked about buying individual companies, much less a start-up, is, “Why would you take on that uncompensated risk?” If there is a risk that can be diversified away, taking that risk should not result in any additional compensation. Risks that can’t be diversified away, like overall market risk, is compensated. When you take that risk, you have an expected higher return because of it, versus treasury bonds or something like that.

Now, do I have any idea what marijuana stocks are going to do over the next five or ten years? I have no idea. Maybe they will outperform the market, maybe they will underperform the market. But I can tell you this. There are a lot of people who are very smart and have access to a lot more resources than you do that are trying to answer that question and struggling with it. And if they are struggling with it, the likelihood of you knowing the right answer without just taking a wild guess is pretty low. So in general, I’d stay away from investments like that. Doctors typically get in trouble when they’re trying to outsmart the market, and they forget the things that really matter, which is making a lot of money, saving a big chunk of it, and investing it in some reasonable way.

Listeners’ Q & A

International Bonds

We had time for a few listener questions after the interviews in this episode.

“There’s a lot of discussion from Bogleheads about the three-fund portfolio, consisting of US and international stocks and US bonds. But what Vanguard does with its own target-date funds is use a four-fund portfolio, adding international bonds to the mix as the fourth asset class. What’s your opinion on this? Should investors looking to use a simple three-fund portfolio add the fourth asset class of international bonds?”

I don’t have international bonds in my portfolio. I don’t feel like it’s a super attractive asset class, or something that one must own. So if you’re trying to keep things simple, if your goal is to have a very simple three-fund portfolio, I wouldn’t feel like that was the fourth asset class to add. Vanguard does add that to their life strategy funds and their target retirement funds, and if you want to, I think it’s perfectly fine, but I think you’re adding a little bit of extra complexity without a ton of additional benefit. I think if I was going to pick a fourth fund to add to a three-fund portfolio, I would probably add a real estate investment trust to that, a tilt toward REITs.

But that is really for you to decide. A portfolio is a very unique thing. There is nothing magic about a three-fund portfolio. The goal is to find something that’s reasonable and stick with it for the long term. To fund it adequately with a good income and a good savings rate. The actual asset allocation does matter, but you can’t predict in advance what the right one is going to be, so you might as well just stick with something reasonable.

Parent Plus Loans

The parents of this listener took out Parent Plus Loans to pay for his undergraduate degree with the intent that he would pay them back. Now his question is with all the types of programs for paying off student loans in residency how do Parent Plus Loans not in his name play into it?

Parent Plus loans are tricky. These are loans your parents take out to pay for your education. This is not something you even have a responsibility to pay back. It’s their loan. But you can actually get public service loan forgiveness for these loans. The issue is, they are not eligible for the IBR, the PAYE, or the REPAYE program. The only income-driven repayment program they’re eligible for is the crappy old one, the ICR program, the one where you’ve got to make 20% of your discretionary income payments. Taking Parent Plus loans is not a good route to take.

Be sure, of course, if your plan is to pay these off for your parents, that you bought enough life insurance on you that they can pay them off if something happens to you. You should also buy enough disability insurance to cover them as well. Otherwise, your parents are going to get stuck with something that they were intending for you to pay off.

Tax Loss Harvesting

“I hold a Vanguard brokerage account with some broad-based index funds, and I’d like to do some tax loss harvesting moving forward. The question I have is that my wife has a workplace retirement plan, a 403(b), where she contributes every two weeks to a Vanguard target retirement account that holds the same underlying funds that I hold in my brokerage account. If she contributes every two weeks to it, can I not tax loss harvest? How do people in this situation work around that?”

What we are talking about here is a wash sale. If you sell a fund and then you buy it back within the next 30 days, you basically don’t get to harvest that loss on your taxes. Technically speaking, wash sales only apply in taxable accounts and IRAs, if you actually look carefully at how the law is written. Now, a lot of people suppose that, because they apply to IRAs, they also apply to 401(k)s, but that’s not technically there. The other thing to keep in mind is, no one is really looking closely at this either. The IRS doesn’t get a list of what you bought and sold in your 401(k) every year. So if you accidentally forget to watch this sort of a thing, no one actually notices at the IRS.

That said, I think the spirit of the law is that you’re not supposed to be buying something in your 401(k) that you just sold in your taxable account, if you’re trying to claim a loss on it. I think the easy fix is just to use different funds in your brokerage account. There are so many funds that are similar to what you should be buying. If you’ve got a Vanguard total stock market in the 403(b), use a fidelity total stock market in the taxable account, or use a 500 index fund, or a large cap index fund, that sort of a thing. It’s so easy to get around it, you might as well just get around it. But I wouldn’t expect to really be caught on this one, should you happen to do it accidentally.

Ending

Thank you for what you do every day. I know your work is not easy, it’s often high-liability work, and it’s difficult work. It took a lot of training to do it, and it can be very demanding. Thank you for your hard work. The purpose of this podcast and the entire WCI enterprise is really to assist you in managing your finances so you can focus on taking care of your patients and doing the things that matter most to you.

If you have questions, this is a great community to find the answers. Ask in the WCI Forum or in the WCI Facebook group. Or if you want to have your questions answered on the podcast go record them here!

Full Transcription

Intro: 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.
Intro: Here’s your host, Dr. Jim Dahle.

WCI: Welcome to White Coat Investor podcast number 98, a discussion with a resident and a medical student. This episode is sponsored by Set for Life Insurance. Set for Life insurance was founded by president Jamie K. Fleischner, CLU, CHFC, LUTCF, in 1993, which she started while attending Washington University in St. Louis. They specialize in individual term life, disability, and long-term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost-effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients and shop around to find the best products available at the best rate. For more information, visit SetForLifeInsurance.com.

WCI: Thanks for what you do. I know your work is not easy, it’s often high-liability work, and it’s difficult work. It took a lot of training to do it, and it can be very demanding. It can be very both physically taxing and emotionally taxing. If none of your patients have thanked you today for what you’re doing, and you’re on your way home from work, or even if you’re on your way into work, I want to personally thank you for your hard work. Thank you so much.

WCI: Our quote of the day today comes from Jeff Atchison, who said, “Hidden fees are a little bit like high blood pressure. You don’t really feel it, and you don’t necessarily see it, but it’ll eventually kill you.” I think that’s so true. You really do have to be cognizant of your fees.

WCI: Now, the Financial Boot Camp book is out. If you’re not aware of this, this is the second book I’ve written. It’s called The White Coat Investor’s Financial Boot Camp. It’s a 12-step, high yield guide to getting your finances up to speed. You may have been introduced to it by the e-mails that you get sent when you sign up for the White Coat Investor newsletter, but this is a dramatically expanded version of those e-mails. We’ve included a bunch of anecdotes from readers that will help inspire you to take those steps you need to to get your finances under control, and I’ve added all kinds of information to each of the chapters. Added a glossary, added a bunch of appendices, an introduction, conclusion, all kinds of stuff that was not in the original e-mails. I would recommend you pick that up, and if you can use it, if you’re relatively early in your financial journey, not early by age, but early by level of financial knowledge, I think you will find it very, very helpful to get yourself up to speed with other white coat investors as quickly as possible.

WCI: If you’re later in your financial journey, you will likely still get a few tips out of it. There’s probably a few pearls in there you don’t know. But this makes for a great gift, for your students, for your residents, for your colleagues. Something you can pass along, where you don’t have to feel like you’re preaching to them, but you can give them something that will really make a dramatic difference in their lives. If you will recall back to the first really good financial book you read, it was probably worth a couple million dollars to you over the course of your life. That’s what good financial literacy combined with a physician income can do.
WCI: Another thing I want you to be aware of is the WCI Con 20 has been scheduled. The dates for this are going to be in March 2020. The 11th and the 15th are travel days, with classes on the 12th, 13th, and 14th of March 2020. So save those dates. You don’t need to get a hotel yet. You can’t even register for the conference yet, that’ll probably happen in July. But if you are interested in putting your name in the hat to be a speaker, there’s an application you can find in the show notes. If you are interested in just giving your input on what speakers you’d like to hear, there’s a separate survey that you can take as well. It’s very quick and easy, you can find a link to that in the show notes if you want to have some input into who comes to the Physician Wellness and Financial Literacy Conference, aka WCI Con 20.

WCI: All right. Today, we have two very special guests. The first is a resident, the second is a medical student. They both agreed to come on and be live on the show. I guess it’s not live as you’re listening to it on the podcast, but it’s live as we’re recording it. And actually discuss their questions they have about their own financial situations. Our first guest on the podcast today is a resident, and we’re going to keep him anonymous, but talk about his personal financial questions, his personal financial situation, and see if we can answer some of his questions, all of which are very common questions for other people in similar situations. I think this can be really helpful for a lot of listeners. At any rate, welcome to the show.

Resident: Yeah, thank you for having me. This is a great opportunity. I’m very happy to be having the opportunity to ask questions and share my experiences thus far.

WCI: Cool. Well, we’ve kind of looked at a list of topics and questions we’re going to try to go over today, in the next 15 minutes or so. Let’s go ahead and start at the top. Do you want to talk about the first question, or thing you want to talk about?

Resident: Yeah. Absolutely. I guess my first question is kind of about student loans. I guess a little bit of back story for my situation, I’m an internal medicine intern, and I’ve got around $175,000 of student loans. I initially consolidated them, and I’m currently making payments that are about $0 a month, based on my prior year tax returns. My question is that I’m newly married and my wife always has student loans, and how you would go about filing taxes and whether or not you would do PAYE or REPAYE and just kind of initially, how to go about that.

WCI: So this is one of the most complex questions out there. We’re going to need at least a little bit more information. What does your wife do?

Resident: She is a nurse. She has about, around $25,000 to $30,000 still in loans. Most of hers are, the interest rate on them are about, a little bit higher than my loans consolidated.

WCI: Okay. And who is her employer? Is it a 501(c)(3)?

Resident: It is, yes. Yes.

WCI: And you’re in a 501(c)(3) residency?

Resident: I am as well, yes. I guess for a little bit more information as well, I plan on probably doing a fellowship, so at least six to seven years of training. I make a typical resident salary and will make a typical fellow salary. She makes a very similar salary as well, if not maybe $10,000 to $15,000 more.

WCI: And what is your plan after training? Are you thinking about staying in academia or otherwise trying to go for public service loan forgiveness?
Resident: I think if I end up doing a fellowship, most likely, because it’ll be six to seven years of training, and then I’ll need three or four more years of academic medicine or a 501(c)(3) until you hit that public service loan forgiveness. Initially, that’s my plan now, yes.

WCI: You said you owe $175,000?

Resident: Roughly, yep.

WCI: Okay. And that’s all federal loans?

Resident: Yes.

WCI: Okay. I mean, you sound like a good candidate for public service loan forgiveness. You’re going to spend a long time in training, you’re making these tiny payments during training, and you get to knock it out relatively easily after you finish your training. You’re a good candidate for it, for sure. You’d be an even better candidate if you owed $500,000 in federal student loans, but even at the amount you owe, you’re probably still going to come out ahead going for public service loan forgiveness.

WCI: Now, that comes with all the usual caveats. I’m sure you’re following closely all the travails people are having trying to get fed loans and the other loan servicers to actually count their payments correctly. And so my first warning to you would be, you’ve got to be all over this process the whole way through. You’ve got to keep a copy of every certification form, get your employer certification form done every year. Keep a copy of every payment you make, so you’ve got a big stack of paperwork where you can literally prove you made 120 payments while employed full-time, and making on time payments in an eligible program for this whole time, this next ten years, basically.

WCI: So the only real questions here are what can you do to maximize that forgiveness, and is it worth it to do those things? For example, one of the things you can do that will increase the amount forgiven is to file your taxes married filing separately. What that does, essentially, is it takes her income away from your income on your $175,000 in loans. And what that can do, basically, is it just makes your payments lower, and the lower the payments you make during your training, the more that’s left to be forgiven in the end.

WCI: The downside of that is, it almost surely increases your tax bill, versus if you were filing married filing separately, given your disparate incomes. You know, one a nurse and one eventually an attending physician. You may end up paying a fair amount extra in taxes in order to maximize that amount. So this will be a little bit of a year to year decision. Every year, literally, you gotta run the numbers and see if it makes sense for you to be doing married filing separately or not. Unfortunately, there’s no obvious answer until you literally look at your taxes and run the numbers on what the payments are going to be. For example, it doesn’t do you any good to lower your payments past zero. Once they’re down to zero, that’s as good as it gets. And doing more, paying additional money in taxes in order to lower them further isn’t going to help you get anything more forgiven.

WCI: The other thing you can do to lower that income is to make tax deferred contributions to your retirement accounts. That can be useful, as well, as a tactic. The downside to it is, you’re taking these relatively low earnings years that you have and not using them to make Roth contributions. So again, there’s a tax cost to this strategy.

WCI: I think in your situation, it is probably worth hiring professional help. I’ve got a list of four or five people on the website under Student Loan Advice, and this is all they do. All they do is give advice on your student loans and help you run the numbers year to year. They usually charge a few hundred dollars, but in your case, that’s going to be money very well spent to help you run those numbers, because this is literally something you’re going to have to do over and over and over again for the next seven or eight years. But it would not surprise me at all that the right answer for you could be being in the Pay As You Earn program, not the Revised Pay As You Earn program, because you cannot do married filing separately under that program. And then, of course, filing your taxes married filing separately. And over the next few years, perhaps also decreasing your income by contributing to a 401(k) or 403(b) your residency may offer.

WCI: I wish I could be more specific than that. It’s just, unfortunately, it’s a very complex calculation.

Resident: Yeah, and everybody’s situation’s unique, which is why it’s difficult to get dedicated advice without hiring somebody, which, I very much appreciate your answer.

WCI: The tricky thing is, you can’t just go to any financial advisor and ask these questions, because they don’t understand the programs. It really is very complex interplay between the payments and your taxes.

Resident: And it’s been difficult, too, this year, trying to file taxes. Most accountants don’t understand it either, so you’re either left hiring somebody or kind of trying to figure it out on your own.

WCI: Yeah, and then you throw in the uncertainty about the program. Obviously, when you finish your training, you also need to be saving up a side fund in case something happens to this program. Okay, let’s move on to your next issue.

Resident: I guess a follow-up question for that would be that, say that all of the public service loan forgiveness does work out, and that is my ultimate goal, is to go for that forgiveness at the end of ten years. Given the current situation, would you recommend contributing to Roth accounts and trying to save to pay taxes now, or would you contribute to tax deferred accounts and try to decrease your income to lower your payments?

WCI: Boy, that’s a hard question, because it comes down to how much faith you have in the public service loan forgiveness program. The right answer for most residents is Roth accounts. But, if you’re trying to lower your payments in order to get more free money, that obviously makes sense as well. I think if you run the numbers, you will be able to see that the tax deferred contributions, at least in some amount, are probably the right answer for you. But you gotta run the numbers on this one.

Resident: Oh, that makes sense. Absolutely. And then I guess, getting more into the investing side, my wife and I both have a 403(b) through our employer, and then we’re obviously eligible to contribute to a Roth account or traditional IRA accounts. Would you recommend one over the other, whether it be IRAs or the 403(b) through our employer?

WCI: As a general rule, you want to make sure you get your match. If there’s a match from the employer, put enough in there to get that. Not getting that is like leaving your salary on the table. Once you’ve got that, I prefer you being in control of it yourself. If you’ve chosen to do a Roth IRA or a Roth account of some type, I’d do the IRA before I did the 403(b) or the 401(k). But, you know, get the match, use the IRA. If you’re able to save even more, great, go back to the 403(b) or 401(k).

Resident: Mm-hmm (affirmative). Okay, great. And then, starting residency, I had heard a lot about life insurance and disability insurance for residents and potentially their spouses. When I started residency, I got myself a life insurance policy and a disability insurance policy, but I wanted to get your thoughts on life insurance and disability insurance for my wife.

WCI: Well, what the real question is for all of this is, what is the plan? What’s the plan if you die? What’s the plan if she dies? What’s the plan if you get disabled? What’s the plan if she gets disabled? What’s the plan if you both get disabled? What’s the plan if both of you die?

WCI: And I think you gotta work through each of those scenarios and go, “Well, what is the plan? How big of a deal is this financially? Is this something we need to insure against?”

WCI: I think once you arrive at that, then you go, “Well, this is what we’d like to happen in the event of my death,” and you look at how much money you have, and you look at how much money you would need to make happen what you would like to happen if you died, and take the difference and buy enough life insurance to cover that. Same thing with disability insurance, it’s basically the same procedure. Certainly, nurses get disabled all the time, and if that would cause significant financial difficulty to your lives, it’s worth buying disability insurance for her.

WCI: Same with life insurance. A lot of people, even with the stay at home parent, choose to insure the stay at home parent, because of the value there. There’s a real economic value to the things that stay at home parent’s doing. I mean, it’s easy to calculate how much child care costs, but other things like meal preparation, shopping, home maintenance, those kinds of things. Housecleaning, maybe. That all has an economic value, and you can add all that up and put a number on it for how much life insurance to have. So I think it’s not uncommon at all for even a stay at home mom or a stay at home dad to have half a million dollars of life insurance on them, just to cover those kinds of costs in the event of their death.

Resident: Mm-hmm (affirmative). And that makes sense. Kind of further complicating our situation is that my wife has life insurance through her employer, which is I think about three times her salary. Obviously, if she was to leave that employer, she would lose it, so what are your thoughts on getting it now or deferring it for another, anywhere from three to six years?

WCI: Well, the issue with life insurance from an employer is, it’s usually some tiny amount. Right? 50, 100, $150,000. It’s almost like, why bother? If you’re going to buy life insurance, buy big numbers. Even half a million on a stay at home parent isn’t that big of a number. When I talk to docs about buying life insurance on them, I tell them it’s a seven figure amount. One million, two million, five million, those kinds of amounts. Term life insurance is very cheap. If you’re going to err, err on the side of buying too much. It just won’t cost you that much money.

WCI: I guess, if you feel like there’s a need there for life insurance, I’d buy it. I’d just go out and buy it through something like TermForSale.com or InsuringIncome.com. These are websites that will give you a quote. You don’t have to give them any personal information. They’ll give you a quote and let you know how much it costs. I think once you run the numbers and see just how cheap it is, you’ll go, “Oh, let’s just get more.”
Resident: Mm-hmm (affirmative).

WCI: It’s nice to have something from the employer, but chances are, if there’s actually a need for life insurance, it’s not going to be enough money.

Resident: Yeah. That’s very helpful, very helpful. And then, one of my other topics that I wanted to discuss, if we still have time is, overall budget as a resident. Residents, it’s a lot more money than we had when I was in medical school, but still it’s not like that attending salary yet. So, I’ve noticed in our situation, every month we have a little bit of money left over after all the bills are paid, and wanted to get your thoughts on whether or not we should use that money to pay off my wife’s student loans, which she’s not going to be going for public service loan forgiveness, or if we should save that money in a savings account for a home that we’re ultimately going to be buying in the next, anywhere from five to eight years.

WCI: Well, I think if the home’s five to eight years away, I don’t think that would be a big priority for me to save up a down payment for it. You mentioned, I think, that her student loans were at a higher interest rate than yours, weren’t they?

Resident: By a little bit, yes.

WCI: Yeah, so five, six, 7%, somewhere in there?

Resident: Right around six to six and a half.

WCI: I mean, that’s a pretty high priority for me. Now, do I put money toward those before I’ve maxed out Roth IRAs, that sort of thing? That’s a hard decision. But certainly, I would do that before saving up a down payment, before really getting a really big emergency fund, before investing in a taxable account. I think it’s a no-brainer to pay off those loans. I think you’ll be glad not to have that over head. It’ll improve your cash flow a little bit to not have that payment going out every month. And I think people just make better decisions in their lives when they get rid of debts like that. So I think that would be a pretty high priority for me. I mean, a six or six and a half percent guaranteed return? Boy, I wish I had an investment like that available to me.

Resident: Yeah. That’s very helpful. There’s always competing interests when you’re out of medical school and finally making money, that you want to save and invest and pay off loans. So that’s very helpful, where some of the priorities may be.

WCI: Yeah, it’s a big problem for a brand new attending physician too, you have all these great uses for cash, and not enough cash to go around to all of them. And then, later in life, you know, I’m at that point in my career where I don’t have as many competing uses for money. I don’t have any student loans to go pay off, I don’t have a mortgage to go pay off. It makes things very, very simple, but it’s kind of funny that when you have this huge need, you don’t have the cash, and later you have the cash without the huge need. But that’s just a matter of how you end up, if you take care of business early on.

Resident: Yeah, that’s very helpful. And then, I had just thought of a follow-up question from the investing question that I had earlier. I know that if I do go for public service loan forgiveness and we file our taxes separately, if I understand correctly, we cannot contribute directly to a Roth IRA. So we would have to use the back door Roth IRA, is that … Can you clarify that at all?

WCI: That’s correct, that’s correct. If you’re doing married filing separately, you ought to plan to do your back door Roth IRA contributions indirectly, or your Roth IRA contributions indirectly or through the back door. Not a big deal, I mean, you’ll be doing it as an attending anyway. Just something to be conscientious of, because otherwise you’ll screw it up and have to recharacterize and reconvert it. It gets to be a big mess. So, just doing it through the back door from the beginning is not a big deal.

WCI: I think the first year I did a back door Roth IRA, I didn’t actually have to do it. I thought my income was going to be over the limit and it wasn’t. But it’s no big deal to fund it that way, as long as you don’t have some other outstanding IRA screwing things up.
Resident: Yeah, absolutely. That’s perfect. And then I guess my final question would be, I’ve taken a huge interest in finances, especially in medical school, now moving into residency. I’ve learned a lot about just how to become financially independent as a physician. Ultimately, I think that’s my goal, hopefully in the next 15 to 20 to 30 years, whatever it may be. I guess I just wanted to get your thoughts on, what are some of the active things that you can do now as a resident, or as an intern at least, to kind of start out on the right path to get good habits going forward?

WCI: Well, I think that’s exactly it. It’s about habits, because nothing you do financially as a resident is really going to move the needle a lot. If you pay a little extra on your loans, that’s not going to make a huge difference compared to what you can do as an attending. If you put a little money away from retirement, that’s not going to make a huge difference. In reality, the most important year of your financial life is your first year as an attending. Hitting the ground running with a written financial plan when you become an attending is really what makes a difference. All of a sudden, you’ve got 200, 300, $400,000 a year coming in the door, and you can really do some cool stuff with it, if you can just avoid using it to buy two Teslas and a two million dollar house. So I think that’s really it, just being conscious of what makes a difference in the financial life of a physician.

WCI: Your most important things now are develop some good saving habits, take advantage of some retirement accounts, manage your student loans well, get that insurance in place that would take care of a financial catastrophe, and just have a written plan for your first 12 paychecks as an attending, because that’s really what’s going to move the needle.

Resident: Is there any actionable tips during residency that would really make a huge difference, in your opinion?

WCI: I mean, I think getting insurance in place is probably the biggest one.

Resident: Okay.

WCI: Not having disability insurance, residents get disabled all the time. Or they develop a medical condition, and now they can’t buy disability insurance. So I think as an intern, that’s probably number one. But aside from that, the other big mistake I see people screw up in residency is not managing their student loans well. They put them in deferment, they put them in forbearance, and then they’re like, “I’ve done seven years of training and I’m going to be an academic attending, but I didn’t make any payments in residency.”

WCI: Well, you just pissed away $200,000 in public loan forgiveness. So I think you gotta be a little bit conscientious to manage those two things well, in particular. Everything else is icing on the cake, above and beyond those two issues, in my opinion, as a resident. You’re not going to become rich by what you do as a resident.

Resident: Yeah, that’s very helpful. I think the biggest thing coming out of medical school, for me especially, was student loans and figuring out how to manage those, because my wife and I got married in that May time right around graduation, so then that’s kind of factoring in her student loans as well, and how to do that with taxes and whether it’s PAYE or REPAYE and things like that, and trying to figure that out. That was probably one of the most stressful things coming out of medical school, but hopefully, we’ve got a good plan.

WCI: Yeah, and in your situation, you’re not in a terrible place. I mean, all together, you guys only owe $200,000. And so, that’s very, very doable. By the time you come out, maybe it’ll be a little bit more than that because it grew, but this is a ratio that a doctor can take care of just living like a resident for two or three years and throwing the difference at the loans. This is not some crazy loan amount that you’ve got. This was a good investment you made to borrow that much money to become a physician, which is not something I can say to everybody. If you come out with an income of $150,000 and you racked up $600,000 in student loans, that wasn’t a good investment. You made a good investment, and so this will work out well for you.

Resident: Yeah. I hope so.

WCI: Just remember not to try to do too much as a resident. I mean, your goal as a resident is to learn medicine, to learn to be a good doc. And you don’t want to get so caught up in trying to get ahead financially, moonlighting and tweaking all this financial stuff, that you fail in your primary job right now, which is to become a good doctor. The finances will take care of themselves. It’s good to pay a little bit of attention to it and make sure you take care of business, but this isn’t where your primary focus should be for the next three to six years. You need to be learning how to be a good doc, how to take care of people, and ensuring that you do get, eventually, that high attending pay.

Resident: Yeah, absolutely. That’s very helpful. I really appreciate all of your help and your guidance here, Dr. Dahle.

WCI: You’re welcome. Thanks for being on the podcast today.

Resident: Yeah. Thank you.

WCI: Okay, our next person on the podcast today is Justin. Justin is a medical student who’s also on the line with us here with a lot of other questions worth discussion on the podcast. Justin, welcome to the podcast.

Medical Student: Thank you very much, Dr. Dahle. Very happy to be on.

WCI: All right. Let’s go over your first question here.

Medical Student: My first question, really, I’ve done some research, but haven’t seen too many answers on it. I was hoping you could shed some light on it, about advice for young married couples who are health care professionals trying to start a family, and just kind of from your experience or colleagues, how much you should liquidate. I am a medical student, so rather young, and just don’t know what to expect when you’re expecting.

WCI: What do you mean to liquidate? You mean cash to have on hand when you gotta pay for delivery, or what are you looking for, mostly?
Medical Student: I guess that part, and on top of a rainy day fund, any additional funds you should have to quick access.

WCI: Yeah. I think it’s good to have cash on hand because there can be a lot of expenses that come up. Obviously, you can spend gazillions on baby stuff. I mean, there’s all kinds of baby stuff out there, and every little item’s going to cost $200. But a lot of it can be had for pretty cheap. Used, and a lot of these baby to baby exchange kind of places. You’d be surprised how inexpensively you can also outfit a baby. I wouldn’t feel, if you’re in a situation in life where you don’t have much money, like you are in medical school, that you’ve got to have the best of best of everything. You don’t need an $800 jogging stroller. I think there’s a lot of places that you can simply skimp. I assure you, the kid will not care or remember what kind of clothes they wore their first year of life. It’s just not going to matter.

WCI: But some stuff can come up. I mean, pregnancy is a high-risk time for medical problems. It’s not unusual at all for people to end up in the hospital and to have problems, and for you to run through your entire deductible. Obviously, some sort of health insurance, whether that’s Medicaid, like some medical students are on, or whether it’s health insurance bought through the school or health insurance bought independently. You gotta have something to cover there. And it’s a good year to have a relatively low deductible, if you have control over that, because you’re going to go through it paying for a delivery. It’s nice that you have nine months’ notice for that sort of thing sometimes, and just to get the insurance in line and be sure you have the ability to pay the copays, pay the deductibles, those sort of things. Otherwise, you end up running into cash flow problems.

WCI: But the truth is, most of the time in medical school, most of your living expenses are probably borrowed money anyway, aren’t they?
Medical Student: Yeah, correct, they are.

WCI: So it’s just a matter of how much you borrow. And of course, the school puts limits on how much they’ll give you. Usually, those are pretty generous limits, and then you can tap into other resources, like family and savings and those kinds of things. But it’s not like you’ve got something else to be doing with your money, right? Paying down loans or maxing out retirement accounts, or that sort of a thing. It’s just a question of how much you borrow, and the idea is to borrow as little as you can.

Medical Student: Right. So I guess, you kind of touched on something I wanted to hear from your experience as well. When you mentioned deductibles and … So, as a fourth year medical student looking into residencies, how much would you say to students should they prioritize a rank list based on, not only cost of living, but benefits, salary, when making our list? Because obviously, the specialty and the fit with the residents and the program is important, but how much do you think should weigh in on that in terms of the financial aspect of being a resident?

WCI: You know, honestly, I think benefits and salary are probably at the bottom of the list. Quite honestly. I actually, my number one choice and the place I went to residency paid the least of all 21 places I interviewed at. It was the worst paying place. It was $34,000 a year. Before I arrived there, in the three months between the time I matched and when I arrived there, they actually gave us a raise, so it was $37,000 my intern year when I got there. I thought that was great. You know, it was way more money than we were living on as medical students. It was wonderful.

WCI: But that really isn’t a high priority. Number one is, are you going to get the education you need? The strength of the training has got to be your number one priority. Number two, what’s your fit there? Do you fit in with these people? Are these people that do the same stuff as you on their time off? Are these people you want to work with? Are these people that you can see yourself hanging out with? That sort of a fit is super, super important in choosing your residency. Item number three is probably location, and that’s for lots of different reasons. If you have family there that can be a support, is it some place your partner wants to live, is it some place you want to live, can you pursue your recreational pursuits on your limited time off there, because if you can’t do it in half a day, you’re probably not going to do it during residency.

WCI: And then, of course, cost of living is also in there. But I think you will generally find, if you’re married, you have children, you’re looking for more of a family kind of atmosphere, you’re probably not going to be in the highest cost of living areas anyway. The fit’s not there. When I interviewed, you go some place in the Bay area or some place in southern California, and most of the residents seem to be single. They’re out going clubbing or whatever. If you’re married with children, you’re probably somewhere else, in the Midwest or something, where the cost of living is naturally lower. I think that often takes care of itself. But you gotta be a little bit careful. Matching into a residency on Manhattan with a stay at home spouse and two kids, you will not feel very wealthy as a resident in that scenario. In fact, there’s a lot of attendings that do not feel very wealthy. They really feel like they’re living paycheck to paycheck in that sort of a situation.

WCI: I think cost of living should be taken into account, maybe as the third item, as part of your location. But not the benefits, they’re just not dramatically different enough from one residency to another that it should sway your opinion, I think, or your rank list.

Medical Student: Yeah, that makes a lot of sense. Obviously, location is one of the most important things for me when I’m looking into. I am in the Midwest, so yes, I did not apply to any major big cities. That is something that is very intimidating to me, for all the reasons you just mentioned.

WCI: Yeah, I remember I interviewed at Stanford, and I think they give you a signing bonus. It was several thousand dollar signing bonus and we thought, “Well, that’s cool,” and then we looked at it and that was basically first month’s rent. We’d have to turn around and pay that for renting on some studio apartment. It just wasn’t going to work, so I ended up … I can’t even remember if I ranked it or not. If I did, it was way down my list based on that. It wasn’t that I thought the program was bad, it was just like, “I don’t want to deal with that when I don’t have to.”

Medical Student: Yeah. All preference related. So, my next question, big fan of your book, by the way. And one of my favorite parts about it is when you mentioned, I’m not sure when this is going to air, but the tax season approaching, and you always look at taxes as a competition between you versus the IRS. I found that very comical. From a competitive standpoint, I’m very much similar to you. So I was wondering, who won this year?

WCI: Well, I haven’t even touched my taxes for this year yet. I’ve still got to do a corporate return I’ve got due in a couple of weeks, and I probably won’t be doing my personal return until at least April, if I don’t file an extension. So, as far as how much taxes I paid, I definitely lost this year. But you know, that’s a good problem to have. It’s far better than the alternative, the alternative of not having to pay a bunch of taxes means I didn’t make much money. So, I had a good year and I’ll be paying a lot of money in taxes. I already have paid a great deal of it in taxes, but I think I’m going to have to write another big check in April to make up for the difference. But it’s a good problem to have.

WCI: I think that is a good thing to do though, to do your taxes every now and then. At least work through the forms, if somebody else prepared them for you, because you learn a lot about the tax code. The day we’re recording this, I actually had a post go up on the blog called A $200,000 Income and Paying Zero in Taxes in Retirement, and that’s entirely possible. That sort of a result comes from just understanding the tax code. I think it is a worthwhile thing to learn. It really can save you tens of thousands of dollars. Would you rather learn a little bit about the tax code, or would you rather work an extra ten days a year? That’s kind of the way I look at it.

Medical Student: Yeah, it definitely can make a difference, I agree. I’m still trying to find a really good book, like you mentioned, to use as a resource to really understand the tax code and the forms related to it.

WCI: Yeah, I hear that a lot from readers, and I keep putting it on my plate of things to do. Really, a doctor-specific tax reduction guide. I haven’t seen it out there. Maybe somebody will beat me to it, and that’s okay with me, if I don’t have to write it. But otherwise, it’s on my list of things to do eventually.

Medical Student: Yeah, you got a big plate. So, also, just coming from a standpoint of trying to look at different additional advantages for executive positions or working in health care policy, do you see any need or benefit to getting a MPH or an MBA?

WCI: You know, I think it’s interesting. We, as doctors, we love education. We love fellowships, we love certifications and degrees. We’re always thinking about getting another one. I know very few doctors that haven’t at least thought about getting another degree, for instance. But the truth of the matter is, most of the time it’s probably not necessary. You’ve got a terminal degree with an MD or a DO. And that is going to open most of the doors you need to open, so before really committing the cash or the time and effort to get an MPH or an MBA, I think you really need to ask yourself, “Do I really have a need for this?”

WCI: Because if you don’t have a need for it, if it’s not going to advance your career, if it’s not going to get you some place that you couldn’t get without that degree, it’s really a luxury. You’ve got to ask yourself, “Can I afford this?” It’s like a Tesla, “Can I afford to drive a Tesla? Do I have 75 or $100,000 sitting around to buy this car or to buy this degree?”

WCI: And if the answer is no, well, maybe you ought to pass on it. I think there are very few physicians who end up in a position where they go, “I really need an MPH to do this.” I think a lot of them just kind of got it during medical school, it seemed interesting. I mean, it’s fine, life isn’t all about money. Certainly, if you have an interest, you have enough time as a physician to make up for taking a year or two to get a degree or to do an extra fellowship or something. It’s not like you’re going to be poor because of it. But there is a cost to it. It’s like the emergency medicine residencies. There are three year residencies and there are four year residencies, and a lot of people call that last year of a four year residence the $400,000 mistake, because there is an opportunity cost to spending time in education rather than being out working.

Medical Student: Well, thank you. Yeah, that makes a lot of sense. It just seems like, like you said, we’re all striving for higher education, and when you get that terminal degree, you’re kind of like, “What do I do now?” I want to keep expanding my knowledge base as much as I can, but I would just to see where else I can take this.

WCI: Yeah, I think we just like to be lifelong learners. I mean, medicine selects for people like that. So I think it’s pretty natural. But when there’s a cost to it, both opportunity cost as well as a real cash outlay, I think you’ve got to look at it a little more carefully.

Medical Student: Yeah. That makes sense. And a lifelong learner, that got me some refund money on my taxes.

Medical Student: I guess my final question is really just, what kind of advice do you give to new primary care attendings in starting or joining a private practice, and the feasible aspect of it depending on where you’re practicing, whether they’re getting bought out by larger health networks.

WCI: I think you’re alluding to kind of a trend we’ve got in medicine right now, where the entire industry is consolidating. Doctors are much more likely to be employed now than they were five or ten years ago. Practices are being bought out by private equity groups. I think a lot of this is contributing to the burnout rates in medicine. I’m not a big fan of it. I really like doctors being able to own their practices, for a couple of reasons. One, they feel like they’re in control, and I think that helps with burnout quite a bit. But also, because I think they take better care of patients that way. And the reason why is that they’re not accountable to anybody but themselves for how they take care of patients. There’s no corporation pushing you to order more tests or pushing you to see patients faster than you should be seeing them, or do procedures that you maybe shouldn’t be doing. I think it actually results in better patient care.

WCI: That said, I think it’s getting harder and harder to find those jobs, and oftentimes, there’s a real financial sacrifice upfront with them. If you’re not in a financial position, because you borrowed $600,000 to pay for medical school, I think it’s a little bit harder to take those jobs. You’re much more incentivized to get the quick money, which oftentimes is an employee job with a contract management organization or with a hospital or something else. I think it’s good to keep your options open. I’ve certainly enjoyed being in private practice, but it’s not for everybody. A lot of people, they just don’t want to deal with that stuff, and they just want to punch the clock and take care of their patients, and not deal with any of the administrative hassles of ownership. There’s not necessarily a right answer to that question.

WCI: Now, you’d sent off a couple of questions that I think might be interesting to talk on the podcast briefly about. One of them was a question about medical marijuana and marijuana investments.

Medical Student: Yes, I did. So, my state recently legalized medical marijuana, and I had some friends who were trying to tell me to get on the, maybe buying ETFs or something with dispensaries and all those start-ups because of their … I don’t know, ability to grow.

WCI: Yeah. It’s kind of a hot new industry. I hear this question a lot, actually. But in reality, this is like any other business. If somebody called me up and said, “Should I invest in the companies that make toilet paper?” I’d say, “Well, why don’t you just buy all the companies?” Because you’re not really sure that toilet paper’s going to better than marijuana, that’s going to do better than oil and gas, that’s going to do better than real estate, et cetera.

WCI: And so my usual inclination, any time anybody asks about buying individual companies, much less a start-up, is, “Why would you take on that uncompensated risk?” If there’s a risk that can be diversified away, taking that risk should not result in any additional compensation. Risks that can’t be diversified away, like overall market risk, is compensated. When you take that risk, you have an expected higher return because of it, versus treasury bonds or something like that. And so I don’t think that’s necessarily the case when you’re picking an individual company or an individual sector, et cetera, because you can diversify that away.

WCI: Now, do I have any idea what marijuana stocks are going to do over the next five or ten years? I have no idea. Maybe they will outperform the market, maybe they will underperform the market. But I can tell you this. There are a lot of people who are very smart and have access to a lot more resources than you do that are trying to answer that question and struggling with it. And if they are struggling with it, the likelihood of you knowing the right answer without just taking a wild guess is pretty low. So in general, I’d stay away from investments like that. Doctors typically get in trouble when they’re trying to get too cute, trying to outsmart the market, and they forget the things that really matter, which is making a lot of money, saving a big chunk of it, and investing it in some reasonable way. I don’t know anybody that’s going to become wealthy quickly because they chose to tilt their portfolio towards marijuana.

WCI: All right. Any other questions today?

Medical Student: No, I think I’m really good. I appreciate all the time you spent, and your team and the White Coat Investor, the forum on Facebook has exponentially saved a lot of time, because that is one great resource to have, a lot of important discussions being made and covering a lot of great things. Once again, I just want to thank you and your team for everything you guys have been doing for us. I know you love giving that motivational talk in the beginning of each podcast, and that, I think it goes a long way. I like hearing that.

WCI: Yeah. It’s amazing how many doctors hear a thank you at work, isn’t it?

Medical Student: It is. But when you hear it from other people, it just sends good vibes. So, thank you again.

WCI: You’re very welcome. Thanks for being on the podcast.

WCI: Okay, we’re going to tack on a few Speakpipe questions at the end of this podcast. Our first one is from Joel Schofer, who was on the podcast not that long ago.

Joel: Hey Jim. It’s Joel Schofer from MCCareer.org. There’s a lot of discussion from Bogleheads about the three-fund portfolio, consisting of US and international stocks and US bonds. But what Vanguard does with its own target-date funds is use a four-fund portfolio, adding international bonds to the mix as the fourth asset class. What’s your opinion on this? Should investors looking to use a simple three-fund portfolio add the fourth asset class of international bonds? Thanks.

WCI: So what he’s basically asking is, should investors add a fourth asset class to their three-fund portfolio, and he specifically names international bonds. Well, I don’t have international bonds in my portfolio. I don’t feel like it’s a super attractive asset class, or something that one must own. So if you’re trying to keep things simple, if your goal is to have a very simple three-fund portfolio, I wouldn’t feel like that was the fourth asset class I would add to it. I agree that Vanguard does add that to their life strategy funds and their target retirement funds, and if you want to, I think it’s perfectly fine, but I think you’re adding a little bit of extra complexity without a ton of additional benefit. I think if I was going to pick a fourth fund to add to a three-fund portfolio, I would probably add a real estate investment trust to that, a tilt toward REITs.

WCI: But that’s really for you to decide. I mean, a portfolio is a very unique thing. There’s nothing magic about a three-fund portfolio. The goal is to find something that’s reasonable and stick with it for the long term, and fund it adequately with a good income and a good savings rate. The actual asset allocation, so long as it’s something that’s not crazy, doesn’t matter all that much. And besides … I guess that’s not the right way to say it. The way to say it is, it does matter, but you can’t predict it in advance what the right one’s going to be, so you might as well just stick with something reasonable.

WCI: All right. Our next question on the Speakpipe, and if you want to leave one of these questions, you can go to www.Speakpipe/WhiteCoatInvestor and leave your own questions for the podcast. This one comes from Chris.

Chris: Hey, Dr. Dahle. I’m an undergraduate student right now, relying on Parent Plus loans. Ideally, I will matriculate into med school in 2020, just after graduation, by then relying on federal student loans in my own name. I know that you generally advise using REPAYE and all those types of programs for paying off student loans in residency, but does that differ when accounting for Parent Plus loans, since they’re not in my name?

Chris: I know that the loans are in my parents’ name, the Parent Plus loans, but the plan was always just to pay them myself because they are unable to cover the costs themselves. Not to mention, it’s my own education, so I mean, I probably should. Anyways, how can I best optimize paying the Parent Plus loans, and ideally registering for IBR for the loans in my own name in my future residency? Should I refinance the Plus loans in my own name and lose the federal benefits? I have a while to think about this, but I figure I’d start early. Thanks for your answer.

