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[Editor’s Note: The following is a re-published post from the newest addition to the WCI Network, The Physician Philosopher. This article is all about a question I answer frequently — what should your savings rate be to reach retirement goals? Enjoy!]

The other day I gave a talk to my residents on Investing 101.  Before I could talk about investing, we had to discuss some personal finance basics, including budgeting and preventing large lifestyle inflation after finishing training. One of the most important questions that we covered was answering the question, “how much should I be saving“?

Today’s post is bent towards answering this question. However, the slant on my site isn’t towards just numbers.  I want to specifically focus on how much of your income you should be using to build wealth when you are feeling stressed out by your personal finances.

In that situation, what’s the cause?  And how much should you be saving? The Big Picture

Let’s keep this simple.  Money can dramatically impact most relationships.

The first time I witnessed this was when a couple – two of my best friend’s parents – had starkly different views on finances. The husband could not have been more frugal, and the wife enjoyed spending the money that they made without a second thought.

They were doing well financially by most standards, but they still experienced an enormous amount of financial stress because they had different views on expectations and reality as it related to finances.

We all know the feeling – when finances put a strain on our relationships with those that we love.  The question is whether this feeling of stress is caused by overspending or by being so frugal that we aren’t just trimming the fat, but have now sunk the knife deep to the marrow.

The 30% Rule can help us figure out what’s causing our issue.

WAR and the 30% Rule

I don’t talk about war much on this blog, but today it’ll be necessary as I introduce you to a different kind of WAR – your Wealth Accumulation Rate (WAR).

In simple terms, your WAR is the % of your AGI spent towards building wealth.

The amount of money you are putting towards building wealth involves both the amount of money you are using to aggressively accumulate assets (savings rate towards investments) and destroying debt.

To calculate your WAR: Add your percentage savings rate (hopefully at least 20%) and the amount of money you are putting towards debt (hopefully at least 10%).

Wealth Accumulation Rate (WAR) =
% AGI paying down debt** + % AGI savings rate

For example, if you were saving 20% of your gross income towards retirement and 20% of your income was going towards paying off student loans, this would result in a 40% WAR. A Case Study 

For example, for someone making $250,000 gross per year, a 30% WAR would amount to $75,000 each year going towards paying off debt or investing.  For the physician on the traditional path, this kind of WAR will typically result in financial independence before the age of 60.

Here is an example of what that might look like for a married couple:

  • Maxing out your 403B/401K at 19,000 (any matching money goes towards your WAR, but it also increases your gross salary!)
  • $19,000 into your spouses 401K
  • backdoor Roth annual contribution of $6,000 (per spouse, if married) = $12,000
  • Paying $25,000 in student loan debt each year

Of course, the higher the student loan debt burden that exists, the more likely it is that a person will need to shift their WAR percentage towards paying off debt.

Hopefully, this person is also applying The 10% Rule towards their bonuses and promotions to help increase their WAR, which will allow them get to their goals even faster!

**Edit: Debt being paid off when calculating your WAR should be “Good debt” such as a mortgage or student loan debt.  It has been pointed out that it should probably not include your consumer debt like that Tesla you are financing.  Increasing your WAR in this way prevents wealth accumulation. 

How Much Should I Be Saving?  The 30% Rule

Obviously, the higher your WAR the better – as long as your life is tolerating it.  A high WAR is how people achieve FIRE.

However, aggressively building wealth to the extent that it negatively impacts your wellness may not be worth it. A WAR that is too high can negatively impact your life and relationships.  On the other hand, if your WAR isn’t high enough, your wellness will also be impacted as you limit your future choices and fail to obtain financial independence.

How much you should be saving can be directly answered after you calculate your WAR.  And, if the thought of saving stresses you out, then you need to figure out if you have a spending problem or a frugality problem.

After you determine whether your WAR is above or below 30%, you put yourself into one of two camps.

Less than the 30% Wealth Accumulation Rate

You are putting less than 30% of your adjusted gross income waging WAR and yet you are still feeling financial stress.

This means you likely need to build something I like to call financial resilience.

Life can be full of tough decisions, but if you are suffering from financial stress (not related to other happenings in your life) and you are at a less than 30% WAR, as a physician, you likely need to find your frugal gene and express it.

Speaking of genes, are your other jeans all designer brands? Are you paying two brand new car payments? Did you buy the big house (or are you contemplating it)? Do you live in a high cost of living area?

