Quick Post: Whitecoat Investor Scholarship and paying it forward.

I am on vacation this month but wanted to check in to post a quick note to any professional student interested in competing for a scholarship. The white coat investor, a great resource, for all of us in the medical field has decided to pay it forward with a scholarship competition. Please click below for the details.

http://whitecoatinvestor.com/the-white-coat-investor-scholarship/

For all others that are professionals, consider donating to this great cause. Hopefully, it will inspire a lot more discussion about the need to learn about financial well being.

A penny saved is a penny, a penny earned is not…

If you really want to get rich you need to get your spending under control instead of working hard for the money. Why? Because a penny saved is a much less.

th-1When transitioning from residency to independent practice you will be struck by how much free time you have. You may be tempted to pick up extra shifts to make some fast cash, and there will definitely be plenty of locums headhunters trying to convince you to do so.

So why should you elect to save money over just picking up a shift:

The real value of picking up that extra shift:

Picking up that extra shift for additional money can be a good, thing, but it does not compare to the benefit of money saved by cutting expenses. Why, because you will pay a greater proportion of your earned income to taxes.

For instance, if you are making single filer making 190K base each additional moonlighting shift you pick up is going to be taxed at a federal income rate of 33%. That mean’s 1/3 of your work is going to uncle sam, this is not including any local taxes you may have to pay. In addition, upping your income may also push you into the AMT range and exclude you from various tax deductions, which means you’ll end up paying even more in taxes.

The value of reigning in your “expenses”

In contrast, cutting cost such as not buying Starbucks every day or not eating out every day can save you a couple hundred to thousand dollars, and also save you the empty calories.

Break free of those golden handcuffs

thThe other costs of picking up that shift is that those Golden Handcuffs can get tighter. Many locum tenems companies really push you to just pick upthat extra shift when you want to by a new fancy toy. It seems like an easy enough answer to your money problems, but lifestyle inflation starts to trickle in when you do that and the next thing you know you are picking up shifts instead of spending time with friends and family. Why not practice a little delayed gratification and save money from your next couple paychecks to pay for your new toy, you may decide that you don’t really need/want it.

Focus on experience over material goods

Since I have stopped moonlighting to make extra cash, I have found my self buying less material goods and spending more time on the things I enjoy (spending time with family and friends, teaching, reading, and spending time outside). Then when I do want to splurge on an experience I have plenty of money and time to go on long family vacations.

Paying off debt vs. Investing

The decision between paying off debt vs. investing to accumulate wealth is largely personal. Some people hate having any debt and may be inclined to pay off all debt before contributing to an investment account where as others are confident that their return on investment will make up for the interest on their debt.

Below are factors I take into account when I decide whether to send my army of little workers (money) off to kill debt or to make more of their own.

1. At what level of interest do I choose to invest over paying down debt?

Generally speaking I am an index fund believer so I estimate my average return to be equal to that of the stock market (~9% average historic return), since I max out my tax sheltered accounts already, I base my current decision to invest on the additional taxes that I could get hit with in a regular investment account.

Generally speaking, if the debt is less than 6% I prefer to invest in place of paying down the debt.

2. What is the interest rate for my debts?

Next, I look at what the interest rates are on my individual debts.

a. Credit Cards have the highest debt so I always pay them off the full balance every month.

b. My mortgages ( I have two, a condo from residency that is finally no longer underwater and my current home). I bought on a variable arm for my condo, the rate is low now, but I am weary of the rates going up, I waiver on whether or not to pay it off. My current home has a 3.75% rate so I am less inclined to pay it off at this time.

c. Student Loans, I am lucky because I have paid down most of my student loan debt (and also paid for a large amount of school with scholarships). My only student loan debt is a low 1.75%, talk about lucky timing. So I have elected to hold off on additional payments. The downside to having this debt is that I cannot right it off because of income phaseouts. If my rate was higher, I would be working on killing this debt. For now I will let it sit.

3. Debt reduction as a means of diversification

Given the interest rates on my current debt I am more likely to get a better return on the market than the guaranteed tax free return of paying off debt and avoiding interest. Therefore, I have elected to focus most of my contributions to the market.

However, I also think of debt reduction as a means of diversification because I essentially have a guaranteed return and a home can act as a hedge against the market. It is probably a better guaranteed rate compared to buying a bond fund in my taxable accounts. Markets can always crash, whereas paying off debt is equivalent to a guaranteed return. Therefore, I continue to make the occasional additional payment to both my house and condo.