WCI: He’s basically asking, what should I do with my Parent Plus loans from undergraduate in residency? Well, Parent Plus loans are tricky. These are loans your parents take out to pay for your education. This is not something you even have a responsibility to pay back. It’s their loan. So unless you have some sort of agreement with them that you’re going to pay them off for them, this isn’t your issue. But bear this in mind. You can actually get public service loan forgiveness for these loans. But the issue is, they are not eligible for the IBR, the PAYE, or the REPAYE program. The only income-driven repayment program they’re eligible for is the crappy old one, the ICR program, the one where you’ve got to make 20% of your discretionary income payments. And so, this is not a great route to go, taking Parent Plus loans for anything. I really don’t like them, I think it’s a bad option, unless it’s like the only way you can possibly go to college, which seems unlikely to me, given the low cost of college compared to medical school.

WCI: Be sure, of course, if your plan is to pay these off for your parents, that you bought enough life insurance on you that they can pay them off if something happens to you. You should also buy enough disability insurance to cover them as well. Otherwise, your parents are going to get stuck with something that they were intending for you to pay off.

WCI: All right, let’s take one more. This one is anonymous.

Anonymous: I have a quick question about tax loss harvesting. I hold a Vanguard brokerage account with some broad-based index funds, and I’d like to do some tax loss harvesting moving forward. The question I have is that my wife, she has a workplace retirement plan, a 403(b), where she contributes every two weeks to a Vanguard target retirement account that holds the same underlying funds that I hold in my brokerage account. If she contributes every two weeks to it, can I not tax loss harvest? How do people in this situation work around that? Any insight would be helpful. Thank you very much.

WCI: So this is about tax loss harvesting. Basically, how do I deal with tax loss harvesting if my wife is using the same funds and contributing every two weeks in her 403(b)?

WCI: What we’re talking about here is a wash sale. If you sell a fund and then you buy it back within the next 30 days, you basically don’t get to harvest that loss on your taxes. Technically speaking, wash sales only apply in taxable accounts and IRAs, if you actually look carefully at how the law is written. Now, a lot of people suppose that, because they apply to IRAs, they also apply to 401(k)s, but that’s not technically there. The other thing to keep in mind is, nobody is really looking closely at this either. The IRS doesn’t get a list of what you bought and sold in your 401(k) every year. So if you accidentally forget to watch this sort of a thing, nobody actually notices at the IRS.

WCI: That said, I think the spirit of the law is that you’re not supposed to be buying something in your 401(k) that you just sold in your taxable account, if you’re trying to claim a loss on it. I think the easy fix is just use different funds in your brokerage account. There are so many funds that are similar to what you should be buying. If you’ve got a Vanguard total stock market in the 403(b), use a fidelity total stock market in the taxable account, or use a 500 index fund, or a large cap index fund, that sort of a thing. It’s so easy to get around it, you might as well just get around it. But I wouldn’t expect to really be caught on this one, should you happen to do it accidentally.

WCI: All right. This episode was sponsored by Set for Life insurance. Set for Life was founded by president Jamie K. Fleischner in 1993. She started it while she attended Washington University in St. Louis. They specialize in individual term life, disability, and long-term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost-effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients and shop around to find the best products available at the best rate. For more information, visit SetForLifeInsurance.com.

WCI: Be sure to check out the Financial Boot Camp book, it’s out. This is my first book I’ve written in five years. It’s really not an update, nor a sequel to the first book, it’s a completely separate book. It’s designed to take you from zero to hero in 12 easy steps. It’s available on Amazon now. By the time you hear this, it should be available also as an e-book and an audio book.

WCI: Thanks for subscribing to the podcast, thank you for giving us a five star rating on iTunes. That does help the message get out to more people. Head up, shoulders back, you’ve got this, we can help. See you next time on the White Coat Investor podcast.

Speaker 8: My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He is not a licensed accountant, attorney, or financial advisor, so this podcast is for your entertainment and information only. It should not be considered official personalized financial advice.

The post Financial Advice for Medical Students and Residents – Podcast #98 appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: The following guest post was submitted by recent residency graduate and regular reader, Dr. Kevin Nguyen, DO. As a new attending struggling to control increased spending, he stumbled across the term lifestyle creep. He decided something was amiss with his upward trend in spending and that he’d better get educated about finances. For someone new to finances, he learned the basics quickly and offers a timely warning to new graduates. We have no financial relationship. ]

Watch Out For the Creep!

After graduating from residency and starting my attending career, I found myself in unfamiliar territory.  I’d spent the past three years as a family medicine resident focused on my education and learning about the practice of medicine. After I graduated and entered the real world, I felt somewhat lost. I am technically proficient as a physician, but if you asked me about managing finances, you’d have gotten a shrug and blank stare.

Recently, however, I’ve begun to look up resources on financial savings and wealth for retirement.  It was through this research that led me to the topic of this article. I noticed that with my new income I was more comfortable spending money I would normally not have. I ate out at fancier restaurants, bought more material goods, and overall spent more money.  In my efforts to reign this in, I came upon the term “lifestyle creep” and how it can affect all physicians that are new to the workforce.

What is Lifestyle Creep?

Explained further, lifestyle creep is the slow but steady changes in a person’s spending habits and standard of living. Just received a raise? Go buy a new pair of shoes. Year-end bonus? Go put money down for that car. Graduate from residency?  Go buy a new house, new clothes, and finally start living. Certainly, it’s not wrong to want to do these things, but lifestyle creep can damage your long-term financial goals and should make anyone suspicious of their spending habits.

The danger of lifestyle creep is that it often goes unnoticed.  You may start off by rationalizing small purchases. By themselves, it may seem like nominal increases to your standard of living, but together, this can add up dramatically and slowly your lifestyle has changed.  A higher lifestyle brings higher expenses, and failure to address this can lead to lost opportunities on saving and investing in your future.  This can have a profound effect on when and how you will retire. We have all heard about the physician with multiple houses and multiple cars. Although we may envy the lifestyle, just know that to keep going at this pace the physician likely will have to work past retirement to pay for all the expenses.

Lifestyle creep affects physicians because the transition between resident to attending career is often followed by a 3-fold increase in salary and disposable income. Paired with years of delayed gratification, and poor financial education, it is no surprise that lifestyle creep traps physicians into making financial mistakes and harming their retirement goals.

3 Traps of Lifestyle Creep and How to Avoid Them

#1 Sudden Increase In Income

The average resident in America makes $57,200.  When compared to the average medical school debt of $190,000, you can see that it does not leave much room for leisure.  Additionally, residents work 60-80 hours a week which often leads to a lower standard of living and lower expenses.  However, this becomes more difficult after graduating. New physicians can make between $150-500K a year depending on specialty.  If not controlled, this greater spending power comes with increased spending habits.

Case Report #1: I Deserve An Upgrade!

Dr. NS is a new internal medicine doctor who is now enjoying the attending life.  His hobbies include traveling, and throughout residency, he used credit card points for trips around the world.  This was a great way to save money and also still enjoy life. He is currently planning a vacation and feels he should upgrade to business class for the extra leg room.  This would cost him an extra $2000, but hey, he’s making more money and can afford it. He rationalizes that he’s earned the ticket.

There is nothing wrong with the above scenario and Dr. NS has every reason to go for the business class ticket, however, this is an example of lifestyle creep.  The next time he plans a vacation, he’ll reminisce about flying business and may opt to fly it again. He was used to one standard of living, but because he has more money, he slowly increased his standard of living.  It will be harder for him to go back down to coach. That $2,000 can be better spent elsewhere.

How Will the “Upgrade” Affect Your Future?

Dr. Kevin Nguyen, DO

It is important to control your expenses and grow into your new income at a slow and steady pace.  When looking at upgrading aspects of your lives, take time to consider how it will impact your future.  Do you need to upgrade right away to a more lavish home or can you look to upgrade a smaller home in your current location? Although you can spend more with the new income, you will have other opportunities to spend money in financially smarter avenues.

Consider this metaphor: your income during residency is a small backyard pool.  You have been swimming in this pool for many years and have gotten used to where you could go. Now, your swimming pool is much larger with a deep end and diving board. You wouldn’t want to venture too far off and drown before you are ready. First, you have to learn to swim and learn to control your new income to avoid drowning in a sea of debt.

#2 Instant Gratification

Instant gratification is a symbol of American culture in the 21st century.  Whether it is purchasing the newest iPhone or adopting contemporary trends, Americans are always looking for their next fix.  By choosing the time-honored career of becoming a physician, most, if not all, choose to have delayed gratification by going through the rigors of training.  If lifestyle creep is a disease, then delayed gratification is one of the medications to manage it. It is important for all new physicians to continue delayed gratification in some fashion.

Case Report #2: Needs vs Wants

Dr. AP is a new doctor that joined a great practice in San Francisco.  He always dreamed of living on the West Coast and is excited to start his new life.  However, he also dreams of owning the new Tesla Model X. He drove his old Honda Civic during medical school and residency but now wants something new.  After some debate, he decides to purchase his dream car. Now he’s able to drive to work with his “doctor car”, but he just incurred another expense.

Was this a necessary purchase or could Dr. AP have driven an older car to work and still be happy?  The extra payments now going to his car could have been used for furthering his financial goals. Due to lifestyle creep and the need for instant gratification, he changed his standard of living.

How Will Instant Gratification Affect Your Future?

Delaying Milestones

It is not only with material goods that delayed gratification should be practiced but also with gratifications of being an adult.  The five milestones often touted for a successful adult are:

1.    Completing school
2.    Leaving home
3.    Marrying
4.    Having a child
5.    Becoming financially independent

By going through medical school and residency, these milestones are pushed back in life.  Most graduates of residency can check off numbers 1 and 2. Some can say they also have checked off 3 or 4.  However, the point is that if you can wait on some of the milestones and not rush into things, you will be better off. Don’t meet milestones for the sake of meeting them, but rather when it is economically feasible.

Don’t feel pressured when you see friends outside of medicine moving forward on these milestones and moving on with life.  If you can save money living at home with your parents, do it. If you can delay having a child, that is a lot of financial savings. Instead of spending money right away, think about where else that dollar could go and gain value. Of course, this needs to be tailored for every person but the advice remains, don’t rush into things until you consider all the financial responsibilities.

The opposite is true for milestone #5 as you should pay off all your debts and save for retirement.  We should hasten our visit to this milestone.

#3 Financial Illiteracy

Of the countless hours it takes to become a physician, almost no time is spent on financial literacy and financial education.  Newly minted physicians enter the world with six-figure salaries and no understanding of how money works. With a disposable income, lifestyle creep inherently takes control of your life. This is why learning how to budget is a necessary but learned skill in avoiding lifestyle creep.

Case Report #3: Not Taking Advantage of Tax-Deferred Retirement Accounts

Dr. KN is a new family medicine physician.  During residency, he made the smart choice of opting into his employer’s 401K match, however, he did not invest in any other opportunities available to him, like the Roth IRA.  His rationale at the time was that he could not afford to spend the extra $5500 a year to max out this account. After looking at his retirement accounts, he realizes that he has not met his financial goals and has to catch up.

Although the employer match helped him build a 401K retirement account of $20,000, he contributed nothing additional to his IRA account.  If he had contributed $5500 every year for his three years spent in residency, he most likely would have doubled his funds.

Doctors Need to Budget Too

There are several methods to budgeting.  Personally, I’ve had success with allocating a purpose for every dollar.  This helped me minimize unwanted spending and see where money flows. In practice, it can look like this:

At the beginning of every month, sit down and allocate your take-home income for that month.  For example, if your residency salary paid you $3000/month, you would allot each dollar into specific purposes.  

A Typical Resident Allocation:

$ 1300 to rent and electricity

$ 300 to groceries

$ 300 to eating and going out

$ 200 to car payments

$ 100 to student loan payments (consolidated with a physician plan)

$ 100 to transportation

$ 100 to internet and cell phone plan

$ 50 to online streaming websites

$ 250 to savings and retirement

$ 100 to disability insurance

$ 200 for incidentals

Doing this monthly will help you adjust and see where you can save. By allocating every dollar, you make it harder to overspend in different areas and avoid traveling further into debt.  Budgeting also allows you to see how you spend money. If you notice that prior month’s outgoing expenditures increased, you should consider decreasing your expenses the following month to compensate. Budgeting is a simple game of checks and balances.

Budgeting for Savings, Retirement, and Student Debt

Putting money towards savings, retirement accounts, and your student debt is an important part of becoming financially independent.  Remember, as physicians you start off making money at a later age compared to the general public. It would be wise to have at least 3 months in savings that is easily accessible, like a high-interest savings account.  Attempt to max out contributions to your retirement accounts (401k/IRA) so that you can meet your retirement goals.

Any extra money put into your student debt is guaranteed return of whatever your interest rate is. If your student loan interest rate is 7%, any dollar paid off is a 7% return on investment risk-free.  That dollar is one less dollar for which the bank can charge you 7%. As a comparison, most high-interest savings account from banks give you around 2-3% interest, while your retirement accounts can average about 7% historically. Depending on the market, your retirement accounts have risk and can go up and down, so it is not 100% guaranteed. When paying off your student loans, you will always get back your interest rate.      

Conquer the Creep!

In summary, lifestyle creep is a slow but steady change in your standard of living which can lead to runaway expenses, failure to save for your financial future, and cost you money.  As physicians, we are at risk because of our newfound income when we transition from resident life to attending. Lifestyle creep worsens from our need for instant gratification and our lack of financial education.  It is important to reward ourselves, but make sure to do so without jeopardizing our future. Learning to grow into our income, continue to practice delayed gratification, and budget correctly by choosing smart financial decisions can help us avoid lifestyle creep.  

What consequences have you paid because of failure to control lifestyle creep? What have you done to combat it? What advice do you have for physicians who bought into too much house, car, and inflated spending habits? Comment below!

The post How to Avoid the Traps of Lifestyle Creep appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: Here’s a re-published post from WCI Network partner, The Physician Philosopher and is about the advice I gave back in 2011 for young docs to “live like a resident” for their first few years after residency. Enjoy TPP’s fresh reminder on the principle!]

Chances are that if you are reading this blog, you have heard it said time and again that when you graduate you should “live like a resident.”  The truth is that this is really solid investing advice.  The White Coat Investor has said on more than one occasion that he can predict your financial future with “surprising accuracy” if you tell him what you did in the first couple years after you finished residency.

That’s all well and good, but where’s the proof that you should live like a resident after residency?  Well, the proof is in the pudding. Let’s look at the ingredients to see if the pudding tastes as good as it sounds.

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Pudding Ingredient Number 1: Savings Rate

The first ingredient in the Live Like a Resident pudding is a giant dash of savings rate.  Your savings rate is the main determinant of your initial success in investing. Later on, your money will start to work for you once you’ve saved a substantial amount.

Why is this initial savings rate so important right after you finish?  Glad you asked.

The 2 Million Dollar thought experiment:

Your goal in this thought experiment is to get to $2 Million Dollars.  Here are the assumptions.  You save 50K annually each year and earn 8% interest growth (we could assume less, it’s just the number I chose).  Given these assumptions, it would take you 19 years to get to that goal (you’d actually be sitting at $2,072,313 at the end of year 19).

To understand the following numbers, here is the key to the following tables:

The First Decade

Even after ten years of savings, your annual savings rate (that $50,000 you save each year) accounts for ~70% of the entire total of your accumulated savings.

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Why should you care?

• This means that the major determinant of your retirement nest egg in your early years is your savings rate (it accounts for 70% of your savings at 10 years).
• With these assumptions, you have not even gotten halfway to your goal of $2,000,000 in TEN years of saving.  In fact, you stand at less than $800,000.
• Remember, though, I have to add another 1.2 million dollars in 9 years and I only saved $800,000 in TEN?

The next decade is where the magic happens.

In the graph, you’ll notice that year 17 is the break-even point where the total amount saved coming from your contributions starts to dive below 50% of the total value and compound interest starts taking over as the predominant factor determining your total savings.

The take-home here is that the further along you get, the less your savings rate has to do with your total accumulation. This is because your compounding interest begins to really shine from all those hard years of saving early while you lived like a resident.

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This is one of the many ways that the rich get richer.  Once you’ve saved “enough” your compound interest starts working overtime for you.

Saving Early Matters

For those that prefer visual representations, the following figure may explain it better.

The blue bars are the % of your total savings that comes from the money you have saved (i.e. your contributions).  The orange bars are the % of your total savings that comes from compound interest.

Time in years is on the X-axis, percentage of your total savings is on the y-axis. Note that the first year you start investing the entire bar (100%) is blue, because all of your savings came from your contribution from that first attending paycheck.

As noted earlier, in year 17 these two points (the blue bar and the orange bar) are even at 50%.  From that time point forward, compound interest is more responsible for your total savings than your contributions.

What happens if we extend the math further?  Well, after 30 years, this savings plan ($50,000 per year for 30 years) was started, the total savings would be $5,641,161.

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Of this total, 73.5% would be due to compound interest (or $4,164,161) and only 26.5% would be from your contributions (a total contribution of $1,500,000, or 30 years at $50,000).

You read that right. You contributed 1.5 million dollars over 30 years and made over 5.6 million dollars.  THAT is the power of living like a resident and earning compounding interest.

What accomplishes a large total savings is having a high savings rate in your early years, and a high savings rate is best accomplished early in your career by living like a resident when you finish.

Pudding Ingredient Number 2:  Grindin’ Debt Like a Resident

Of course, your savings rate is only part of the pudding.  Your savings rate could be even higher than $50,000 per year if you didn’t have those pesky student loans.

This is why it is so important to make a plan to deal with your student loan debt early!  And, if you don’t know what to do, then get a student loan consult!  The sooner you have a plan, the sooner you can take the next steps.

This is important because the % of your money put towards debt and your savings rate help determine your Wealth Accumulation Rate (WAR).  The higher your WAR, the faster you’ll be obtaining your financial independence.

After all, after you live like a resident and that debt is paid off you can then put that money towards others important things, including:

• A higher savings rate that will allow you to reach your financial goals faster. If you had started out investing $75,000 per year, you would have reached the 2 million dollar mark by year 15 instead of year 19.  That could save you four years.
• You can make a big purchase, such as a bigger home, with the increased monthly cash flow (though I don’t encourage you to think about money in terms of monthly payments).
• Invest more in your kid’s 529 or perform your first backdoor Roth IRA.
• Use some of that money (via The 10% Rule) to enjoy a little more of life.  Maybe take that vacation you’ve been waiting to take.

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You can do whatever you want with the additional money once your student loans are paid off.  Odds are that once you have built the kind of financial muscles it takes to live like a resident, any financial goal is within reach.

Ingredient Number 3: A Pound of Earnings

One of the big advantages that you have coming from residency is that you are “used to” living and working like a resident.  If you can keep that work pace up for even an extra 12 to 24 months following residency, you’ll likely make a lot more money.  That is one of the ways that I paid off $200,000 in student loans in 19 months after I finished training.

This additional work could be through locums tenens work, picking up extra shifts, or working a side hustle or three.  For example, some ways that I’ve earned additional income since finishing training include my side hustles including picking up extra shifts, performing medical malpractice expert witness work, and my The Physician Philosopher blog.

The point is that when I finished training, I was used to working resident hours. Keeping that going really helped us achieve our financial goals sooner.

Putting Living Like a Resident Together

The more of Ingredient Number 3 (work ethic) you have the more you can add of Ingredient 1 (Savings Rate) and Ingredient 2 (Grindin’ Debt) to the recipe.

Since this post hasn’t had enough math yet…let’s add some more here.  Let’s say you earn an extra $1,500 per month from your extra shifts or side hustles.  This would leave you with a couple of choices:

One choice is to pay off more debt.  Say you came out of medical school with $200,000 in debt.  You were smart and refinanced your loans to 3.5%.  At $4,000 per month, this will take you 4.6 years to pay off.  If instead, you worked a little harder and made some extra cash, you might be able to pay $5,500 per month.  This would pay off that same amount of debt in 3.3 years.  It would also save you about $4,000 in interest as well.

Alternatively, if you invested that extra $1,500 per month for three years after residency (total of $54,000 over that time) this would turn into $404,643 after 30 years at 8% compounding interest.

Either way (paying down debt faster or increasing your savings rate) you are building your wealth much more quickly. This is why it is so important to continue to work hard after residency.  You can accomplish your goals faster.

Take Home: Live Like a Resident

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Many readers will already understand these principles, but for anyone early in their career, I hope this serves as a solid reminder. What you do in those first few years after you finish is fundamental to your financial success.

If you need help figuring more of this stuff out, then I encourage you to go and purchase The Physician Philosopher’s Guide to Personal Finance.  It’ll teach you the 20% of personal finance doctors need to know to get 80% of the results.

What did you do right after you finished?  Did you buy the big house and the nice cars?  Did you put the extra money towards grindin’ debt or investing?  If you had a time machine, what would you do? Leave a comment below.

The post Proof is in the Pudding: Live Like a Resident appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: The following guest post was submitted by fourth-year emergency medicine resident at the University of California, San Diego and regular reader, Dr. Ashely Alker. It’s always great to get guest posts from regular readers and sometimes those of us who have been reading for years forget how life-changing getting the basics right at the beginning can be. We have no financial relationship.]

As a new physician, you will be faced with unique financial challenges. Understanding loan repayment options during your transition from medical student to resident to attending is very important. If you have no medical student debts, this article is not for you. But if you, like me, have substantial educational debts to pay, then start reading!

MS4 to PGY1

Pay Off Any Credit Card Debt

If you have credit card debt, pay it off and cut-up your credit card. Card debt is only slightly better than using loan sharks. If you have an issue living off your resident salary, be sure you are not overspending. The median household income in the United States is $56,516. Therefore, you should be able to live on a resident salary. If you have an emergency and need financing, take out a loan. Credit cards are for reward points, not loans. If you are not paying it off every month, you should not have it.

Taxes

During your MS4 year of medical school, file your taxes. I filed taxes during my MS4 with an income of $0. Technically you should not have to file taxes for an income of $0, and you may be able to accomplish the same benefits without filing. But I wanted to be certain, so I filed taxes with an income of $0.

If you made money during your fourth year of medical school or are married, you will need to consider how it will affect your income-based payments. If you are married, consider whether you should file taxes “married filing separately.”

Apply for an Income-Based Repayment Plan

In 2015, Revised Pay as You Earn (REPAYE) became available. This plan is beneficial because if your monthly payment does not cover your interest charge on your loans the government will pay 50% of your unpaid interest on each monthly payment. If you have an income-based payment higher than your monthly interest, due to being married or supplemental income, you may want to choose the Pay As You Earn plan (PAYE).

REPAYE and PAYE are payments that are based on your income from the previous tax year. During your first year of residency, if you had an income the previous year of $0, your payments will be $0 per month.

Apply For Certification

When you file for REPAYE or PAYE each fall also submit the certification of your residency program as a nonprofit. You accomplish this by filling out this form and having it certified by your institution, then mail it or upload it online if Fedloans is your loan server. I recommend keeping a copy of your PSLF forgiveness form and calling yearly to be sure they have received your form.

Recap

1. 1. File taxes your MS4 year
   2. Apply for REPAYE online, PAYE if high family income
   3. Apply for PSLF certification via mail (U.S. Department of Education, FedLoan Servicing, P.O. Box 69184, Harrisburg, PA 17106-9184)  or online. Keep a copy of your form.

Dr. Ashely Alker

PGY2 Year

Re-Apply for Income-Based Repayment Plan

You will need to re-apply for REPAYE/PAYE annually using your taxes from the previous year. There will not be any strong reminders from Fedloans to do this, so you will have to set a reminder yourself. The estimated payments based on an annual resident salary of $40-65k are approximately $200-$400 per month.

Re-Certify

When you recertify your income-based loan repayments, also send federal loans your annual PSLF certification, again endorsed by your residency program. You will have to send this paperwork every year for your best chance to ensure loan forgiveness through PSLF.

If you miss the renewal of your income-based payments, they will default to the standard repayment plan. My PAYE payment is $271 a month, while my standard repayment plan payment is $3,300 a month. If you cannot make a payment, you cannot default on your loan if your goal is to have your loans forgiven through PSLF. You will have to call Fedloans and place your loans into deferment, while you recertify your loans as PAYE for the next month.

When you call Fedloans to confirm they received your PSLF form also ask for the number of “qualifying payments” you have made. You need 120 payments to qualify for PSLF.  You should keep track of this number annually. Write it on your PSLF form for that year and keep a file.

Re-Assess Your Tax Filing and Income Status/IBR Payment Amount 

Recap

1. Reapply for REPAYE online, PAYE. remember to set yourself an annual reminder for this.
2. Determine if your tax filing status and income will affect your income-based payment amount.
3. Reapply for PSLF certification via mail (U.S. Department of Education, FedLoan Servicing, P.O. Box 69184, Harrisburg, PA 17106-9184)  or online. Keep a copy of your form.
4. Call Fedloans (1-800-699-2908) and confirm your number of qualifying payments made. Keep track of this annually.

PGY3 to PGYx (Intermediate Years of Residency)

Do It All Over Again

Remember that each Fall you will need to re-apply for PAYE and PSLF on the anniversary date of your first certifications. In a four-year program, loan management during your PGY3 year is identical to your PGY2 year.

Recap

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1. Reapply for REPAYE online, PAYE. Has your tax filing status and income greatly changed?
2. Reapply for PSLF certification and keep a copy of your form.
3. Call Fedloans (1-800-699-2908) and confirm your number of qualifying payments made.

Final Year of Residency

Non-Profit or For-Profit?

At graduation, you will determine if you are working for a non-profit. This includes VA and university hospitals or for-profit groups. For many physicians, you will be employed by a group contracted with a hospital and not by the hospital itself, therefore you will not be working for a for-profit.

If you are working for a for-profit group, you will not qualify for PSLF and you will want to consolidate your loans unless you qualify for another government repayment program. Once you consolidate your loans you can no longer take part in government benefits like deferments, 20-year payment loan forgiveness, federal governments or states forgiveness programs.

The benefit of consolidation is an interest rate that saves you tens of thousands of dollars. Rates vary based on your market, fixed vs variable, and other factors. Once you consolidate with a private lender, file your taxes as married filing together. This will save you money filing taxes and on your taxes themselves.

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Recap

1. Determine if you will be working for a non-profit or using state or federal government loan forgiveness programs. If yes, consider if you should continue PSLF, recertifying yearly and always tracking your number of payments to your goal of 120.
2. If you are working for a for-profit consider consolidating. Here (link) is a current list of some good rates for consolidating. In 2019, there are some great rates available.
3. If you are consolidating, consider filing taxes as married filing together.

Fellowship

If you are doing a fellowship you can continue on the PGY3- PGYx path of income-based loan payment and PSLF recertification annually.

Recap

1. Reapply for REPAYE online, PAYE. Has your tax filing status and income greatly changed?
2. Reapply for PSLF and keep a copy of your form.
3. Call Fedloans (1-800-699-2908) and confirm your number of qualifying payments made.

The Last Six Months of Residency/Fellowship

If you are employed by a non-profit and you choose to commit to PSLF, your monthly income-based repayment will likely be equal to your standard repayment plan payment, once you make over 150K annually. Remember to continue to recertify your PSLF annually for ten years.

Get Life and Disability Insurance

Before you graduate residency and fellowship there are several things you MUST do. You must have both life and disability insurance. Check with your residency program for deals on policies. My institution has an agreement with insurance brokers, who represent all companies, for a no physical, gender-neutral policy at a very competitive rate. This is huge for anyone with current medical conditions and for women.

Get Financially Educated

At least six months before graduating residency, read the book “WCI Financial Bootcamp” and “The White Coat Investor.”  WCI Financial Bootcamp will walk you through buying disability and life insurance policies. I also recommend financial planning. This means laying out your finances to understand your net worth and how long it will take you to pay off your loans and save enough to retire.

Live Like a Resident

Lastly, as White Coat Investor advises, live like a resident! No “doctor houses” or “doctor cars.” We are a different generation. We have significant loans with a health system that is no longer as lucrative and stable as it was in the past. Financial independence is the goal.

Recap

1. Read the WCI Financial Boot Camp and The White Coat Investor Books
2. Do financial planning. Understand your net worth and what it will take to reach your retirement goals. (Good link for this with saving and retirement refs)
3. Get disability insurance
4. Get life insurance
5. LIVE LIKE A RESIDENT, for at least five years post-training.

What do you think? What would you add to a financial checklist for residents? Comment below!

The post Financial Guide For Residents by a Resident appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: The following is a republished post from WCI Network partner, The Physician Philosopher. It illustrates the critical importance of that first year out of training, and even the first paycheck. It is amazing how much wealth can be built quickly when you hit the ground running with a physician income and financial literacy.]

Remember how strange it was seeing that large of a number in your bank account after your first “real” paycheck? After years of being paid as a resident, it seemed a bit surreal.  It is at this exact moment that you make some of the biggest financial choices of your life.  Come join Dr. Jones and Dr. EFI (Early Financial Independence) as they show you the importance of the decisions you make in your early years in practice. This is a tale of two doctors who just received their first attending paycheck.

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The Pivotal Moment

The reason that the moment you start making a “real” paycheck is such a pivotal one is that the decisions you make right then determine your trajectory. It can be very hard to change your course after those first three to five years.  It’s possible, but it’s much harder.

Either you set yourself on a trajectory for great financial success and early financial independence OR you choose a lifestyle that will leave you in shackles and working til you can’t work anymore.

The biggest problem here is that many of the choices you make are often binding. You cannot easily reverse a lot of decisions.  For example, if you buy a $1 million dollar home with nothing down and then find you want to sell it a year later… you better believe that financial pain will be real.

A Tale of Two Doctors: The Set-Up

Here is how this post is set up.

We will follow Dr. Jones and Dr. EFI as they make very different choices when they finish training. For each doctor, we will discuss their lifestyle inflation after training, decisions on student loans, retirement planning, and their eventual trajectory.

Let’s make some assumptions for both of them, though:

• Both doctors are 35 years old when they finish training.
• They are both married, and their spouses do not work.
• Both doctors have $250,000 in debt.
• They each have a starting annual salary of $250,000.
• Both made the smart decision to get term life insurance and disability insurance.
• They both privately refinanced their loans.

Doctor 1: Introducing Dr. Jones

Dr. Jones has waited long enough.  She spent four years in undergrad, four years in medical school, four years in anesthesiology residency, a year in fellowship, and now she is ready to reap the rewards of a lot of hard work.

Dr. Jones wants to live the doctor’s life she has always heard about.

She doesn’t want to keep up with the Dr. Joneses.  She is Dr. Jones.

Lifestyle Changes After Residency

Her monthly take-home paycheck is now $14,500.  That’s $10,000 larger than her last residency paycheck!

After signing on to her new contract, she found the exact house that she wants.  It’s only $800K with a 4% interest rate.  With a 30 year fixed mortgage that makes for a monthly payment of $4,100.

And the garage will fit the two new BMW’s she bought for her and her spouse perfectly.  She got a steal with 3.5% financing for a monthly payment of $1,800 to cover both cars.  Don’t forget the $200 monthly car insurance payment.

Student Loans & Retirement

Investing

She understands that she could pay down her debt quickly or max out her 401K and take advantage of her employer’s voluntary match, but she just doesn’t see the need.

Her employer has a mandatory contribution. So, she puts in the required 2%, which is matched ($5,000 per year), but doesn’t see a lot of other reasons to save for a retirement that is 30 years away.

Student Loan Plan

Having said that, she also doesn’t want to keep her loans around forever.  So, she refinanced.

Her $250,000 in student loans are now being paid via a 10 year fixed plan with a 3.5% interest rate.  The monthly payment on this will be around $2,500.

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The Breakdown of Dr. Jones’ Paycheck

Here is how her monthly paycheck would break down.

$14,500 Take Home
-$4,100 mortgage payment
-$2,000 car payment + insurance
-$2,500 student loan payment
-$600 Disability/Life Insurance
$5,300 remaining

This leaves Dr. Jones and her spouse with $5,300 for all of their other living expenses.  This might include a country club membership, cell phones, designer clothes/jewelry, cable TV, premium gas for the BMW’s, eating out, vacations, utilities, etc.

That doesn’t include furniture for the house she just bought.  But that can all be financed or go on a credit card, right?

All of her bonus pay will go towards the awesome vacations her and her spouse deserve. They’re working hard!

Take-Home for Dr. Jones Over The Next Ten Years

The take-home here is that Dr. Jones is living large.  She bought the house, the cars, and is not being aggressive with her student loans… she is really going to get behind the eight-ball.

How far behind?  Let’s see.

Given Dr. Jones’ lifestyle, she would probably want to have $200,000 each year in retirement.  If she retired at 65, she would likely need $200,000 x 25 = $5,000,000.

If this current plan continues, and we assume an 8% interest growth on the $5,000 she is saving each year.  After ten years (age 45), she will have an unimpressive $74,000 saved for retirement.

At that point, her debt would be gone. Maybe I am not giving her plan enough credit.  What if she started saving after her loans are paid off in 10 years?

Let’s say she started maxing out her 401K and with her employer’s contribution and additional voluntary matching, she started investing $56,000 (max for 401K in 2018) for the next twenty years.

At age 65 how much would she have still assuming 8% growth?  The answer is a little less than $2.5 million.  Taking 4% of that each year for retirement, she would only have $100,000 per year.

Remember, because of her lifestyle, she needed $200,000 per year.  So, that’s half of what she wanted for retirement and she is now 65. Unless things change drastically for her, she will likely never get to that goal.

This is a story of big lifestyle inflation after you finish training.

Don’t do it.

Doctor 2: Introducing Dr. Early Financial Independence

Fortunately, there are better examples and Dr. Early Financial Independence (Dr. “EFI”) is going to show you that.

Dr. EFI knows better.  She has completed her four years of medical school, four years of anesthesiology residency, and also did a one-year fellowship. However, she wants to start off on the right foot.

She has done her homework and knows enough about personal finance to do it herself.  And she knows where to get financial help if she ever needs it.

With a more moderate approach to the lifestyle bump after residency, Dr EFI is not going to chase after a house three times her income right now, but she is going to buy a great house.  Eventually.

Before she can get the house she is going to make some good financial decisions. She will still enjoy a bump in lifestyle after finishing training, but Dr. EFI is going to limit lifestyle creep through The 10% Rule.

Let’s see how she does compared to Dr. Jones.

Lifestyle Change After Residency for Dr. EFI

Because she maxes our her 401K (pre-tax $18,500) her take-home pay is $13,700 utilizing the same federal and state tax assumptions as Dr. Jones.

Dr. EFI followed The 10% Rule when she saw her paycheck increase dramatically. So, she took about 10% of that increase and decided to bump her lifestyle.  She has earned that.

She moves into a small rental home for $1,000 per month. It’s slightly bigger than the $750 apartment they were staying in during her fellowship year.

She drove a beater all during her years in medical school and residency to keep costs as low as she could.  But she really likes the new Toyota Prius (Touring edition for $30,000) because it gets almost 60 miles per gallon.

Making the same assumption as we did for Dr. Jones, she decides to surprise her spouse with one, too.

Despite the advice from other personal finance blogs, she finances a car. At 3.5% for 5 years, this will cost her approximately $1,000 per month for both cars, including insurance.

Dr. EFI wants to keep this plan in place for three years after she finishes.  Once her student loans are gone, she will be able to finally reap the real rewards.

How can she have so much discipline?  Well, she understands how important these beginning years are to her financial success.

Student Loans and Investing

Investing

Dr. EFI decided to max out her 401K to take advantage of her employer’s 2% required match, 4% voluntary match, and employer contribution. With everything included, she is maxed out to 401K limit of $56,000.

Catching FIRE doesn’t happen without intentional decisions. Not usually.

Dr. EFI’s take-home pay is $800 less each month ($9,600 for the year), but because of her employer match up to the 401K limit she is saving $51,000 more each year than Dr. Jones despite only contributing $13,500 more than Dr. Jones.

That’s a steal right there.

Her and her spouse also max out the $12,000 each year for their first backdoor Roth.

All in all, she is investing $67,000 by contributing $29,500 of her own money.

Oh, and after her student loans are paid off… she will have even more going towards investments, likely in her employer’s excellent 457 account and a taxable account.  More on that below.

Student Loan Plan (Turned to investments)

Dr. EFI wants to be done with her student loans as quickly as possible.  So, she refinanced her loans to a 5-year variable because she knew this would offer her the best rate.

She averages 3.25% interest and she decides to pay $6,000 per month in student loans. This way, her loans will be gone in 3.5 years with no additional payments.

If she takes any extra bonus money she receives and, according to the 10% Rule, puts the other 90% of her bonus pay towards her loans; her loans would likely be gone in less than three years.

After her student loans are paid off, which have been costing her $6,000 per month, she plans on taking about a third of that money ($2,000), combining that with her current home rental payment ($1,000) and putting it towards her mortgage on a new “doctor” house ($3,000 mortgage payment on a $550,000 home).

She will take the other $3,000 remaining from her previous student loan payments that are now gone and put it into a taxable account.  That will total an additional $36,000 per year to take her annual investments to $103,000.

We have accounted for $5,000 of the previous $6,000 monthly student loan payment. What about the remaining $1,000 per month?

That, my friend, is for pure enjoyment on whatever she wants to spend it on. She could put it towards her mortgage and pay it off in 20 years instead of 30.  Or she could take two $6,000 vacations each year.

It’s up to her and her spouse, but they’ll find success because they know how to be intentional with their money decisions.

The Breakdown of Dr. EFI’s Paycheck

$13,700 Take Home Pay
-$1,000 rental/apartment payment
-$1000 car payment
-$6,000 student loan payment
~$900 Post-tax Backdoor Roth money
-$600 Disability/Life Insurance
$4,200 remaining

So, Dr. EFI has $4,200 (post-tax) left to spend each month compared to the $5,300 that Dr. Jones has.  Though, it is worth mentioning, that $4,200 is definitely more than she made on a resident or fellow salary.

So, despite buying two new cars for her and her husband and living in a slightly better place than in residency, she still has more money than she did as a resident to spend on eating out, going to the movies, or catching a ball game.

The Next Ten Years

What does Dr. EFI get for the $1,100 sacrifice she is making per month compared to Dr. Jones?

Well, ten years out from training she will be able to accomplish all of the following (compared to Dr. Jones who definitely won’t):

• Dr. EFI’s student loans will be paid off in three years (compared to 10 + a lot of extra interest paid for Dr. Jones)
• At ten years out of training, she will have accumulated $1,250,000 in her investment accounts (compared to the ~$74,000 of Dr. Jones)
• She will have a very positive net worth (compared to Dr. Jones’ very negative net worth)
• She will be well on her way to financial independence and retiring early (Dr. Jones will never be able to retire at her current lifestyle)

Take-Home for DR. EFI

Dr. EFI is making some real progress!

She and her spouse get together and realize that once all of their debt is gone (no more car loans, mortgage, college for kids if they have any) they could live very comfortably on $120,000 per year in retirement.

Since they want to retire early they need it to last a little longer. So, they multiply their desired annual number by 30 (instead of 25 for traditional retirement).

They will need $100,000 x 30 = $3,000,000 to retire.  If they take out 3.3% ($100,000 per year), that should last as long as they need it.

Assuming she doesn’t change anything about her investments above, she will get to that number by age 52.  If she were to increase her investments in her taxable account by $1,000 per month (say, when those car loans are paid off after five years), she would reach that goal a year earlier at age 51.

Not too bad!  Retiring at age 51 would be swell.

This all assumes no increase in pay, no additional money from bonuses towards investments (which she would obviously make), and that her spouse never works or has retirement accounts of their own.  If any of those things happened, they would likely meet their goals in their mid to late 40s.

At that point, Dr. EFI could choose to be a doctor and work because she wants to, and not because she has to.

All the while, Dr. Jones would not be able to retire even at age 65 (fifteen years later).  And that remains true even if she really turned it around after 10 years of making mistakes.  Yikes.

Compound interest is wonderful, but it takes time!  That’s why your savings rate early on is so important.

The Big Picture

I should mention that there is a middle ground where you save 20% of your AGI each year and comfortably retire at 60 or 65.  That said, you can get there much sooner if you want.  Who knows how much you will love your job in twenty years?

The big picture here is that you can have an increase in lifestyle immediately after you finish, but you have to keep it in check. You can have most anything (except the huge house), but you can’t have everything all at once.

Otherwise, you’ll be like Dr. Jones who looks wealthy on the outside, but will be working until she can’t work anymore.  Unfortunately, this is not as uncommon as you’d like to think.

The take-home?

Residents, fellows, and newly minted attending doctors… take a small bump in lifestyle when you finish.  I suggest 10%. Then, put the rest towards building wealth for two to three years.  Your future self will thank you later.

What do you guys think?  What approach did you take (or will you take if not there yet)?  Did I leave anything out?  For those further along in the journey, what would you have recommended to yourself?  Leave a comment below.

The post The Tale of Two Doctors: The First Paycheck appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: The following guest post was submitted by Barbara Hamilton, MD who blogs at Tiredsuperheroine.com. There are some great quotes in this inspiring article about decimating student loan debt — with my favorite being the very last sentence. I have no financial relationship with Dr. Hamilton, but one of my student loan refinancing partners, CommonBond, just increased their cash back bonus for WCI readers to $550 when you refinance with them!]

There is No Fairy Godmother to Wish Student Loan Debt Away!

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I mean, your godmother might be a wonderful person, but don’t imagine that your attending salary will rescue you, from rags to riches, like Cinderella. This is just too easy a trap to fall into, and interest rates on student debt are far higher than they used to be (sorry). It used to be educational debt was subsidized to 2 or 3%, but now grads are facing interest rates of 6% and higher.

Not only that, but overall debt burdens have risen in the last decade. At my public medical school, in 2008, the average student debt balance was around $135,000. This included some who graduated with no debt, so the average for borrowers was a bit higher. At that time, students who graduated from for-profit medical schools in the Carribean were the only ones I knew sporting loan balances of $250,000 or higher. Sorely, this is the current reality for many in our profession.

I Paid Off My Student Loan Debt and You Can Too

Have you heard the expression “Pay yourself first?” It’s a personal finance adage meant to convey the idea that you should contribute to non-negotiable expenses and savings first, before using the remainder as disposable income, i.e., for new things or luxuries. I consider educational debt repayment in the “pay yourself first” category, and I focused on it keenly. 

You’re carrying a debt of $150,000, $300,000 or $1,000,000 on what’s inside your brain. That’s crazy, right? I thought of my student loans like a mortgage on the mind. Makes you want to wear a helmet at all times, doesn’t it?