Maybe, its time to make lifestyle changes if you are feeling financial stress with a WAR of less than 30%.

More than the 30% Wealth Accumulation Rate

If, however, you are feeling the tight constraints of your budget and you are saving over 30% of your AGI, you may need to question the extent of your frugality. Is it cutting too deeply?

For example, my friends’ parents mentioned in the introduction:

Their WAR was likely much >30%, but this was clearly negatively impacting their marriage. It simply isn’t worth it to pinch pennies with a high-income if it negatively impacts your marriage. Becoming Financially Independent and Retiring Early (FIRE) is important, but it should not be an all-consuming goal that prevents you from living a life well lived.

Who cares how big your bank account is if you aren’t enjoying life?

Take Home

Calculating your WAR and using The 30% Rule should serve as a guideline for discussion and thought. You can either adjust your spending or adjust your WAR to improve your wealth and live the intentional life of your dreams.

I think a 30% WAR is a pretty reasonable goal, but I need to show some grace and recognize that not everyone’s situation is the same.

Regardless, this is one of the tools I use to consider how I am doing in my mission to obtain both wealth and wellness.

Am I investing enough? I don’t know…

What is your WAR? Does it impact your lifestyle negatively? Are you feeling financial stress with a WAR more than or less than 30%? What do you think?

Subscribe to The Physician Philosopher Blog

The post How Much Should I Be Saving? The 30% Rule appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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[Editor’s Note: The following is one of my regular columns published at Forbes and is about a frequent topic on this site — how to lower your investment-related costs for maximum returns.]

Limiting your investment-related fees and expenses is a critical aspect of investing. In my work at The White Coat Investor helping doctors, attorneys and similar high-income professionals develop financial literacy,  I have repeatedly seen that most investors are paying far too much in investing expenses. Reducing these is one of the most reliable ways to boost your return without taking on any additional risk. Unlike many things in life, with investing, you get (to keep) what you don’t pay for.

Reducing investment costs could potentially allow you to retire years earlier with far more money. Consider two investors, one of whom is paying 2% of the portfolio each year in investment related expenses and 1% of the portfolio in taxes (3% total) to an investor paying 0.1% in expenses and 0.4% in taxes (0.5% total). If we assume they both invest $50,000 per year for 30 years and earn 8% before fees, how much less will the investor with the high expenses retire with? A quick calculation shows that she will end up with 37% less ($5.6 million vs $3.5 million.) As the investor moves into her retirement years, those high expenses continue to limit the amount she can spend from the portfolio and make it far more likely that she will run out of money.

It is critical that an investor examine each of these five categories of expenses and minimize them wherever possible.

5 Investment Related Expenses to Minimize # 1 Advisory/Management Fees

Perhaps the largest category of expenses are those paid for financial advice and investment management services. Many in the industry consider 1% to be a standard level of fees. However, on a multi-million dollar portfolio, 1% can add up to $20,000, $50,000 or more each year for the exact same work the investor used to pay $5,000 for. When paying an advisor an Asset Under Management (AUM) fee, it is critical to do the math each year by multiplying the portfolio size by the fee.

Since there are many high-quality advisors willing to provide these services for $1,000 to $10,000 per year, it seems silly to pay $50,000. A better arrangement (for the investor at least) is to pay either a flat annual fee for investment management and/or an hourly rate for financial planning. Although your fees will still likely add up to a four-figure amount each year, at least they will not be a five figure amount.

Recognizing the importance of costs, some interested investors have decided to educate themselves about investing. With time, the necessary knowledge and discipline are relatively easy to obtain, but the potential do-it-yourself investor should be cautioned that they would be much better off paying a fair price for good advice than doing it poorly themselves. Of course, there are hybrid solutions that can reduce fees dramatically. These include enlisting the aid of a financial planner with the initial development and implementation of a plan and then maintaining it yourself. One could also meet with an hourly rate advisor periodically for a second opinion and a sounding board on any changes to their plan. # 2 Mutual Fund Expense Ratios

Another significant fee for most investors are the expenses associated with running the mutual funds they invest in. Yet again the industry seems to believe that 1% is the industry standard. However, using low-cost index funds from providers such as Vanguard, Fidelity, iShares, and Charles Schwab you can relatively easily reduce that cost to less than 0.1% per year. Every dollar saved is a dollar that remains in your portfolio working for you.