So what would you do? Comment below.

What can mustachianism do for you?

This is a great video summary of mustachianism.

This is how I see it fitting into medicine.

1. To be rich, by that I mean financially free of debt and able to practice medicine for the joy of it, not just as another job. Mustachianism will help you get your spending under control and help you focus your little workers ($) on reaching financial freedom.

2. To be happy, we have worked so hard and sacrificed our youth and sometimes even relationships for our profession. It is important for us to learn how to balance medicine and the rest of the life. Mustachianism helps you evaluate what makes you happy, most often, it is not material possessions.

3. To make the world a better place. Part of this is cutting down waste so we can really focus our energy on making a longer lasting impact on society and in our relationships with others. Mustachianism helps you focus on the altruistic reasons you went into medicine.

What do you think?

Finding the right disability insurance policy

disability-insurance

As a physician, your finances are often tied to your ability to show up everyday and work (unless you are independently wealthy/have large stream of passive income). When you are young and healthy, getting disability insurance is often the furthest thing from your mind, but it should be your first step in asset protection (ensuring your ability to provide for yourself and your loved ones).

When I was in training, I eventually realized that I needed to purchase disability insurance, but I had no idea when to or which insurance company to use. Thinking that my clinical gurus (attendings) were also financial gurus, I blindly went with one of their advisors. Needless to say, several years later and thousands of dollars later I ended up having to shop for a policy that would adequately protect me and my family if I were to become disabled.

To make things simple for those of you searching for policies, I am going to layout some key points to consider when looking for a disability policy that will protect you as a physician.

When to buy: Disability insurance should be bought early, ideally sometime while you are in training. This is generally when you ar most healthy and when you can get the best rates. This is especially important for women because rates go up dramatically when you get out of training because of actuarial concerns about increased risk for disability from such conditions as motherhood/childbirth. It’s not fair, but it’s how the insurance world works…

Own Occupation: Generally speaking you want own occupation specific policy. It should clearly lay out when you are considered disabled (i.e. some state that if you can do any work as a physician you are not disabled, that includes working a desk job for an insurance company) so make sure you clearly have it spelled out. If you have any concerns make sure to get it clarified in writing. For additional reading, here is a great post of disability insurance by the whitecoat investor.

Non-cancelable Policy Rider: This rider keeps insurance companies from canceling your policy as long as you continue to pay your premium.

Future Purchase Option Benefit Rider: If you are suspecting a jump in your salary. i.e. transitioning from residency/fellowship into an attending. Many policies will layout how much more of an option you can purchase as a benefit. If you are at your suspected max salary or can easily live on your current level of pay (most budding mustachians) you can probably save money by not paying for this rider.

Cost of Living Adjustment Cola Rider: This benefit provides for an increase in your disability to keep up with inflation. The range of increase can very, I have generally seen 3% and 4% riders. An important thing to know is that the cost of living adjustments vary greatly between companies, they do not necessarily increase every year so check with each insurance company to find out how their policies work. If you are a bit of a mustachian/close to your FI number you may not need a COLA rider since you are probably living well below your income.

Waiting period: This is the amount of time you have to be disabled before your policy kicks in. The standard seems to be 90 days, you can extend it to 180 days. This will reduce the cost for the policy, but you should consider a number of factors. Do you have additional disability or short term medical leave from your work that will cover you for injury. You may want to adjust your policy to kick in for when those short term benefits run out. The other option would be to extend your policy waiting period out to correlate with how many months your emergency savings will cover you. (I generally keep 6 months of expenses in a liquid account. So in this case, I may want to consider changing my waiting period to 180 days OR I could move more of my savings into a taxable account.)

Growing the half-stache

As physicians we are remarkable fortunate. We make a relatively good annual income despite the enormous debt we take on. We also start later in life. However, we are fortunate because we have a remarkable stable job, we are in demand and for the most part we can write our own ticket especially if we are willing to move.

One of our biggest financial problems is overcoming our’s and society’s perception that we are rich and that we have to portray that lifestyle.

If you believe that, you deserve an old mustachian face punch!

If you are interested in gaining your freedom after years of training/indentured servitude you must gain financial freedom, your loans and your expenses are your new master. So what do you need to do to get out from underneath this new yoke?