If you find yourself with a huge student loan balance, throw that fancy school name around whenever you get the chance, you are paying for it! If, however, you find yourself reading this at the beginning of your medical journey, think about what a school’s name really means to you, and how much financial sacrifice it’s worth, relative to your other available options.

Barbara Hamilton, MD

For people that claim student debt is “good debt,” I’d argue that point. Say you graduated in the early 2000’s and had an interest rate of 2%… that’s cool for you. That’s not the reality any longer. At current rates, interest compounds, and the principal loan balance won’t move much, as you pay chiefly interest. There are simply better things to do with your paycheck and your headspace than to amortize your student loans for thirty years.

What’s wonderful about paying down your debt, is that it’s a guaranteed return on your money. When you invest in the market, you hope for an average return, and pray the value of your holdings doesn’t plummet. When you pay down a 6% loan, it’s like getting a guaranteed 6% return on your money. 

When you finish training, your income will increase suddenly, you will lose the ability to deduct student loan interest. So when you repay your loans, you pay in post-tax money. If you’re paying a third of your income in taxes, you have to earn $30,000 gross to pay back $20,000 in loans. It’s sad but true. You have reached a higher tax bracket, and the government is not going to give you a break for it once you’ve attained an attending level income. 

If you’re aiming for public service loan forgiveness, there is great advice on how to deal with the uncertainties of the future of this program. Basically, use incredible discipline to save a large loan pay-off fund in case the program evaporates, or you don’t qualify. Since I don’t work for a non-for profit entity, I didn’t qualify. Further, since my principal was average, I was not going to make any major life or job decisions based on my debt. It was up to me to pay off, and I did it! You can too.

I Paid My Student Loans Off By Bucking Tradition

If you find yourself living an average life, and struggling to get by, examine the big expenses. I’ll offer an example.

My Wedding

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Consider the example of an average wedding. If you have hundreds of thousands in student loan debt, you do not have to have a fancy wedding. You do not have to have a wedding fitting of a doctor. Have a humble wedding.

Growing up in the Northeast, everyone I knew spent thirty thousand dollars or more on a wedding, whether they could afford it or not. It’s cultural. Coming of age, I never knew that people in the west, in states like Montana, commonly have barnyard weddings, with simple food served at picnic tables. Where I come from, there is a four-figure donation to a church, and a huge family to feed. There is a cocktail hour that could feed a small nation. There are too many courses to count. While having a large wedding is valued by many with large families, the fancy factor is often excessive.

I bucked tradition by getting married in California, where I was living. Since my extended family lives in NJ, many people declined to come, slashing our guest list. Therefore, instead of hundreds of guests, we had about 75. We got hitched on the front lawn of a little hotel, officiated by a long-time family friend. Our reception was a mid-century modern pool party. We celebrated under string lights and palm trees. Instead of an expensive band and disc jockey, talented guests played music and sang all night.

When a local catering estimate threatened to consume half our budget, my fiance found a two-woman catering outfit in a nearby desert suburb. For a fraction of the cost, they prepared a delicious buffet, better than many of the wedding meals I’ve had. The smaller catering team came with a bartender, so we bought our own booze. Guests enjoyed high-quality vodka, champagne, and garnishes, all from our local price club. It was delicious, concocted into signature drinks by our caterers.

Floral arrangements were likewise steep, and my husband-to-be balked at the cost of decorating. There was a $1600 minimum to work with a Pinterest-worthy florist. Instead, my Mom, Maid of Honor and I made a trip to the Los Angeles flower market. We walked the stalls with cash, spending just under $500. We were tickled when asked if we were industry professionals. It was a fun experience to buy, then arrange the buds, flexing our creativity. I acquired glass vases from a craft store and tied leather sashes around each one.

Platinum Level Scholarship Sponsor

The wedding was a far cry from that expected by my family, but with student loans, I simply couldn’t afford more! Despite the irked Aunts and Uncles, in terms of money, time, and stress, we chose the better option. Social pressures are powerful, and they can ruin your financial life if you allow it. After all, it’s normalized in our culture.

Maybe you’re already married, and realized you overspent; that ship has sailed. Or maybe someone else paid for the wedding; good for you. The point is that sometimes you have to break the “rules” to meet your financial goals. This way of thinking can be applied to other expenses in your life. Don’t let other people dictate what you can and can’t afford.

Sometimes, women are especially susceptible to these social forces, which push us to care for everyone all the time. You’re asked to help your brother’s family with financial trouble, i.e., enable your brother’s gambling addiction? You think, “Maybe I can help them out a little bit…” You’re asked to pay for your sister’s kids’ private school education. “Sure, I mean, I don’t have kids of my own…”

These scenarios are built on the myth of the (automatically, effortlessly) rich doctor.

In my view, the rich doctor is the one who has empowered herself. She has paid herself first and chased down her financial goals. Consider that you could actually control your interest rate or your student loan balance. You can!

#1 Refinance

I re-fi’ed with Sofi, and found the process transparent and motivating. You can choose a fixed or variable rate, depending on your balance and risk tolerance. To get a truly fantastic rate, I chose a variable rate, and I was motivated even more, each time I received notice of a small rate hike.

#2 Lump-Sum Payments

Gold Level Scholarship Sponsor

The loan term you choose will determine how quickly the principal balance goes down. Making a lump sum payment is a powerful move: your principal decreases by the amount you contribute, not less. It’s beautiful!

Decimate Your Student Loans!

I developed a passion for decimating my student loan debt and felt empowered as my balance got smaller. I battered it with lump-sum payments. The loan servicer automatically decreased my monthly payments to reflect the five-year term I’d agreed to. Still, I paid the balance down ahead of schedule. Now, that monthly payment is history.

If you marry rich, or have a windfall, maybe you’ll be rescued from your student loans, like a fairy tale. More likely, you’ll combine debts with a partner. For most of us, there’s no fairy godmother to wave the student loan debt away. Since you don’t practice medicine in a fantasy world, empower yourself!

If you know you should refinance your student loans, today is the day! You will likely make more money refinancing your student laons than you made seeing patients today! Check out the WCI Refinancing Partners:

Company

Cash Back

Rates

Residents?

$500

Variable 2.68%-7.76%
Fixed 3.75%-7.27%

No

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$500

Variable 2.27% - 6.89%
Fixed 3.47% - 7.59%

No

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$300-750

Variable 2.24% - 6.67%
Fixed 3.49% - 7.50%

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$350

Variable 2.80% -6.01%
Fixed 3.29% - 6.69%

No

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$300

Variable 2.43%-6.65%
Fixed 3.50%—7.02%

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$300-750

Variable 2.37% - 9.72%
Fixed 3.49% - 9.99%

No

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$300

Variable 2.430% to 6.65%
Fixed 3.49% to 8.074%

Yes

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$300

Fixed 1.95%-4.45%

No

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$400

Variable 3.21%-5.16%
Fixed 3.9%—4.87%

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$550

Variable 2.48% -6.25%
Fixed 3.20% - 6.25%

No

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How have societal pressures influenced your spending, investing, savings, and student loan debt management? What societal “rules” did you break to reach financial goals? What advice do you have for docs that are struggling with societal pressures? Sound off below!

The post You Can’t Wish Your Student Loan Debt Away appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

Podcast #119 Show Notes: How to Pay for College with Robert Farrington

This episode we interview Robert Farrington, the founder of thecollegeinvestor.com, where he provides lots of information for young investors, for indebted people with student loans, and millennials in particular. Robert, Mr. Money Mustache, and myself started our blogs about the same time, though both of theirs are bigger than mine. His message is about getting out of student loan debt and starting to invest. Whether it’s millennials or not, his goal is to help people navigate the complex world of student loan debt, so that they can build wealth as early as possible. We discuss the order of operations for paying for college. There are nine basic ways to pay for college. You should max out each of them before moving on to the next step. We discuss each of those steps as well as the repayment plans available for student loans. If you are struggling under the weight of student loans, this episode will provide you information and encouragement to get rid of those student loans and begin building wealth as quickly as possible.

Sponsor

This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President, Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost-effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients. Because of the volume and exceptional reputation of Set for Life Insurance, as well as the relationships they have developed over the years, Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender-neutral policies (saving women significantly), priority underwriting handling and, on some occasions, exceptions in the underwriting process. Contact Jamie at Set for Life Insurance today.

Announcements

Recommended Financial Advisors

If you haven’t checked out our new recommended financial advisor page, I recommend you go check that out. This page is something that I have been working on for years. Even from the very beginning of this blog, I have been getting questions from people asking for recommendations for financial advisors. In the beginning, I just threw a few names up there, people I knew who were good. Then I had people start approaching me to be listed on that page. I ended up turning lots of them down, obviously, because, I think, most financial advisors really aren’t very good. Eventually it just became so much work, we started charging for it. I was doing too much work analyzing all these different firms and trying to figure out who are the good ones to be giving it away for free. I put an application in place, basically I asked all the questions that I think you ought to ask a financial advisor when you hire them. And if they could get all the questions right, that they were fee only, they’re fiduciaries, the price was reasonable, they were giving good advice or using passive investments, etc, then, I was okay with them being listed on that page. The page grew and became very unwieldy for anyone to sort through. So, this summer, we redesigned the page, in order to make it much more useful to you. We now have some premium listings at the top, that include all kinds of information about the advisors. And then, each advisor has their own individual little page on our site, where you can get even more information about them. We are adding clips from podcasts, when they were on there and a video so you can actually get a sense of who they are and what their personality is like and who their ideal client is.

We have tried to turn this into a very useful page for those of you who are interested in hiring a financial advisor. Whether you want to do it temporarily, or whether you want to do it long-term. They will all work with you in any location. Chances of you being in their location are not high but if you’re in a big metropolitan area, there’s a good chance that, at least, one of these advisors, you could meet with locally, if that was important to you. But, for the most part, they work with people via Skype and email and phone, which is really all you need when it comes to a financial advisor.

WCI Scholarship

We are closing the submissions for The White Coat Investors scholarship at the end of this month. You have until August 31st at midnight Mountain Time, to get your application in. We have had hundreds of people apply, and we still could use a few more judges. So, if you’re interested in being a judge, email us at, scholarship@whitecoatinvestor.com. That’s the same place you send your application, if you want to apply for the scholarship. We’re giving away over $90,000 in cash and prizes this year.

It’s a great thing that not only helps improve financial literacy, because we are giving a copy of one of our White Coat Investor books to every member of the winning people’s class, the top five winners, everyone in their class gets a copy of a White Coat Investor book. But it also directly reduces the indebtedness of the top five winners. They are getting a check that will help them to not have to borrow so much money for their education. We are proud of being able to pay it forward along with advertisers and readers/listeners that have donated money to the scholarship.

How to Pay for College

The College Investor

Our guest in this episode is Robert Farrington of thecollegeinvestor.com. He was an entrepreneur from a young age. He always had a side hustle as a kid. He was selling candy bars in middle school that his mom would take him to Costco to buy and resell. In college he was selling stuff on eBay he picked up at garage sales. But when he started his blog, he had graduated from college and was working as a manager at Target. He enjoyed the people he worked with, and he felt the job was pretty easy and paid very well. This also gave him the flexibility to do side hustles. The college investor earned more than his career path about two years before he left Target. It is hard to keep working nights, weekends, and holidays when you don’t financially need to. Sounds a little like an emergency department, right?

The mission of The College Investor is to help people get out of student loan debt and to start investing and building wealth. He really champions his own path of doing it through side hustle. He is a big believer in the earn more mentality.

“I think that we are blessed, at this day and age, that you have limitless money making opportunities. And so, while you still need to budget and be mindful of your spending, I think, if you develop a side hustle, you earn more, you can achieve your financial goals of getting out of debt and investing early, and you can achieve that much sooner. Plus, student loan debt is complicated and confusing. And so, I really just enjoy helping people navigate that process, because, it’s hard, you’re like fighting the government effectively, and it can be a challenge.”

He publishes new articles on his blog Monday through Friday. They have a lot of reviews. He has always been passionate about the new up and coming companies and financial technology companies. He reviews pretty much every product, service, software, that is out there in the personal finance space so check that out if that is something that interests you. They definitely have the personal finance basics and interesting articles around different topics surrounding student loan debt. You’ll probably find everything you could ever want to know about student loan debt on his site and a lot of investing content as well.

Millennials and Student Loan Debt

The blog itself has a big focus on millennials but personal finance topics are open to everyone. The math is the math, and the tools are the tools. Millennials get lots of flack. People are calling them lazy or overly lifestyle focused. But Robert doesn’t think that is valid. It’s a different day and age. My parents don’t really understand how I make a living on the internet. And so, millennials just have different tools, different avenues to earn than the baby boomers did. They have different viewpoints on life, but Robert feels they’re definitely not lazy or lifestyle focus. I asked him what’s the biggest financial challenge these days for millennials? He said,

“Student loan debt is definitely the biggest financial challenge, I think, in aggregate. But I also think, there’s a lot of macroeconomic factors out there. Even though employment is good, wage growth is stagnant, the boomers are still jamming up the workplace for young adults, and so, they are not having as many opportunities to promote and advance their careers as quickly as previous generations, which keeps that wage growth stagnant. And lifestyle costs are higher, so, things that people would have done in the past, like buying a home or purchasing other things, it’s just more of a challenge. And so, when you combine all these factors, it really is just, it’s macroeconomics, and it’s individual personal financial choices, that have made the financial picture for millennials more challenging than, I think, previous generations encountered.”

Ways to Pay for College

I obviously really focus my message on physicians and other high income professionals, regardless of age. And that crowd’s big financial challenge is definitely student loans as well. Robert wrote a fantastic article that he called the order of operations for paying for college. It goes through nine ways to pay for college. Presumably, you max out each of them before moving on to the next step. Here are the nine steps for paying for college

1. Scholarships and grants
2. Your own savings as a student
3. Your earnings as a student
4. Your parents’ savings for college
5. Your parents’ current income
6. Fellowships and assistantships
7. Aid through school work related programs
8. Federal student loans
9. Private student loans

I think it is a great list, and I totally agree with it. I asked Robert why he felt that article needed to be written?

“The article needed to be written because so many people, especially in mainstream media, I guess, you could say, just default to, you’ve got to use student loans to pay for college. And it’s like student loans are one option to pay for college, but there’re so many things that people forget are actual other options. And usually, better ways, I guess, you could say, to pay for college. And I just really wanted to demystify that, like, look, there is a good way to pay for college, and you can maximize each of these buckets.”

Scholarships

We ranted for a bit about scholarships and how they are the number one most underrated way to pay for college because no one wants to put in the work to get the scholarship. But the scholarship is the easiest, best way to get free money to pay for school. He runs a scholarship on his website called the Side Hustle Student Scholarship. He wanted to reward entrepreneurial high school students. He asked them to share their story, and then, he will give one of them a $2,500 scholarship. He only gets 100 or so entries to that scholarship. Once he starts combing through them, 70 out of the 100 did not meet the criteria for the scholarship. And it’s stupid things like they didn’t put a picture and he asked for a headshot. They didn’t put the school they were going to, they didn’t format their essay correctly. So a $2,500 scholarship, and really, you are in competition with 30 other people. The odds are so good. The crazy thing is when he has talked to other people that have run scholarships, it’s very similar across the board. 70 to 80% of all scholarship applications get disqualified just for not meeting the basic criteria. For the WCI scholarship, we have run into similar issues. We have a set word count (800-1200 words) and each year we throw out scholarship essays because of their lack of ability to count to 800 or 1,200. Scholarship applicants have lost out on tens of thousands of dollars because they didn’t pay attention to the word count.

Student Loans

Robert wants people to realize paying for college isn’t all about student loans; there’s so many ways to do it. You can save as a student, you can work through college, your parents can save, you can get fellowships. And then, if needed, federal student loans should always be first, for the most part, and then, private student loans. For most people, they should really think about this order, especially if you’re a parent, you should tell your young high schooler, even late middle schooler, that, “This is what we have, this is what we expect.” Have these conversations, so that, by the time they’re in their junior year of high school, it’s not a surprise, they know what it’s going to take, and they can plan accordingly.

Like Dave Ramsey, I believe no one needs to borrow for an undergraduate education. I don’t think anyone is going to work their way through dental school. But if you pick the school right, you pick one with a reasonable amount of tuition, you bust your butt, maybe your parents help you some, you can get through undergraduate without debt.

Robert agrees and says,

“My big thing with student loans is figuring out the return on investment of your education dollars. I don’t necessarily think borrowing is bad, but everyone gets into trouble with it. And it’s not different than borrowing for a house or borrowing for a car, it’s, they borrowed too much and they couldn’t afford it. And so, if you want to be a teacher today, in America, that’s great. But, realize, your starting salary, depending on where you teach, could be in the low 30,000, to maybe like 45, 50,000, if you’re in New York or California. And so, if you’re going to earn that after graduation, that’s fine, it’s not necessarily a bad thing. But don’t go spend $80,000 to become a teacher, maybe you go to your local community college. Which, in a lot of states now, they’re making free. And even if it’s not free in your state, it’s very cost effective. Do that for two years, knock out all your undergraduate stuff. Then, you transfer to your local in-state school, you finish up your two years, and you could be done and get a teaching credential for $10-$20,000. Now, when you’re looking at your starting salary as a teacher, you can afford to service that debt on your starting salary. It might not necessarily be the easiest, but it’s definitely a lot better than spending $80-$90,000 to be a teacher.”

He feels a little debt can be a positive return for you. It’s just when you spend way too much, that it becomes negative. His rule of thumb is never to borrow more than you expect to earn in your first year after graduation. If you’re going to go be a doctor, the same rule applies. If you’re going to go be a pediatrician, you expect to make $150,000, you should probably keep your borrowing to about $150,000. If you’re going to go be an orthopedic surgeon, you’re going to make $600,000 a year, then you can definitely afford to borrow a lot more. But, it varies, based on what you want to do after graduation, and you have to be intentional with that spending.

If your dream is to be a pediatrician or another lower paying medical specialty, remember your dream isn’t to struggle financially for the next 40 years of your life. If you don’t think you can keep your borrowing to 1X your starting salary, you should look at navigating the variety of programs that are out there to help you.

You do your due diligence, you take out federal loans, you go work in a public clinic, and you get Public Service Loan Forgiveness. Or, you could take advantage of one of the many rural opportunity programs, practicing in a remote location in exchange for them paying a portion of your loans over time. There are a lot of programs out there for that. But Robert stresses that you have to do that work upfront, and you have to commit yourself to that. The course can be laid out, and you can analyze all your options. But, you just need to do that upfront, versus when it’s too late.

Why Do People Struggle With Student Loans?

I asked Robert why do people struggle so much with student loans? Are they just ignorant and undisciplined? Is the system unfair? Or, is it some combination of both?

“It’s definitely ignorance and the system. So, one, we’re expecting these 18 year old, 19 year old kids to make very important financial decisions with very little to no guidance or education. I remember when I got my student loans. I remember, I got an email from the financial aid office, this was like May or June, before my freshman year, and it said, “Congratulations, you’ve received financial aid.” Right? So, notice, they don’t call them student loans, they say, “Congratulations, you have a financial aid award.” And then, I click the link in the email, took me to the financial aid website. And it said, like, “Click here to accept your award.” You have a little checkbox, and that checkbox is next to a student loan, but they’re calling it a financial aid award.

And then, you scroll through some terms and conditions, which, at this point in our lives, we’ve all been trained to just skip to the bottom of the terms and conditions and hit Accept. And that’s how I got my student loans. It is crazy how easy it is, and there is no education that’s part of it.”

Robert said when you literally take all the different paths that someone can take with their loan type, and their career and their repayment plan, there’s 150 plus different variables.

That is hard to navigate. It can be very challenging to navigate repayment. And then, when you combine that with the fact that these loan servicers are call centers with 10,000 plus employees that are making a minimum wage, they’re probably not necessarily doling out the personal financial advice you need.

The whole system is very challenging, and the best thing you can do is just educate yourself. No one in this world is going to care more about your money than you.

What are the Biggest Student Loan Related Mistakes People Make?

I asked Robert what are the biggest student loan related mistakes he is seeing his readers making these days?

“The biggest one I see, is that, people are not doing their research when it comes to what qualifies for these loan forgiveness plans. What repayment plans they should be on? They are just defaulting into getting six months of deferment on their federal loans after graduation, and then, automatically going into the standard 10 year plan. Well, they see that first bill, and they’re like, “I can’t afford it.” Well, then they default. And then, that drags on, their loans grow, and it becomes a mess. And they’re not sorting it out until it’s too late.”

Of course, we talked about Public Service Loan Forgiveness and headlines like “99% of people are denied for Public Service Loan Forgiveness.”

Robert feels like that headline could not be more misleading about the effectiveness of Public Service Loan Forgiveness, and what it actually takes to qualify.

“So, the fact that people think that they would qualify for Public Service Loan Forgiveness in month one that the program started, is so wrong. And it’s not the government’s fault that people didn’t educate themselves on how the program worked. And then, when you look at the denial reasons, the number one most common reason that you’re getting denied, is because you didn’t fill out the application correctly. So, it’s like, of course, the government’s going to deny you. Follow the directions, people.”

Certainly, there are issues with people not understanding how PSLF works. Certainly, there are competency issues on the part of those running the program. But I asked him does he think that this is going to be around for a long time? Does he think people should really be counting on it? Does he think this is a good program?

“I think it’s a great program that is poorly structured. So, like in my ideal world, for those that don’t know, direct student loans is the number one qualifying criteria. Number two is you have to be on a qualifying repayment plan. Which is the other thing that I think is silly with this program, why be so strict? You have to be on a qualifying repayment plan. And the number three is you have to work in qualifying public service for 120 months, 120 payments, right? And so, if you look at the data, the program is actually doing exactly as expected. So, here’s some scary stats, in 2019 to 2021, there’s only going to be 1,800 people this year and next year or so, that are going to get Public Service Loan Forgiveness. That’s just the math of who had the qualifying criteria 10 years ago, there just wasn’t very many.

But when you fast forward this clock to 2025, they’re going to have 150,000 people that are potentially eligible for Public Service Loan Forgiveness in 2025. And that starts to make sense, because, when the program started, you know what? Direct loans were only 1- 3% of all student loans issued. So, number one criteria doesn’t get met. And then, the other one, the correct repayment plan, most of the repayment plans didn’t come about until 2009 to 2011. And 2007, when the program started, income contingent repayment was the only repayment plan that existed, right? And that was a really, it’s still a really terrible plan. It’s not really terrible, but it’s not the best, right?

It would have been so rare, in 2007, for someone to have direct loans, for someone to be on income contingent repayment, and for them to follow the law so well that they recertify or they started certifying their employment immediately. So rare. But, when you start thinking about 2015, 2016, the program has been around for a few years. Now everybody is getting direct loans, after 2011. Pay As You Earn was created, IBR was created, REPAYE was created, so, these qualifying repayment plans were all created. People were graduating college, the program that existed, now it’s starting to make sense. 2015, 2016, 2017, you have big cohorts of borrowers that are potentially eligible for loan forgiveness.

So, the program is working exactly as it should. People just need to realize that it takes 10 years from this point in time. So, 2022-2023, we’ll start seeing lots more people getting student loan forgiveness in the program. And that’s why I also think it’ll be around. So, the numbers say it’s going to come in the future, the biggest groups of lobbyists in America are public service employees. You’re talking, the teachers, the firefighters, all the politicians are surrounded in their offices by people that are potentially eligible for public service. It would be very bad politically to eliminate the program. I think they should reform it, and then, they should expand it, open it up, fix some of these things. But the program is working well, and I think we’re going to start seeing huge waves of people on the next two, three years, start getting loan forgiveness. And then, we’ll start seeing a lot of positive chatter around it.”

I asked him the question that is often asked in our circles, is it fair that physicians who really only made payments for four years, because they made little tiny payments during their residency and fellowship, should have $400,000-$500,000 forgiven when they’re making $600,000-$700,000 a year?

“One of the reasons I really like Public Service Loan Forgiveness, is that, it requires 10 years or 120 payments of giving back. And what we deem as public good, public service jobs, are typically in the public good, right? So, you’re not getting something for nothing. We are asking these people to commit to working in the public good for a period of 10 years. And these programs have always existed in different forms or fashions, even before Public Service Loan Forgiveness. And so, it’s really a question like, if you disagree with the fact that we’re talking about Public Service Loan Forgiveness, and that it exists, well, your beef shouldn’t be with that orthopedic surgeon, your beef should be with your legislators and your congressman. The program exists. If you don’t like it, channel your efforts towards people that can create the laws and change the laws, not the person that is taking advantage of a perfectly legal program.”

He could see the change, like what President Obama proposed, of limiting the amount of money forgiven but thinks it would have to go hand in hand with a lot of other reforms.

“One of my big beefs and one of my actual proponents is, I am a big believer that you should cap the amount of student loans that you can take out, especially Grad PLUS Loans, which, I know, a lot of docs take advantage of. The fact that you can borrow unlimited amounts of money for grad school is part of the price inflation of grad school, and of all these different universities. And on the flip side, that’s where people get into trouble. So, I would say, if you’re going to cap the amount of student loans that can be forgiven, well, you also need to cap the amount, both federal and private, that can be borrowed. And then, you’re going to see a massive change in the marketplace, which, I can’t tell you if it’ll be good or bad, there’s definitely going to be pros and cons and arguments on both sides of that equation.

But, I think they would have to go hand in hand together. I think, in terms of Public Service Loan Forgiveness, doctors that work in public service are giving back. Like, they’re staffing VA hospitals, they’re staffing nonprofit clinics and providing services that other people might not want to provide. They’re probably working in lower income areas, seeing different clientele than other practitioners. Or, they’re educators, and they’re educating the next group of doctors that we need in this country. So, on the flip side, they are doing public service, and I don’t think we should dismiss that. Even though their loan balances are higher, they’re specially trained, and they have services and things that are valuable in our country.”

We discussed doctors and other high income professionals that are having trouble paying off their student loans even with high incomes 1X their student loans. They have a high income, but they’re not building any kind of wealth. They sometimes have a payment mentality. The biggest driver of wealth is getting out of that payment mentality. You can service your loan payment or you can just pay off your loans.

“Once you start getting out of the payment mentality, ‘well, I can nurse a longer payment here, and I can nurse a longer payment there,’ you’ll start building wealth, and you’ll start seeing your whole financial outlook change. And I think that’s the biggest thing, doctors start getting this great income, but then they start filling in the gap between their mandatory expenses and what they’re earning with fun stuff and other stuff, and that just wastes all their money.”

Make a Plan to Pay off Student Loans

Robert feels like as you are navigating that student loan repayment, it’s really important to get organized and know your options, and make the plan and stick to the plan. You’ve already become a doctor, you know how to commit to something. You went through a lot of schooling, a lot of training, more than anybody else in this country. You are totally capable of committing to the plan, and then sticking to that for the five years that it’s going to take to eliminate your student loan debt.

“Get educated, know exactly what you need to do. Dot your I’s, cross your T’s on these forms, and it can be done. You can get out of a student loan debt very quickly and easily, but you just have to be very diligent about it.”

Ending

Check out all the resources available to you at thecollegeinvestor.com. If you need help making a plan to pay off your student loans, contact one of our recommended student loan advisors. It’s interesting to get a student loan perspective of an average Joe. We talk about this stuff in terms of doctor incomes and doctor debt loads. We forget, there are lots of people struggling with an income of $50,000 a year and student loans of $80,000 a year. Which obviously takes a lot more sacrifice to pay off, than it does for a lot of us with physician size loans and incomes. So make a plan and get them out of your life.

Full Transcription

Intro: 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 Dahle.

WCI: This is White Coat Investor Podcast, number 119. Paying for College, with Robert Farrington. This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993, which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long-term care insurance. They work on the client’s behalf, to shop around, to find the most suitable products at the most cost effective rate. For more information, visit, setforlifeinsurance.com.
WCI: All right, if you haven’t checked out our new financial advisor page, our recommended financial advisor page, I recommend you go check that out. You can find it at, whitecoatinvestor.com/financial-advisors. This page is something that I have been working on for years. Even from the very beginning of this blog, I have been getting questions from people basically asking for recommendations for financial advisors. And so, in the beginning, I just threw a few names up there, people I knew who were good, and that’s how it started. And then, I had people start approaching me to be listed on that page. I ended up turning lots of them down, obviously, because, I think, most financial advisors really aren’t very good.
WCI: And then, eventually, it just became so much work, we started charging for it. I said, “I’m doing too much analyzing all these different firms and trying to figure out who are the good ones, to be giving it away for free.” So, we started actually, it was one of our ads that you could buy. You could buy a listing on the page, so long as you pass my criteria. And so, I put an application in place, basically asked all the questions that I think you ought to ask a financial advisor when you hire them. And if they could get all the questions right, that they were fee only, they’re fiduciaries, the price was reasonable, they were giving good advice or using passive investments, et cetera, then, I was okay with them being listed on that page.
WCI: Well, that page grew and grew and grew and grew, until we had over 40 advisors listed on there, and it just became very unwieldy for anybody to sort through. So, this summer, we redesigned the page, in order to make it much more useful to you. And so, we’ve got some premium listings at the top, that include all kinds of information about the advisors. And then, each advisor actually has their own individual little page on The White Coat Investor website, where you can get even more information about them. We’ve added clips from podcasts, if they were on there. And we’ve also added a video that you can actually get a sense of who they are and what their personality is like and who their ideal client is like, and learn more there.
WCI: So, we’ve tried to turn this into a very useful page, for those of you who are interested in hiring a financial advisor. Whether you want to do it temporarily, or whether you want to do it long-term. Whether you just need to put together a written financial plan, or whether you want someone to manage your assets going forward, we’ve got a list of these top financial advisors from across the country. They will all work with you in any location. Chances of you being in their location are not high, obviously, because these are firms all over the country. But if you’re in a big metropolitan area, there’s a good chance that, at least, one of these advisors, you could meet with locally, if that was important to you. But, for the most part, they work with people via Skype and email and phone, which is really all you need when it comes to a financial advisor, you don’t really need someone you can sit down with face-to-face.
WCI: So, check out that list, that’s at whitecoatinvestor.com/financial-advisors. Also, we’re halfway through August here, and you know what that means. That means, we are closing the submissions for The White Coat Investors scholarship at the end of this month. You have until August 31st of midnight Mountain Time, to get your application in, if you want to get The White Coat Investor scholarship. Now, we’ve had hundreds of people apply, and we still could use a few more judges. So, if you’re interested in being a judge, email us at, scholarship@whitecoatinvestor.com. That’s the same place you send your application, if you want to apply for the scholarship. We’re giving away over $90,000 in cash and prizes this year.
WCI: It’s a great thing that not only helps improve financial literacy, because we’re also giving a copy of one of our White Coat Investor books to every member of the winning people’s class, the top five winners, everybody in their class gets a copy of a White Coat Investor book. And so, it’s really helping to spread financial literacy throughout our medical and dental schools and other financial professions. But it also directly reduces the indebtedness of the top five winners, they’re getting get a check for cash, that will help them to not have to borrow so much money for their education. And so, we’re proud of being able to pay it forward, pay our success forward in that way, be sure to check that out.
WCI: We’re not the only ones that contribute to it, though, we have a lot of sponsors you’ve been seeing on the blog lately, and hearing about on the podcast. Our five platinum level sponsors include, Alexis Gallati, that does strategic tax planning. Ben Utley, he’s a financial advisor at Physician Family Financial Advisors. Splash Financial, which does student loan refinancing. Bob Bhayani, a doctor at disabilityquotes.com, who does disability and life insurance. And Larry Keller at Physician Financial Services, who also does disability and life insurance. So, thank you for supporting those who support what we’re trying to accomplish here at The White Coat Investor.
WCI: We have special guests here today, let’s bring them on to the call, and then, I’ll introduce them. Our guest today is Robert Farrington. He’s an online entrepreneur, the founder of The College Investor. He calls himself America’s Millennial Money Expert. I first met him at FinCon in 2013, which is about the time I was getting pretty serious about The White Coat Investor as a business. The other person I met at that conference was Mr. Money Mustache. And the three of our blogs have grown up together over the last few years. The College Investor started in 2009, Mr. Money Mustache started in April 2011, and I started in May 2011. I think, my blog is the smallest of the three in terms of traffic, but I think I interact in more ways than either the other people do. So, maybe that makes up for a little bit of it.
WCI: Welcome to the show, Robert.
Robert: Hey, thanks so much for having me. You were actually the first FinConer, I should say, that I ever met in the lobby of FinCon in 2013. I still remember that, because, you’re like, you had an investor in your name, and I had an investor in my name. And it was like, “Oh, what do you do?” That’s still so funny that that was when we first met.
WCI: Yeah, I remember that conversation, because I was like, “So, is this investing for college?” And I think your response to me was, “No, it’s for people in college that are investing.” And I said, “Okay, that’s interesting. It seems a little bit hard to invest while you’re in college. I know, I didn’t do any in college, because I didn’t have any money. I was too busy donating plasma for food money at the time.”
Robert: Yeah, I always was passionate about it, and I don’t know why I thought that people would want to know what some 19, 20 year old kid, what his thoughts were on investing. But, hey, I wanted to share my thoughts, and here we are today, at 10 years later, right?
WCI: Yeah. How old are you now?
Robert: I am 34 right now.
WCI: 34 years old. Okay.
Robert: Yeah.
WCI: So, you’re the college investor, what did you study in college?
Robert: I actually went into college because I was going to be a computer science major. And my freshman year, I was in the basement of a computer lab, programming, and I hated it. I just, I couldn’t stand it. I actually really liked the science and the logic behind it, but I just could not stand programming. So, I ended up switching my major to political science and economics, and that’s what I ended up doing after my freshman year.
WCI: Now, as I read your bio on your site, thecollegeinvestor.com, it sounds like you’re an entrepreneur from a young age. Are you honestly surprised to see what you’re doing now with your life?
Robert: I am. I was definitely always had that side hustling, how to earn money mentality, since I was a little kid. I was selling candy bars in middle school, that my mom would take me to Costco and I’d resell. I was selling stuff on eBay through college, that I’d go to garage sales and pick up. But, my parents were also, my dad was in the military, and then, he was in the defense contracting world for 20 years. And my mom worked in public service for her whole entire career of 40 years, so, they all had these stable jobs. I really never expected myself to start a business, and then, actually, do the business full-time. After I graduated from college, I was working at Target, and I actually did that. And that was my career.
Robert: I was a store manager there, I really loved it. I never expected it to be here, honestly.
WCI: So, that’s what you were doing? When you started The College Investor, you were managing at Target.
Robert: Yeah. I mean, I was at the bottom of the ladder back then. But, yeah, I mean, I started working in high school and college, cashiering and working on the sales floor. And then, after college, I became an assistant manager. And a couple of years after that, I became a store manager for Target. And I really enjoyed it, it actually, it was fun with the people I worked with, and I felt the job was pretty easy. And I think, people were surprised to hear that Target store managers get paid very well. So, it was great. And it also gave me the flexibility to do side hustles and build up my side business. Which, honestly, when I started, I never expected it to be where it was today.
WCI: So, when did the side business become the main business?
Robert: Well, it earned more than my career path, about two years before I left. This was about four or five years ago, at this point in time. It was a fantastic side hustle. The more I earned, and I was at Target, it’s almost like the movie office space. It’s like the less I was stressed about my day job. And it finally got to a point where I was like, “Why am I still doing this?” Because, the only drawback with retail is, it’s nights and weekends and holidays. So, the busiest time of the year is Christmas-
WCI: Sounds like an emergency department.
Robert: It does sound like an emergency department, right? So, you still had to… It’s like, I have young kids, even though the money is really good, and I found the job to be easy. Like, why am I still putting my family through this? My son had just started playing soccer, and it’s like, I have to miss like half of his games, because I’d be working on the weekend. And it really wasn’t serving any purpose, other than extra cash at that point in time. So, it was tough to leave, but I finally had to make that choice of what my priorities were of my life, and that’s really where we’re at today.
WCI: Let’s talk about The College Investor, what’s the mission of The College Investor? And how’s that changed over the years?
Robert: Yeah. Today, I am all about helping young adults, and really, anyone, get a student loan debt to start investing and building wealth. And I really champion my own path of doing it through side hustle. So, I’m a big believer in the earn more mentality. I think that we are blessed, at this day and age, that you have limitless money making opportunities. And so, while you still need the budget and be mindful of your spending, I think, if you develop a side hustle, you earn more, you can achieve your financial goals of getting out of debt in investing early, and you can achieve that much sooner. And then, plus, student loan debt is complicated and confusing. And so, I really just enjoy helping people navigate that process, because, it’s hard, you’re like fighting the government effectively, and it can be a challenge.
WCI: So, this has been a little bit of an interesting development in the physician financial space over the last, I’d say, two or three years. I mean, my WCI network partner, Passive Income MD, is always talking about side hustles and these other things. There’s a physician side gig’s Facebook group that has 36,000 members in it. And I look at it, and I go, “These are doctors, right? They’re making 150, 200, 300, $400,000 a year. Do they need a side hustle?”
Robert: Well, I mean, it’s never a need, right? It’s also like, I don’t know, I started, I always enjoyed my side hustle is because it’s like, what’s my hobby, right? And my hobby is earning money. And so, back, when I was in college, I would go to garage sales and I would flip things on eBay. I’d buy them, I’d resell them on eBay, because I enjoyed it. I don’t find any enjoyment in watching TV, I don’t necessarily find enjoyment in doing other things that people might consider to be their hobby. My hobby really is making money and earning money. And so, if I was going to spend my time doing something, I’d like it to generate some kind of income or have a return. And clearly, I don’t think I’m the only one in this. I mean, there’s definitely people that need a side hustle to provide for themselves or change their financial situation.
Robert: But, I think, especially when you look at like a doctor side hustle group, I bet you, they’re just people out there and physicians out there that enjoy the idea of entrepreneurship, without the risk, per se. Or, they just enjoy that kind of thinking skills or those activities.
WCI: Now, your website, the blog itself, it seems to have a big focus on millennials. What’s so special about millennials? Why millennials?
Robert: Well, it is millennials, but it’s everybody. You get found in search, just like you, people are googling topics, and my blog will come up. But, marketing one on one, I had to pick something, right? And the one thing I always thought about with millennials is just like the baby boomers, the baby boomers are always going to be called baby boomers. From the 70s and 80s, they were called the baby boomers, till today, they’re called the baby boomers. And I view the same thing with millennials, is, they’ve been coined millennials, and they’re going to be called millennials till they die. And so, it’s like, as long as I want to do this, millennials will be around, and I just felt like that was a choice. But, on the flip side, the blog and the personal finance topics are open to anyone.
Robert: I mean, the math is the math, and the tools are the tools. And so, I do have a much broader audience. I’d say, millennials actually only make up about 40% of everyone that visits our website. But on the flip side, it’s just a branding thing that I picked, because, I didn’t necessarily know what I was going to morph into five years ago when we were setting all this up.
WCI: So, you consider yourself a millennial?
Robert: I’m an older millennial. Yes.
WCI: How old are the youngest millennials these days?
Robert: The youngest millennials now are like 22, 23, they’re all wrapping up college, getting into the workforce. And the oldest ones are in their mid 30s, like I am. So, it’s basically mid 20s to mid 30s, is the millennial generation these days.
WCI: So, they’re still getting lots of flack, a lot of them get really personal about it. People are calling them lazy or overly lifestyle focused. Do you think that’s valid or not?
Robert: I don’t. I think it’s just, it’s a different day and age, right? So, when I look at every generation, there’s plenty of boomers out there that have no savings, still have student loan debt, and are lazy. There are plenty of, every generation, Gen Xers, all of them that have these terms. It’s just, we’re in a different time and a different space, and so, my parents don’t understand how I provide for a living on the internet. And so, millennials just have different tools, different avenues to earn. They have different viewpoints on life, but they’re definitely not lazy or lifestyle focus. There’s plenty of that in every generation, and I think, that’s just a very much an overgeneralization of the millennial generation.
WCI: It’s interesting, your parents have no idea what you’re doing, either. It’s basically the line my dad told me, when I talked to him about buyout offer I had a couple of years ago. He’s like, “I don’t really understand what you’re doing.” Yeah. It’s such a unique, the internet, we all knew in the 90s was going to change things, but we had no idea how it could change our lives personally, I think, going forward. I had no idea in college that I would be making most of my money online, basically.
Robert: Absolutely. And I think that’s the interesting aspect of the world we live in today. And I think, millennials, and then, the next generations, like the Gen Z, or Zennials, or whatever they’re calling themselves, one thing that they have going for us and we have going for us, is that, we have adopted the internet and embraced it, and we communicate and leverage it in ways that other generations haven’t. And so, when they say, millennials can’t communicate, I would challenge that millennials actually are the most communicative generation that has ever existed in the history of our planet. The problem is, they’re communicating on text, and on Snapchat, and online in different ways, and what they have lost, and this is where I think the criticism comes from, is they’ve lost the ability to verbally communicate in a face-to-face conversation. Now, that’s becoming rare and rare.
Robert: It’s not to say they don’t communicate, but, some of the social norms and social skills that previous generations have built themselves on, the millennials are changing or are having different norms of what that looks like, and that can be challenging to understand.
WCI: Yeah, I think that’s probably where a lot of that criticism comes from is just different.
Robert: It’s just different, and the next generation is going to be different. And in 40 years, you and I are going to be, “Look at these young kids these days, I can’t believe they’re so lazy and what,” but they’re just different.
WCI: What’s the biggest financial challenge these days for millennials? I mean, mid 20s to mid 30s, what’s their challenge? What are they struggling with?
Robert: Student loan debt is definitely the biggest financial challenge, I think, in aggregate. But I also think, there’s a lot of macroeconomic factors out there. Even though employment is good, wage growth is stagnant, the boomers are still jamming up the workplace for young adults, and so, they are not having as many opportunities to promote and advance their careers as quickly as previous generations, which keeps that wage growth stagnant. And lifestyle costs are higher, so, things that people would have done in the past, like buying a home or purchasing other things, it’s just more of a challenge. And so, when you combine all these factors, it really is just, it’s macroeconomics, and it’s individual personal financial choices, that have made the financial picture for millennials more challenging than, I think, previous generations encountered.
WCI: Now, my work mostly focuses on high income professionals like doctors. Are millennial doctors any different from other doctors, in any significant material way?
Robert: I think that it’s hard to know, but there’s inflation and everything, but I think the cost of schooling is definitely higher. And so, the student loan debt is higher. Just like other career paths, I think wages are getting limiting. I think, it definitely depends on your specialty, right? And you know this much more than I do, but you go into pediatrics or other specialties, where there is a demand for doctors in many areas, the wages aren’t there. And then, on the flip side, you go into more advanced specialties, and there’s still great wages, but you’re tacking on another six years of training or something, that’s just going to add to your cost. So, it’s not necessarily any different than going into other professions. I think, the income potential is there, the ROI on your education spending can still be there, but you just have to just be mindful across the board.
WCI: Are you planning to keep focusing on millennials as millennials age, with your writing and your blog? Or, are you going to stay focused on younger folks? And in turn, it’s going to become focused on Generation Z and et cetera.
Robert: I mean, I’m going to continue just driving home the message that we are about getting a student loan debt and starting to invest. Whether it’s millennials or not, that’s my goal is navigating the complex world of student loan debt, so that you can build wealth as early as possible. And sadly, early as possible might be their 30s or 40s. But, hopefully, we can knock them and tap into them when they’re in their late teens, early 20s, to set them up for success.
WCI: Yeah. Let’s turn now a little bit toward your blog and your site. I noticed, looking through it, in preparation for this, that you’re apparently trademarking a couple of terms, America’s Millennial Money Expert, and America’s Student Loan Debt Expert. And I know I’ve had enough hassle and expense defending The White Coat Investor as a trademark, and can’t imagine defending those two terms, why did you decide to trademark those? And how’s that gone for you?
Robert: I honestly decided to trademark them because I thought they were cool. There really was no material business aspect to it, except, how could I spend 700 bucks to have it? But, I actually have leveraged it in many ways that have earned back that ROI. Now, defending them is probably something different. Luckily, I haven’t encountered it, because, you see a lot people call themselves a millennial money expert, but no one actually… or a student loan debt expert, but you tack on America’s, and that’s where you get more of the defense aspect of it. But, I don’t even know if I would pursue it a ton, I probably would just cursory to keep the trademarks there. But, I leveraged a lot when it comes to our brand partnerships, and some of the brands really do like that.
Robert: And for a while there, I thought I was going to do more spokesperson work and be more public facing of my brand, and that’s where these terms, I was really going to start leveraging more. But, I’ve pivoted over the years, but they’re still pretty fun to have.
WCI: Now, let’s talk a little bit about your business a bit. I mean, you have grown this enough that it was making enough money for you to be able to quit your job, you’ve now got seven people working for you, what’s it like to be a boss? Do you like it or dislike it?
Robert: Oh, and see, I very much dislike being a boss. I do have seven team members, I mean, but they’re all freelancers, it’s all virtual. One of the things that I grew up with at Target, when I was a store manager, I had over 200 people reporting to me, various different pay levels and structures. And I enjoyed that, and that was like that season of life. But, once I left, I really I’m a firm believer, especially in the online world of a company of one. There’s a new book out for it. I was always saying, a business of one, and there’s a new book out called Company of One. But, we live in this day and age where it’s like, I don’t necessarily see this reason to scale up a team. And actually, I see more horror stories of online companies that scaled up with big teams, and then, an algorithm changes and they’re laying off all these people. That sounds not appealing at all.
Robert: So, yes, we do have freelancers, though, seven people are all outsourced team members. But I keep it lean, I keep it virtual, we run everything online, on email. No set hard, like, ask and see kind of things, where you have to be at any certain time. That’s what I really love about an online business is that virtual aspect, that company of one aspect, where, I, pivoting out of that corporate “world” into this online entrepreneurship world, I value my time, I don’t have as much of a set schedule. Family comes first, and I want that for the freelancers that work for me, and I really enjoy that.
WCI: How much time do you think you’re putting in these days, into the work?
Robert: I put probably about 20 to 30 hours a week in. And it definitely varies, there’s some longer days, like, those days where I’m going to be like a six, seven hour days. And there’s days that maybe goes in and just check email for an hour or so, and go from there.
WCI: I mean, what can people expect when they go to your website? I mean, are you publishing something every day? How many articles a month typically come out? I mean, what should they expect when they go there?
Robert: Yeah. We publish every day. Well, Monday through Friday. Sometimes I do it on the weekends, but, pretty much, Monday through Friday, we have a new article. We have a lot of reviews. So, one of the things that I’ve always been passionate about is, the new up and coming companies and financial technology companies. One thing that we’ve become known for is, we do review pretty much every product, service, software, that’s out there in the personal finance space. So, we do a lot of reviews. And then, we definitely have our personal finance basics and interesting articles around different topics around student loan debt. You’ll probably find everything you could ever want to know about student loan debt on our site. And then, we do have a lot of investing content as well.
WCI: This is a tricky thing, I think, anybody that’s an online entrepreneur runs into. How do you balance writing about stuff your readers need to know about, and writing posts that actually make money?
Robert: Yeah, it’s tough. And I’ve been doing this a while, and I still don’t have 100% the answer. But, one thing that I know, is that, I like to write the stuff that my readers need to know about, and I outsource those that I don’t want to write that make money, like the reviews and different things. But, on the flip side, people do want to know that stuff, it’s just not necessarily what I want them to know about. And so, it is about striking the balance. But, the one thing I have learned, is that, if you’re going to write about something, cover all the basics. So, let’s say that you want to dive into the student loan space. Well, what are you going to talk about there? Student loan forgiveness. Well, then there’s 80 plus different programs, and you should probably start covering all of those. And people want to know about all of them.
Robert: And you’ve got to build this ecosystem around your content. And some of it, not everyone’s going to want to know about, but if you could help that one person, then it might be worth it. And I will say like, I’ve written some very obscure stuff. And some of my most obscure content is also what has gotten some of the most exposure. I wrote an article, I don’t know, probably like five, six years ago, about, pay ahead status and Public Service Loan Forgiveness. And how, if you go into pay ahead status, you can disqualify yourself from Public Service Loan Forgiveness, because it lowers your next future monthly payment. And I wrote this because a reader had this problem. And I researched it and wrote about it, and then, nothing happened. I think, over the course of two years, maybe 1,000 people viewed the article, which is very low on our site.
Robert: But then, Ron Lieber, from the New York Times reached out, and was like, “Robert, why the heck did you write this? We’re doing an in-depth piece on this, and we have the same thing. We’re finding readers have it, and we’ve been investigating fed loan about this.” And their whole investigative journalism kind of money, picked up our article and picked up our story and shared that out there. So, I think karma is always a good thing, you help people, you create content that’s worthwhile, and you’ll get paid dividends from it in some way or another down the road.
WCI: Well, you also put it in a forum on your site, what’s that been like?
Robert: I created the forum, solely to create a place where people can ask questions in their own words. So, the hard part with personal finance and doing this for so long, is that, I speak in a different language, probably that most readers speak. And so, I wanted a place where they could post a question using their own language, and then, be able to answer those. And most of our forum responses redirect them to the appropriate article on our site. And we don’t get a ton of engagement, but we do answer people’s questions. So, I would say, we get one or two posts a week, nothing crazy, nothing like your forums, but it does serve as that answer for people in their own language, which I think is very valuable. Because, people type in all kinds of crazy search terms, because they don’t know exactly what they’re looking for. And I think, the forums can help address that and help people find the answers that they are looking for.
WCI: Now, thumbing through some of your content, I see an article you wrote recently on the best place says to trade options. Do you think it’s a good idea for your readers to be trading options?
Robert: I don’t. But, on the flip side, I have had this realization over the last few years that I also cannot be my readers mom. So, whether I agree or disagree, all I can do is tell them my thoughts on it. And then, on the flip side, at least, show them tools and resources, so, they might not get themselves in a lot of trouble. And the one thing I also think, is that, as a young adult, let’s just say, you’re in your 20s, and you’re trading on… you’re not probably not spending your life savings trading options, you probably have $500, $1,000, and you’re going to trade options on it. And if you lose it all, well, that’s terrible. But, on the flip side, it’s a cheap lesson learned for the future, hopefully.
Robert: So, that’s my goal with this. I talk a lot about, trading options is one, I talk about paying for advice and paying for help. People are going to do it, whether I agree or disagree. So, my goal is to, at least, show them the right way to go about it, give them the insight of what it is, and then, at least, provide reputable tools that they won’t get scammed out of their money or other things in that regard.
WCI: Let’s talk a little bit about the subject to this podcast, paying for college. You had a fantastic article that you called the order of operations for paying for college. And it went through nine things that basically, nine ways to pay for college. And presumably, you max out each of them before moving on to the next step. It started with, number one, scholarships and grants. And then, number two, your own savings as a student. Number three, your earnings as a student. Number four, your parents’ savings for college. Number five, your parents’ current income. Number six, fellowships and assistantships. Number seven, aid through school work related programs. Number eight, federal student loans, and number nine, private student loans.
WCI: I think it’s a great list, and I totally agree with it. Why did you feel like that article needed to be written?
Robert: The article needed to be written because so many people, especially in mainstream media, I guess, you could say, just default to, you’ve got to use student loans to pay for college. And it’s like student loans are one option to pay for college, but there’re so many things that people forget are actual other options. And usually, more better ways, I guess, you could say, to pay for college. And I just really wanted to demystify that, like, look, there is a good way to pay for college, and you can maximize each of these buckets. And number one is scholarships, which are the totally number one most underrated way to pay for college. And it drives me nuts, just because no one just wants to put in the work to get the scholarship. But the scholarship is the easiest, best way to get free money to pay for school.
Robert: Let me give you an example, I run a scholarship on my website, it’s live right now, it’s called the Side Hustlin’ Student Scholarship. And I wanted to reward entrepreneurial high school students. I want them to share their story, and then, I’ll give them a $2,500 scholarship. I’ve been doing this for three years. So, the crazy thing is, is, it’s $2,500, and there’s a second place prize for $500. I only got 100 or so entries to that scholarship. And then, once I started combing through it, 70 out of the 100 did not meet the criteria for the scholarship. And it’s stupid things, it is like, they didn’t put a picture, I asked for a headshot. They didn’t put the school they were going to, they didn’t format their essay. Some people put them as a Google document, but they don’t allow you to get the permissions to access that Google document.
Robert: So, here you are, as a $2,500 scholarship, and really, you’re in competition with 30 other people. The odds are so good. And that’s what’s so crazy is, when I talk to other people that I’ve run scholarships, it’s very similar across the board. 70 to 80% of all scholarship applications get disqualified just for not meeting the basic criteria. And then, it’s just, it’s a numbers game, right? So, you just do the expected value of the scholarship and your competition, and then, how many you apply to you. If you want to put the work in, as a high school junior or a high school senior, I would say, if you applied to 50 to 60 scholarships, you could easily pay for 50 to 75% of your college education cost. And it’s just crazy to me.
WCI: Yeah, that’s definitely an issue. And I’ve run into similar issues with our scholarship. We had one person within the last few years, where the scholarship was clearly, or their application was clearly going to be a winning application. But, we have a strict word limit on their essays, it’s 800 to 1,200 words. And for their lack of ability to count to 1,200, they lost out on tens of thousands of dollars. So, it’s pretty amazing.
Robert: Just crazy to me. Yeah. And that’s where I just want people to realize, is that, paying for college isn’t all about student loans, there’s so many ways to do it. And you can save as a student, you can work through college, your parents can save, you can get fellowships. And then, yeah, federal student loans should always be first, for the most part, and then, private student loans. And of course, this order of operations probably only applies to 90% of people, there’s always going to be some random case out there, where it’s like, well, I should do this, or I should do this. And it’s like, yes.
Robert: But, for the most people, you should really think about this order, especially if you’re a parent, you should tell your young high schooler, even late middle schooler, that, “This is what we have, this is what we expect.” Have these conversations, so that, by the time they’re in their junior year of high school, it’s not a surprise, they know what it’s going to take, and they can plan accordingly.
WCI: Now, if you listen to Dave Ramsey, and honestly, I probably agree with him, he would say that nobody needs to borrow for an undergraduate education. He probably extend that even to graduate school. I wouldn’t quite go that far, I don’t think anybody’s going to work their way through dental school. But, that’s how he believes it. That if you pick the school right, you pick one with a reasonable amount of tuition, you bust your butt, maybe your parents help you some, that you can get through without debt. Do you think that’s fair? Do you think that can be done? Do you think most people should be getting through their undergraduate education without borrowing?
Robert: Absolutely. I think, if you look at the stats, about 40% of people graduate college today even, with no student loan debt. So, 40% of America is already doing it, it’s 60% that aren’t. That number continues to be less and less people over time, but it’s totally doable. I think, my big thing with student loans is figuring out the return on investment of your education dollars. I don’t necessarily think borrowing is bad, but everyone gets into trouble with it. And it’s not different than borrowing for a house or borrowing for a car, it’s, they borrowed too much and they couldn’t afford it. And so, if you want to be a teacher today, in America, that’s great. But, realize, your starting salary, depending on where you teach, could be in the low 30,000, to maybe like 45, 50,000, if you’re on New York or California.
Robert: And so, if you’re going to earn that after graduation, that’s fine, it’s not necessarily a bad thing. But don’t go spend $80,000 to become a teacher, maybe you go to your local community college. Which, in a lot of states now, they’re making it free. And even if it’s not free in your state, it’s very cost effective. Do that for two years, knock out all your undergraduate stuff. Then, you transfer to your local in-state school, you finish up your two years, and you could be done and get a teaching credential for 10, $20,000. Now, when you’re looking at your starting salary as a teacher, you can afford to service that debt on your starting salary. It might not necessarily be the easiest, but it’s definitely a lot better than spending 80, $90,000 to be a teacher.
Robert: And then, when you combine that with scholarships, when you combine that with potentially working through school, and all these other ways that we talk about on the order to save, you can even minimize your debt further. So, Dave’s not wrong. But on the flip side, thinking about the return on investment of your dollars, a little debt here can be a positive return for you. It’s just when you spend way too much, that it becomes negative.
WCI: So, what rule of thumb can people follow? How do they know when they’ve spent too much?
Robert: My rule of thumb is, never borrow more than you expect to earn in your first year after graduation. And so, like, if you want to be a teacher, you’re going to make $40,000, you should never borrow more than $40,000. If you’re going to go be a doctor, the same rule applies. If you’re going to go be a pediatrician, you expect to make 150,000, you should probably keep your borrowing to about 150,000. If you’re going to go be an orthopedic surgeon, you’re going to make $600,000 a year, where you can definitely afford to borrow a lot more. But, it definitely varies, based on what you want to do after graduation, and you have to be intentional with that spending. But, on the flip side, that’s hard to tell a 17 year, old 18 year old kid, when they’re making these decisions.
Robert: So, it definitely needs to have a lot of parental involvement in it.
WCI: Right. I mean, what about the person that, “This is my dream, I want to be a pediatrician, and my family can’t help me at all. And I don’t think I can get the grades I need to get into medical school if I’m working. And so, my only option is to borrow $600,000 to get this job that pays 150 or 200”? What do you say to that person, that feels like you’re killing their dream by giving them advice like that?
Robert: I say like, on the flip side, though, is your dream to struggle financially for the next 40 years of your life. So, it might be your dream to help people, but maybe you could go be, start with being LPN, and then, be an RN. And then, do it for a lot less, and still help people. Because, if you’re going to be a pediatrician, I don’t want to dismiss pediatricians, but you’re treating colds and ear infections, and you’re referring them out to specialties, that’s why they don’t earn very much. So, could you get your same fulfillment without jeopardizing your future 40 years of your life, trying to pay back this debt. You could also look at navigating the variety of programs that are out there to help you.
Robert: So, if you really do your due diligence, you take out federal loans, you go work in a public clinic, and you get Public Service Loan Forgiveness, well, maybe it’s worth it. Or, you could take advantage of one of the many rural opportunity programs. So, like, every state has some kind of program out there, where you could go be a doctor or a nurse in remote location, and they’ll basically forgive your loans or pay a portion of your loans over time. There’s a lot of programs out there for that. But, once again, you have to do that work upfront, and you have to commit yourself to that. Whether it is, like, doctors already are putting themselves and they’re committing themselves to 8, 10 years of education.
Robert: So, you’ve got to ask yourself, “Is it worth the commitment for another 10 years beyond that, potentially, or more, to achieve this dream of mine.” And it’s either going to be working in an area you might not want to work in, or it’s going to be struggling financially, because you took on too much debt you can’t afford to pay. The courses can be laid out, and you can analyze all your options. But, you just need to do that upfront, versus when it’s too late.
WCI: Yeah, I certainly agree with that, that you have to look at it and analyze it upfront. Now, for those 4,000 pediatricians that are utterly mad right now, send all your hate mail to Robert, not to me. All right?
Robert: Please do.
WCI: I know you guys are doing lots more than cold. So, send him your email.
Robert: Let me know, because my sister is starting her training right now, and she wants to be a pediatrician. And so, we’ve had these conversations. Send me your love and hate and advice for her, and you can send it to me, of course. Don’t blame Jim.
WCI: I tell you, the first part of your answer to the last question is going to get you some emails. So, here we go.
Robert: That’s all right, I’m all for it. Once again, it’s definitely the good and the bad. People do have their goals, but finances plays such a huge part of your life, and you have to do the expected value of it. And not to say that it’s not worth it or whatnot, but that’s just the math.
WCI: Yeah, you don’t get a pass on math.
Robert: You don’t.
WCI: Just because you want to be a doctor. That’s absolutely right. Okay, why do people struggle so much with student loans? Are they just ignorant and undisciplined? Is the system unfair? Or, is it some combination of both?
Robert: It’s definitely ignorance and the system. So, one, is we’re expecting these 18 year old, 19 year old kids to make very important financial decisions with very little to no guidance or education. I remember when I got my student loans. I remember, I got an email from the financial aid office, this was like May or June, before my freshman year, and it said, “Congratulations, you’ve received financial aid.” Right? So, notice, they don’t call them student loans, they say, “Congratulations, you have a financial aid award.” And then, I click the link in the email, took me to the financial aid website. And it said, like, “Click here to accept your award.” You have a little checkbox, and that checkbox is next to a student loan, but they’re calling it a financial aid award, a financial aid award.
Robert: And then, you scroll through some terms and conditions, which, at this point in our lives, we’ve all been trained to just skip to the bottom of the terms and conditions and hit Accept. And that’s how I got my student loans. It is crazy how easy it is, and there is no education and no anything to go around it. So, that’s part of it. But, on the flip side, did you, Jim, there’s over 150 different options for your student loan debt, when you’re set and done? I’m talking about, student loan forgiveness, repayment plans, deferment options. When you literally take all the different paths that someone can take with their loan type, and their career and their repayment plan, there’s 150 plus different variables.
Robert: And so, that’s just hard to navigate as well. And yes, most people are going to default into like one of four different major ones. But that’s not to say that, option number 121 isn’t the best one for you. And so, it’s very challenging to navigate repayment. And then, when you combine that with the fact that these loan servicers, our call centers with 10,000 plus employees that are making a minimum wage, they’re probably not necessarily doling out the personal financial advice you need, right? They’re just trying to answer your-
WCI: That’s a nice way to put it. I usually say, utterly incompetent.
Robert: Is it incompetence? Or… is it, I’m making $10 an hour in the call center, and then, on the flip side, you have to say, does the caller, that’s calling fed loan or whatever company they’re calling, are they saying the right things to the representative, that the representative even knows what they’re talking about? Because, so many people are just ignorant of the terms to use. Like, when you’re calling and saying, “I need to lower my student loan payment.” Well, are you asking for an income driven repayment plan? Or, are you asking for the extended plan? Or, do you need a deferment? Or, are you looking for a loan forgiveness options?
Robert: Like, I’m a call center rep, I don’t know your financial situation, I don’t care about your financial situation. I’m getting paid $10 an hour to answer this call, and so, if you also aren’t clear about what you’re asking for, it’s very difficult for a call center representative to help you. So, the whole system is very challenging, and the best thing you can do is just educate yourself. Because, I mean, you know the rule, no one in this world is going to care more about your money than you. And so, if you don’t care about it, it’s going to be challenging.
WCI: Yeah. What are the biggest student loan related mistakes you’re seeing your readers making these days?
Robert: The biggest one I see, is that, people are not doing their research when it comes to, what qualifies for these loan forgiveness plans? What repayment plans they should be on? They are just defaulting into, let’s just say, you’re done with college, right? You get six months of deferment on your federal loans, and then, you automatically go into the standard 10 year plan, if you don’t elect a choice, right? Well, they see that first bill, and they’re like, “I can’t afford it.” Well, then they default. And then, that drags on, their loans grow, and it becomes a mess. And they’re not sorting it out until it’s too late. And then I see the headlines, like, 99% of people are denied for Public Service Loan Forgiveness. I’m sure, most of your listeners have seen that headline.
Robert: Well, that headline could not be more misleading about the effectiveness of Public Service Loan Forgiveness, and what it actually takes to qualify. So, the fact that people think that they would qualify for Public Service Loan Forgiveness in month one that the program started, is so wrong. And it’s not the government’s fault that people didn’t educate themselves on how the program worked. And then, when you look at the denial reasons, the number one most common reason that you’re getting denied, is because you didn’t fill out the application correctly. It’s like 33% of all of them didn’t fill out the application correctly, or left a blank or whatnot. So, it’s like, of course, the government’s going to deny you. It’s just like your scholarship winner, they went over the word count, they got knocked out of the running for it, right? Follow the directions, people. I don’t know.
Robert: So, those are the most common things that I see. Is not taking action, and then, just not doing your diligence around your own things.
WCI: What is your opinion on the current status of Public Service Loan Forgiveness? I mean, certainly, there’s issues that people not understanding how the program works. Certainly, there are competence issues on the part of those running the program. I mean, it takes a year and a half to get a recount of the payments you’ve made. I mean, do you think that this is going to be around for a long time? Do you think people should really be counting on it? Do you think this is a good program? A bad program? What are your thoughts on where we’re at currently with Public Service Loan Forgiveness?
Robert: Sure. I think it’s a great program that is poorly structured. So, like in my ideal world, for those that don’t know, direct student loans is the number one qualifying criteria. Number two is you have to be on a qualifying repayment plan. Which is the other thing that I think is silly with this program, why be so strict? You have to be on a qualifying repayment plan. And the number three is you have to work in qualifying public service for 120 months, 120 payments, right? And so, if you look at the data, the program is actually doing exactly as expected, right? So, here’s some scary stats, in 2019 to 2021, there’s only going to be 1,800 people this year and next year or so, that are going to get Public Service Loan Forgiveness. That’s just the math of who had the qualifying criteria 10 years ago, there just wasn’t very many.
Robert: But when you fast forward this clock to you as at 2025, they’re going to have 150,000 people that are potentially eligible for Public Service Loan Forgiveness in 2025. And that starts to make sense, because, when the program started, you know what? Direct loans were only one to 3% of all student loans issued. So, number one criteria doesn’t get met. And then, the other one, the correct repayment plan, most of the repayment plans didn’t come about until 2009 to 2011. And 2007, when the program started, income contingent repayment was the only repayment plan that existed, right? And that was a really, it’s still a really terrible plan. It’s not really terrible, but it’s not the best, right?
Robert: And so, it would have been so rare, in 2007, for someone to have direct loans, for someone to be on income contingent repayment, and for them to follow the law so well that they recertify or they started certifying their employment immediately. So, rare. But, when you start thinking about 2015, 2016, the program has been around for a few years. Now, you have direct loans, everybody is getting direct loans, after 2011. You start having, pay as you earn was created, IBR was created, repay was created, so, these qualifying repayment plans were all created. People were graduating college, the program that existed, now it’s starting to make sense. 2015, 2016, 2017, you have big cohorts of borrowers that are potentially eligible for loan forgiveness.
Robert: So, the program is working exactly as it should. People just need to realize that it takes 10 years from this point in time. So, 2022, 2023, we’ll start seeing lots more people getting student loan forgiveness in the program. And that’s why I also think it’ll be around. So, the numbers say it’s going to come in the future, the biggest groups of lobbyists in America are public service employees. You’re talking, the teachers, the firefighters, all the politicians are surrounded in their offices by people that are potentially eligible for public service. It would be very politically, I don’t know, I don’t think they’d be able to stomach it politically to eliminate the program. I think they should reform it, and then, they should expand it, open it up, fix some of these things. Even their fixes, like temporary expanded Public Service Loan Forgiveness is so poorly done.
Robert: Like, you have to apply, get denied, and then send an email to fed loan, that’s just totally incompetent that they would even created a law like that. But, they did, I think they need to definitely fix some of these gaps in there. But the program is working well, and I think we’re going to start seeing huge waves of people on the next two, three years, start getting loan forgiveness. And then, we’ll start seeing a lot of positive chatter around it.
WCI: Now, some people say it’s not fair, it’s not fair that an academic orthopedic surgeon, who really only made payments for four years, because they made little tiny payments during their residency in fellowship, should have four or $500,000 forgiven, when they’re making six or $700,000 a year. What do you say to those who criticize that aspect of the program for high income professionals?
Robert: Totally. I mean, there’s always going to be a moral hazard with everything. I mean, there’s always going to be those one or two people that take advantage. Whether you call it taking advantage or not, it’s what law is. But, on the flip side, one of the reasons I really like Public Service Loan Forgiveness, is that, it requires 10 years or 120 payments of giving back. And what we deem as public good, public service jobs, are typically in the public good, right? So, you’re not getting something for nothing. We are asking these people to commit to working in the public good for a period of 10 years. And these programs have always existed in different forms or fashions, even before Public Service Loan Forgiveness. The military is a prime example, they’ve been doing this for 20, 30 years. Where, you go and serve in the military for five years, and they’ll give you $50,000 to pay off your loan.
Robert: And so, it’s really a question like, if you disagree with the fact that we’re talking about Public Service Loan Forgiveness, and that it exists, well, your beef shouldn’t be with that orthopedic surgeon, your beef should be with your legislators and your congressman. The program exists, if you don’t like it, channel your efforts towards people that can create the laws and change the laws, not the person that is taking advantage of a perfectly legal program.
WCI: Now, some people say, “Well, this wasn’t designed for doctors, this was designed for firefighters and teachers.” And in fact, the Obama budget, I think it was in 2013, had a recommendation to limit the amount you could have forgiven to just $57,000 a year, which obviously makes this a non-starter for most docs to use the program. What’s your opinion of a change like that? Would it be a good change? A bad change to the program? And what do you think the likelihood of something like that happening is?
Robert: I can see something like that happening, but I think, it would have to go hand in hand with a lot of other reforms. One of my big beefs and one of my actual proponents is, I am a big believer that you should cap the amount of student loans that you can take out, especially Grad PLUS Loans, which, I know, a lot of docs take advantage of. The fact that you can borrow unlimited amounts of money for grad school is part of the price inflation of grad school, and of all these different universities. And on the flip side, that’s where people get into trouble. So, I would say, if you’re going to cap the amount of student loans that can be forgiven, well, you also need to cap the amount, both federal and private, that can be borrowed. And then, you’re going to see a massive change in the marketplace, which, I can’t tell you if it’ll be good and bad, there’s definitely going to be pros and cons and arguments on both sides of that equation.
Robert: But, I think they would have to go hand in hand together. I think, in terms of Public Service Loan Forgiveness, doctors that work in public service are giving back. Like, they’re staffing VA hospitals, they’re staffing nonprofit clinics and providing services that other people might not want to provide. They’re probably working in lower income areas, seeing different clientele than other practitioners. Or, they’re educators, and they’re educating the next group of doctors that we need in this country. So, on the flip side, they are doing public service, and I don’t think we should dismiss that. Even though their loan balances are higher, they’re specially trained, and they have services and things that are valuable in our country.
WCI: Now, I run into doc sometimes, that say, man, I’m just having a lot of trouble paying off my $200,000 in student loans on my income of $200,000.” Well, what do you say to those people? Do you think that’s ridiculous? Or, what’s your response to docs who are taking years and years and years to pay off their student loans with ratios like that?
Robert: Yeah, I think it’s a challenge. I mean, every situation is so unique, and it’s no different than someone that’s struggling to pay off $30,000 in student loan debt is. There’s income based repayment plans, right? So, if you’re already on that, your payment is kept 10, 15% of your discretionary income. And if you’re still struggling at that point in time, you’ve got to look at the rest of your budget. I also see, and you talk about this a lot on your site, is like, these doctors that make 200, $300,000 a year, and have no wealth, actually. They have a high income, but they’re not building any kind of wealth. Because, they’re spending all their money, they have a second vacation home, they have a boat, they have an RV, all these things, you don’t need those, right? You shouldn’t be blowing your money.
Robert: You actually had an anonymous question in your forum the other day that I really loved it, in the private Facebook group for your White Coat Investors. And there was this guy that had this payment mentality, he owed his parents money still, and he had all these payments, and he was paying on like three cars and all this stuff is. The biggest driver of wealth is getting out of the payment mentality. And so, you can service your loan payment, or you can just pay off your loans. And once you start getting out of the payment mentality, well, I can nurse a longer payment here, and I can nurse a longer payment there, you’ll start building wealth, and you’ll start seeing your whole financial outlook change. And I think that’s the biggest thing, is that, doctors start getting this great income, but then they start filling in the gap between their mandatory expenses and what they’re earning with fun stuff and other stuff, and that just wastes all their money.
WCI: Yeah. Now, we’re starting to push up against an hour here on this podcast, we better start wrapping it up here. But I wanted to give you the chance, if there’s anything else you’d like the 20 to 30,000 docs and other high income professionals that will eventually listen to this podcast to know, what would you like to tell them? If you’ve got their ear here just for a minute or two, what’s the most important thing you think you could tell them at this point?
Robert: Yeah. Honestly, as you are navigating that student loan repayment, it’s really important to get organized and know your options, and make the plan and stick to the plan. You’ve already been a doctor, you know how to commit to something. You went through a lot of schooling, a lot of training, more than anybody else in this country, right? So, it’s like you are totally capable of committing to the plan, and then sticking to that for the five to 10 years that it’s going to take to eliminate your student loan debt. But it can be confusing. One of the things that we’ve been doing is creating a tool called LoanBuddy to help navigate that. Jim, I’ve shared a little bit with him. But, there’s tools out there, there’s services, there’s Jim’s pod, The White Coat Investor is phenomenal, so many great resources, the forum there.
Robert: Get educated, know exactly what you need to do. Dot your I’s, cross your T’s on these forms, and it can be done. You can get out of a student loan debt very quickly and easily, but you just have to be very diligent about it.
WCI: Thank you so much, Robert. We’ve been talking with Robert Farrington, the founder of thecollegeinvestor.com, where he provides lots of information for young investors, for indebted people with student loans, millennials in particular. And he’s been doing that since 2009. So, a very successful online entrepreneur. Thank you so much, Robert, for coming on our show.
Robert: Thank you so much for having me. This has been great.
WCI: Okay, I hope that was helpful, talking about that with Robert Farrington. It’s interesting to get it from perspective of an average Joe. Somewhat often, we talk about this stuff in terms of doctor incomes and doctor debt loads. And sometimes we forget, there’s lots of people out there struggling with an income of $50,000 a year and student loans of $80,000 a year. Which obviously takes a lot more sacrifice to pay off, than it does for a lot of us with physician size loans and incomes.
WCI: This episode was sponsored by Set for Life Insurance. Set for Life is, first and foremost, a client centric company, they listen carefully to the needs of clients. Because of the volume and exceptional reputation of Set for Life Insurance, as well as the relationships they have developed over the years, Set for Life clients have access to special services not available elsewhere in the industry. This includes, special discounts, gender neutral policies, saving women significantly. Priority underwriting handling, and on some occasions, exceptions in the underwriting process. For more information, visit, setforlifeinsurance.com.
WCI: All right, make sure you get your scholarship applications in. If you would like to help us judge this scholarship, is not that hard. Yes, it doesn’t pay anything, you get no recognition for it, but you’ll only have to read some routine 10 and 20 of these essays, and you’ll have real impact on the choice of who wins these scholarship dollars and which medical schools actually end up getting these books for their medical students. So, make sure you get your scholarship applications in by the 31st. If you’d like to be a judge, again, email us at scholarship@whitecoatinvestor.com, put volunteer judge in the title, and we’ll get you in there to do that. Basically, the only criteria is, you can’t be a student or a resident, you have to be a professional working in your profession, or a retiree, and we’ll let you be a judge.
WCI: So, we could use as much help as we can get with that, we’re going to have hundreds of hundreds of applications this year. Head up, shoulders back, you’ve got this, we can help. We’ll see you next time on The White Coat Investor Podcast.
Disclaimer: My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author and podcaster. He is not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only. It should not be considered official personalized financial advice.

The post How to Pay for College with Robert Farrington – Podcast #119 appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: As part of our 2019 WCI Medical School Scholarship program, we offer a sponsored post to each of our Platinum Level Scholarship Sponsors. Today is the first of those sponsored posts from student loan refinancing lender, Splash Financial. Splash is launching a new resident and fellow program today available starting at 9 a.m. EST August 21, 2019, so be sure to check out their website for details and thank them for their generous donation to the scholarship! Remember, the deadline to submit an essay to the scholarship contest is August 31st so be sure to pass the word along.]

After reading this article, we hope you’ll be prepared with the confidence and knowledge to get the best deal on refinancing student loans. As experts, we’re pulling back the curtain and providing inside information on what to look for when refinancing – and at the same time, we’re sharing insight into the student loan refinancing process here at Splash. Let’s get started!

Platinum Level Scholarship Sponsor

But first, congrats! After years (and we mean years!) of devoting yourself to undergrad, med school, and possibly even residency or fellowship (you may still be going through this *sigh*), you can finally breathe again and live like a normal person – an all-powerful attending, that is. Unfortunately, you may still have student loans weighing you down.

If you’re like most people, you want to put your student loans behind you as fast as possible, but you need a step-by-step guide on what to look out for. Lucky for you, that’s exactly what Splash has put together.

Top 6 Tips for Refinancing Your Student Loans

#1 Interest Rate

Risk

You probably know this already, but your interest rate is the lever that controls how much your student loan costs you over time. The higher the rate, the more you pay. When you took out your loans, you were a greater risk to lenders – but that was before you got into residency. Actually, that was before you had even graduated from medical school! As a resident, you’re now viewed as a lesser risk and lenders will likely offer you a lower refinancing rate reflecting that fact. Refinancing after graduation is a simple way to possibly save you a lot of money.

When you refinance your medical school student loans, you are replacing your existing loans with one new loan that has a lower interest rate. For example, if you have $200,000 in loans with an average interest rate of 7%, you’ll pay drastically less if you refinance to a $200,000 loan at a 5% interest rate.

Ok – refinancing student loans replaces the loan with a new interest rate, but you might be wondering how that new rate is even calculated. How do these refinance lenders, such as Splash Financial, determine your risk level? It varies, but most lenders fall back on two main areas of evaluation:

1. Lenders will look at your credit score and history of responsibly paying your bills.
2. They will also look at your debt compared to how much you make in income – essentially, the likelihood of you being able to repay the loan.

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A higher credit score and better debt-to-income ratio will earn you a lower interest rate.

Federal Reserve

Rates also depend on external factors, such as the Federal Reserve. When the government increases its Fed funds rate, overall rates within the lending market increase. It costs lenders more to access capital, and those higher rates are passed on to you. On the other hand, when the government decreases the Fed funds rate, you might see lower rate offers. Most economists think we are going to see a few rate reductions over the next 12 months. In fact, you can even track the probability according to economists.

So, if you received a good rate in the past or have already refinanced, your financial situation or the external market environment could have changed to help you get an even better rate and save more money. It may be worthwhile to take another look at refinancing.

#2 An Interest Rate Secret (yes, more on interest rate)

You get it – interest rate is important, but we want to share a secret about the typical lender’s rate offer. Whether it’s on the phone or on your computer, many people think an actual person calculates an offer for you, but the reality is, it’s nearly all digital and based on internal algorithms that determine risk. When you check your rate with a normal lender, they plug your information into their one and only algorithm or formula and spit out an offer. What makes one lender different from another is that unique algorithm. It’s why rates are almost never the same across lenders.

But here at Splash, we approach this process differently. When you check your rate on our site, which takes less than 3 minutes, we instantly analyze the rate you would get with multiple lending partners – running multiple unique pricing engines to find you a great deal. By bringing back the best rate, we save you time and point you towards your greatest potential savings.

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#3 Loan Term & Total Savings of Refinancing Student Loans

Most student loan refinancing lenders offer a range of loan terms which allows you to choose how long you have to pay it back – often in 5, 7, 10, 15 or 20 years. As you make your decision, it’s important to consider your monthly payment at each term. If you are paying back $100,000 over 5 years vs 10 years, you can anticipate your payment to be double – make sure you can afford it.

People ask us this all the time: should I take out a 10-year loan or a 5-year loan? The answer really depends on how close the interest rate offers are. For example, if the rates are identical, we’d suggest you take out a 10-year loan and pay more than your required monthly payment. That way, you have the flexibility of a lower payment if something comes up, but you can still pay it off in 5 years if you want. Which leads us to prepayment fees, the fourth thing on our list.

#4 ZERO Fees

Look for no origination fees, no application fees, and no prepayment fees. No matter which loan term you choose, you shouldn’t be penalized for making extra payments or increasing the amount of your payments. At this point, the absence of fees is mainstream in the industry – but make sure to read the fine print. Lenders are required to disclose fees rather than hide them, so just be on the lookout when refinancing student loans.

#5 How Easy is the Process?

You’re busy, we get it – but does every lender understand that? Consider your initial experience as a sneak peek into how easy the process is going to be. How much work did it take to get a rate quote? Is the design clean and intuitive? Was there any email communication related to what you’re looking for?

Of course, a lender with a great, low rate will go a long way to cover for a really difficult application process but given the time limitations most doctors have, you probably want to at least know upfront that it’s going to be a tough process. Use the initial rate check as an overall determination of how easy the entire process will be.

Splash has invested heavily to improve the overall customer experience and has made a lot of progress over the last two years. In 2019, we were named one of the Top Student Loan Refinancing Companies for Customer Service by NerdWallet. But honestly, when residents completed the first iteration of our application, we marveled that they got through so quickly or even at all (it lacked automation and the design resembled something from 1995 – not to be too brutal on ourselves)! Now our application is clean, intuitive, and automated in many parts – but many lenders haven’t made those investments. Keeping tabs on whether or not you’re happy with your experience may help save you from a lender who’s stuck in the stone age.

#6 Bonus

From referral to limited-time offers, many student loan refinancing lenders provide the opportunity to cash in on bonus promotions. In fact, White Coat Investor negotiates fantastic offers for doctors! Take note of the offers available to you and if they’re paid out in cash, like the bonuses Splash offers. While you should report all bonuses as income to the IRS, realize that offers over $599 require the lender to issue you a 1099 form.

It’s fun to get excited about a bonus but be careful to stay focused on what really matters – paying less in the long run on your student loans! Choosing a company with a high refinancing rate for its $300 bonus probably isn’t worth it. Going with the company with the lower rate will likely save you more.

#7 Lost Government Benefits — PSLF (yes, the title says 6 but we want to discuss an important topic)

This isn’t really something to look out for, but it’s a big topic that people are concerned about. The government benefits that really matter for doctors are Public Service Loan Forgiveness (PSLF), Income-Based Repayment, and forgiveness in the event of total and permanent disability. When you refinance student loans, you lose ALL of these benefits, but you may also gain new ones. Normally, lenders have some forbearance policy if you were to lose your job. Some offer forgiveness for death and disability. None offer PSLF.

These benefits can sometimes paralyze a person from making a choice, even if they aren’t applicable.

Here’s a simple way to think about it – if you’re in private practice, you should refinance student loans. Actually, if you’re in any hospital or group that is not a 501c3 organization, you should refinance, assuming you can get a lower rate. Regardless of the place you work, if you have private student loans, you should refinance those loans. You don’t receive government benefits when you have private loans.

If you work in a non-profit hospital and are pursuing PSLF, your best option depends on your situation. It may be worthwhile to approach a financial advisor with questions or research more online. For example, certain income-based repayment programs will base your monthly payment on joint household income. That means that if you’re married and your spouse doesn’t have loans, you may repay your loan prior to any forgiveness. There are ways around this problem, such as filing taxes separately, but we bring it up to make the point that it’s not one-size-fits-all. Also, anyone who was on deferment rather than making a payment during residency should probably refinance – we’re really sorry to tell you but those “non-payments” don’t count towards your 120 required payments for PSLF. Regardless, if you do have questions about PSLF, it may be smart to consult a financial advisor.

Information overload? Maybe. But we hope it’s prepared you to make the best refinancing decision for you! If you have any questions about the insights we shared or about how Splash can help you, give us a call at 1-800-349-3938.

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Splash Financial is a leading, online platform that helps medical professionals to refinance their student loans and reach financial freedom. With a new, low-interest rate, you could save thousands off your total loan cost. In under 3 minutes, you can quickly check your rate for free (without affecting your credit score!). Plus, Splash offers the ability to refinance on your own, with a cosigner, or even with a spouse – and never charges any application, origination or prepayment fees. Splash also offers a resident and fellow program that allows you to pay a significantly reduced monthly payment while in training. Find out how much you can save today!

What is your experience refinancing student loans? Was it an easy process? What could have made it easier? Comment below!

The post Top 6 Tips for Refinancing Your Student Loans appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: Here’s a re-published post from WCI Network partner, The Physician Philosopher and is about the advice I gave back in 2011 for young docs to “live like a resident” for their first few years after residency. Enjoy TPP’s fresh reminder on the principle!]

Chances are that if you are reading this blog, you have heard it said time and again that when you graduate you should “live like a resident.”  The truth is that this is really solid investing advice.  The White Coat Investor has said on more than one occasion that he can predict your financial future with “surprising accuracy” if you tell him what you did in the first couple years after you finished residency.

That’s all well and good, but where’s the proof that you should live like a resident after residency?  Well, the proof is in the pudding. Let’s look at the ingredients to see if the pudding tastes as good as it sounds.

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Pudding Ingredient Number 1: Savings Rate

The first ingredient in the Live Like a Resident pudding is a giant dash of savings rate.  Your savings rate is the main determinant of your initial success in investing. Later on, your money will start to work for you once you’ve saved a substantial amount.