1. Control your spending- I am not saying you need to continue to live like a resident, but at least slowly grow into your income. You will be shocked by how much more money will be in your attending paycheck than your resident paycheck, even those of us in academia! Evaluate what purchases really give you satisfaction and spend money there instead of just buying indiscriminately.

2. Pay down your debt- First, payoff any credit card debt you have since it is typically the highest interest.  If you are like many of us, you graduated with student loan debt consider paying it off since it is not tax deductible given your new high earnings. The only exception to this may be if you have a great interest rate on your loan, the remaining balance on my federal student loans that I consolidated is 1.75% so I am taking my time paying that down. Next, consider paying down your mortgage if you have one, you can think of paying off that mortgage interest as a guaranteed earning. i.e. saving 4% interest is equal to earning 4% interest (probably more so, since you may be taxed on that 4% earning).

3. Fully contribute to your retirement accounts- Pay yourself first. Pay the max into your retirement fund. With a traditional 401k or 403b this money goes in pre-tax so you save money on taxes. Your employer also may match contributions so don’t leave free money at the table. Even after paying yourself first, you will still have much more money than you ever did as resident to spend.

4. Consider opening an HSA- If your dependents and you are generally in good health or you have a great employer plan consider getting a High Deductible Health Plan. This will allow you to put money in pre taxes (once again saving you taxes now), it grows tax free (more saved taxes since you don’t pay on the interest), and then you can spend it tax free if it is for a qualified health expense.

5. Invest in yourself and in your family- Don’t be tempted by the money. A career in medicine is a marathon so don’t sprint after the fast money. Take time to do the things you enjoy, reconnect with family and friends, and grow as a person.

Well, I hope this helps. For more reading on being a financially independent badass, I recommend reading Mr. Money Mustache, all of his posts may not apply to you, but there are definitely points you can glean from most of them.

It’s time to get your learning on!

Like many of you that went into medicine, I had no clue about financial literacy. Through the pre-med years, I was taking science and liberal arts classes and spending the rest of my time socializing or nerding out doing research.

Then I went to medical school, where the most financial education I received was that I should try to limit the loans I take out, but if I could not make things meet, here are a list of private institutions that will loan you money. You’ll be able to pay them back when you make the big bucks… I saw my friends and I sink deeper into debt.

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Looking back, there were a few enlightened medical students that really pushed to enhance our education about financial well being. Unfortunately, like many other idealistic students, I felt that talking about money and medicine was a taboo subject to focus my energy on other extracurricular activities.

I then went through residency and fellowship, where I learned how to become a good doctor and learned how to critically evaluate medical literature to care for patients. It wasn’t until I left academy while my wife was in fellowship that I took the time to enhance my financial literacy.

Once I undertook this task, I realized that it really was not that difficult. Just like other physicians, I had always been told that I should just outsource it to an “expert” because they were trained to do this, and all that financial jargon just intimidated me. What do I do with an HSA? how much money should I put into retirement and why? What should I invest in? It just seemed so mind boggling, but now I had a reason to learn. I had all this free time since I was not mentoring residents and I was newly married and now had to think about the future.

I did the following:

1. Just like we had to take the time to learn and acclimate to medical jargon, we need to put in the effort to familiarizing ourselves with financial jargon. I used the whitecoatinvestor.com and bogleheads.org to get my financial education on.

2. I started to commit myself to reading one financial book at a time such as The Boglehead guide to retirement.

3. I found an financial advisor I could trust, this person helped me get rid of bad “investments”like a whole life policy and a disability policy that was not profession specific that I was sold from my previous “financial advisor.” He then helped me open an IRA or investment account.

4. I started learning how to invest, with the additional funds I had saved in my “emergency” account.

These steps got me started on a road to financial freedom because going out there and applying what I was learning made the financial world much less scary and just like in medicine, by doing, I was learning and ingraining these practices into my brain.

The need for mustachianism in medicine

I decided to write this blog to help other physicians reach financial freedom. Your path may not be the same as mine, but I think all of us that practice medicine owe it to ourselves and our patients to reach financial freedom through financial literacy.

The prescription for freedom is fairly simple:

Use your earned income (paycheck) to pay down debt (loans), use selective spending to buy what really provides value to you, and invest the rest and make that money work for you.

it is my hope that this blog will offer meaningful advice on ways to free fellow physicians from the shackles of debt.

Stay tuned! In coming posts, I will talk about my journey to financial freedom.