Why is this initial savings rate so important right after you finish?  Glad you asked.

The 2 Million Dollar thought experiment:

Your goal in this thought experiment is to get to $2 Million Dollars.  Here are the assumptions.  You save 50K annually each year and earn 8% interest growth (we could assume less, it’s just the number I chose).  Given these assumptions, it would take you 19 years to get to that goal (you’d actually be sitting at $2,072,313 at the end of year 19).

To understand the following numbers, here is the key to the following tables:

The First Decade

Even after ten years of savings, your annual savings rate (that $50,000 you save each year) accounts for ~70% of the entire total of your accumulated savings.

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Why should you care?

• This means that the major determinant of your retirement nest egg in your early years is your savings rate (it accounts for 70% of your savings at 10 years).
• With these assumptions, you have not even gotten halfway to your goal of $2,000,000 in TEN years of saving.  In fact, you stand at less than $800,000.
• Remember, though, I have to add another 1.2 million dollars in 9 years and I only saved $800,000 in TEN?

The next decade is where the magic happens.

In the graph, you’ll notice that year 17 is the break-even point where the total amount saved coming from your contributions starts to dive below 50% of the total value and compound interest starts taking over as the predominant factor determining your total savings.

The take-home here is that the further along you get, the less your savings rate has to do with your total accumulation. This is because your compounding interest begins to really shine from all those hard years of saving early while you lived like a resident.

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This is one of the many ways that the rich get richer.  Once you’ve saved “enough” your compound interest starts working overtime for you.

Saving Early Matters

For those that prefer visual representations, the following figure may explain it better.

The blue bars are the % of your total savings that comes from the money you have saved (i.e. your contributions).  The orange bars are the % of your total savings that comes from compound interest.

Time in years is on the X-axis, percentage of your total savings is on the y-axis. Note that the first year you start investing the entire bar (100%) is blue, because all of your savings came from your contribution from that first attending paycheck.

As noted earlier, in year 17 these two points (the blue bar and the orange bar) are even at 50%.  From that time point forward, compound interest is more responsible for your total savings than your contributions.

What happens if we extend the math further?  Well, after 30 years, this savings plan ($50,000 per year for 30 years) was started, the total savings would be $5,641,161.

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Of this total, 73.5% would be due to compound interest (or $4,164,161) and only 26.5% would be from your contributions (a total contribution of $1,500,000, or 30 years at $50,000).

You read that right. You contributed 1.5 million dollars over 30 years and made over 5.6 million dollars.  THAT is the power of living like a resident and earning compounding interest.

What accomplishes a large total savings is having a high savings rate in your early years, and a high savings rate is best accomplished early in your career by living like a resident when you finish.

Pudding Ingredient Number 2:  Grindin’ Debt Like a Resident

Of course, your savings rate is only part of the pudding.  Your savings rate could be even higher than $50,000 per year if you didn’t have those pesky student loans.

This is why it is so important to make a plan to deal with your student loan debt early!  And, if you don’t know what to do, then get a student loan consult!  The sooner you have a plan, the sooner you can take the next steps.

This is important because the % of your money put towards debt and your savings rate help determine your Wealth Accumulation Rate (WAR).  The higher your WAR, the faster you’ll be obtaining your financial independence.

After all, after you live like a resident and that debt is paid off you can then put that money towards others important things, including:

• A higher savings rate that will allow you to reach your financial goals faster. If you had started out investing $75,000 per year, you would have reached the 2 million dollar mark by year 15 instead of year 19.  That could save you four years.
• You can make a big purchase, such as a bigger home, with the increased monthly cash flow (though I don’t encourage you to think about money in terms of monthly payments).
• Invest more in your kid’s 529 or perform your first backdoor Roth IRA.
• Use some of that money (via The 10% Rule) to enjoy a little more of life.  Maybe take that vacation you’ve been waiting to take.

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You can do whatever you want with the additional money once your student loans are paid off.  Odds are that once you have built the kind of financial muscles it takes to live like a resident, any financial goal is within reach.

Ingredient Number 3: A Pound of Earnings

One of the big advantages that you have coming from residency is that you are “used to” living and working like a resident.  If you can keep that work pace up for even an extra 12 to 24 months following residency, you’ll likely make a lot more money.  That is one of the ways that I paid off $200,000 in student loans in 19 months after I finished training.

This additional work could be through locums tenens work, picking up extra shifts, or working a side hustle or three.  For example, some ways that I’ve earned additional income since finishing training include my side hustles including picking up extra shifts, performing medical malpractice expert witness work, and my The Physician Philosopher blog.

The point is that when I finished training, I was used to working resident hours. Keeping that going really helped us achieve our financial goals sooner.

Putting Living Like a Resident Together

The more of Ingredient Number 3 (work ethic) you have the more you can add of Ingredient 1 (Savings Rate) and Ingredient 2 (Grindin’ Debt) to the recipe.

Since this post hasn’t had enough math yet…let’s add some more here.  Let’s say you earn an extra $1,500 per month from your extra shifts or side hustles.  This would leave you with a couple of choices:

One choice is to pay off more debt.  Say you came out of medical school with $200,000 in debt.  You were smart and refinanced your loans to 3.5%.  At $4,000 per month, this will take you 4.6 years to pay off.  If instead, you worked a little harder and made some extra cash, you might be able to pay $5,500 per month.  This would pay off that same amount of debt in 3.3 years.  It would also save you about $4,000 in interest as well.

Alternatively, if you invested that extra $1,500 per month for three years after residency (total of $54,000 over that time) this would turn into $404,643 after 30 years at 8% compounding interest.

Either way (paying down debt faster or increasing your savings rate) you are building your wealth much more quickly. This is why it is so important to continue to work hard after residency.  You can accomplish your goals faster.

Take Home: Live Like a Resident

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Many readers will already understand these principles, but for anyone early in their career, I hope this serves as a solid reminder. What you do in those first few years after you finish is fundamental to your financial success.

If you need help figuring more of this stuff out, then I encourage you to go and purchase The Physician Philosopher’s Guide to Personal Finance.  It’ll teach you the 20% of personal finance doctors need to know to get 80% of the results.

What did you do right after you finished?  Did you buy the big house and the nice cars?  Did you put the extra money towards grindin’ debt or investing?  If you had a time machine, what would you do? Leave a comment below.

The post Proof is in the Pudding: Live Like a Resident appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

Podcast #128 Show Notes: Resident Physician Financial Mistakes

There are some aspects of finances that are unique to resident physicians. It is really during this time that you are putting on the training wheels and learning to manage your finances before the big money comes in. We interview a resident in this episode and discuss cashflow/budgeting, filling out a W-4, doing Roth or tax deferred retirement accounts when going for PSLF, seeking student loan management advice, disability insurance for a two resident couple, and dealing with an HSA when switching between programs after your intern year. Luckily most of the mistakes you make during this time are relatively low cost to fix but the better choices you make now can set you up for great financial success down the road. Keep in mind, at this stage of residency, I was completely financially illiterate. So if you are listening to this podcast as a resident you are way ahead of where I was.

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Quote of the Day

Our quote of the day today comes from Tom Noakes, CFP. He said,

“We do not all need to hire a full time driver if we only need directions.”

That is the truth. Some investors prefer having a full time driver, a financial advisor that handles everything, and other people just need a little bit of direction. Eventually, once they figure it out, they can drive themselves wherever they need to go as far as portfolio management goes.

Cashflow and Budgeting

Kyle and his wife don’t track every dollar spent. But they have a primary checking account where their paychecks are deposited and then auto drafted out for their 403B contributions and Roth contributions.  They each get a grand a month as “allowance” that they use to pay for eating out, gas, travel, etc. If the other person is not going over their thousand dollars, the other partner doesn’t ask questions. That has worked well for them.

Our budgeting process was initially an Excel spreadsheet and every month we recorded what we spent. We were really strict in the beginning because money was pretty tight. Katie worked my intern year and after that, she was a stay at home mom. That was the only real decrease in income we ever had. But it certainly made things tighter. We watched every dollar for years and years and years and the budget served as training wheels in many respects. Once we learned how to ride the bike, the budget probably doesn’t matter as much anymore. Now it’s mostly just keeping track of the cash flow.

It is really hard to keep track of it if you’re not doing some sort of meeting every month or some sort of planning process. We have specialized a little bit in the last couple of years. Katie does most of the buying and she does a much better job of it. As that relates to our budgeting process, she keeps track of the spending. She goes over the credit card statements and the bank account statements and makes sure it’s all legit and adds it all up and then feeds that into one line on our spreadsheet. That’s literally as close as we look at our spending. It is one number.

I am in charge of moving the money around between the accounts and adding up the income. At the beginning of the month or whenever we get around to doing this process, I go through all of our sources of income. We look at all our investing accounts and we take the income and add all that up. Then using our effective tax rate, we take 34% of what that number is and we set it aside. This is our tax money,  so we don’t spend that or invest that because we know we’re going to need it within the next few months to pay taxes with. Then we give to charity based on that total as well. Then we decide what we’re going to do with the rest. Right now, we’re making much more than we spend. So the main thing we do at our monthly meeting is talk about what do we want to do with the rest? It turns out to be either invested or the last few months we’ve been saving up for this home renovation. That is what our monthly budget meeting is about. She brings one number to it, I bring another number to it and we talk about the difference, really, and what we’re going to do with it. And that’s our current cash flow budgeting process.

As far as that tax money, we set aside the 34% because we know we’re going to need that eventually, but that’s not necessarily what we pay in taxes. As an S corp for White Coat Investor, we’re obligated to pay a certain amount of taxes every time we pay ourselves a salary. I calculate that out and send that in as required by federal law. Then we make quarterly estimated payments. We calculate those as 110% of one quarter of last year’s tax burden. That’s what our quarterly estimated payments are. Basically just enough to stay in the Safe Harbor. If we owe more next April, which we usually do, we write that check out of this money that we’ve been setting aside for taxes. So that’s our cash flow and budgeting.

That tax money is sitting in a Vanguard money market account. I think this month it’s in the prime money market account. For some reason, the municipal money market account yields have dropped enough that it actually makes more sense despite our high tax bracket to just be in a taxable money market account for now. But that’s a calculation you have to run. You take the yield of the taxable money market account and you multiply it by one minus your marginal tax rate. And if that’s higher than the yield on the municipal money market account, you do that. If it’s lower, then you put your money in the municipal money market account. Every few months I do that calculation just to make sure I’m in the right one, but we just let it sit there until it’s time to write a check to the IRS.

Filling out a W-4

The W-4 is a form that an employee fills out for their employer. You select your number of exemptions. One for you and one for your spouse and one for dependents, etc.  The idea is just to estimate how much tax you’re going to owe at the end of the year. That’s the whole point of the form. The employer then withholds that from your paycheck and sends it to the IRS on your behalf. But that amount of money that’s withheld actually has very little to do with the amount of taxes that you owe, which is calculated on your return. The goal isn’t necessarily to minimize the amount of money withheld on the W-4. If you want to minimize the amount of money withheld on the W-4, you put 10 exemptions on there. Because then they’re going to hardly withhold anything.

Now that’s probably not even legal to do, nor is it advisable. What you should try to do is just get the amount withheld about right. If you are not in the safe harbor at the end of the year, you’ll not only owe the taxes that you would otherwise owe and the interest that you may owe on that, but you also owe penalties. So the goal is to be in the safe harbor. What is the safe harbor? Well, the safe harbor is that you have either paid all the tax you owe. That will obviously keep you in the safe harbor. If you’ve had that all withheld or paid it is in quarterly estimated payments, that’ll keep you in the safe harbor. Or if you have paid, at least for a high income earner, 110% of what you owed last year, you’re in the safe harbor and won’t have to pay any penalties.

The third way you can be in the safe harbor is if you owe less than a thousand dollars. There’s a $1,000 difference between what was withheld on the W-4 or what you paid in your quarterly estimated payments and what you actually owe in taxes. If that’s less than a thousand dollars, you’re in the safe harbor and don’t owe any penalties. So the goal is just getting into the safe harbor and the W-4 is a tool to help you do that.

A lot of people don’t realize there are a few strategies you can do using the W-4. For example, with quarterly estimated tax payments, it matters when you make the money and when you pay the taxes. If you made all your money in the first quarter but you didn’t pay the taxes until your fourth quarter estimated payment, you can get dinged. But with a W-4 and money that’s been withheld by an employer, the IRS doesn’t care.

Money withheld in December is exactly the same as money withheld in January. So what some people have done to game the system a little bit is have a few more exemptions on their W-4 earlier in the year and less late in the year. And thus more is withheld from the paycheck late in the year. I don’t know that I’d recommend it, I just try to estimate it correctly. If you find you’re getting huge tax returns every year, well, you probably need to claim more exemptions so you’re having less withheld from every paycheck. If you find you’re writing big checks every April, you probably need to have more withheld from your paycheck and that’s the whole point of the W-4.

HSA Issues as a Resident

Kyle had an HSA because he had a high deductible health plan as an intern, and now his residency program for the next four years does not have a high deductible health plan. So he has a few thousand dollars in that HSA. What should he do with it? He basically has two choices.

1. Spend it on health care. They come with a debit card and or a checkbook. As you spend money on healthcare, write the check out of the HSA. That’s a totally legitimate use of an HSA.
2. Leave it in the HSA. He can invest it within the HSA. He doesn’t have to leave it in the employer’s HSA. You can roll it over to a good one, like Lively, that I’ve got an affiliate relationship with, or you can roll it over to Fidelity. That’s where my HSA is at. Those are both great places, low fees to invest your HSA and just let it grow for the long term.

What you probably shouldn’t do is pull all the money out of the HSA and pay taxes and penalties on it. There’s a pretty good penalty if you pull it out and spend it on something besides healthcare, at least up until age 65.

Kyle also has another issue that other residents may run into. He put too much money in his. HSAs have a cool rule called the last month rule, which basically says if for the last month of the year you’re eligible for an HSA, you can make a whole year’s contribution for that HSA. He took advantage of that for last year and maxed out his HSA. Even though he was only an intern for six months of that year, he got to make a whole year’s contribution. But there’s a catch. You also have to stay eligible for the next year, which he did not because when he left his internship at the end of June, he is now in a program without a high deductible health plan.

He needs to look at the regulations to see exactly how much he has to now pull out of it. I suspect he can probably still leave a significant amount of that money in there because he should still be eligible for contributions for that last six months of 2018, as well as the first six months of 2019. So he may not actually have to withdraw that much and pay penalties on that much. But a careful reading of the rules surrounding the last month rule would definitely be in order for him. As a general rule, people should be aware of that, that if you’re not going to have an HSA for the whole next year, that last month rule has a special provision that nails you. So something to be careful about.

Kyle ran the numbers and he has to pay a 10% fee on half of $3750 that wasn’t supposed to be in there plus 10% fee on all the earnings of that.  He has to fill out part three of the form 8889. But how was he supposed to know? He didn’t know his new employer didn’t have an HSA-eligible plan until he went through the match as an intern.

If you are going to a new employer anytime soon, it’s definitely worth getting in touch with the HR department of the new employer to make sure you’re not going to get burned by this. But in the end, he will owe a couple hundred bucks, so no big deal. He will be able to handle that, even on a resident income.

Roth IRA Contributions with Re-Invest Option

Kyle and his wife do autodraft contributions to their Roth IRA at Vanguard every month and wonder about the re-invest option. Before I answered that question, I caution about doing autodrafts. It is great to automate your finances. Don’t get me wrong. The problem with this is he and his wife are eventually going to need to do their Roth IRA contributions through the back door and it may not be clear exactly which year they have to start doing that.

It could even be during residency if they start doing significant amounts of moonlighting. Once you get that modified adjusted gross income up over, I think it’s about $190,000 a year right now, you’re no longer eligible to make direct Roth IRA contributions. You have to keep an eye on that, and before that year starts for whatever year you’re going to be over that amount, they will have to stop this autodraft Roth IRA contribution because those are direct Roth IRA contributions.

The re-invest option is just about reinvesting dividends. I’m a big fan of reinvesting your dividends and your capital gains distributions as long as you’re inside a retirement account. In a taxable account, what that does is it gives you a whole bunch of different tax lots to keep track of and they might be really small tax lots. They might only be a few dollars, even. And while the brokerage will keep track of those for you, I prefer to just have all my dividends and other distributions in a taxable account go into my sweep account or my money market account and then I reinvest them with the next month’s investments. So I’m still reinvesting the money, but I’m doing it manually rather than automatically into the same investment. But inside a Roth IRA, I see no reason not to just reinvest and automate your finances in that respect.

Disability and Life Insurance for Two Physician Resident Couples

Generally, federal student loans and refinanced student loans go away at death. There are a few that don’t, so when you refinance your loans, read the fine print and make sure that the company is not going to apply that to your estate. If it is, it’s definitely worth buying some life insurance to cover that risk. That’s a heck of a lot cheaper than paying the higher interest rate on non-refinanced student loan. But just be aware when you’re refinancing your loans to look into that provision.

There are a lot of dual physician couples that have struggled with this question and the responses and decisions basically range from what Kyle is doing, no insurance at all to both partners being fully insured. For a dual physician couple, he is married to a gynecologist, she is married to a radiologist essentially. You can have a very nice life on a radiologist income, just one without being married to another doctor. So it is totally reasonable to buy no insurance at all. But what I see most dual physician couples do is pick something in the middle. They realize, well, if one of us becomes disabled, I might not want to work as much, we might not want our income to drop as much. And so they both get partially insured. That keeps the premiums down, so they’re not spending quite so much money but also provides something coming in if one of them were to get disabled.

Same with life insurance. There are a lot of costs that come up when one person is having to do all of the bread winning. Maybe hiring a housekeeper or hiring out child care. So they choose to buy some smaller life insurance policy. The other thing you have to keep in mind is there’s always a possibility that you both become disabled or both die at the same time. And if you have kids relying on you, there is a certain risk there. The benefit of buying at least a small policy on each of you is you’re insuring against that possibility, as well. So lots of different ways to slice that. I don’t think there’s a right answer. I think you just need to think through: what is the plan if I die, what is the plan if she dies, what is the plan if I get disabled, what is the plan if she gets disabled, what is the plan if we both die, what is the plan if we both become disabled? Work through the possibilities and if those are not acceptable to you without buying disability or life insurance, well, buy the insurance. At least enough until the plan becomes acceptable in the event of those relatively rare but catastrophic financial outcomes. If you need life or disability insurance contact the sponsor of this episode DI4MDs at info@di4mds.com or 888-934-4637.

Public Service Loan Forgiveness and Retirement Account Contributions as a Resident

Both Kyle and his wife have not taken public service loan forgiveness off the table. Now, how should that affect your retirement account contributions as a resident? The general rule is that residents and other people that are in lower income years should use Roth accounts and those in their peak earnings years should use tax-deferred accounts. But Kyle’s situation is essentially one exception to that general rule. If during residency you’re going for public service loan forgiveness, if you use a tax-deferred retirement account, it lowers your income, and with a lower income, you have a lower income driven repayment program payment due. The lower the payments you make, the more that is left to be forgiven after 10 years in the public service loan forgiveness program.

Now you have these two factors weighing against you. You have the extra taxes you’re probably going to end up paying by virtue of not using the right retirement account, but you’re weighing that against the possibility of getting more money forgiven. It actually becomes a very complex calculation to decide exactly what to do. But if you go to the student loan advice people I recommend, they can help you run the numbers for those. Someone in Kyle’s situation is the ideal person to go spend $300-$500 with these student loan advisors and help work out what exactly the right plan is for you. Because the plan could very well be tax-deferred contributions to keep those payments down. But it’s possible to put too much in there. If you have your payments down to zero dollars already, more tax-deferred contributions are not going to help lower that payment any further. So you can go too far, too. You really just have to run the numbers. I wish the government hadn’t made the rules for these programs so complicated, but unfortunately, they have, and there’s no way around it. If you’re in a complex student loan situation, you have to look at how you file your taxes, what IDR program you’re in, and what retirement accounts you’re using because it all goes into the calculation of what exactly is right in your situation. It can be pretty complex, unfortunately. So that is a noted exception to the “Roth is for residents” rule. If you thought you were almost surely going for public service loan forgiveness, I would say, okay, lean toward the tax-deferred accounts. If you’re like, well, we might but we probably won’t, then I would still lean toward the Roth accounts even if it made your payments bigger just because in the end, I think you’ll be glad you got more money into a Roth account in relatively low tax bracket years.

Roth IRA Contributions vs 403B Contributions

“I think I have a fundamental confusion on the retirement accounts. So I maxed out my Roth IRA. That has nothing to do with my max contribution for 403b. Correct? Because in my institution, we’re actually able to do traditional tax-deferred and then we’re also able to do Roth 403b contributions. So I actually could maybe put a little bit more into it. Is that correct?”

That’s right. They’re completely separate contribution limits. So you can put $6,000 into each of your Roth IRAs each year and you can put $19,000 into each of your 403bs each year. That’s a heck of a lot of savings for a resident couple. Even a dual resident couple. That is pretty close to half of your income as a resident, pretty impressive. But it’s the same question whether you do Roth or whether you do tax-deferred. Now, the truth is, for your IRA, you should almost surely do Roth because the presence of that retirement account at work and your income are going to make it such that you are not eligible to deduct a traditional IRA contribution. And if you can’t deduct that, you might as well do the Roth IRA contribution. That one’s probably a no brainer for Kyle, but he would have to do have a little bit of debate deciding whether to do the Roth or the tax deferred 403b. This is when a student loan professional would be helpful.

When Should You Meet with a Student Loan Professional?

Kyle asked when is the best time to talk to a student loan professional. Earlier or later in residency? Obviously from the last two questions, you can see that these questions come up earlier in residency. The sooner you speak to a student loan professional the better. I know 400 or 500 bucks is a lot of money to an intern, but this could mean the difference in tens of thousands of dollars to some doctors in how much you have forgiven, how much you pay in interest, how much you make in your retirement accounts.

I think it’s really being penny wise and pound foolish. If you’re in any complex student loan situation,  hire that advice early on in residency. It doesn’t need to be an annual meeting, necessarily. For a lot of people, a one time meeting to set up the plan would be fine, but it’s probably a good idea to meet early in residency and then again late in residency and put together that plan of what you’re going to do as an attending.

I think most of the people I have on my recommended list give you some discount on a repeat or a second meeting anyway. So it’s not like that second one is super expensive, but most people probably don’t need an annual meeting. But if you’re in a complex enough situation, stuff is changing and one spouse’s income is moving around, or you start moonlighting or something, you might need to look at this again annually. But again, that’s way cheaper than anything else you hire in financial services.

Other Types of Insurance

Kyle asked about getting new insurance when you move states for residency. As I move state to state, I’ve had the same insurance policies through USAA, which is available to military members and they’re used to people moving around all the time. So it’s no big deal. My premiums may go up or down when I go to a new state. But I basically keep the same policy. You may be able to even keep the same agent or broker that you’ve been using for your home and renters and auto policies and umbrella policies. Usually, they’re licensed to sell in more than one state. If they’re not, they can refer you to somebody else. But it’s not that big of a deal to shop this out.

You can call two or three companies and just get quotes and as long as you’re okay with the service that company offers, you just take the lowest price. A lot of people are surprised just how much they can save by shopping it around. Oftentimes you can cut your costs significantly in this department. They’re also surprised when they find out that these costs are much more expensive in some states than others. It’s like disability insurance. If you’re going to buy disability insurance and at some point, this is going to involve California, buy it in the other state. If you’re going to move to California, buy it before you go. If you’re moving from California, buy it after you leave, just because it’s much more expensive to buy in California.

But as far as those policies, what are absolute needs? Well, I think the liability is really a big need, especially for a doctor. That’s the main reason you’re buying these policies and your state likely has a minimum amount of liability you have to carry on your auto policy. It’s probably only 50 or 100,000, which is not nearly enough. No, when you think about people out there driving around $130,000 Teslas, just totaling their car is going to get you over your liability limit. So you need to increase those limits to several hundred thousand dollars and then typically stack an umbrella or a personal liability policy on top of that. You can buy that from the same person you get your auto or your homeowners or your renters insurance from most of the time.

As far as other absolute necessities, there aren’t a lot. Some people prefer having collision and comprehensive coverage on the car, especially if it would be a major financial burden to replace it. We typically carry it on our newer cars and not necessarily on our older cars. A lot of people wonder about uninsured and underinsured coverage, that can be a good idea as well. For example, let’s say an occupant of your car is injured in an accident that is not your fault, but the other person who caused the accident doesn’t have any insurance. Well, they may turn to you and sue you for their losses and that’s where the uninsured and under insured coverage would kick in. You have to be aware that there’s a lot of umbrella policies out there now that don’t cover that risk. So make sure you read the fine print carefully.

As far as renters policy goes, just make sure everything’s covered. There’s a lot of fine print in there and it’s worth going through it and seeing what is and what isn’t covered. A lot of times people are surprised to find that firearms above a certain dollar amount or jewelry above a certain dollar amount is not covered by their homeowner’s or renter’s policy. Actually, you have to buy a special additional rider with an additional premium to get those sorts of things covered. Also, flood insurance has to be purchased separately and earthquake insurance has to be purchased separately, as well, if you want those things covered.

It’s interesting because a lot of people think they have coverage from hurricanes and they don’t realize that their policy only covers wind damage. It doesn’t cover water damage. Even though it’s all one weather event, the insurance adjusters are out there trying to decide whether it was wind or water that caused the damage. And so, if you’re in an area where you could see those storms, you have to be careful to know exactly what you have covered. It may not be adequate. Those are my general rules for getting new auto and renter’s insurance.

You can get a broker for these insurances. The broker essentially functions as an independent insurance agent and they can find you the best policy. It generally doesn’t cost you any more to use a broker because the commission would just be kept by the company if it wasn’t paid to the broker. That’s probably what I would do if I was going to a new place. I’d find essentially an independent, automobile and homeowners insurance broker and have them shop it around for me, tell them what you want and find the best deal for you in that state. If you live in these states: AL, AR, AZ, CA, FL, IL, KS, LA, MS, ME, NC, ND, NY,  OH, OK, TX, TN, and VA we have an advertiser that can assist you, Jared Rossi of StoneBriar Insurance Group. He is an independent insurance broker that can help readers and listeners in those states with their auto and home owners insurance.

Transitioning to Attending

Kyle and his wife have different length residencies so she will finish a year before him. This probably isn’t atypical for dual physician couples. He wanted to know what he should be aware of during this transitional time period.

I think there are a few things to think about during that unique year. The first one is jobs. Chances are unless they are going to stay in the same geographic area, then she will only have a job for a year, presumably, unless they are going to separate for a year while she goes to a new geographic area and works. As she negotiates that position, it’s more about the short term than it is about the long term. Things like student loan repayment programs may matter more than the total dollar amount of a contract. Partnership doesn’t really matter to her. She’s looking for the highest paycheck. So the employer that she takes a job with for that year may be very different than it would be if it was more likely to be a long-term situation.

Consideration number two is housing. They don’t want to get into a permanent house yet. Job situations are not stable, not with one of them coming out of residency. So it’s probably a year to continue renting. Ideally, they just stay in the same place they are in now. That would be living like a resident. They are now earning as one attending and one resident and still living like a resident. That will allow them to pay a massive amount towards student loans, max out retirement plans, save up a down payment, save up a big emergency fund. They don’t have any, but for a lot of doctors, paying off personal loans and credit card loans and those kinds of things and just really getting on top of finances that year. It is really a big financially focused year in that respect.

The only other real consideration aside from those two factors, I think is the opportunity to still use Roth accounts. That might be different if you were still going for public service loan forgiveness at that point. You may still want to be in tax-deferred accounts in order to maximize the amount forgiven. But someone who was not going for public service loan forgiveness, this is a good year to use Roths because while yes, one of you is an attending, you are still not in your peak earnings years. So if you had any tax-deferred accounts left over from residency or fellowship, that would be a good year to convert them. It’s even better the year that she leaves residency rather than the year that he leaves residency. But both are lower than your peak earnings years.

But that’s a good time to do Roth conversions, do Roth IRA contributions, do Roth 403b contributions, etc. It’s just a great year to be able to take advantage of your lower tax bracket to get a little bit more money into Roth accounts.

Ending

Kyle is going to be very successful given how much attention he is paying to his finances already. Keep in mind, at his stage of residency, I was completely financially illiterate. So any resident reading this blog and listen to the podcast is way ahead of where I was and I’m sure will be even more successful. If you are one of those residents, tell your colleagues about the blog and podcast so they can join you in managing their finances well from the beginning.

Full Transcription

Intro: 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 Dahle.

Dr. Jim Dahle: Welcome to The White Coat Investor Podcast number 128, resident finances. We have a lot of big changes around here at The White Coat Investor household. I came home from a trip to Lake Powell earlier this week to find that our entire lot had been deforested. I had no idea that I had 125 trees on the property. We now have two. We have had them all chopped down, so we get rid of them in bulk trash pickup day in preparation for upcoming home renovation. But we’re also packing boxes like crazy. We’re moving to another house in the neighborhood. We’re going to be renting for about seven months as we move out of here in order to do this home renovation. It’s going to be a pretty major deal. You know how these things are. You get started and then you start asking, well, while we’re doing that, let’s do this. And that just snowballs until now we’re knocking out all four walls of our home and having a real major home renovation.

Dr. Jim Dahle: It should be an interesting time, but it’s going to mean a few changes around here. You may notice a few, I don’t think you will, but you might. We’re moving from our basement podcasting studio here to basically recording this podcast out of a bedroom at the new place. So maybe the sound will be a little bit different in future podcasts. We’ll have to see. Hopefully, we can still keep it high quality. We’re excited though, when we move back into the house, we’re going to have dedicated studio space and so hopefully that will even improve the quality of the podcast. But if you’ve ever been through a home renovation, you know what we’re going through in the next six or seven months. So we appreciate your patience with that.

Dr. Jim Dahle: We’re always getting feedback about the podcast and apparently, I’m not funny or entertaining or cool enough. I’m told by my staff that I’m going to have to be a little bit cooler, but we’ll see if I can manage that. It seems highly unlikely given the history of my life. If you go back to junior high, I certainly wasn’t cool then and I’m not sure I was ever cool in high school or since then, so at least people appreciate that the podcast is pretty information heavy and useful information even if it isn’t super entertaining. But if you can think of ways that we can make this a little bit more entertaining and funnier, then we’re all ears for your suggestions. If we can help 50,000 of you at a time instead of 25,000 of you at a time, that’s much better.

Dr. Jim Dahle: Speaking of feedback, we’re going to be sending out a survey or at least giving you a link on the podcast to a survey for ways to improve the podcast. So watch for that coming up. Our sponsors today are DI4MDs, Disability Insurance for MDs. The principles at DI4MDs have collectively been advising physicians, business executives and other professionals for over 40 years utilizing knowledge and resources to take care of their life and disability insurance needs. Experience in relationships enable them to secure specialty specific disability and practice overhead insurance policies per residents, fellows and practicing physicians, the special discounts and favorable underwriting. They have established numerous guaranteed approved disability plans for residents and fellows and hiring specialists with disability benefits up to $250,000 per month. Their expertise extends to military physicians and they’re honored to assist those who serve our country. They guided physicians through the claims process enabling them to collect over one million dollars in benefits in 2019. They can be reached at info@di4mds.com, 888-934-4637 or at www.di4mds.com.

Dr. Jim Dahle: Thanks for what you do. Being a doc like most of you are, at least I think so, I guess we don’t know until we actually survey you, is difficult work. It’s a long training period, it’s competitive, it’s high risk. It happens 24/7, 365, it’s not easy and there are a lot of difficult things that you have to deal with, but it’s also rewarding. Well, I was at Lake Powell as I mentioned recently, and my wife cut her finger just chopping vegetables. First time she’d ever had stitches. She got them at Lake Powell. It’s nice to be able to not only have the stuff to do that, but the skills to do it and to do it competently. So there are a few advantages to being a doc.

Dr. Jim Dahle: On a second trip to Lake Powell I had recently, I was Canyoning with a friend and he tore his calf muscle, is what the injury ended up turning out to be in the end, but had been on a blood thinner. So ended up with a big hematoma and a ton of swelling and a ton of pain. We actually ended up evacuating him, getting him out off the Lake earlier to get him into a medical care. He went in and saw an emergency doc and had an MRI read by a radiologist and had an orthopedist consulted. And you know what, that’s you guys. So I appreciate you being out there. I think this was 11 O’clock on Friday night by the time he left the ER. Spending your Friday evening and taking care of my friends. So thanks for what you do. It is appreciated. And even if your patients forget to say thanks, I want you to hear it from somebody today.

Dr. Jim Dahle: Our quote of the day today comes from Tom Noakes, CFP. He said, “We do not all need to hire a full time driver if we only need directions.” And that’s the truth. Some investors prefer having a full time driver, a financial advisor that handles everything and other people just need a little bit of direction. Eventually, once they figure it out, they can drive themselves wherever they need to go as far as portfolio management goes. If you are not aware, we have negotiated special deals for you with all of the main student loan refinancing companies. You can find out about these deals by going to the page under the recommendations tab on our site. It’s the first one under the recommended tab, student loan refinancing and consolidation guide. And you can find that at whitecoatinvestor.com/student-loan-refinancing. And most of these deals, if you go through the links on the site, we’ll give you something like $300 cash back. That is in addition to getting a lower rate on your loan.

Dr. Jim Dahle: You’re saving thousands in interests, you get $300 cash back right at the beginning, and you can actually serial your refinance. You can go from one company to another as long as you can get a lower rate each time. So every time rates go down, you should refinance. Just remember that if you want the lowest possible interest rates, you’re probably going to need a five year term and a variable interest rate. That’s what will get you these rates down under the 2% and 3% range. But if you’re sitting there with six, seven, eight, nine percent student loans and you are not going for public service loan forgiveness on them, and you do not need the protections of an income driven repayment program, go refinance your loans. There’s no reason to be carrying these things around and paying thousands more each year in interest with money that could be going to our principal and getting you out of debt sooner.

Dr. Jim Dahle: All right. We’ve got a special guest on today. Let me get him on the phone and we’ll introduce him. Okay. Our special guest today is Kyle. Kyle is a resident and I’m going to give him a chance to introduce himself a little bit, but he took up my invitation that I gave a while back to listeners of this podcast that if they want to come on the podcast, I’ve got a long list of questions that we can answer and discuss on the podcast that we will do so. So welcome to The White Coat Investor Podcast, Kyle.
Kyle: All right. Thanks for having me.

Dr. Jim Dahle: So tell them a little bit about where you’re at in your training, your family situation, et cetera.
Kyle: All right. Well, me and my wife are in our second years of training. I’m in radiology. I completed my intern year and I’m an R1 and she is a second year OB-GYN residents.

Dr. Jim Dahle: Very cool. And you guys have been married how long?
Kyle: We’ve got married our fourth year of med school, right before the March show, is a little hectic March and April. But we got married fourth year, so two years.
Dr. Jim Dahle: Okay. Maybe not quite newlyweds anymore, but pretty close to it. Congratulations on that, by the way. What was your background financially before you ended up in the medical pipeline? Did you come from a family that was relatively well to do or middle-class or relatively poor upbringing? What messages did you get about money from your parents?

Kyle: I think I had a transition throughout my life. I have a brother and a sister and we grew up on the lower side of the scale. My dad worked hard and my mom worked hard, but I think we were living a little bit paycheck to paycheck. But through their hard work ethic, they worked themselves up and by the time always going to late college and medical school, we’re in the upper middle class. But during college, they were in the housing industry and that was right through the ’08, ’09 era. So I was a little bit on my own to get through undergrad.

Dr. Jim Dahle: And how about your wife? What was her upbringing like?
Kyle: Her mother is an emergency medicine physician and she grew up on the West coast. I’m from the East coast. Similar, she was a couple of classes up above me, but still she has a very good sense of money. Her parents made her work hard, just how my parents made me work hard and we were able to get a good value of a dollar.
Dr. Jim Dahle: Very cool. So you’ve been listening to the White Coat Investor Podcast for quite a while. Pretty much all of them, was the impression I got. But how long have you been following the White Coat Investor? Since what point in your training?

Kyle: I don’t quite know what tipped me onto you. I was always interested in money and just, like I said, my dad was very frugal and I was frugal myself and just gravitated towards you. I didn’t quite get hooked on WCI until the podcast came out. I have probably listened to every podcast one, two, three times. Just in passing, working out, traveling to interviews during fourth year med school and stuff like that. I don’t read the blog as much, if you’ve referenced something, I try and read the start here, but I’m more of a passive listener certainly. And my wife wants nothing to do with finance. She says that’s my job. I enjoy it. So she does other things. She’s a heck of a cook.
Dr. Jim Dahle: Awesome. Before we go too much further, tell us a little bit about your financial situation that you’re at now. I mean, you guys are basically PGY2s. I presume you both have a big old student that burden or maybe, maybe not.

Kyle: Yeah. I think we’re a little bit above average, so I think it’s right at 200 is the national average. We’re both at around 230 each. We knew what we were getting into. We moved it up a little bit. It’s probably too much in med school, but we went to a state school and the tuition wasn’t too high. After I hear some horror stories on this and reading, I think we’re doing better than others.

Dr. Jim Dahle: Yes, you certainly are doing better than the others, but you’ve got a pretty big hole there. You owe almost half a million dollars in student loans. Do you have other debts that you’re carrying around?
Kyle: No, just those. Both our cars are paid off. We’re just living in an apartment. So rent and monthly to dos, but no debts, no car payments, no deep credit card payments or anything like that.

Dr. Jim Dahle: In the assets so far, do you got anything saved for retirement or anything?
Kyle: Yeah. Since we became employed, we maxed out our Roth in intern year and maxed out an HSA last year. Well, maxed it out. That’s a question for later. I messed that up a little bit. And then we’re just saving. I’ll try and do the 20%. I want to max out a Roth. And now in our new program we’re doing a 403b and I’m doing traditional to try and take advantage of the PSLF a little bit, but that’s only just kicked in since it’s from the August paycheck. So not too much has been deposited into that. I think 11,000 each in the Roth, around 6,000 each in the HSA and then very minimal on the 403b.

Dr. Jim Dahle: So your plan for now is public service loan forgiveness or your loans?
Kyle: Yes. Well, at least we’re setting ourselves up for it. It’s still 50, 50, just because the job market changes so much and it depends on where do we want to go and if it’s available. But I’ve truly enjoyed teaching and I think the hospital environment is where I’ll be. My wife is not as interested in the PSLF, but we’re still setting her up for that.
Dr. Jim Dahle: So what income driven repayment programs are you in right now?
Kyle: We’re both in repay. We did actually the intern guide from your website, I forget the individual that wrote it, but we did the consolidation right with the zero payments. So we had zero payments throughout our intern year and I actually all qualified for PSLF. If I did my paperwork along those lines and got 12, zero dollar qualified payments. Actually, just made my first direct debit payment last month, I believe.

Dr. Jim Dahle: Awesome. Well, all right. Let’s get into some of these questions you sent me. The first few of which are actually about me. I occasionally do get these from listeners, so let’s hit them. The first one is, what does a typical day or week like for The White Coat Investor? As an emergency doc, I never really had a typical day or a week. I was always working, rotating shifts and so every day the week was different and that really hasn’t changed. My typical day and week just doesn’t exist. For example, last week I spent the whole week canyoneering in Southern Utah. A bunch of people that they go to the financial blogger and podcast or conference called FinCon. They’re like, “Where is he?” And I’m like, “Dude, if you’re going to plan FinCon when I could be off canyoneering, I’m probably not going to go.” So I didn’t go, I went canyoneering. I spent the whole week, late Sunday night until Saturday basically at Lake Powell. Totally incommunicado, not doing any blogging or podcasting or working shifts or anything, just on vacation.

Dr. Jim Dahle: But this week, yesterday was Sunday, went to church in the morning, checked a few emails, spent some time working on some chores around the house, visited some other people. That was kind of Sunday. Today we had a White Coat Investor staff meeting. That went for about three hours this morning. Now we’re recording this podcast. After this is done, I got to do my taxes unfortunately for the year. Yes, I know it’s September, but we filed an extension this year and I finally, finally just got my last K1, so I get to do my taxes and that’s probably what I’m going to spend the afternoon doing. Then in the evening, going to visit some friends.

Dr. Jim Dahle: Tomorrow I’ve got a shift in the morning. I’ve got a day shift, go and see patients at the hospital. I think there’s a trauma meeting I’ve got. Tomorrow evening, I’ve got a webinar I’m doing and this will have already taken place by the time you hear this podcast, but it’s a webinar that ACEP is putting on. Then I’ll be doing for emergency positions. On Wednesday. I’ve got a podcast I’m on. That’s about the only event I’ve got on my calendar for Wednesday, so I’ll probably be writing a blog post or two as well as spending some time in the Facebook group this week. Where our staff has decided to take big focus on the Facebook group and try to see if we can help a bunch of people in there and see how much of that ends up coming to the blog. That’s one of our projects for the week, so I’ll probably be working on that on Wednesday.
Dr. Jim Dahle: On Thursday, as I mentioned at the beginning of the podcast, we are moving out of our house because we’re renovating. So Thursday I’m planning to spend the whole day packing stuff up and putting them in boxes. Friday I’ve got another shift. This one’s also a day shift in the ER and then I’ve got some friends coming into town, some high school buddies. They will become into town that evening and I’ll be spending time with. On Saturday, we’ll be going to the BYU Washington football game. That’s our big plan for Saturday. That’s my week. Relatively easy week.

Dr. Jim Dahle: Next week I’ve got four shifts and I’m going to spend one day moving in addition to that and also recording a podcast with the physician on fire next week. That’s a week in the life of the White Coat Investor. It’s wonderful because I’m not working any night shifts, so I really actually enjoy almost all aspects of both of my jobs now that I’m not doing that. I basically eliminated the things I didn’t like about my work. That’s typical day in a week in the life for the White Coat Investor. Any other questions about that, Kyle?

Kyle: That sounds pretty busy. That canyoneering and a football game, sounds fun. I really enjoy when you and the other WCI folks like physician and fire do a podcast. Those are some of your best ones I believe.

Dr. Jim Dahle: Yeah. So it should be the one that runs after this one for those who are keeping track. Next week we’ll have the physician on fire on. Canyoneering is an interesting sport. It’s basically descending slot canyons, is what it is. There’s some climbing, there’s some repelling, there’s some swimming. There’s a lot of problem solving and use of some cool technology as well as exploring some wild places. So it’s a lot of fun. I usually spend at least a couple of weeks a year doing that.

Dr. Jim Dahle: All right. How do I maintain balance? It was your next question. I don’t think I do. I think my life is incredibly unbalanced, but where the balance is swings around the places. You can tell just from a typical day in the life schedule. I may have a week off every month. That’s actually probably pretty typical. I usually go on vacation for a week every month. So I guess that helps me to maintain balance. But it feels the rest of the time that I’m just keeping balls in the air. Just trying to juggle and not letting anything hit the ground. As far as all your other responsibilities between family and White Coat Investor work and my clinical work and those kinds of aspects. I think we all struggle with this. I think we try to prioritize what’s most important. About a lot of times, we get in trouble in that we take stuff that’s urgent but not important.

Dr. Jim Dahle: I don’t know if you’ve ever seen one of these graphs. You divide all the things in your life into urgent and non urgent and important and not important. And what happens is we tend to prioritize the urgent things even if they’re not important over the more important things that may be less urgent. So I’m trying to spend a little bit more time on the non urgent but important aspects of my life, most of which involve my family and community service and that kind of stuff.

Kyle: I think that’s from Seven Habits, I believe. The only reason I read that book was you suggested on one of your earlier podcasts.

Dr. Jim Dahle: Yeah, it is a great book. I read a long time ago, it was given, Oh, I don’t know. I must have read it in my early twenties, I’ll bet. And then when I got married, we had the Seven Habits of Healthy Families or productive families or something given to us as a wedding present. I don’t know if I ever read that one, but I was just adapting the original Seven Habits to Families, I think. But there’s a lot of truth to that. If you’ve never read this book, it’s worth your time. It really helps you to put first things first. I think that’s one of the habits and sharpen the saw, I think is the seventh habit. I can’t remember what all the other ones are, but they’re definitely worth applying in your life.

Dr. Jim Dahle: All right. Your next question also to me is, I know you’ve said you prefer forums, but what podcasts do you listen to or is it all music in your car? It’s interesting, I just had a discussion about this on the White Coat Investor forum. People were talking about what podcasts they listen to and how there’s so many physician financial podcasts out there now. The truth is, I’m not a huge, not podcast, blogs rather. I’m not a huge podcast listener. I’m not a huge blog reader. A lot of people are surprised by this because I have a podcast and I have a blog. But the way I actually prefer financial information is I prefer books and forums. The books give you the evergreen material, they have it set up in a format that’s easy to understand and allows you to hang things on a framework. Then forums are about as up to date as things get. As news articles come out and tax law proposals come up, they get discussed on forums and I like the give and take there and the interaction with the other people that you get on a forum.

Dr. Jim Dahle: So those are actually my two favorite ways of learning about financial information. But what I have learned from this White Coat Investor enterprise is everybody is not like me. Some people are like, I’m not going to a forum, I’m going to do a Facebook group, or I’ll watch YouTube videos or read it or I’ll read a blog or I’ll read email newsletters or books or whatever. Everybody’s a little bit different and I’ve been surprised, not so much anymore, but initially just how many people a new medium reaches that weren’t paying any attention whatsoever to The White Coat Investor message in the old median. And you sound like you were that way. You said you don’t even read the blog, right?

Kyle: That was definitely me. I’m a podcast person for life now. You’re really the only one I listen to.

Dr. Jim Dahle: Yeah. So let’s see. What podcasts do I listen to when I listen to podcasts? Because I do sometimes. Let me just go to my podcast library and see what’s in it. I have got Cycling News. I listen to that one. [inaudible 00:21:04] News, also a cycling podcast. I’ve got ER Cast on there. I’ve got Risk Management Monthly, that’s aimed at emergency docs as well. I’ve got Ted Business on there. I’ve got Hidden Brain from NPR. I’ve got Freakonomics, I’ve got Planet Money. I’ve got the Dave Ramsey Show.

Dr. Jim Dahle: How I Built This by Guy Raz, is an entrepreneur podcast. It’s become much more popular since I started listening to it. But it’s also great if you’re interested in entrepreneurial stuff. I keep track on some of my competitors out there as well. Physicians doing podcasts, at least somewhat relevant to money. Doctors Unbound, Docs Outside the Box. Hippocratic Hustle, Kerry Jenkins over there, Married to Doctors. I’ve had Lara McElderry on this podcast. She does that one. Financial Residency was one of my advertisers. Ryan Inman, I’ve got his podcast on my list. A lot of different podcasts I listen to. I don’t know if that’s a recommended list for anybody, but that’s what’s on my phone right now as I look at it. So I guess those are the podcasts I do listen to, but I confess there’s a lot of music in my car and not podcasting.

Dr. Jim Dahle: All right, let’s get into a little bit more financial stuff. So you want to talk a little bit about cashflow and budgeting. Why don’t you tell us what you guys are doing as far as your budgeting process now. You said your wife’s not super interested in it, so let’s hear about how the two of you have worked out a system.
Kyle: She’s not into money, but she’s really good at budgeting, and she doesn’t spend a bunch of random stuff. But what we have is we sat down like you suggested it and had a little bit of a meeting and built up an actual budget. Now I don’t track my dollar to dollar by no means. I don’t see the utility of too much in that, but we have a primary checking account where our paychecks are directly deposited. And then from there everything is auto drafted out.

Kyle: Before we see anything, the 403bs are already been taken out, the Roth is taken out to go to our Vanguard Roth account and then we each actually get a grand a month as “allowance.” With that allowance we spend everything. So food comes from there, eating out, gas, any type of travel or anything like that. So it’s a rollover. And if you’re not going over your thousand dollars, the other partner doesn’t ask questions. So it’s just along that line. More for, I’m real big penny pincher. But more for her she likes to spend some money on some random stuff that of course as a guy I don’t understand. But that’s just how we have set it up, and it’s actually worked out pretty well.

Dr. Jim Dahle: Yeah, our budgeting process, I think I’ve talked about before on the podcast and on the blog and we just started using initially just a spreadsheet, a Microsoft Excel spreadsheet, and I’ve literally got all spreadsheets from our entire marriage. The last 20 years of spreadsheets. One every month of what we spent. And the first few were hilarious. I did a blog post on one of these ones. I found one and it talks about our long distance phone bill. Who has one of those these days? But we were really strict in the beginning because money was pretty tight. I remember when we were living on in med school and residency and it was pretty tight. Katie worked my intern year and after that she was a stay at home mom. That was the only real decrease in income we ever had. But it certainly made things tighter. We watched every dollar for years and years and years and the budget served as training wheels in many respects. Once we learned how to ride the bike, the budget probably doesn’t matter as much anymore. Now it’s mostly just keeping track of the cash flow.

Dr. Jim Dahle: It’s really hard to keep track of it if you’re not doing some sort of meeting every month or some sort of planning process. You just got money flying everywhere and you’re not sure where it’s coming from, where it’s going. So we’ve specialized a little bit in the last couple of years to our strengths. And what Katie’s strength is, this is a little bit traditional. Traditionally, the man makes the money in the woman’s spends the money, but in our house, that’s the way it works out. And the reason why is because she’s better at spending money. She actually shops for stuff and compares prices and gets a better deal on it. Whereas I shop like a hunter. Go out, kill the beast, drag it home, and whatever price you got on it, you’ve got it. You’ve now got the item. I’m not much into comparing prices. When I buy something, I don’t care. I want to get it as fast as I can, not necessarily get the very best deal I can.

Dr. Jim Dahle: Because of that, we let her do most of the buying and she does a much better job of it. If we’re buying airplane tickets or whatever, she buys them. As that relates to our budgeting process, she keeps track of the spending. She goes over the credit card statements and the bank account statements and make sure it’s all legit and adds it all up what it was and then feeds that into one line on our spreadsheet. That’s literally as close as we look at our spending. It is one number. All the gas, all the groceries, all the kids’ activities, all this stuff, it’s one line on our spreadsheet because we just don’t care anymore. We don’t care what it was spent on, we just care what the total was. That’s our tracking that we do now.

Dr. Jim Dahle: I am in charge of moving the money around between the accounts and adding up the income. At the beginning of the month or whenever we get around to doing this process, I go through all of our sources of income, and that’s the White Coat Investor profit for that month. That’s what I made with my clinical work that month. We look at all our investing accounts and we take the income from that and so on and so forth and add all that up. Then we take our effective tax rate, is in the 33%, 34% range. We take 34% of what that number is and we set it aside.

Dr. Jim Dahle: This is our tax money basically, so we don’t spend that or don’t go invest that because we know we’re going to need it within the next few months to pay taxes on it. Then we give to charity based on that total as well. And then we decide what we’re going to do with the rest. Because right now, we’re making much more than we spend. So this is the main thing we do at our monthly meeting. We just talk about what do we do with the rest? And the rest turns out to be either invested or the last few months we’ve been saving up for this home renovation. And so all the rest has been going toward this home renovation account lately. But that’s what our monthly meeting is about. She brings one number to it, I bring another number to it and we talk about the difference really and what we’re going to do with it. And that’s our current cash flow budgeting process.

Dr. Jim Dahle: As far as that tax money, we set aside the 34% because we know we’re going to need that eventually, but that’s not necessarily what we pay in taxes. As an S corp for White Coat Investor, we’re obligated to pay a certain amount of taxes every time we pay ourselves a salary. I calculate that out and send that in as required by federal law. And then we make quarterly estimated payments. The way we make those is we just calculate it as 110% of one quarter of last year’s tax burden. That’s what our quarterly estimated payments are. Basically just enough to stay in the safe Harbor. That’s what we do with our tax money. And then if we owe more next April, which we usually do, we write that check out of this money that we’ve been setting aside for taxes. So that’s our cash flow and budgeting.
Kyle: Do you just keep it aside in a money market or?

Dr. Jim Dahle: Yeah, it’s just sitting in a Vanguard money market account. I think this month it’s in the prime money market account. For some reason the municipal money market account yields have dropped enough that it actually makes more sense despite our high tax bracket to just be in a taxable money market account for now. But that’s a calculation you have to run. You take the yield of the taxable money market account and you multiply it by one minus your marginal tax rate. And if that’s higher than the yield on the municipal money market account, you do that. If it’s lower, then you put your money in the municipal money market account. Every few months I do that calculation just to make sure I’m in the right one, but we just let it sit there until it’s time to write a check to the IRS.

Dr. Jim Dahle: All right. Your next question though was not for people like me that are self-employed, it’s for people like you that are employees. About the W-4, you had a question about how to fill it out in order to minimize the amount of tax with health. What’s your big concern there as far as the W-4 goes?
Kyle: I think when I originally wrote this question, it was a couple months ago. Actually, I believe you talked about on the podcast and it got me a little bit interested in it and I did my own Googling and I came across what you just discussed, how you have to pay out a certain amount of taxes within a grand or however much you made last year. I just don’t think I had a firm enough grasp on what the W-4 entailed. I had briefly heard of somebody paying their tax bill on a credit card in order to obtain points and stuff. But I just think they were working with a different process than me as a W2 employee.

Dr. Jim Dahle: Yeah. So the W-4, this is a form that an employee fills out for their employer and you basically pick up how many, mark off a number of exemptions. One for you and one for your spouse and one for dependence, et cetera. And the idea is just to estimate how much tax you’re going to owe at the end of the year. That’s the whole point in the form. The idea is that the employer then withholds that from your paycheck and sends it to the IRS on your behalf. But that amount of money that’s withheld actually has very little to do with the amount of taxes that you owe, which is calculated on your return. The goal isn’t necessarily to minimize the amount of money withheld on the W-4. If you want to minimize the amount of money withheld on the W-4, you put 10 exemptions on there. Because then they’re going to hardly withhold anything.
Dr. Jim Dahle: Now that’s probably not even legal to do, nor is it advisable. What you should try to do is just get the amount withheld about right. Because if you are not in the safe Harbor at the end of the year, you’ll not only owe the taxes that you would otherwise owe and the interest that you may owe on that, but you also owe penalties. So the goal is to be in the Safe Harbor. What is the Safe Harbor? Well, the Safe Harbor is that you have either paid all the tax you owe. That will obviously keep you in the Safe Harbor. If you’ve had that all withheld or paid, it is in quarterly estimated payments, that’ll keep you in the Safe Harbor. Also, if you have paid at least for a high income earner, 110% of what you owed last year, you’re in the safe Harbor and won’t have to pay any penalties.

Dr. Jim Dahle: Then the third way you can be in the safe Harbor if you owe less than a thousand dollars. There’s $1,000 difference between what was withheld on the W-4 or what you paid in your quarterly estimated payments and what you actually owe in taxes. If that’s less than a thousand dollars, you’re in the safe Harbor and don’t owe any penalties. So the goal is just getting a safe Harbor and the W-4 is a tool to help you do that. But what a lot of people don’t realize is there’s a few strategies you can do using the W-4. For example, with quarterly estimated tax payments, it matters when you make the money and when you pay the taxes. If you made all your money in the first quarter but you didn’t pay the taxes until your fourth quarter estimated payment, you can get dinged. But with a W-4 and money that’s been withheld by an employer, the IRS doesn’t care.

Dr. Jim Dahle: Money withheld in December is exactly the same as money withheld in January. So what some people have done to gain the system a little bit is have a few more exemptions on their W-4 earlier in the year and less late in the year. And thus more is withheld from the paycheck late in the year. There’s a few ways you can gain it there. I don’t know that I’d recommend it, I just try to estimate it correctly. And if you find you’re getting huge tax returns every year, well, you probably need to claim more exemptions and so you’re having less withheld from every paycheck. If you find you’re writing big checks every April, you probably need to have more withheld from your paycheck and that’s the whole point of the W-4.

Dr. Jim Dahle: Now, you also mentioned paying your tax bill on a credit card, and this can also be pretty slick. A lot of people don’t realize this, but the IRS allows you to pay your taxes with a credit card. Let me see if I can find the URL here that it has there, so I give you the right information. It is irs.gov/payments/pay-taxes-by-credit-or-debit-card. And they give you one, two, three processors you can use there. However, there’s a fee, and that’s what you need to realize. The lowest fee there is 1.87%. So if you’re getting 1% back in cash for using the credit card but you’re paying 1.87%, this is not a good strategy for you. So you really need a credit card that’s paying you at least 2% cash back in order to come out ahead doing this. Whether those are points, whether those are miles, whether that’s cash back, you need a pretty good credit card and a pretty good cash back credit card to make anything doing this.

Dr. Jim Dahle: It is convenient. It’s nice to not have to mail the check. You could’ve saved yourself the stamp there. But there’s not a huge arbitrage here. Even if you’ve got a 2% card, like the fidelity card, you’re earning 2%, you’re paying 1.87%, you’re probably not going to get wealthy on this arbitrage. But it certainly is something that can be done and it gives you a few more weeks before the money actually comes out of your bank account. And of course, you can get a little bit of cash or points back, but for most people, this is not a huge strategy that y’all spend a lot of time trying to figure out.
Kyle: Yeah, I blame our physician on fire for that one. He wrote a couple of articles on credit card churning, I think got me too excited about it.
Dr. Jim Dahle: Yeah, I think you are a lot of those credit card folks that are really into these credit cards. You know they have 20 credit cards at a time. They got a spreadsheet to keep track of them all. What they have found is the money is not in the cash back. It’s not in getting 2% back after spending 1.87%. The money’s in the signup bonuses. That you got to spend $3,000 on the card in the next three months and then you get 50,000 miles. That sign up bonus is obviously at a much higher rate in the ongoing use of the card.

Dr. Jim Dahle: So if you’re into credit card churning and credit card, what do they call it? Arbitrage. I can’t remember what the term is right now. Credit card farming, whenever you want to call it. But you need to come up with a way to spend a few thousand dollars on a card. Yeah, paying your taxes with it is a pretty good way to do it. For most employees, it’s not going to work though because most of your taxes are withheld from your paycheck by your employer. I guess you could do it if you owe money come April. But otherwise, that one’s mostly for the self employed that are making quarterly estimated tax payments.
Kyle: Yeah, I think that’s where my original question came from. Bring it down so I had something to pay in April.
Dr. Jim Dahle: Yeah, exactly. Well, that would give you an option if you had less money withheld from each paycheck and owed money in April and you could pay that with a credit card. But you got to keep in mind if you don’t have enough withheld to stay in the Safe Harbor, it’s going to cost you some penalties and that’s going to reduce the amount that you’re getting from the credit card churning. I worry about people that get into this credit card game, I think it’s relatively easy to screw it up and end up paying a bunch of interest. You don’t have to pay a lot of interest on a credit card to eliminate all the benefits you got in the previous year from your careful tracking of your credit cards. Nobody ever gets rich off this. This is definitely a little bit on the side, a little bit of a side hustle. It’s not something that’s gonna make a dramatic difference in your financial life. Maybe you get a few trips to Europe for free, and that’s about it.

Kyle: I think when I did the math, it was just more trouble than it’s worth.
Dr. Jim Dahle: Yeah. Okay. So let’s talk a little bit about your HSA woes now. You mentioned you had an HSA because you had a high deductible health plan as an intern and now it’s going to sit because your new program, your residency program is four year program, does not have a high deductible health plan. So you’ve just got a few thousand dollars in that HSA. So what should you do with it? Well, you basically have two choices. Your first choice is you can just spend it on your health care needs-
Kyle: All right. Jim, one sec.

Dr. Jim Dahle: Yes.
Kyle: Actually, since writing these questions, I actually developed another problem with it. I’ve maxed it out intern year under the last month rule. And then when I came to my new program without a high deductible health insurance program, I now will have to do pay, I believe a 10% fee on my next, on my 2019 income taxes due to over-funding that account. That was another question I was leading to.

Dr. Jim Dahle: Yeah, let’s address that too. But basically, the two questions, as far as the money you have in there, you can certainly just leave it. You can leave it in the HSA. If you haven’t done a good HSA, you can invest it. You don’t have to leave it in the employer’s HSA. You can roll it over to a good one, like Lively that I’ve got an affiliate relationship with, and you can roll it over to Fidelity. That’s where my HSA is at. Those are both great places, low fees to invest your HSA and just let it grow for the long term. That’s option number one, is just leave it there. Option number two is to just spend it on your health care needs. They come with a debit card, they come with a checkbook. As you spend money on healthcare, write the check out of the HSA. That’s a totally legitimate use of an HSA.

Dr. Jim Dahle: What you probably shouldn’t do is pull all the money out of the HSA and pay taxes and penalties on it. There’s a pretty good penalty if you pull it out and spend it on something besides healthcare. At least up until age 65. You’ve got a separate issue though. Your issue is that you put too much money in there. Now, they have a cool rule called the last month rule, which basically says if for the last month of the year you’re eligible for an HSA, you can make a whole year’s contribution for that HSA. And that’s what you took advantage of for last year. Even though you were only an intern for six months of that year, you basically got to make a whole year’s contribution. But there’s a catch. You also have to stay eligible for the next year, which you did not because when you left your internship at the end of June, you’re now in a program without a high deductible health plan.

Dr. Jim Dahle: So I’d have to look at the regs to see exactly how much you’re going to have to pull out of there. I suspect you’re probably can probably still leave a significant amount of that money in there because you should still be eligible for contributions for that last six months of 2018, as well as the first six months of 2019. So you may not actually have to withdraw that much and pay penalties on that much. But a careful reading of the rules surrounding the last month rule would definitely be an order for you. And then of course, you’re probably going to end up having to pull some of that money out and paying at least a little bit in penalties, but it’s not going to be the whole thing. It’s not like you’re going to be just nailed on it. You should still get significant benefit out of using that HSA. So I wouldn’t beat yourself up too much about it.
Dr. Jim Dahle: But as a general rule, people should be aware of that, that if you’re not going to have an HSA for the whole next year, that last month rule has a special provision that nails you. So something to be careful about.
Kyle: Certainly.

Dr. Jim Dahle: Have you actually run the numbers yet to see how much you have to take out of that account?
Kyle: I did run numbers. Actually me and you, I’ve had a discussion, I don’t know if it was through email or some other form. I had contact with the WCI through multiple outlets and it comes down to I have to pay a 10% fee on the overdrafts and the earnings on my 2019 income taxes for that. It’s a little bit fishy. I haven’t looked at it in a while, but I’m pretty sure it comes down to a 10% fee on everything that was put in there that wasn’t supposed to be there.
Dr. Jim Dahle: Right. The question is how much wasn’t supposed to be in there?
Kyle: Oh, it’s half. So six months I maxed it out, so I was able to do the six months. I believe it was like 3750 that year. So half of 3750 wasn’t supposed to be in there.
Dr. Jim Dahle: Right. That sounds right.

Kyle: I have to pay 10% on that plus 10%, I believe on all the earnings of that.
Dr. Jim Dahle: But you should be eligible to make contributions for part of 2019 as well, correct?
Kyle: Yes, and I did. I made the full six months and that’ll be fine.
Dr. Jim Dahle: Okay. So you’re basically taken out 1800 bucks or whatever and paying a 10% penalty on it and the earnings.
Kyle: I have to fill out part three of the form 8889 and it’ll do my math from a me on there. It’s probably part of the HSA. That’s where you fill in every year for the HSA.
Dr. Jim Dahle: So it’ll calculate it for you there. You say So you’re going to owe a penalty of a couple of hundred bucks, something like that?
Kyle: Yup.

Dr. Jim Dahle: But not the end of the world.
Kyle: You live and you learn.
Dr. Jim Dahle: But how were you supposed to know, right?
Kyle: Actually, you taught me.
Dr. Jim Dahle: Well, I guess, but did you know your new employer wasn’t going to have an HSA eligible plan?
Kyle: No, I did not.
Dr. Jim Dahle: When did you find that out? I guess when you go through the match really, right?
Kyle: Exactly. Yeah. I went through the maths as an intern.

Dr. Jim Dahle: Yeah. So if you are going to a new employer anytime soon, it’s definitely worth getting in touch with the HR department of the new employer to make sure you’re not going to get burned by this. But in the end, as you can see, it’s not like you got to pull, you don’t owe thousands to the IRS, you owe a couple hundred bucks, no big deal. You’re going to be able to handle that even on a resident income.
Kyle: Yeah.
Dr. Jim Dahle: Okay. Your next question was about your Roth IRA contributions. So you and your wife auto draft your Roth IRA contributions to Vanguard every month and there’s a re-invest option. Should you do that or should you not? Well, first of all, I’d caution you about the auto drafts. What happens with these is, it’s great to automate your finances. Don’t get me wrong. You know the book, The Automatic Millionaire has a lot of truth to it where they’re basically advocate for automating everything. The problem with this is you and your wife are eventually going to need to do your Roth IRA contributions through the back door and it may not be clear exactly which year you have to start doing that.

Dr. Jim Dahle: It could even be during your residency if you start doing significant amount of moonlighting. Once you get that modified adjusted gross income up over, I think it’s about $190,000 a year right now, you’re no longer eligible to make direct Roth IRA contributions. So you’ve got to keep an eye on that and before that year starts for whatever year you’re going to be over that amount, you got to stop this auto draft Roth IRA contribution because those are direct Roth IRA contributions. That’s one thing to be aware of there. They’re great, but you just got to realize that at some point you got to start doing these through the back door. But the re-invest options is just about reinvesting dividends. And I’m a big fan of reinvesting your dividends and your capital gains distributions as long as you’re inside a retirement account.
Dr. Jim Dahle: In a taxable account, what that does is it gives you a whole bunch of different tax lots to keep track of and they might be really small tax lots. They might only be a few dollars even. And while the brokerage will keep track of those for you, I prefer to just have all my dividends and other distributions in a taxable account go into my sweep account or my money market account and then I reinvest them with the next month’s investments. So I’m still reinvesting the money, but I’m doing it manually rather than automatically into the same investment. But inside a Roth IRA, I see no reason not to just reinvest and automate your finances in that respect. Does that make sense?

Kyle: Yeah. There was a little option on it and I again, I’ve done a little bit of reading on it since then, but yeah, you perfectly sums it up. Thank you.
Dr. Jim Dahle: Yeah. So you guys are a two physician resident couple who decided not to get insurance at. You guys don’t have disability insurance or life or has that changed since you sent these questions to me?
Kyle: No disability or life.
Dr. Jim Dahle: Yeah. Tell us about your reasoning when you went through that because it’s not necessarily unreasonable. There’s a lot of different things people choose when there are two physician couple. But tell us about your reasoning to do it that way.

Kyle: Originally, I was planning on doing that and I think I actually reached out on the forums and a couple of people on the forums convinced me otherwise of like, hey, you need to look into getting disability insurance. And I reached out to a couple people through the conditions that both me and my wife have had previously. It was not the perfect definition of disability insurance and it was just not going to cover what was needed. It wasn’t the typical disability insurance. I’m sure most people are obtaining. So we just decided to basically self insurance. I’m her disability insurance and she’s mine.
Dr. Jim Dahle: And the same for your life insurance.
Kyle: Life insurance, basically, the only debts we had was student loans. So on my understanding that we won’t be liable for each other’s student loans. So we’d be able to obtain or basically take care of ourselves with the income, our physician income.

Dr. Jim Dahle: Yeah. So that’s generally the case for federal loans as well as most refinance loans. They just go away at death. There are few, when you refinance your loans, you’ve got to read the fine print and make sure that the company’s not going to apply that to your estate. If it is, it’s definitely worth buying some life insurance to cover that risk. That’s a heck of a lot cheaper than paying the higher interest rate on an unreal finance student loan. But just be aware when you’re refinancing your loans to look into that provision. But there are a lot of dual physician couples that have struggled with this question and the responses and decisions basically range from what you guys are doing. No insurance at all to both partners being fully insured. But you guys are in a very different situation than my wife and I was.

Dr. Jim Dahle: When I came out as an attending physician, we had no assets. This was long before we were financially independent. My wife was a teacher, and I was a physician. What if I became disabled? Our financial life was going to be dramatically different without that disability insurance. And so it was a really important part of our financial plan. For a dual physician couple, you’re married to a gynecologist, she’s married to a radiologist essentially. You have a very nice life on a radiologist income, just one without being married to another doctor. And so it’s totally reasonable to go to the complete other extreme and say, we’re not going to insurance at all. But what I see most dual physician couples do is pick something in the middle. They realize, well, if one of us became disabled, I might not want to work as much, we might not want our income to drop as much. And so they both get partially insured. That keeps the premiums down, so they’re not quite spending so much money but also provides something coming in if one of you were to get disabled.

Dr. Jim Dahle: Same with life insurance. There are a lot of costs that come up when one person is having to do all of the bread winning. You’ve got to go out there and you got to maybe work a little bit more than you were, or you got to hire a housekeeper, or you got to hire out more child care, whatever it might be. So they choose to buy some smaller life insurance policy. The other thing you got to keep in mind is there’s always a possibility that you guys both become disabled or both die at the same time. And if you’ve got kids relying on you, especially there is a certain risk there, it might be pretty low.

Dr. Jim Dahle: There’s a certain risk there, and the benefit of buying at least a small policy on each of you is you’re insuring against that possibility as well. So lots of different ways to slice that. I don’t think there’s a right answer. I think you just need to think through what is the plan if I die, what is the plan if she dies, what is the plan if I get disabled, what is the plan if she gets disabled, what is the plan if we both die, what is the plan if we both become disabled? Work through the possibilities and if those are not acceptable to you without buying disability or life insurance, well, buy the insurance. At least enough until the plan becomes acceptable in the event of those relatively rare but catastrophic financially outcomes. Does that make sense?

Kyle: Yeah, it makes perfect sense. We don’t have any kids currently, but we did discuss possible obtaining more insurance when that was in the horizon. Also, when I actually approached the forums, they brought up another good point, unspeakable, not really polite way, but they also brought up the divorce rate where that could mess up your whole finances as well. So I just wanted to put that out there. Of course, that’s not on anybody’s plans, but-
Dr. Jim Dahle: Yeah, for sure.
Kyle: … you have to mention it.

Dr. Jim Dahle: Yeah. Well, it’s actually pretty good for dual physician couples. They always say docs are always getting divorced, but if you actually look at the data for a dual physician couple, the divorce rates only about 10%. So it’s much lower than the 50% that it is in the general population. You’ve got that going for you, but it certainly isn’t zero and it’s a pretty significant risk that you should do what you can about for sure.
Kyle: Yes. And you can get through step one, you can get through the maths together. It’s pretty taxing on anybody.
Dr. Jim Dahle: For sure. It’s like I tell people all the time, your best asset protection move is probably date night because that really is your biggest, biggest risk of loss, is getting divorced.

Kyle: Oh man. Now my wife’s going to pressure me into date night. Thanks a lot.
Dr. Jim Dahle: All right, well let’s talk this next question, which is a very good question. It relates to your guys a student loan plans. You’re both, at least for now, at least keeping public service loan forgiveness on the table. Now how should that affect your retirement account contributions as a resident? Is basically what you’re asking. Because the general rule is that residents and other people that are in lower income years, they’re not in their peak earnings years, should use Roth accounts and those in their peak earnings years should use tax deferred accounts. But you are noting essentially one exception to that general rule. And the reason why is if during residency, if you’re going for public service loan forgiveness, if you use a tax deferred retirement account, it lowers your income and with a lower income, you have a lower income driven repayment program, payment due. And the lower the payments you make, like the zero dollar payments you made last year, the more that is left to be forgiven after 10 years in the public service loan forgiveness program.

Dr. Jim Dahle: Now you’ve got these two factors weighing against you. You’ve got the extra taxes you’re probably going to end up paying by virtue of not using the right retirement account, but you’re weighing that against the possibility of getting more money forgiven. And so it actually becomes a very complex calculation to decide exactly what to do. But if you go to the recommended student loan and vice people I have on my website, that’s again under the recommended tab under student loan advice, they can help you run the numbers for those. And this situation like the one that you’re in where you’re thinking about going for public service loan forgiveness, it’s a dual physician couple. You’re contributing to retirement accounts but you’re not sure which ones, this is the ideal person to go spend three or four or $500 with these student loan advisors and help work out what exactly the right plan is for you. Because the plan could very well be tax deferred contributions to keep those payments down.

Dr. Jim Dahle: But it’s possible to put too much in there. If you got your payments down to zero dollars already, more tax deferred contributions are not going to help lower that payment any further. So you can go too far too. You really just have to run the numbers. And I wish the government hadn’t made the rules for these programs so complicated, but unfortunately, they have and there’s no way around it. If you’re in a complex student loan situation, you’ve got to look at all these things.
Dr. Jim Dahle: You’ve got to look at how you file your taxes, you got to look at what IDR program you’re in, you got to look at what retirement accounts you’re using because it all goes into the calculation of what exactly is right in your situation. And it can be pretty complex unfortunately. So that is a noted exception to the Roth is for resident’s rule. If you thought you were almost surely going for public service loan forgiveness, I would say, okay, lean toward the tax deferred accounts. If you’re like, well we might but we probably won’t, then I would still lean toward the Roth accounts even if it made your payments bigger just because in the end, I think you’ll be glad you got more money into a Roth account in relatively low tax bracket years.

Kyle: I’ve taken similar thoughts to that and I maxed out my Roth just IRA every year. That’s the plan. I think I have a fundamental confusion on the retirement accounts as well. So I maxed out my Roth IRA. That has nothing to do with my max loan contribution for 403b. Correct? Because in my institution, we’re actually able to do traditional tax deferred and then we’re also able to do Roth 403b contributions. So I actually could maybe put a little bit more into it. Is that correct?
Dr. Jim Dahle: That’s right. They’re completely separate contribution limits. So you can put $6,000 into each of your Roth IRAs each year and you can put $19,000 into each of your 403bs each year. That’s a heck of a lot of savings for a resident couple. Even a dual resident couple. I mean, what’s that work out to be, 50 grand? That’s got to be pretty close to half of your income as a resident is pretty impressive. But it’s the same question whether you do Roth or whether you do tax deferred. Now, the truth is for your IRA, you should almost surely do Roth because the presence of that retirement account at work and your income are going to make it such that you are not eligible to deduct a traditional IRA contribution. And if you can’t deduct that, you might as well do the Roth IRA contribution. That one’s probably a no brainer for you, but you do have a little bit of debate there deciding whether to do the Roth or the tax deferred 403b.
Kyle: Currently we are doing the Roth IRA and then just a tax deferred 403b.

Dr. Jim Dahle: Yeah, that’s probably not a bad way to go. But to know whether that’s right for you, you honestly got to sit down and run the numbers. And if you need help doing that, I’d get one of those student loan professionals and get some, pay for some formal advice. Which segues us well into your next question, which is when is the best time to talk to a student loan professional? Earlier or later in residency? Obviously, you guys are pretty early in residency, and you’ve got all these questions, you’re not sure what to do. So the answer is early. Because you want to do it sooner rather than later. Now I know 400 or 500 bucks is a lot of money to an intern, but this could mean the difference in tens of thousands of dollars to some doctors and how much you have forgiven, how much you pay in interest, how much you make in your retirement accounts.
Dr. Jim Dahle: I think it’s really being penny wise and pound foolish. If you’re in any complex student loan situation, do not hire that advice early on in residency. It doesn’t need to be an annual meeting, not necessarily. For a lot of people, a one time meeting to set up the plan would be fine, but it’s probably a good idea to meet early in residency and then again late in residency and put together that plan of what you’re going to do as an attending. Because maybe by now you know you’re not going for public service loan forgiveness and as time to refinance, or you know, you want to make sure you’re in the right plan as you become an attending, and you want to know, well what retirement accounts should I be using as I become an attending. And so probably a couple of meetings during residency are worthwhile.

Dr. Jim Dahle: I think most of the people I have on my recommended list give you some discount on a repeat or a second meeting anyway. So it’s not like that second one is super expensive, but most people probably don’t need an annual meeting. But if you’re in a complex enough situation, stuff is changing and one spouse’s income is moving around, or you start moonlighting or something, you might need to look at this again annually. But again, that’s way cheaper than anything else you hire in financial services. You go hire an investment manager, and you’re probably going to spend five grand a year, you go talk to these guys for 300 or 400 bucks and it’s just not nearly as expensive. Okay. Your next question, you’re now in a new state I understand, right?
Kyle: Yeah, we switched.

Dr. Jim Dahle: And you need some new insurance. So I assume you’ve already got the insurance now. Right?
Kyle: There was a little bit of a leeway from my previous state that I’ve able to keep those policies for a little bit as I’m pricing it out and getting used to the new program and use a new moving everything like that, and it’s just get bumped further and further down on the to do list. So I actually have not obtained it.
Dr. Jim Dahle: Okay. You go to a new state, a lot of times you just modify the insurance policy you have. As I move state to state, I’ve had the same insurance policies minor through USAA, which is available to military members and they’re used to people moving around all the time. So it’s no big deal. My premium is may go up or down when I go to a new state. But I basically kept the same policy. You can even keep the same agent or broker that you’ve been using for your home and renters and auto policies and umbrella policies. You can keep the same person. Usually, they’re licensed to sell in more than one state. If they’re not, they can refer you to somebody else. But it’s not that big of a deal to shop this out.

Dr. Jim Dahle: You can call two or three companies and just get quotes and as long as you’re okay with the service that company offers, you just take the lowest price. A lot of people are surprised just how much they can save by shopping it around. Oftentimes you can cut your costs significantly in this department. They’re also surprised when they find out that these costs are much more expensive in some states than others. It’s like disability insurance. If you’re going to buy disability insurance and at some point this is going to involve California, buy it in the other state. Whether you’re going to move to California, buy it before you go. If you’re moving from California, buy it after you leave just because it’s much more expensive to buy in California.

Dr. Jim Dahle: But as far as those policies, what are absolute needs? Well, I think the liability is really a big need, especially for a doc. That’s the main reason you’re buying these policies and your state likely has a minimum amount of liability you’ve got to carry on your auto policy. It’s probably only 50 or 100,000, which is not nearly enough. No, when you think about people out there driving around $130,000 Teslas just totally in their car is going to get you over your liability limit. So you need to increase those limits to several hundred thousand dollars and then typically stack an umbrella or a personal liability policy on top of that. When you buy that from the same person you get your auto or your homeowners, your renters insurance from most of the time.

Dr. Jim Dahle: As far as other absolute necessities, there aren’t a lot. Some people prefer having collision and comprehensive coverage on the car, especially if it would be a major financial burden to replace it. We typically carry it on our newer cars and not necessarily on our older cars. A lot of people wonder about uninsured and underinsured coverage, that can be a good idea as well that will cover. For example, let’s say an occupant of your car is injured in an accident that is not your fault, but the other person who caused the accident doesn’t have any insurance. Well, they may turn to you and sue you for their losses and that’s where the uninsured and underinsured coverage would kick in. You got to be aware that there’s a lot of umbrella policies out there now, it don’t cover that risk. So make sure you read the fine print carefully.

Dr. Jim Dahle: I was talking to an advisor on the podcast not that long ago, who pointed out that USAA umbrella policy no longer covers that. So I may be shopping for a new policy myself soon too. But those are the main things. As far as renters policy goes, just make sure everything’s covered. There’s a lot of fine print in there and it’s worth going through it and seeing what is and what isn’t covered. A lot of times people are surprised to find that firearms above a certain dollar amount or jewelry above a certain dollar amount is not covered by their homeowner’s or renter’s policy. Actually, you got to buy a special additional rider with an additional premium to get those sorts of things covered. Also, flood insurance has to be purchased separately and earthquake insurance has to be purchased separately as well if you want those things covered.
Dr. Jim Dahle: It’s interesting because a lot of people think they have coverage from hurricanes and they don’t realize that their policy only covers wind damage. It doesn’t cover water damage. Even though it’s all one weather event, the insurance adjusters are out there trying to decide whether it was wind or water that caused the damage. And so if you’re in an area where you could see those storms in the Southeast, you’ve got to be careful exactly what you have covered. It may not be adequate. Those are my general rules for getting new auto and renter’s insurance. Do you have any specific questions about them?

Kyle: No. Just the process or if you had a specific process that you went through. The people that covered me in my previous state are not qualified in the state I moved to, so I’m not going to have to do the shopping. But I was just wondering if there’s an easier way to do it. But now it sounds like I’m going to have to-
Dr. Jim Dahle: No, you just got to shop it. I mean, you can get a broker. Just like if you’re buying health insurance on your own, you can go to a broker and then shop it around for you. That’s not a bad idea because the broker essentially functions as an independent insurance agent and they can go out there and find you the best policy. It generally doesn’t cost you any more to use a broker because the commission would just be kept by the company if it wasn’t paid to the broker. That’s probably what I would do if I was going to a new place and had to really shop it around is I’d find essentially an independent, automobile and homeowners insurance broker and have them shop it around for me, tell them what you want and find the best deal for you in that state.

Kyle: There we go. There’s the tip I wanted. My last question I think I have for you, I’ve taken up a bunch of your time and I appreciate you talking with me, was me and my wife where she’s OB-GYN and she only has a four year program. She’s got three more years and I have four more years. And what to do in the transition from fellowship to attending hood to possibly moving and all that on top of, I’ve heard several of you discuss about Roth conversions during that time too. So just how everything’s timed if there’s any certain principles that need to be followed during that time as well.

Dr. Jim Dahle: Sure. Well, I think there’s a few things to think about during that unique year that you’ve got. The first one is jobs. Chances are, unless you were going to stay in the same geographic area, then she’ll only have a job for a year presumably, unless you guys are going to separate for a year while she goes to a new geographic area and works. As she negotiates that position, it’s more about the short term than it is about the long term. Things like student loan repayment programs may matter more than the total dollar amount of a contract. Partnership doesn’t really matter to her. She’s looking for the highest paycheck. So the employer that she takes a job with for that year may be very different than it would be if it was more likely to be a long-term situation. I think that’s consideration number one.

Dr. Jim Dahle: Consideration number two is housing. At this point, you probably don’t want to get into a permanent house yet. Your job situation is not stable, not with one of you coming out of residency. So it’s probably a year to continue renting. Ideally, you guys just stay in the same place you’re in now. That would be living like a resident. You’re now earning as one attending and one resident and still living like a resident. That will allow you to pay a massive amount towards student loans, max out retirement plans, save up a down payment, save up a big emergency fund. You don’t have any, but for a lot of docs, pay off personal loans and credit card loans and those kinds of things and just really get on top of your finances that year. So it’s really a big financially focused year in that respect.

Dr. Jim Dahle: The only other real consideration aside from those two factors, I think is the opportunity to still use Roth accounts. That might be different for you guys if you were still going for public service loan forgiveness at that point. You may still want to be in tax deferred accounts in order to maximize the amount forgiven. But someone who was not going for public service loan forgiveness, this is a good year to use Roths because while yes, one of you is an attending, you are still not in your peak earnings years. So if you had any tax deferred accounts left over from residency or fellowship, that would be a good year to convert them. It’s even better the year that she leaves residency rather than the year that you leave residency. But both are lower than your peak earnings years.

Dr. Jim Dahle: But that’s a good time to do Roth conversions, do Roth IRA contributions, to do Roth 403b contributions, et cetera. It’s just a great year to be able to take advantage of your lower tax bracket to get a little bit more money into Roth accounts. Those are about the only considerations I can think of for that year. Is there anything else specifically you had a question about what to do that year?
Kyle: No, I think you summed it up. It’s going to be a hectic, cool time, but we’ll just take one step at a time.

Dr. Jim Dahle: Yeah. But it’s so wonderful. Because you’re finally at the light at the end of the tunnel and if you have got your financial ducks in a row coming out and then you start getting attending paychecks, it feels like you’ve got money coming out your ears. Yes, you’ve got all these great things to do with it and you still got lots of debt, but it’s like finally we’re there. We’re actually being paid for all this work we put in for a decade and we can actually start really making progress toward our financial goals. That’s really the most important year in your financial life, is that year that you leave residency. It’s really a wonderful time too. So maybe it makes you a little bit anxious, but I assure you is much better than getting resident paychecks.
Kyle: Money coming out your ears sounds like a good problem to have.
Dr. Jim Dahle: Yeah, it’s wonderful. I think we’ve addressed all the questions, unless you’ve come up with more while we’ve been talking?
Kyle: No, none specifically. You answered a ton of them. I appreciate everything.

Dr. Jim Dahle: Well, you’ve got an opportunity here. You’ve got 20 or 25,000 docs here that you can say anything you want to. Any messages you have for them?
Kyle: I just would repeat the same old stuff that you said, save a good chunk, live like a resident for the first five years and that’s my goal.
Dr. Jim Dahle: I’m sure you guys will be very successful given how much attention you’re paying to this. Keep in mind, at your stage of residency, I was completely financially illiterate. So you are way ahead of where I was and I’m sure you’ll be even more successful. I wish you both a lot of success both in your careers and in your finances, and I’m sure you will have a financially wonderful life given how much attention you’re paying to this stuff early on in your career.
Kyle: Thank you so much. I owe a lot of it to you.

Dr. Jim Dahle: Well, thanks for coming on the podcast, Kyle. I’m sure a lot of other residents will find your questions very useful and interesting.
Kyle: Oh, that’d be awesome.
Dr. Jim Dahle: Okay, that was great. It’s always fun to have a real live listener on, they are always worried that they might sound silly or that they’re not at a professional podcaster, but you know what, you guys seem to love those episodes. So if you are one of these folks that would like to come on and talk about your finances and your struggles and maybe your mistakes, let us know and we’ll see if we can get you on the podcast.

Dr. Jim Dahle: All right, so our sponsor for this podcast was DI4MDs. Your source for individual specialty specific disability insurance on both an underwritten and guaranteed approved basis. Their creative solutions can help you secure up to $250,000 per month in benefits if needed. In addition, they represent the most cost effective companies for both term life and the recently introduced life and long-term care insurance policies. But their underwriting relationships, you will be assured of qualifying for the most favorable risk class considering your health and avocations. Whether you are a resident fellow, practicing or military physician, you’ll benefit from their expertise, knowledge and experience to develop a personalized solution for your disability and life insurance needs. Reach them at info@di4mds.com, 888-934-4367 or www.di4mds.com.

Dr. Jim Dahle: Thanks for subscribing and leaving us a five star review. Doing those things actually helps spread the word and get financial literacy out to doctors and other high income professionals. So thanks to those of you who have left us five star reviews. We appreciate that. Head up, shoulders back. You’ve got this and we can help. We’ll see you next time on The White Coat Investor Podcast.
Disclaimer: My dad, your host, Dr. Dahle is a practicing emergency physician, blogger, author and podcaster. He is not licensed accountant, attorney or financial advisor. So this podcast is for your entertainment and information only and should not be considered official personalized financial advice.

The post Resident Physician Financial Mistakes – Podcast #128 appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: This guest post was submitted by Dr. Shirag Shemmassian, a medical school admissions expert and founder of Shemmassian Academic Consulting. I’ve been trying to compile some information on medical school scholarships (other than ours) for a long time and am pleased that Dr. Shemmassian has saved me the trouble! We have no financial relationship, but if you talk to him, you can tell him to buy an ad from me.]

If you’ve heard people lament how “Being a doctor isn’t what it used to be,” or “The golden age of medicine has passed,” you’re not alone.

Physicians and non-physicians express concerns about the future of the profession in part because of increasing medical school tuition and practice costs. There are countless articles on the rise of medical school debt—and college debt before that—as well as health insurance premiums.

At the same time, medical school enrollment is increasing. Clearly, financial concerns are not deterring students from pursuing a fulfilling, high-income career path.

Nevertheless, anecdotally speaking, interest in medical school scholarships and other ways to pay for medical school is also at a record high. Parents routinely ask how they can reduce their own financial burden, and also help their child pursue their desired medical specialty in their desired location—with fewer money concerns—when the time comes.

But how exactly can you find and obtain free money to pay for medical school? The three most common ways are:

1. Apply to medical schools that offer merit scholarships
2. Apply for federally funded scholarships
3. Search for private scholarships

We’ll cover each scholarship category and how to increase your odds of receiving them.

Medical School Merit Scholarships

In 2018, NYU School of Medicine made headlines when it announced its decision to go tuition-free moving forward. Applications to NYU shot up and many families became hopeful that other schools would follow it and the Cleveland Clinic Lerner College of Medicine. Time will tell.

Regardless, some medical schools offer merit-based aid to their most promising applicants in an effort to recruit them. While not an exhaustive list, they include:

• The University of Chicago Pritzker School of Medicine
• University of Cincinnati College of Medicine

  Dr. Shirag Shemmassian

• Duke University School of Medicine
• Emory School of Medicine
• Mayo Clinic School of Medicine
• University of Miami Miller School of Medicine
• University of Michigan Medical School
• Northwestern University Feinberg School of Medicine
• The Ohio State University School of Medicine
• University of Pennsylvania Perelman School of Medicine
• University of Pittsburgh School of Medicine
• Stanford University School of Medicine
• UCLA David Geffen School of Medicine
• Vanderbilt University School of Medicine
• University of Virginia School of Medicine
• Washington University School of Medicine in St. Louis

Of course, the majority of these schools have some of the highest average GPA and MCAT scores and are therefore incredibly hard to get into. Moreover, most of their students receive no merit aid. And while consideration for merit scholarships at these schools requires no additional materials, the same attributes that make you an attractive candidate for admissions will increase your likelihood of receiving these awards.

First, medical schools expect a high level of academic achievement. Merit scholarships are typically given to students who have at least a 3.7 GPA and 515 MCAT score.

Second, they want to award students who have demonstrated longstanding commitment and achievement through extracurricular activities. For instance, you can demonstrate an outstanding research record through publications and strong research recommendation letters, or a history of impactful healthcare entrepreneurship. The possibilities for developing an extracurricular specialty are limitless.

Medical schools also want to enroll students who exhibit qualities typically observed among excellent physicians, such as leadership, empathy, humility, and interpersonal warmth. If you present a compelling narrative about your background and fitness for medicine, along with how you intend to impact the medical and patient communities throughout your career, you’ll stand out to award committees.

Federally Funded Medical School Scholarships

There is a well-documented shortage of primary care physicians, especially in rural areas, as well as in the military. To address these gaps, the federal government offers full scholarships to medical students who commit to working in medically underserved areas or as active-duty physicians in the military.

If you’re confident about wanting to work in these settings, applying for related federal scholarships is a great way to substantially reduce your medical education costs. On the other hand, it’s important not to be short-sighted. While avoiding large tuition payments and debt is enticing, long-term commitments to working in settings that don’t excite you can lead to major regret.

On the military side, the Health Professions Scholarship Program (HPSP) provides a full scholarship for students who agree to eventually serve in the military as a physician, for at least three years. A year of active-duty service is required for each year you receive the scholarship.

If you’re interested in working in medically underserved areas, consider the National Health Service Corps Program (NHSCP). This full scholarship requires a minimum of two years of work as a primary care physician in areas with physician shortages. A year of such work is required for each year you receive the scholarship. The Indian Health Service also provides similar opportunities.

Finally, the NIH’s Medical Scientist Training Program (MSTP) is a great option if you love research and are interested in pursuing an MD-PhD. While you’ll likely have to be in school somewhere between 7-9 years—8 years is the average—an MSTP grant will pay for your entire medical education.

Private Medical School Scholarships

Competition is great, but not when it’s for limited scholarship opportunities.

Unfortunately, most students look for scholarships in the same places as everyone else. They’ll search their school’s website for in-house offerings, Google “medical school scholarships” and click a few links on the first page, and so on.

However, the more eyes there are on a certain scholarship opportunity, the greater the competition and lower the likelihood you’ll receive it.

The reverse is also true. The harder to find or more “niche” a scholarship is, the easier it is to obtain it. Moreover, scholarship application deadlines are spread throughout the year, so it’s wise to search regularly and organize opportunities in a spreadsheet.

It’s common to hear, “There’s so much free money out there. You just have to find it!” The problem is, no one tells you where or how to find it.

Online Scholarship Databases

Websites like Scholarships.com or Unigo list various medical school scholarships. But while they compile a wide array of opportunities, they’re where most people look, which means greater competition.

Similarly, scholarships that are incredibly easy to apply to, like those that require no essays, are much less likely to award you. Instead, these low-threshold opportunities are typical ways for companies to grow their mailing lists. In the private scholarship world, if it looks too good to be true, it probably is.

Financial Aid Offices

Manual Searches

The best opportunities are typically found when you manually search for private niche scholarships. Typically, niche scholarships have highly specific eligibility criteria that filter out most potential applicants. For instance, they might be reserved for women from a certain ethnic minority background, or individuals interested in oncology research.

I recommend you write down various aspects of your background, including ethnicity, place of residence, gender, community service history, research interests, disabilities, and so on. Then, perform online searches for as many combinations of these details as possible. For instance, you can search for, “Scholarships for Colombian medical students” or “Scholarships for medical students with disabilities.”

Make sure that you don’t limit your search to “medical” scholarships, but rather that you search for medical school, graduate school, and general higher education scholarships. You might come across particularly lucrative opportunities, like the Soros Fellowship for New Americans or the White Coat Investor Scholarship, whose 2019 grand prize winner took home over $42,000 in cash.

Once you identify a list of scholarships that you’re eligible for, you should apply to however many you can. Application requirements typically include some combination of recommendation letters, a CV, and an application essay.

Fortunately, many of the essay prompts will be similar and can be satisfied by your medical school personal statement or another essay you wrote when applying to med school. In other words, they shouldn’t be too difficult to apply to. Additionally, you can use the content of your medical school scholarship essays to write your ERAS personal statement. That said, you should never blindly recycle your work. Scholarship organizations have specific missions and are looking to award applicants who are aligned with their mission, through previous work and future aspirations.

Final Thoughts

Medical school scholarships offer a great way to reduce your financial burden during your years of education and beyond. While a few thousand dollars here and there might not seem like much if you’re facing six-figure debt, every dollar counts.

You’ll increasingly thank yourself once you graduate since your loan principal and interest payments will be lower. And that means a shorter path to financial freedom.

Did you receive a scholarship award for medical school? How did you find scholarships to apply for? Comment below!

The post Medical School Scholarships: How to Increase Your Odds appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: Today’s WCI Network post comes from The Physician Philosopher and is a great summary of the basics any attending should follow in order to get started on the right financial path.]

One of the most important financial moments in a young doctor’s life is the transition between finishing training and their first job. We have discussed what to do with the first attending physician paycheck, avoiding keeping up with Dr. Jones, and a simplified approach to investing. Today, let’s discuss 10 financial tips for new attending physicians that will set them on the right path.

For a full synopsis, I’ve also written The Physician Philosopher’s Guide to Personal Finance, a book that discusses the important financial steps along the way to becoming a doctor.

1. Make Intentional Goals!

In 2018, we had a visiting professor give a grand rounds. In it, he talked about the physiologic changes caused by climbing Mount Everest. They drew blood gasses at altitude, and he talked about how people trained for months to climb the highest mountains in the world.

Apparently, it is a tedious and difficult task learning to condition the body to accomplish such a challenging feat. During the ascent, people often feel lightheaded, uncomfortable, and nauseous. Oxygen deprivation can even cause delirium.

Yet, people push through, because they know that once they arrive at the precipice the view is going to be worth it. And they will have accomplished something that few others can claim.

Personal finance is analogous. The road to financial independence can be tedious and difficult.  Climbing the mountain of money is no easy feat.

If you don’t know the “why” behind your money decisions (i.e. the “precipice” you expect to see after your disciplined financial journey), it often becomes impossible to maintain the financial discipline it takes to achieve your goals.

This begs the question: What are your goals in life? This is a tough question for many to answer.

Fortunately, there are tools that exist to help you think through this process. To answer these tough questions, I suggest using the Three Kinder Questions.

You might find it strange that my first tip for new attending physicians involves discussing the big picture, but you’ll have to trust me when I say that if you don’t picture the Mount Everest of your financial life first, you won’t make it past base camp.

2. Moderate Lifestyle Inflation With The 10% Rule

Now that you have spent some time determining what is most important to you in life, you get to have a little bit of fun. But this fun needs to happen in a way that doesn’t hurt your financial future.

Before we get to the fun stuff… recognize that if you have a negative net worth (Assets – Debts = Net Worth), then you don’t need to make your financial situation worse.

You wouldn’t expect a panhandler on the street with a net worth of zero to buy a $1 million home. If your net worth is negative, you are less wealthy than the panhandler. So, you probably shouldn’t buy the $1 million home either.

All work and no play makes Jack a dull boy, though. So, I want you to look at the difference between your post-tax take-home pay at the end of training. Then, I want you to look at your anticipated first paycheck as an attending physician.

Next, I want you to use The 10% Rule.

In a nutshell, take 10% of that increase in take-home pay, and spend it on whatever your heart desires. In other words, if your take-home pay goes up $10,000 – then take $1,000 and spend it on whatever your heart desires each month.  This is your allowed lifestyle inflation after training.

I won’t put you in a box here. There are no rules other than that it cannot cost you more than 10% of the increase in take-home pay.

Then, take the other 90% of your money and use it to build wealth through the next 8 steps outlined in this post.

If you use the 10% rule for 2-3 years after you finish training, you will be amazed at the progress you can make. We used the 10% rule to enjoy some deserved lifestyle inflation while I paid down $200,000 in student loans in 19 months, and increased our net worth ~$500,000 in two years.

3. Build an Emergency Fund

What sort of major expenses am I talking about? Let’s look at a personal example. As I write this, our air conditioning is currently zapped from a power outage and subsequent electrical surge.

Outside of home repairs, other financial catastrophes include job loss, medical bills, emergency pet care, or car repairs. One of the most important reasons for an emergency fund is to bridge the gap between the time you might get disabled and when your long term disability insurance kicks in.

Having the peace of mind that an immediate emergency fund provides is crucial to financial success. Otherwise, you risk being tempted to sell retirement savings that should be considered untouchable.

Great, so you need 3 to 6 months’ worth of living expenses saved. Figuring out the exact sum you will need requires you to figure out how much money you spend.

This brings us to our next point…

4. Make a Backwards Budget

While it might be simple, personal finance is not easy.

It is human nature to spend the money that we see in our bank account. For this reason, we need to know exactly where our money is coming from, where it is going, and to create a purpose for each dollar.

This is called a budget. I absolutely hate budgeting.

An alternative to budgeting involves tracking spending using products like Mint. Tracking spending is better than budgeting, in my opinion. This is what we originally used to determine how much we needed for our emergency fund.

After we tracked spending for a year or so, we started using a backwards budget. This is what we have stuck with over the last year.

Backwards Budgeting Primer

Instead of creating a typical budget (which is a great tool, if you can stomach it) where you outline every single line expense item, backwards budgeting takes a big picture view.

Backwards budgeting involves deciding to put money towards the things that are most important first. Then, you get to live your current life with whatever money is left.

Some people call this “paying yourself first.” By this, they mean paying your future self first with automatic payments by investing for retirement, and your current self last with any remaining money. Hence, the backwards budget.

Here is what our backward budget looked like after we finished training:

• 10% Tithe to Our Church
• $5,500 to my student loans (plus 90% of bonuses per the 10% Rule)
• We maxed out my monthly 403B ($1,583.33 per month in 2019)
• Maxed out my wife’s monthly governmental 457 ($1,583.33 per month in 2019)
• Placed additional money into wife’s 401K
• Backdoor Roth IRA money

The remaining money is what we had left to live on.

Once our student loans were gone, our focus turned to our annual savings rate. To be financially independent by 45 (this is our goal, which doesn’t have to be yours), we realized we needed to be saving ~$115,000 annually.

This savings rate is actualized by planning our financial goals first so that we can achieve that life we designed in Step 1 above. Then, we get to spend whatever money is left.

[Note: We live a great life right now, too, and don’t feel like we are “sacrificing” to get to our future goals – we know more money won’t make us happier].

If you budget this way, you don’t have to worry about nickle and diming every single expense. If your financial goals are being achieved, then it doesn’t matter what you do with what is left.  Spend it lavishly on whatever you’d like!

5. Set up your Student Loan Repayment Plan (& Other Debt, too)

Speaking of backwards budgeting, a student loan repayment plan should be one of the first items in the backwards budget for the 80% of new attending physicians who have student loans. Another 21% of physicians need to include credit card or consumer debt in this discussion.

If you have high-interest consumer debt (>8% interest) pay that off first. I’d argue that you should plan to deal with this before making an emergency fund.

If you have $10,000 in credit card debt at 17.5% interest, you already have an emergency.

After you tackle any high-interest consumer debt, you should aim to attack those pesky student loans.

Hopefully, you’ve determined whether you are pursuing Public Service Loan Forgiveness or have privately refinanced your student loans. If not, stop now. Do not pass go. Do not collect $200. Go and figure out your student loan repayment plan.

When it comes to this goal (and all financial goals), I encourage you to make SMART financial goals. “SMART” is an acronym for Specific, Measurable, Achievable, Relevant, and Time-bound.

For example, my wife and I anticipated paying back $200,000 in student loans. So, we made a goal to refinance our student loans with a 7-year variable rate. We then followed our pay down progress through quarterly net worth calculations. Finally, we put a time stamp on it. Our loans were going to be paid off in 24 months. We made this goal from the very beginning.

Our SMART goal sounded like this, “We are going to pay off $200,000 in student loans by paying $5,500 monthly payments and using 90% of any bonus money in 24 months.”

Then, we exceeded our goals by paying off the loans 5 months early. However, this would not have happened had we not made SMART financial goals that had a purpose – to become debt-free.

6. Create your Investing Plan

You can read my post on practical investing to get you started.

Then, sit down and write out an investor policy statement. If you need an example of that, Dr. McFrugal can hook you up. He wrote a great post on Creating an Investor Policy Statement.

The point is that you need to have clear goals. Here are some examples:

• How much money are you trying to save each year?
• What kind of funds will you invest in? Actively managed or passively managed?
• What will your asset allocation be for your investments? In other words, what percentage stocks to bonds? Large-cap, mid-cap, small-cap? How much international exposure? Will real estate or other asset classes be involved?
• How often will you rebalance your funds if they stray from your intended asset allocation?

Either way, it is important to have a plan. If you are interested in making a full financial plan, you can consider using the Fire Your Financial Advisor Course by White Coat Investor. It is pricey ($499 as of this writing), but much cheaper than what a full financial plan would cost from a financial advisor.

7. Get Adequately Insured

Every new attending physician needs to realize a couple of things.

First, you are upside down in debt. So, you do not have a ton of assets to protect (which is why the next section on estate planning will be short). What you do likely have is a high-income earning potential. You need to protect that.

The second thing you must realize is that your income is not guaranteed.

Disability Insurance

If you don’t already have disability insurance (ideally purchased in residency/fellowship or within months after training), go ahead and take care of that.

However, make sure to buy disability insurance the right way. I was led astray when I tried to get mine, and now I am unable to get personal disability insurance to this day.

Don’t be me.

Term Life Insurance

If you have a spouse or children, you also need adequate term life insurance (Note: I did NOT say whole life, permanent, or cash value insurance).

I recommend using the following formula to figure out how much life insurance you need. Make sure your payout can help your loved ones cover all of the following (i.e. add all of the following together):

• Any debts you currently have (mortgage, car loans, etc)
• Potential college for children (estimate $150,000 – $200,000 per kid)
• Your annual income for the next 10 years (e.g. $250,000 income x 10 = $2.5 million)

For most physicians, this will result in life insurance coverage between $2 million and $5 million.

This is a ball-park number for the amount of life insurance you need. Subtract whatever you get from your workplace, and that is how much you should have for your personal term life insurance policy death benefit.

Other Insurance Products

Umbrella insurance is also a good idea for most physicians.

If someone comes onto your property and breaks their leg on something (e.g. like your trampoline), you want to be able to cover that in case it becomes necessary. Or what about some insurance that would help cover you if your teenage kid drives off the road and hits a pedestrian while they are texting and driving (despite you admonishing them not to do this)?

This is what umbrella insurance does. And it is dirt cheap.

I think my wife and I pay something like $50 per month for a $2 million umbrella insurance policy, though they do make you raise your minimum coverage on other policies to make it less likely to need the umbrella insurance.

Obviously, you also likely need home and auto insurance.

On most other things, I started self-insuring once I built up my emergency fund. I do not insure my phone, laptop, etc… when I know that I could cover the expense myself if something was damaged.

That said, do what helps you sleep at night.

8. Estate Planning

This part should be short. In essence, you likely don’t have a lot of assets to protect when you start as a new attending. So, getting an attorney to build a trust for you likely isn’t high on the list of priorities.

That said, if you are married and/or have children you need to make sure things are taken care of if the worst-case scenario happens. We talked about term life insurance above, but here are some additional items to keep in mind:

1. Get a will so that your spouse has less of a hassle and your kids don’t get stuck in probate if you both die at the same time (sorry to be morbid, but it is the topic at hand).
2. Names beneficiaries on all documents (investment vehicles like your 401K/403B/etc, life insurance policy, life insurance policy at work, etc)
3. Keep a document that has all of your passwords and locations of the document in a secure location.

9. Learn about Taxes

A friend of mine at work (who just came back after leaving his first private practice job) told me a crazy tax story. He had a colleague at his previous place of employment that not only inflated his lifestyle to the point where he was living paycheck to paycheck. He also didn’t know what quarterly estimated taxes were!

This mistake led my friend’s partner to owe $100,000 in taxes back to the IRS after his first year in practice. He is now on a payment plan to pay it back.

Moral of the story: spend some time figuring out the tax structure of the group you join.

If you earn an income as a partner in a group, side 1099 income, or some other non-W2 wages….then you likely owe quarterly estimated taxes.

At least there is a silver lining here, since you are finishing training now (instead of in 2017) you likely won’t have to pay the Alternative Minimum Tax anymore.

10. Say “No” to Steak Dinners

It won’t take long for you to get an email from someone in the financial industry. Or maybe you’ve already been tapped on the shoulder by a friend. They will invite you to free dinner, coffee, lunch, or something else. The meal will be provided by an insurance or financial company.

Of course, life has taught us all that very few things come free. This situation is no different. They are likely selling you conflicted financial advice.

These dinners are like playing poker. If you’ve been at the table for a while and cannot figure out who the sucker is, it’s probably you.

Realize that you are about to be pitched a whole life insurance policy or a chance to build a relationship with a fee-based financial advisor who plans to sell you one.

If you must go, eat the free steak. Just don’t take your advice from that dinner or buy any products. Otherwise, you’re likely the one buying the dinner for everyone there. You just don’t know it.

A Bonus Tip: Know Where to Find Help

If you have read The Physician Philosopher’s Guide to Personal Finance, frequent this site, and still need some financial advice, I have a suggestion for where to get it.

Find a Gold-Standard Financial Advisor, which I define as someone who is:

• a fiduciary
• fee-only
• paid under a flat-fee model
• experienced working with physicians

If you don’t know where to find this, check out my recommended financial advisor list on The Physician Philosopher. You might notice that the list isn’t very long. That’s because no one makes it on there if they don’t meet the strict criteria mentioned above.

Take-Home: Financial Tips for New Attending Physicians

This is one epic post, but it should help you set out on a pretty good journey if you follow the steps outlined above.

If you have other questions, feel free to reach out to me. Or read the book. It’s good, and perfect for medical students, residents, and new attending physicians.

What do you think of the list? Is it missing any financial tips for new attending physicians? Leave a comment below.

The post 10 Financial Tips for New Attending Physicians appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: Do you have a new perspective or expertise you’d like to share with the WCI community as a guest post? We want to hear from you! Submit your article by June 10 to be considered for Summer 2020 publication. See our guest post policy for more details.]

Residents are busy folks.  Their time is consumed with clinical work, clinical learning, and sleep.  What extra time they have should be spent with their loved ones and on other activities that keep them sane.  But at some point, there are a few financial chores that it would be foolish for a resident to ignore. This list originally had five items on it, but for our republication in 2020, I added a bonus item!

#1 Life Insurance

If someone depends on your income (AKA a spouse or children), you need life insurance, you need a lot of it, and you need it now.

Learn More

• How To Buy Life Insurance

#2 Disability Insurance

Not only is a resident uniquely exposed to the risk of disability since she has a low, or even negative, net worth, but she also has years of living ahead of her which will need to be paid for by either her career earnings or her disability insurance.

Remember that if she is disabled and has to declare bankruptcy, her student loans WON’T be discharged (erased) in the proceedings.  She has to die to have her student loans discharged.

She can also often get disability insurance cheaper as a resident, since she is probably young and healthy AND often in a separate class of physicians than attendings in her specialty.  (Some classes of doctors such as ophthalmologists or orthopedists actually have to pay more for disability insurance.  Residents are often put into the same category as family docs and internists.)

Although she cannot qualify for, nor afford, as much disability insurance as she needs, every little bit helps, and she can get a future purchase option rider that will allow her to upgrade as her income grows.

Learn More

• What You Need to Know About Disability Insurance
• How to Get Discounts on Disability Insurance
• Recommended Insurance Agents

#3 Roth IRA

Using a Roth IRA used to be a no-brainer for a resident who is probably in the 12-22% bracket and will likely spend the rest of her career in a bracket much higher. Beginning contributions in residency not only preserves that tax-advantaged space (if you don’t use it now that “space” is gone forever) but also gets the resident in the habit of saving.

If you cannot save anything as a resident, you probably won’t be able to do it later as an attending. Saving also keeps you from taking on new debt as a resident, including car loans, credit card loans, or even inappropriate mortgage loans. However, these days it is likely better for a resident going for PSLF or receiving a significant REPAYE subsidy to use a tax-deferred account in order to maximize those benefits.

Don’t flip out, you only need to take care of a few financial things as a resident.

Learn More

• Why I Love the Roth IRA
• Tax-Deferred Retirement Accounts: A Gift from the Government

#4 Financial Education 

Residency is a great time to begin your financial education. Knowing the difference between a 401a, a 529, and a LTC Rider will help you build wealth, reach your financial goals, and be able to focus your time and effort on family, wellness, and your patients.

Time is limited, but it only takes a few minutes to regularly read a financial blog like this one. Some find it easier to fit in listening to The White Coat Investor Podcast or to ask questions and join discussions on our Facebook, Forum, or Reddit groups. I recommend that everyone carve out some time to read one good financial book each year. Also, consider taking the Fire Your Financial Advisor! online course to get a financial plan in place. We’ve tried to make it as simple as possible to find something effective that works for you.

Learn More

• Fire Your Financial Advisor
• 2020 Continuing Financial Education Course
• Recommended Books

#5 Billing/Coding Education 

Most residency programs spend at least a little time teaching you the coding and billing specifics for your specialty.  Pay extra attention to these sessions, realizing it will pay huge dividends down the road for you. Coding and billing is just as important to your future career as learning how to manage the clinical issues.

Specifically, discuss these issues with the community doctors that you work with.  Your academic attendings are much more likely to be salaried and probably won’t be as well-versed in these details.

Also, consider taking the WCI partnered Medical Billing and Coding Course. It’s a high-yield way to increase your income by teaching you how to work smarter, not harder. [Use code WCI-THIRTY-OFF for an additional 30% discount until June 30].

Learn More

• Medical Billing and Coding Course
• 4 Tips to Increase Your Primary Care Physician Income

#6 A Student Loan Plan

Learn More

• Student Loan Refinancing and Consolidation Guide
• WCI Recommended Student Loan Advisors
• Ultimate Guide to Student Loan Debt Management for Doctors

Taking these steps as a resident will put you in good standing to begin your career on the right financial foot.

What do you think? What else should residents be concentrating on besides learning medicine? Comment below!

The post The Six Big Money Items You Should Do as a Resident appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[As we republish this 2015 post today, I was pleased to see it needed no updating at all, except to mention one of the best parts of our recent home renovation was to place a very sweet foosball table into the game room. Maybe my kids will have a chance in the med school lounge.]

My four years in medical school were some of the best years of my life. We were newlyweds and true DINKs (Dual Income, No Kids,) even if it wasn’t much of an income. I had my $920 a month military stipend and my wife was working as a ski instructor (comes with a personal and spousal season pass, far more fun than a personal and spousal IRA) or getting a teaching stipend while in grad school. We didn’t have much, but life was good.

Professionally, I was learning new things every day that I would be using for the rest of my life. Our class was just 100 people, and far more tightly knit than the tens of thousands at my undergraduate institution. Sure, there were disappointments upon getting my first gross anatomy exam results back (when I realized that everyone in medical school is as smart as I am,) but for the most part, the competitive part of my education was over and the collaborative part had begun.

Some of the best collaboration, of course, takes place in the student lounge. Many of the most important lessons of medical school I learned at the foosball table.

Lesson # 1 How To Take a Beating

We played a unique brand of foosball. We called it two-ball. It was played with four people, two per side, and with two balls at once. If the second ball went in your goal prior to you getting the first ball out of your goal and back into the game, that was a “Bjork,” named after our medical school dean, the fine Dr. Bjorkman. A Bjork was worth two points, rather than the standard one. The reason for two balls and Bjorks was that the game to 10 points went a lot faster so that many different people could play in the 10 minutes between classes.

However, it turned out that by the time my class sauntered into the lounge in September of our MS1 year, the MS2s were far more talented at this game than we were. Thus ensued a spectacular beating. A talented set of MS2s might run a dozen of us off the table in less than 10 minutes. It was probably three months before we ever beat the MS2s by the skin of our teeth, an event to be celebrated for sure.

David Bjorkman, MD- A med school dean so fine he had a foosball shot named after him

But there was a lesson there, that carried over throughout the rest of medical school, certainly residency, and throughout our careers — We didn’t know much and our skills were even worse.  That humility came in particularly handy during MS3 rotations and internship.

It is also an important skill in investing. When you realize how cloudy your crystal ball is, you’ve taken your first step toward a winning investing strategy.

Lesson # 2 Take Advantage Of Your Strengths

However, all good things come to an end, and those MS2s eventually moved on to their MS3 rotations, rarely to be spotted in the lounge again. It was our turn to rule the table. Sure enough, along came a fine set of brilliant, but inept, MS1s. All those skills we had honed against the class of 2002 could now be placed into deadly effect against the class of 2004. They hung their heads and walked away as we called, “Next!” and another pair stepped up to take their licks.

Life is a bit like that too. Financially speaking, we all have strengths.

• We might be married to another high earner.
• We might have a relatively low student loan burden.
• We might have a relatively high earning potential.
• We might be perfectly happy living in a low cost of living area or in a frugal manner.
• Perhaps we learned the importance of a few financial skills early and began saving for retirement in our thirties.
• Maybe our 401(k) plan is particularly good, such as the Federal TSP, or we get a big employer match.
• Perhaps we get a 403(b) AND a 457(b).
• Maybe we have a stomach of steel and sleep like babies during bear markets.
• Perhaps we have interest in some entrepreneurial pursuits or think landlording is a fun hobby.
• Maybe you have a frugal spouse, or you can live at home, or whatever.

You probably don’t have all of these strengths at your disposal, but the chances that you have none of them are very low. Take advantage of the ones you do have. Those “MS1s” won’t suck forever– beat the snot out of them while you can.

# 3 You Can’t Carry Someone From The Front

Eventually, we’d get sick of plastering the MS1s 10-0, 10-1, 10-1, 10-0, and 10-2, all in less than 10 minutes and we’d mix it up a bit by putting an MS1 and an MS2 on each team. That was when you quickly learned that you can’t carry someone from the front. As many football coaches have learned, defense wins championships. And if you want to win with an MS1 on your team (and play in the next game instead of watch it,) you’d better make him the “front-man.” In Foosball, the front-man is in charge of the three-man and the five-man rows, rather than the far more critical two-man and goalie. While you can score goals from the back, you can’t stop a good player from the front.

Sometimes in life, we end up paired with an MS1, financially speaking. Your partner may have zero interest in investing, or perhaps a massive student loan burden. Or perhaps a spending problem. While financially speaking you would obviously be better off with an “MS2” on your team, life isn’t all about finances.

If you are paired up with an “MS1,” don’t try to carry him from the front. Take the lead with the financial planning, budgeting, and investing. Eventually, he’ll figure out how to play, get that five-man up when you shoot, and you’ll find financial success together. He might even teach you a thing or two about how to bring happiness through reasonable spending!

# 4 Thoreau Was Wrong

Henry David Thoreau, in the ever-classic Walden, said this:

Age is no better, hardly so well, qualified for an instructor as youth, for it has not profited so much as it has lost. One may almost doubt if the wisest man has learned anything of absolute value by living. Practically, the old have no very important advice to give the young, their own experience has been so partial, and their lives have been such miserable failures [that] they are only less young than they were. I have lived some thirty years on this planet, and I have yet to hear the first syllable of valuable or even earnest advice from my seniors. They have told me nothing, and probably cannot tell me anything to the purpose. Here is life, an experiment to a great extent untried by me; but it does not avail me that they have tried it.

I could not disagree more. Aside from some diversion from studies, some of the most valuable time I spent in medical school was at the foosball table at the feet of my mentors. Yes, they taught me the delicacies of how to “push” and “pull” the ball prior to shooting and how to feed the ball so it always rolled to my best shooter, but more importantly, they passed down all kinds of practical wisdom, particularly when an MS3 or 4 would swing by the lounge for a few minutes.

• Which lectures to attend and which to skip
• Which books to use studying for the boards
• Which rotations to take, in which order, and how to do well on them
• Which attendings and residents to avoid, and which to go to for letters of recommendation
• How to interview and match into our chosen specialty
• Which were the top programs in our specialty and who in the school had connections to them

Our financial lives are no different. The more you can learn from the experience of others, the better.

I frequently run into someone with a fantastic idea about how to invest. The idea backtests well and seems intriguing. But then I find out the person is two years out of college, has a negative net worth, and has been following this fantastic strategy for only a few weeks. Maybe it will work out, maybe it won’t. But it seems far wiser to me to find a successful person who is 1, 10, or 30 years ahead of me and ask them how they did it. Then copy them.

If you want to be skinny, do what skinny people do. If you want to get rich (or comfortable, wealthy, financially independent, or whatever euphemism you prefer), do what rich people do. Sure, there are factors out of your control, but for the most part weight control like financial independence is the sum of thousands of tiny, seemingly meaningless decisions.

# 5 Pay It Forward

Eventually, we became the MS4s. Thanks to excellent preparation from our mentors we honored our rotations in our chosen specialty and matched at our #1 pick. We now had a little more time to swing by the lounge than we did as MS3s. Now was our chance to learn the joy of sharing some of what we knew with those who come behind. Maybe you showed up on this website as a figurative “MS1.”

• You read a few dozen posts and a few good books.
• You fired your commissioned salesman “advisor” and found some qualified help (or became the qualified help.)
• You dropped your investment-related expenses by thousands a year.
• You boosted your savings rate while increasing your happiness and optimized your financial situation.
• You got your insurance and estate planning nailed down.

Now is your chance to pay it forward. I can guarantee that someone you work with has too much of the wrong kind of insurance and too little of the right kind. Or is paying too much money for bad advice. Or thinks that he has to drive that $60,000 car even though he still owes $300K in student loans. Find a way to help him. You’ll both be better for it.

What do you think? Who has helped you financially and how have you passed it on? What valuable lessons were you given at your financial “foosball table?” Why is it so fun to pound the ball into the back of the goal while an MS1 has his head down next to it fishing your last shot out of the goal? Comment below!

The post 5 Financial Lessons I Learned Playing Foosball appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

There is a very strange phenomenon I’ve noticed amongst 4th-year medical students.  They have this seemingly overwhelming desire to buy a house.  I’m not sure if its the delayed gratification thing rearing its ugly head, or if it is some unwritten rule that once you own a house “you’ve made it.”  While everyone’s situation is different, and rules of thumb aren’t necessarily helpful, most residents probably shouldn’t buy a house.

I wish my crystal ball had been working properly back when I was a new resident renting in Arizona during the housing bubble. If I would have bought when I first arrived and sold just as I finished residency before the market burst, I could have made out very well.  Some of my classmates doubled their money in 3 years.  It didn’t work out so well, however, for the new interns buying houses when my classmates were selling and they obviously took a shellacking when the bubble burst.

10 Reasons Why New Interns Should Curb Their Housing Fever

# 1 You Don’t Have a Down Payment

There are five benefits to using a down payment.

Market Swing Protection

Using a down payment protects you from swings in housing prices.  It costs approximately 10% of the value of a house to sell a house (6% commission, 1-2% to fix it up and 2-3% due to the house sitting empty for a couple of months.)  If you put 20% down, the value of the house can drop 10% or so before you’re underwater.  Many people are stuck living in or renting out their homes because they literally cannot afford to sell it.  You don’t want to be in that situation.

Better Rates and More Options

The more money you put down, the more loan options and better interest rates you are offered.  There are, of course, many lenders who do “Doctors Loans,” requiring little to no down payment, but just because someone is willing to lend you money without a down payment and without verifiable income (aside from a contract) doesn’t mean that loan is actually a good deal for you.

Avoid Private Mortgage Insurance

A 20% down payment allows you to avoid private mortgage insurance (PMI) on conventional mortgages (PMI isn’t required on Physician Mortgages). PMI doesn’t even help you — it’s insurance your lender makes you buy to protect THEM.

Avoid Jumbo Loan Rates

You may be able to avoid a higher rate “jumbo” loan by putting more money down.

Smaller Mortgage Payment

The more you put down, the smaller the principal and thus the smaller the mortgage payments, improving your future cash flow.

# 2 You Don’t Have any Income

Traditionally, no one would loan you money until you had a steady job.  If you’re applying for a loan in April of your last year of med school, you’re unable to show any income.  If you were a lender, who would you offer a better deal to — someone with several months of steady income or someone who hasn’t made anything in years?

Again, this constrains your loan options, and the fewer options you have, typically, the more expensive your options will be.  “Doctors loans” are generally your only option, and depending on your state, you may only have a handful of lenders to choose from.

#3 You Have Tons of Debt Already

It is no longer uncommon for a graduating medical student to have $250K or more in relatively high-interest student loans.  Residents usually already require a special government program like IBR to help lower their payments during residency.  It really isn’t a great time to be adding on even more debt, not to mention it is harder to get a loan with tons of debt hanging over your head, narrowing your choices to just “Doctor Loans.”

#4 Residency is Only 3-5 Years Long

Even realtors, the most diehard advocates for purchasing a home early and often, admit that it’s hard to break even on a home unless you’re in it for at least 3 years.  The main reason for this is transaction costs.  Expect to spend 5% of the value of a home when you buy it, and another 10% when you sell it.  This includes closing costs, the cost of fixing it up, furnishing it, realtor commissions, and a couple of months of the house sitting empty while you’re selling it. In order to make up for that 15 % in transaction costs, you’ll need to pay down the loan and the house will need to appreciate.

On a typical 30 year mortgage (4% fixed) bought with 0% down, you’ll pay down 5.5% of the mortgage in 3 years (9.5% in 5 years.)  That means you need the home to appreciate about 3% a year during residency just to break even.  If it doesn’t appreciate, or worse, goes down, you’re going to lose money.

Even if everything works out, and you spend 5 years in the home and it appreciates 3% a year, you’re looking at a gain of only 9.5% of the value of the home.  That’s $14K on a $150K house and assumes that your monthly costs for principal, interest, taxes, insurance, and maintenance are equal to what the equivalent rent would be.  That’s hardly a huge sum of money worthy of all the risks and hassle you went through for 5 years.

#5 You Can Rent a House

I always hear about how people are sick of living in an apartment and delaying gratification for their entire 20s.  People don’t seem to realize that you can usually rent a house that is just as nice as the one you can buy.  Your choice isn’t between renting a tiny apartment and buying a big house.  Your choice is between renting the house you want to live in and buying the house you want to live in.

#6 New Home Buyers Underestimate the Costs of Ownership

Houses are expensive consumer items, not an investment. When the furnace or dishwasher breaks, you can’t just call the landlord to replace it.  Roofs, windows, flooring, carpet, and paint only last so long.  New buyers are also often surprised by the cost of property taxes and homeowners insurance, not to mention special hazard insurance like flood and earthquake insurance.

Don’t forget to add in the cost of furnishing the house also – drapes, rugs, and furniture.  It’s not a simple matter of comparing your rent payment to a mortgage payment.  Play around with the NYT Rent vs Buy calculator and you’ll quickly see what I mean.

#7 You Won’t Want to Live in That House as an Attending

I counsel graduating residents to try to live like a resident for a while to get themselves set up on a solid financial footing, but the truth is that almost everyone upgrades their lifestyle at least a little upon residency graduation.  That 1400 square foot bungalow that seemed like a mansion compared to the 500 square foot apartment you had as a med student isn’t going to seem adequate when those attending-size paychecks start rolling in.  For most graduating residents, staying in your residency house isn’t even an option since you’re starting a job (or a fellowship) in another city.

#8 Home Maintenance Costs Either Time or Money

When you rent, much of your home maintenance will be taken care of by the landlord.  Fixing broken appliances, repairing leaky roofs or windows, cutting the lawn,  or removing snow all costs either time or money, neither of which is abundant for a resident.  The less of this you have to worry about, the more time you can spend learning medicine and the more money you can use to stabilize your financial future.

#9 Residents Don’t Get a Tax Break for Owning a Home

When I originally wrote this post in 2013, I spent about $10K in mortgage interest and another $4K on property taxes, which saved me something like $5K on my taxes.  Residents likely can’t afford a big enough house that the mortgage interest and property taxes are more than the standard deduction [Especially, with the new higher standard deduction].  A resident likely only has a 22% marginal tax rate, decreasing the value of any deduction they would get.  Remember that part of the reason that people say you should own your home is for the tax benefits.  You don’t really get those as a resident.

10) Budgeting is Easier as a Renter

Living on a tight budget isn’t ever easy, but it is far easier to budget for a simple rent payment each month than it is to account for the myriad of variable expenses you’ll run into as a homeowner.  As an attending, you replace an appliance out of your monthly earnings.  As a resident, you’d have to clean out your emergency fund to do the same thing.  You can also project your housing costs upfront- exactly 36 months of rent for a 3-year residency as opposed to who knows how many repairs you’ll have to do and how many months it will take you to sell when you move on to your attending job.

Now don’t get me wrong.  Sometimes buying a house can work out just fine.  You might be in a situation where you can’t find anything acceptable to rent.  Buying will work out better for a longer residency than a shorter one, and if your spouse works, too, then you may even see some tax benefits from it.  It also seems like a decent time to buy, in general, when there are very low-interest rates.  But for these 10 reasons, the default option for a resident should be to rent, not buy.

What do you think? Do you think residents are better off buying or renting? What did you do? How did it work out? Comment below!

The post 10 Reasons Why Residents Shouldn’t Buy A House appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: We’re a little over two months away from announcing winners of the annual WCI Medical School Scholarship and we need judges and donations! If you want to be a judge, send an email to scholarship@whitecoatinvestor.com with the words Volunteer Judge in the subject line. Katie and I will match any dollar donated up to $50,000. The more you donate, the larger the prizes will be! Thanks for all you do to pay it forward.]

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Today I’d like to highlight thirteen of you in a post. I hope it not only gives those who have paid off their student loans a pat on the back, but also inspires those of you who have not yet done so to “Git er done!” Let’s get started!

Axelsons Pay Off $415K in Student Loan Debt!

First up is Daniel and Anna Axelson.

The Axelsons paid off $415K over 2.5 years after getting out of training. How did they do it?

My wife and I collectively had over $400,000 in medical school debt. For our first 2.5 years out of training, we paid our modest bills, retirement accounts, and then every spare penny (including bonuses!) went to debt reduction. We made a budget and stuck to it, and knew exactly how much we could afford to put to loans each month – thus it was easier to make sure we did so!

Congratulations Anna and Daniel!

Dr. Palastro Pays Off $230K! 

Next, we have Wendy Palastro.

Dr. Palastro paid off $230,000 in student loan debt over six years. Her tips?

• Frequently refinance to lower rates
• Pay extra to the loan regularly
• Track payoff progress and celebrate milestones
• Listen to podcasts and audio books about finances for ongoing inspiration

Congratulations Wendy! Well done.

Team Brown Pays Off $75K!

Next up is David Brown and Company.

$75K might not seem like much to today’s graduates, but these folks didn’t waste any time getting rid of it. They paid it off just one year out of training. If you can pay off $75K per year, your student loans won’t last very long either. How did they do it?

• Cheap medical school
• Frugal living
• Completing medical school and residency in relatively low cost-of-living areas

Keeping your debt down sure makes it easier to pay it off. Congratulations to the entire Brown family!

Dr. Sheth Pays Off $192K!

Our next contestant on #livelikearesident is Dr. Pooja Sheth.

Dr. Sheth paid off precisely $192,925 in student loans over just sixteen months. Here’s how she did it:

I made student debt payoff my first priority after completion of fellowship. My mother had done me a great favor during residency by taking out a home equity loan on her house and paying $117k of my student debt since she had a better interest rate than what I was paying. When I became an attending I felt even more motivated to pay her back quickly (including interest. The $193k includes paying her back). My husband and I are pretty low maintenance people so keeping a resident lifestyle after fellowship wasn’t too difficult for us, and so we have saved and continue to save aggressively with our one-income household.

The first step is facing the music. Pour yourself your beverage of choice, sit down with your partner, and add up all your debt on one sheet of paper. Yes, to the dollar. It worked for this couple and it can work for you. Congratulations to Pooja, her partner, and her mother!

Dr. Hussain Slaughters Debt!

Perhaps our most impressive example today comes from Syed Asad Hussain.

$200K is about the average debt for MD school graduates these days, and that is what Dr. Hussain had. What wasn’t so typical, however, was the fact that he (and his fine family) kicked the tar out of their debt in JUST SEVEN MONTHS! Very impressive. How did he do it?

• Moonlighting in residency
• Living like a resident
• Aggressive contract negotiation (negotiating higher income)
• Resident spouse (2nd income)

Maybe it’s easier to live like a resident when at least one of you is a resident, but it’s still no small feat. Congratulations Syed!

Dr. Taylor Pays Off $311K!

Let’s get back to some above-average loan burdens. Next up is Jonathan Taylor.

I tell people to get their loans paid off within 5 years of leaving training, and these folks made it. They paid off $311,000 in student loans in 4.5 years. Here’s the story:

We tried to make it a visual experience and set tangible goals. We filled a glass vase with 311 marbles, and moved over one marble to the empty vase with each 1k payed off. Also, we set a monthly amount above the minimum payment that we would send in each month. Some months we could not meet that amount, but we made sure to catch up the following month. The yearly bonus went directly towards the student loan. A key thing was to make sure we enjoyed life in the midst of the journey by traveling every few months and doing some low cost home improvement projects. Our goal from the beginning was to have the student loan paid off before we had kids, but we had about 90k left when we discovered we were pregnant. We buckled down for the last 8 months, and by God’s grace, we sent in the last payment 17 days before our daughter was born.

Congratulations to all three of you and nice work in the final sprint.

Dr. Ross Crushes $420K!

Next up, Matthew Ross.

I get emails all the time from people who owe $400K+. I tell them to do what Dr. Ross actually did:

• WCI
• Dave Ramsey
• Podcasts
• Creating a debt payoff chart
• Everything over 10k in my account immediately went to debt
• Don’t get accustomed to big income

The result? Debt-free in just 2 years and 8 months. Congratulations Dr. Ross!

Sazamas Sprint For Two Years!

Our next contestant is Dr. Alan Sazama.

The Sazamas owed $230K, but wiped it out in just two years while she was in school. How did they do it? The usual formula:

I set a goal of two years to pay off my loans and stuck to it. My group was short staffed so there were extra shifts to pick up. I bought a cheaper house in a low cost of living state with small mortgage payment. Drove an older used car. My wife and I still did some fun things and took a trip or two, but primarily lived like we did when we were living on her High school teacher salary while I was in training. We didn’t eat at fancy restaurants, we shopped bargain racks, and made a priority to putting extra money towards our loans. I did work quite a bit extra but this was easy for me coming out of residency. Having a goal made it easier. I had a target to shoot for. Thankfully, by sticking to it, my wife and I paid off our 230K of loans combined. (Wife is a PhD student). I submitted my last school loan payment on my 2 year anniversary of my start date as an attending, hitting my goal! Now, I’ve backed down my work hours and turned my attention to saving, and enjoying life a bit more without the burden of student loan debt! It can be hard to #livelikearesident but it’s so worth it!

Instead of telling yourself the ways your situation is different from those of all these folks, look at all the ways your situation is similar. Do what they did and enjoy the benefits. Congratulations Alan!

The Wrights Did Not Live Like a Resident

Next up is Taylor Wright. He and his wife paid off $240,000 in 3.5 years. They didn’t even have to live like a resident to do it.

My wife and I kept our ten year old paid for cars, I worked nights and weekends at a side job, we made our loan payments at the beginning of each month the day I was paid, we kept track of where we were compared to an amortization schedule, and kept to our residency budget plus a 50% raise so we felt like we had moved up a lot.

Congratulations Dr. Wright!

$350K Smacked Down By Dr. Rivello!

George Rivello is our next winner.

Dr. Rivello is a man of few words, but he did manage to pay off the precise sum of $350,786.43 in just three years. How? Three words:

Brown bag lunches.

I suspect there was a little more to it, but either way, well done. Congratulations George!

Lisa Paid It All Off!

Lisa is a bit anonymous today, but she still has an impressive story. She paid off a $350,000 student loan, a $215,000 house, and a $21,000 used SUV just six years out of residency.

I graduated in 2013 and got bad financial advice from an insurance salesperson. Started my own practice in 2016. Recognized the bad advice in 2017 when I discovered WCI. Started reading financial books (Simple Path to Wealth and WCI Financial Boot Camp.) Started tracking our budget and aggressively paying off debt for my husband and myself in 2017. Became debt free in 2019, started investing in a taxable account January 2020 – right at the peak! Also maxing out our retirement accounts as of 2019. I just wanted to say thank you to WCI for opening my eyes to bad advice and helping me find a better path to financial freedom.

Well done, Lisa!

Dr. Hargett Is Living Her Best Attending Life!

Damayea Hargett is the next contestant on #livelikearesident.

She paid off $260,000 in two years. Here are her tips:

Refinance loans. Pay off all high interest credit cards ASAP. Modest housing, don’t buy a new car, avoid shopping and splurging on material things. Use a CPA–the less you pay Uncle Sam, the more you can pay to your loans. Consider a financial advisor (that’s who set me on my path). Use a spending tracking app like Mint. Get and use a good rewards credit card and pay for EVERYTHING with it and have autopay setup monthly to avoid interest. Use those rewards to travel. Make a monthly budget- stick to it. Reward yourself for following through. Set a payoff timeline- mine was 5 years but then I got addicted. Instead of going shopping I’d get excited at the end of the month on how much extra I could pay off. Have an accountability partner who checks in on your progress and also reminds you of your goals, your why and points out when “your tryna ball out”.

After fellowship I splurged a little–had a nice rental, massages and salon visits monthly, took family on vacation and consistently ate out. I got a financial advisor who had me track ALL expenses for 3 months and pointed out how much I was spending on useless stuff with my “disposable income”. I immediately moved to a much cheaper & smaller place, cut out most luxuries (no blowouts, massages, dog grooming, subscriptions, cable, gym memberships). The exception was travel(paid for with credit card points) and the occasional eating out with friends ( which earned rewards with every meal/drink). I then dumped ALL of my disposable income at the end of each month into my loans. Once I was debt free I felt relieved and now am living my best attending life. I lived like a resident for six years already- so adding two more was not that hard and well worth it. Some would say invest instead of paying off loans but psychologically I needed to be free so paying it off was what I chose and I have no regrets.

Congratulations Dr. Hargett!

Dr. Boyle Gets Out From Under $470K

Our winner of the biggest debt paid off award today is Craig Boyle. With four kids of my own, I have a pretty good idea where that debt came from.

Dr. Boyle paid off $470K in just 5 years, 4 months. His tips:

Consistently higher payments, and every bit of extra money towards loans. That means signing bonuses, holiday bonuses, moonlighting, unexpected increases in pay. Honestly, every extra bit. Also, Don’t take out any other debt besides a mortgage. No cars, no credit cards, nothing else.

Congratulations Dr. Boyle!

The Common Denominator

Lots of lessons to learn here, but I think a common theme can be seen. All of these docs (and their families) made wiping out their debt a major priority in their lives. Whether they spent one year or six years paying it off, they prioritized becoming debt-free over a lot of other good things they could have done with their money. Congratulations to all of you!

If you would like to celebrate your debt pay off with us, leave your name, story, and picture at https://www.whitecoatinvestor.com/debtfree and let the entire WCI community share in and be inspired by your achievement.

What do you think? What do you think is the key to success in paying off student loans quickly? Comment below!

If you’re still sitting on loans that can be refinanced, what are you waiting for? Hurry up and get cashback and a lower rate by clicking on the links below!

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The post Student Loan Payoff Celebration #livelikearesident appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor’s Note: Today guest post was submitted by a physician named Billy. He and his dermatologist wife bought and sold a home during residency and have a few takeaways for residents considering homeownership. Long time readers know my general recommendation for residents is to rent because more often than not, buying for just the length of a 3-5 year residency does not allow for enough appreciation to overcome the substantial transaction costs (among other reasons). The problem with that advice is that residents still sometimes come out ahead financially by buying. It’s less than half the time, but it is still a significant percentage. So people see the anecdotes and forget the general rule. If you combine that with the strange burning desire new doctors (and especially their partners) have to buy a new home, I pretty much assume most residents are going to buy a home no matter what I say to them. Billy and I have no financial relationship.]

We broke an oft-cited WCI “rule” and bought a house right before my wife began residency. Here is why we did it, what we learned, and a word of caution to other medical students or residents who might be reading this.

We did not read much WCI material back in 2015 and 2016 as we approached Match Day, so I suppose we can play the ignorance card to some extent. Yet my wife and I always tended to be frugal. My parents were avid disciples of Dave Ramsey. She saved most of her money from summer jobs. We prioritized budgeting and retirement savings from early on in our marriage. We both graduated college and grad/med school without debt and we were heading to a low cost area. We resolved to buy an inexpensive house relative to our income with 20% down. PITI was 7-9% of our total monthly income. We would also maximize one 403b and two Roths, so buying did not set us back for our savings goals.

After we closed late this spring, I was reflecting on a few takeaways from buying and selling as a resident:

If You’re a Resident, Buying Most Likely isn’t for You

We as a culture often prize homeownership for its own sake. WCI has written extensively on this idea and makes several insightful points for med students to remember. For starters, student debt is a huge issue for many residents, and adding on a mortgage can quickly overwhelm someone. Home maintenance can eat up a resident’s limited, precious time. Additionally, houses in the “resident range” probably aren’t going to be a “forever home.” Many people move away after residency to a nicer area or otherwise outgrow that small condo or starter home.

As I noted above, I believe we were in a unique position with two earners, a low-cost area, and being debt free. Just because it worked for us in our unique circumstances does not mean this it is right for you! I’m sure WCI will agree with me for emphasizing this point first and foremost. In the vast majority of cases, the answer for housing during residency is to rent.

Beware of the Semi-Speculative Nature of Real Estate

Our neighborhood increased in value a lot while we lived there for four years. We bought at $160,000 and sold at $220,000. We made quite a few updates ourselves. But, more notably, older midcentury cottages would be torn down and half-million-dollar-plus custom luxury homes would go back up. Generally speaking, a house structure depreciates in value (repairs, upkeep, etc), while the land is what “appreciates.” Likewise, many assume appreciation is a given and fall into the trap of wild speculation. You’ve probably heard of the following arguments in one way or another:

This neighborhood is on the upswing, might as well get in now!

Why buy cheap, when the bank will loan you triple or quadruple that?

That’s even more money you’ll make down the road!

Note the highly emotional and speculative nature of these statements.

We truly got lucky in this regard. We simply bought where we liked. We were near a park, elementary school, and community pool. So, of course, we were pleasantly surprised that we had a good “return” on investment when we sold. Yet if we had bought in a neighborhood next to ours, we would not have seen such rapid appreciation. Real estate is a funny business. It is a mixture of consumption and investing. One obviously “consumes” a property while living in it. At the same time, real estate is an asset and can appreciate over time. Many areas generally grow in value, but that does not mean homeownership is a risk-free investment.

Maintaining and Updating a Property Will Cost You Money

I know this point sounds comically obvious, but it bears repeating again and again to prospective homeowners. Houses cost money to upkeep. Sure, we had homeowner’s insurance, but when we discovered our toilet was leaking, the repairs fell upon us to either do it ourselves or hire someone who could. As I mentioned before, we didn’t mind this kind of work. However, never forget that it will cost you in one way or another, whether money, time, or sanity! Even if you enjoy tinkering and watching HGTV, there are still many things you will likely need professional help with.

Here’s a list of a few random “emergency” expenses we had:

• $600 for a new water heater and install (our second week after moving in!)
• $750 in HVAC repair after the first cold snap of fall
• $2,250 for an electrician to fix and upgrade our breaker box
• $1,000 to repair subfloor damage in a bedroom
• $800 for materials (a DIY repair) to replace a leaky toilet, damaged subfloor, and new tile in a bathroom

Homeownership will cost you in one way or another, whether your own time or hiring someone else!

And there were thousands more spent on paint, wood floors, sod, and other cosmetic items. Some homeowners might think we got off lucky with so few “emergencies!” My point in sharing this is to show that this can cause a lot of stress and financial hardship for a one-income resident with a lot in student loans. Upkeep expenses can easily deplete any resident’s emergency fund.

Professionals Can Still Make Mistakes

Whether agents, inspectors, or a handyman, professionals are only human. Our home inspector did not catch the leaky toilet or faulty water heater. When we sold, I also noticed the buyer’s inspector did not do a very thorough job on the report. “Normal wear and tear” and “appears serviceable” don’t always mean everything is good to go. Take inspections with a grain of salt, and plan for something to go wrong.

Additionally, it is imperative to do your due diligence for hiring a real estate agent. We were happy with ours, but that did not always protect us from erratic or unprofessional behavior from buyers and their agents. Our buyer’s agent did a poor job of notifying our side on appointment times for the inspection, appraisal, and survey. After closing, the agent also called us directly to complain about how the curtains and a decorative mantle were not included in the sale. Our agent, my wife, and I were absolutely shocked they did this!

Selling Will Cost You Money

Selling a home will most likely cost you several thousand dollars. I do not think many first-time homebuyers truly understand this concept. Realtor fees, though seemingly “small” in low single percentages, can amount to quite a lot. Buyers often try to negotiate with sellers to cover their own costs. And top it off with the fact that a resident isn’t building too much equity during those first few years of payments since a lot is going to interest.

Our selling process was probably more stressful than most. We accepted an offer on our house on the day our state had its first COVID-19 case. I think the power dynamic during negotiations shifted as our state shut down. We had most of it at first, being in a hot neighborhood. Then the market cooled off and offers and showings become rarer. So, when it came to repairs, we were put in a position to make concessions.

One unexpected example for us was that our appraisal came back a couple thousand lower than contract price. We learned that this was a unique issue that rapidly appreciating neighborhoods sometimes experience, where previous comps have not “caught up” to the current state of the market. So in the end, we had to lower the price. I suppose we could have sought another buyer with additional cash to bring at closing, but as I noted before, COVID-19 complicated things, and we wanted the sale to go through.

I share all of this to emphasize that transaction costs can quickly eat away at your “profit” during selling, especially if you are a resident dealing with a short 3-6 year turnaround. If your property only appreciates 1% each year, then realtor fees, repairs, or appraisal issues can make those proceeds shrink. We still got out lucky, but it was a stressful process.

Conclusion

Home buying worked out well for us overall. If we were four years younger, however, we most likely would not have bought, simply because of current housing prices and our desire to put at least 20% down (we would have had to look outside our neighborhood). We felt it appropriate to share our own experience, because many times someone might be tempted to think their situation is unique (i.e. “I know I’ll stay in this city!”, “My family is nearby”, or “I might as well take advantage of low interest rates!”). With real estate, however, it is so important to think rationally and develop some kind of plan. Don’t buy simply because you think it will be the next step in life. Proceed with extreme caution, especially if you’re a med student beginning residency!

What do you think? Do you think the rule of thumb should still be “Don’t buy a house in residency”? Did you buy or rent in residency? Did you see enough appreciation to overcome transaction costs? Comment below!

Is it the right time for you to buy a house? Our Recommended Mortgage Lenders are ready to help! Specializing in Physician Mortgages, they offer the best loan packages to fit your unique lending needs.

The post A Story of Residency Homeownership appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

[Editor's Note: Today's guest post was submitted by Dr. Rikki Racela. I applaud Dr. Racela's energy and determination to figure out and correct his financial errors. It should give a lot of hope to those of you who are still digging yourself out from those stupid doctor mistakes. Enjoy!]

It was an hour before midnight and I was pumped!  I was about to go to Montreal to celebrate a bachelor party.  The flight was the next morning and, even if I wasn’t going to the Mecca of bachelor celebrations, just the anticipation of getting away was bliss. 

I was choosing the credit cards to use internationally when I realized that the minimum payment was due in one hour on one of my Chase cards.  My anticipation turned to panic as I frantically called Chase and paid over the phone in order to avoid the late payment penalty.  A few minutes before midnight the payment went through!  Whew . . . a wave of relief went through my body.

I could not stop, however, from reflecting later on the plane, at the Montreal dining clubs, and during other bachelor related debauchery activities, some profoundly deep financial musings:  How’d I get this credit card debt in the first place?  My wife and I are both doctors, after all.  How did it come to this?  I had a financial advisor for Pete’s sake!  Wasn’t I supposed to be insulated from situations like this?

The answer was I was stupid.  Well, not totally stupid, more financially stupid — FinStupid! 

How an Ivy League Doc Made the Most Mistakes Imaginable and Dug Himself Out – And You Can, Too!

Despite graduating from Princeton, I had a Forrest Gump financial IQ.  Yes, I had walked the same campus as economic pioneers Jack Bogle, Daniel Kahneman, and Burton Malkiel.  Yet I had balance-transferred $31K of consumer debt to a Chase credit card, and could only afford the minimum payment.  I went to Princeton, the number one college in the US (sorry, Harvard grads), and still fell prey to Wall Street.  What happened is that I chose to dedicate my time, energy, and intelligence to just medicine, never thinking that this 100% dedication to learning our craft would have devastating consequences.  I actually chose to be FinStupid, wrongly thinking that this complete medical immersion would make me the best doctor I could be.  That fateful choice led me to depend on a financial advisor salesman.  Forrest Gump was right; stupid is as stupid does, financially speaking.

Before finding WCI, I had a buddy of mine from high school be my financial advisor. He worked with the all too popular Northwestern Mutual. During residency, as mentioned above, I was too busy learning medicine to address my finances.  And who better to trust than a childhood friend?  With him, I didn’t see a salesman.  I saw the guy who pitched against me in Little League, who ran laps with me during football practice, who shared jokes with all the other dudes in high school.  I did not see, until later, the amount of money I was paying in fees and commissions.

I had great hopes that he and Northwestern Mutual would lead me to financial success and I could focus on neurology. For the first 7 years starting at the end of my residency and going through my early attendinghood this financial advisor led me into the dark side of Northwestern Mutual's underbelly of financial products and was basically taking advantage of my financial illiteracy.  While my back was turned focusing on being an empathetic neurologist, my advisor had sold me expensive products that were detrimental to my wealth.

That, combined with lifestyle creep and not living like a resident, I found myself in credit card debt, having money fights with my wife, and not being able to afford my tax bill (side note: I live in NJ; if you ever have the chance to live here, don’t!). I even rushed through patients in order to generate more income.  I am ashamed to have compromised the thing I value most — integrity in patient care — to pay off $28,000 a year of whole life insurance premiums. 

I remember a scathing e-mail I received from the sister of a patient with a posterior fossa neoplasm whose visit I had sped through. On the off chance they might be reading this, I am sorry.  My total dedication to being a superior neurologist and ignoring personal finance led me to be a worse doctor.  It was at this desperate moment that I found the White Coat Investor and made a total 180-degree turn. Now instead of being a FinStupid, I like to think I’m FinSmart.  I am no longer distracted paying off Northwestern Mutual whole life insurance premiums. Instead, I am now laser-focused on my patients.

I've made a ridiculous amount of mistakes. I have read and listened to numerous WCI podcasts and blogs and the number of mistakes you guys in the community have made pales in comparison to mine. Not so much in absolute dollar amounts (there was an orthopedist that bought whole life insurance and was more than $100K underwater, then got disabled and could no longer practice!), but rather in the number of products that my advisor had placed my money that were subject to increased prices, exorbitant fees, and illiquidity rules that prevented me from building wealth. 

For anyone else that has fallen prey to these products and gotten out, congrats, we did it!  For those of you feeling that sense of crushing burden of financial regret and shame, the point of this post is don't despair!  WCI will lead you out, just like it led me out, and just like it led others of us out — many without the need of having to put trust in another financial advisor.  If I can get out of all the inappropriate products that were sold to me, then any doc can right their financial ship.  Also at the end, I will also mention a separate issue of recovering from credit card identity theft committed by . . . wait for it . . . mom!

The Damage

The following is the expensive, fee laden products my wife and I had with Northwestern Mutual (I had to unwind these things twice!):

1. whole life insurance policies paid up at 65
2. convertible, non-level term to 80 life insurance
3. advisor led traditional IRA’s rolled over from old attending job 401k’s
4. variable annuities within IRAs
5. an advisor led Virginia 529 plan

How I Dug Out Of My Whole Life Insurance Policy

First, I did not formally fire my financial advisor.  Not only do I hate conflict, but also I knew I needed his help untangling this massive mess.  I tackled the whole life insurance first. 

Dr. Rikki Racela getting dirty at the Reebok Spartan Race.

Through the immense resources here on WCI I learned the best choice for us was to 1035 exchange the whole life policies into low-cost variable annuities in order to preserve the cost basis.  I asked for in-force illustrations from my advisor for both whole life policies.  I then asked to have the premium payments immediately be put on hold (btw each policy cost $14K per year — that decision immediately freed up $28K per year of cash flow!).  I also asked when the dividend on the cash value would actually be paid.  Northwestern Mutual pays a dividend, and I did not want to formally exchange the policies until that dividend was paid.  Because the cash values were $67,000 and $54,000 and the cost bases were $92,000 and $79,000 respectively, it made sense to do the exchange to make up the cost basis tax-free in a low-cost variable annuity. 

The most cost-friendly options mentioned on WCI forums were Jefferson National (now Nationwide), Vanguard, and Fidelity.  Given my cash values, Fidelity had the lowest cost at 25 basis points, so I went with them.  At the time I was doing this in 2019, Nationwide would have been cheaper if my cash value exceeded $96,000.  I contacted Fidelity that I wanted to do a 1035 exchange, and they guided me through the process.  It was helpful to have the in-force illustrations while doing this.  A helpful step by step guide was written by TJ on June 4, 2015, at 1:15 pm MST on the WCI post How to Dump Your Whole Life Policy.  TJ, if you are out there, man, thank you!

Term Life Insurance

I next tackled the term life insurance.  As recommended by WCI, I went to term4sale.com and picked the insurance company that gave me the cheapest rate, which happened to be Lincoln.  I knew also that we needed new disability insurance because Northwestern Mutual's definition is not true own occupation.  I used the links here on WCI and found the best price with an independent agent, who also provided me with the term life insurance policies.  Turns out for the same amount of disability benefit with a better definition of disability the new policies were actually cheaper, even being 7 years older!

Only then, with new term and disability insurance in place, did we cancel the Northwestern Mutual policies.

IRAs

The next thing to tackle was the IRAs that kept us from contributing via the backdoor Roth IRA.  I had a traditional IRA that was rolled over from a previous attending job, which was easy to transfer to a solo 401k I had set up at Fidelity. I didn't need to talk to my advisor about making this change.  However, I did need my advisor to help unwind the variable annuity within the IRA that was set up after residency.  Now you might be asking, “why would you have a tax-advantaged product within a tax-advantaged account?” Fees, my friend, fees. I found out later that annuities are layer, upon layer, upon layer of fees.  My advisor didn’t tell us that part. He sold them to us as “a pension during retirement.”  In order to get rid of the IRA, I first had to ask my advisor to liquidate the variable annuity.  After this was done, I did a rollover to my solo 401k and my wife had her retirement plan at work pull the money into her 401k.  I never bothered looking into surrender charges, etc . . . I am angry enough as it is.

529 Plan

Finally, for the 529 plan, I contacted Virginia where the plan was held. I explained that I wanted to convert from the advisor-led plan, which had 130 basis points of fees, into the self-directed one, which used Vanguard funds at an average cost of 13 basis points – 10x cheaper!

Extra Bonus — Ripped Off by Mom

This final financial disaster was actually not Northwestern Mutual-related but rather being ripped off by my own mother!  My wife and I were mortgage shopping and went to Chase Bank as our first stop.  You would not believe my surprise when the loan officer said that I would not be approved given there were multiple credit cards with maxed out balances on my credit report.  I looked over a copy of my credit report and saw 5 credit cards with multiple balances on them that I had no idea existed, totaling up to $31,000.  One of those credit cards was listed as me being a joint account holder with my mother, which pointed the finger to the culprit. 

Needless to say, I was very angry at my mother and tried to work my way out of this mess.  You wouldn’t believe it, but I went to my local police station to at least formally document the crime.  Don’t worry, I didn’t throw my mom in jail — and, FYI, the local police actually have no jurisdiction in regards to arresting non-local cybercrimes.  Anyway, I filed disputes with the 3 credit bureaus with the formal police documentation and was successful in getting these cards off my Transunion and Equifax reports.  Unfortunately, Experian would not remove these cards.  I ended up having to pay the unpaid balances in order to clean my credit report with Experian.

Summary

After all this, I would have to disagree with Warren Buffet’s “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”  A doctor can do a bunch of things wrong and still come out financially ahead. My wife and I are now maxing out our retirement plans at work, doing Backdoor Roth IRAs every year, saving 20% of our income, have true own-occupation disability insurance, laddered level term life insurance policies, an appropriate emergency fund, and credit card debt that has a 0% APR while the money used to fully pay it off sits in a high yield savings account. It was only through the resources of WCI as well as the tenacity and perseverance that defines us as doctors that we could defy the wisdom of Warren Buffett.  If I can crawl out of the above plethora of financial traps, then you can too!

What financial mistakes have you made? Were you sold whole life insurance inappropriately? How did you correct your mistakes? Comment below!

Tonight at midnight MST is the last chance to get a signed copy of Financial Boot Camp when you purchase Dr. Cory Fawcett's new training course, Automating your Real Estate Investments. Try it RISK-FREE today!

The post From FinStupid to FinSmart appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

I woke up early one morning a few months ago worried about a financial situation. It wasn't my financial situation. It was yours. At least many of yours. And the more I thought about it, the more angry I became. By the time I drug my butt out of bed, I was furious. Truly. I'm mad at everyone in this situation. And I'm angry that nobody else is as pissed off about it as I am. So instead of eating breakfast, I'm sitting here ranting into the internet to try to get over it.

I had a colleague walk up to me at the hospital the other day. He said, “Hey, I'm reading your book. I didn't even realize that was you”. This has happened to me many times, and it is kind of fun to be “internet famous”. When you write a financial blog and book and share intimate details of your financial life with the world, others get very comfortable sharing theirs with you. Here are the basics of his story:

• 1-2 years out of residency in a lower-paying specialty with a stay-at-home wife and some kids
• Did an MPH, delaying his career by a couple of years
• Borrowed the full cost of attendance each year and most living costs
• Despite attending a relatively cheap school, finished residency owing $400K, 1/3 at 7.9% and 2/3 at 6.8%
• Working 25 days (12-24 hour shifts) a month including many nights/call
• Has a “local physician transitioning into finance” who has already given him a whole life insurance application he's filling out, calling it a “Life Insurance Retirement Plan (LIRP)”

Do you understand now why I'm so mad?

Get Mad at Debt

I'm mad at the doctor and his partner for not learning about finance earlier in life and for borrowing more than they knew they should have. I'm mad at his medical school attendings for not teaching him basic personal finance. I'm mad at his residency attendings for not teaching him basic personal finance. I'm mad at his medical school for jacking up the price of tuition. I'm mad at the government for funding stupid decisions. I'm mad at this other doctor who is an insurance agent masquerading as a financial advisor committing the equivalent of financial malpractice. And mostly, I'm mad at a system that is going to burn this doctor out before he ever gets back to broke. And I'm mad that this doctor, and probably many of you in the same situation, aren't nearly mad enough at the situation you're in. That fury will drive you to learn what you need to know about finance. It will give you the discipline you need to be successful.

It reminds me of Aragorn's conversation with Frodo about the ring of power in the Inn of the Prancing Pony:

Are you frightened?

Aragorn: You draw far too much attention to yourself.

Frodo: What do you want?

Aragorn: A little more caution from you. That is no trinket you carry.

Frodo: I carry nothing.

Aragorn: Indeed. I can avoid being seen if I wish, but to disappear entirely, that is a rare gift.

Frodo: Who are you?

Aragorn: Are you frightened?

Frodo: Yes.

Aragorn: Not nearly frightened enough. I know what hunts you.

 

I Know What Hunts You

Like Aragorn, I know what hunts you. It might not be a black rider, but it is equally dark. It is waking up five or 10 years out of residency, sick of working 70 or 80 hours a week, and realizing you can't cut back a bit without a dramatic change in your financial life, and you don't even like the financial life you have now. You still owe hundreds of thousands in student loans, own little of your house (and perhaps are even underwater), pay too much in taxes, and have built little wealth. Maybe your spouse wants to leave you because you're always fighting about money and he or she never sees you and you realize that this is what the next 30 years of your life are going to look like.

This doc I ran into in the hospital is a great doc! There are lots of great docs out there. They're getting chewed up and spit out. Is it partially their own fault? Sure. Is it partially a systems problem? Absolutely. But part of it is your problem and my problem. We've got to get this message out to our peers sooner. And we certainly can't be contributing to the issue by selling them crappy insurance they don't need while they owe hundreds of thousands of dollars at 7-8%!

A Race Against Burnout

Many doctors think they have decades to pay off their student loans. They look at the burden and it looks like a mortgage. In fact, these days it may be even larger than the mortgage. But there is a huge difference. You can sell the darn house at any time and pay off the mortgage. You've taken a mortgage out on your brain and you better hope you can pay it off before someone forecloses on it. You don't have three decades. You've got five years. 10 at the most. Trust me. By then you will want to have that debt out of your life. You will want to cut back a bit from that crazy pace you agreed to after residency because it seemed so much easier than the 80+ hours you had been working. By then that $200-300K you're being paid won't seem like nearly that much money. And this career that you desired so much as a 20-year-old may feel like golden handcuffs 20 years later. You want to practice on your own terms, but you can't. Because of that stupid debt that felt like monopoly money back in med school.

How Fast Can You Pay Debt Off?

The first question I asked my colleague was “How fast can you pay the debt off?” He thought he could do it in three years, but I'm not convinced he has actually run the numbers. You know why? Because the figure he threw out later in the conversation ($5K a month) won't pay that debt off in three years. How do I know that? Because I've actually done the math. Think about it. $400K at 7% = $28K a year in interest. $5K a month or $60K a year would only put $32K a year toward that debt. At $5K a month, he'll still owe $300K in 3 years. You can do it more formally with a simple spreadsheet or financial calculator. The function you want to use is the “Period” function, often abbreviated NPER. It looks like this:

=NPER(Rate, PMT, PV, FV,Type)

• Rate is your interest rate—divide it by 12 to get the approximate monthly rate
• PMT (Payment) is how much you pay each month, always a negative number
• PV (Present Value) is how much you owe (a positive number in a debt situation)
• FV (Future Value) is how much you'll owe at the end, i.e. zero
• Type is whether you make the payment at the end of the month (0) or at the beginning (1)

Let's plug his numbers in:

=NPER(7%/12,-5000,400000,0,0) = 108 months, or 9 years.

Now, 9 years isn't the end of the world. Sometimes people run their numbers and it's 20 or 30. But it certainly isn't five years, much less three. The depressing part is, if he had let the military pay for medical school, he would now only be 2.5 years away from having his debt paid off, and I can assure you they wouldn't have him working any more than he's working now. Can he keep up the pace he's at now for 9 more years? Can he do it without being grouchy? Can he do it while still giving competent, compassionate patient care? I hope so, but I know there are a large percentage of docs that cannot.

My general advice is to come up with a written plan to get your student loans paid off within 2-5 years of residency graduation. If you can save for retirement and a down payment at the same time, that's great (and will help you lower your taxes and housing expenses), but being done with the student loans within 5 years takes priority. Not only does this allow you to get out of debt before it starts feeling like you're stuck, but it also allows you to get the very best terms on a student loan refinance, which is usually a 5-year variable rate. Let's say this doc makes a commitment to get his loans paid off quickly and so feels comfortable taking that 5-year variable. Maybe he gets it for 3%. How much would he have to pay to be done in three more years? (Remember he's already a couple of years out of residency.) How much to be done in five more years? Let's run the numbers. This time we'll use a related function called “PMT” which solves for the monthly payment.

3-Year Scenario

Here's what the function looks like in a spreadsheet:

=PMT(Rate,NPER,PV,FV,Type)

Putting his numbers in:

=PMT(3%/12,36,400000,0,0) = $11,632

Is that a lot? It sure is. That's 50% of your gross income for a doc making $280K. If you're paying half your gross income, and a quarter of it is going to taxes, you're left to live on the other quarter (about $70K, just a little more than you made as a resident). And that's not even counting any sort of retirement investing, college investing, or heaven forbid whole life insurance premiums. In essence, you've already spent three years' worth of physician paychecks (i.e. 3 years of your life) and now you have to pay for it by essentially doing residency twice. The real sacrifice of becoming a physician isn't doing residency. It's doing residency twice!

5-Year Scenario

I don't actually know how much this particular doc gets paid. I hope it's at least $280K, but it might not be. Let's say the 3-year scenario is just impossible without selling the house and having his family leave him. So he opts for a 5-year scenario. What do those payments look like?

=PMT(3%/12,60,400000,0,0) = $7,187 a month.

That's more than he's planning to pay now, but not that much more. Especially if he can save the $18K/year insurance premium from the policy he's being peddled as a LIRP. $5,000 + $1,500 only leaves him about $700 a month to cut from their lifestyle. That's very doable with a few minor lifestyle changes. Eat out one less time each month. Go on one less vacation a year. Wait a couple more years to upgrade the minivan and you're there.

Get Out of Debt

It's time for you to get out of debt. Whether you're just finishing residency now or whether you're at that 5-10 year point and starting to feel a little crispy. Run your numbers. Refinance your loans. Quit worrying about the investing vs loan paydown question and get it done. The cavalry isn't coming. You're on your own. There will be no white rider at first light on the fifth day. You don't get a pass on math just because you dedicated your life to healing the sick and injured. Get as mad as I am about your debt! Take control and seize the financial life you want and you deserve.

What do you think? How long should you take as a doctor to get out of debt after residency? How was your motivation to work long hours 5-10 years after residency compared to when you took out your student loans? Comment below!

[Editor's Note: Attention first-year US MD/DO/Dental students! Thursday, April 15 is the deadline to apply to be a White Coat Investor “Champion” for your medical or dental school class. Champions will pass out FREE copies of The White Coat Investor's Guide for Students to classmates and get sweet WCI swag. Check here to see if your school is still available.

Today's guest post was submitted by Morgan Sweere, a former guest post contributor and an MS3 at the University of Arkansas for Medical Sciences pursuing a career in emergency medicine. Sometimes it is hard for me to remember what it was like to be a poor medical student and recall what a huge blessing an extra $100 a month was back then. While the apps discussed below aren't going to dramatically speed your way to financial independence, they may make your life in the “early years” just a little easier. We have no financial relationship with Morgan or any of the apps or businesses that she recommends.] 

Before my first day of medical school, I knew that each day would be tough. My mom told me “when your back is against the wall, you will have no choice but to figure it out”. I have found out that this piece of valuable advice is true for medical school but also for finances, and for life. I thought my professors would teach me all that I would need to know for exams. I did not realize I would have to spend hours studying on my own because, while my professors have done a terrific job, no question or piece of information is off-limits in medical exams. I have learned that no topic or piece of information is too tough for me to learn when I apply countless hours of studying.

Using Money Earning Apps to Help with Medical School Expenses 

Though class and studying takes up much of your time, you also hear of “what’s to come”. As a medical student with no outside financial help except scholarships won on my own, these extra activities and their associated costs put almost as much stress on a person as the exams. Well maybe not quite, but you get the picture; it is still a lot. As a person with my financial back “against the wall”, I knew I had to figure it out early so the stress would not eat away at me for years. This includes not only what you learn in medical school but how to pay for the activities you have to do in medical school.

Late in January, the AAMC released their recommendations for the 2021-2022 academic year, which include that away rotations will resume in August. While this could still change, it is imperative for current first, second, and third-year students to begin preparing for the fourth year of medical school. Fourth-year is likely the most expensive year of school because there are extensive “hidden costs” apart from the other years, including those that are associated with away rotations and interviewing. If a student is not particularly financially educated on these costs and is unprepared, the expenses, which can be tens of thousands of dollars, can be quite shocking.

Away rotations are one of the most important parts of the residency application for competitive specialties, such as emergency medicine. Other articles have spent time trying to conquer this topic and decrease money spent on traveling and staying in other locations during this time, so I will not waste time sharing the more mainstream tips. What I will do here is look at some of the more unconventional ways I have tried to reduce these costs.

Best Money Making Apps

Morgan Sweere

Throughout medical school, I have tried to earn money through various avenues, such as working as a phlebotomy tech at a local ER on the weekends, tutoring, proctoring for the ACT exam, and other odd-end jobs which have contributed to my ability to pay for these expenses. My father is the youngest of nine, so I have numerous relatives as well as friends who will allow me to stay with them if one of my rotations is close to where they live. However, there are some other small, easy apps I’ve found which students can use to help accumulate some money over time. I have used these for years and have relatives who also use them and send their rewards to me. I have saved the rewards from these apps for the last three years for my away rotation costs and for my interviews. Thus I have accumulated quite a bit over time, as seen in parentheses below, without it straining anyone’s budget.

1. Shopkick: Shopkick is an app that will give you money simply by ENTERING the store! You don’t even have to buy anything. You can get “kicks” by walking into the store, scanning certain products, and making purchases. You can save your points to add up to get gift cards that could be useful for rotations, such as for Uber, or even for PayPal credits. I earn about $10 to $15 monthly on this app. (approximately $500)
2. Fetch Rewards: Fetch is a receipt scanning app that can be used to earn points towards gift cards on hotels, flights, and Airbnb. I earn $10 to $20 monthly on this app. (approximately $500)
3. Ibotta: Ibotta gives rebates on grocery items. Through this app, I was able to earn about $15/month. Over time, these rebates could be used to pay for travel expenses—without purchasing anything extra! These rebates can be redeemed for gift cards or through Paypal. (approximately $500)
4. Receipt Pal: Receipt pal is another receipt scanning app that can be used to earn Visa gift cards on all receipts. You can even scan receipts from friends, family members, and the dropped ones you find in the parking lot. I earn about $5 per month and redeem it via Paypal. (approximately $150)
5. Coin Out: This is another receipt scanning app that gives you cash. It is usually pennies per receipt but, as I use the receipts on numerous apps, every little bit adds up. It also has a survey badge and other badges where you can earn more. I only average $2 to $3 monthly but every little bit counts. (approximately $80)
6. Rakuten: This app pays me for shopping. If I go to shopping sites on the app, it pays me a percentage based upon the site of my purchases. As I am a broke medical student, I do not make much but purchasing essentials like ink and dog food earns me roughly $30 every three months and is sent as a check to me. (approximately $350)

Many of the receipts I use can be input into multiple apps, capitalizing on the rewards earned through them. These are seemingly small amounts of money, but through such small actions, I have been able to save over $2000 towards paying for travel associated with away rotations and interviews.

It is each student’s sense of responsibility and hard work that gets them through the coursework and exams in medical school. I took the same sense of responsibility and hard work to the finances involved in medical school. I have learned how to manage my money to help me through the required activities, and to enable me to do my best in medical school while taking out the least amount of loans I can.

How have you creatively generated funds during medical school? Comment below!

The post How to Earn Thousands with Money Making Apps appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.