Some beginning investors might wonder if paying cut-rate prices gives them cut-rate returns. However, time and time again its demonstrated that over the long run low-cost index funds outperform the vast majority of their actively managed peers. In fact, having low costs is one of the best predictors of future returns of mutual funds. It certainly works better than looking at past returns, the method most investors use. It isn’t that the managers are stupid. On the contrary, the issue is that they are all so smart that they make the market efficient enough that the game of trying to beat it is no longer worth playing. They can add value, but not enough to overcome the cost of playing, especially once taxes are taken into consideration.

# 3 Commissions

I want my money going to unforgettable experiences — not commissions, fees, and taxes.

Investing-related commissions are an interesting expense to consider. These can be completely eliminated by a do-it-yourself mutual fund investor who buys funds directly from the fund provider. However, many investors are paying huge amounts in commissions. This is often a result of mistaking a commissioned salesman for a fiduciary, fee-only financial advisor. While they think they are being given unbiased investment advice, they are actually being sold high-expense mutual funds and insurance products such as annuities and whole life insurance by a broker operating under the suitability standard rather than the fiduciary standard. At times these salesmen may obscure the fact that they are charging commissions by calling them “loads” or even telling the investor that the insurance company is paying that cost, not you. Of course, all expenses are ultimately paid by the investor.

Even a do-it-yourself investor may be running up the commission bill. A commission may be charged each time an individual stock or ETF is bought or sold, even inside a qualified retirement plan like a 401(k). Even at a rock-bottom price of five dollars per transaction, if you’re doing 20 transactions a month it adds up to $1,200 per year. While you don’t necessarily want the expense tail to wag the investment dog, every little bit helps keep costs down and returns up.

# 4 Turnover-Related Costs

Wise mutual fund investors always look at the turnover percentage when selecting a fund. Embedded in that percentage are some hidden expenses paid by the fund but may not be included in the expense ratio. Costs include commissions paid by the fund and bid-ask spreads that allow the market-maker to cover her own expenses and profits. A broadly-diversified index fund may have a percentage less than 10% (meaning less than 10% of the stocks in the fund are bought or sold each year) while an actively managed mutual fund may see a turnover percentage of 200% or more. A long-term, buy-and-hold investing philosophy on the part of the fund and the investor helps keep these costs down. A speculating day-trader is continually whittling down the nest egg with each transaction.

# 5 Taxes

Taxes are another major expense borne by the investor. Although this expense helps pay for government rather than the financial services industry, it lowers the investor’s return all the same. There are many techniques for lowering these costs, and a good advisor or do-it-yourself investor should be familiar with most of them. Investing in tax-advantaged accounts such as 401(k)s, Roth IRAs, Health Savings Accounts, and 529 College Savings Accounts makes a big difference. So does limiting turnover by lowering capital gains taxes due, particularly short term capital gains taxes. More advanced techniques include tax loss harvesting, tax gain harvesting, using appreciated shares for charitable donations, use of municipal bonds when bonds are held in a non-qualified account and appropriate tax location of asset classes.

Lowering your investment-related expenses are a sure-fire way to boost your returns, hasten your retirement and allow for a more comfortable retirement without taking on additional risk. Do all you can to reduce your advisory fees, mutual fund expenses, commissions, turnover-related costs, and taxes.

What have you done to lower your investment-related costs?  Comment below!

The post Boost Your Investing Returns By Lowering Your Investment Costs appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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Podcast#106 Show Notes: Financial Advice for Those Starting a Family

A listener asks me for financial advice as they start a family. Children are expensive. Does that mean you shouldn’t have children? The decision really comes down mostly to a lifestyle decision. What do you want out of your life? Do you want to raise a family? Do you want to have children? If you do, this is going to work out. My readers and listeners are in the top 1-3% of incomes in this country. If you can’t raise a kid, who can afford to raise a kid?! If you want kids, go ahead and do it. Don’t let the financial consequences dissuade you. But don’t kid yourself that there aren’t financial consequences. When you add more people to your family, you’re going to have some additional expenses. You look at some of these surveys and they estimated that it costs a quarter million dollars raising a child to age 18. There are ways to economize, cut back, and do it cheaper. But either way, it’s not cheap. Also depending on when you have your children that may affect when you can retire, or at least be retired as an empty nester. There is a lot that goes into the decision of if and when to have children.

Podcast #106: Financial Advice for Those Starting a Family - YouTube

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Now Origin is a company that I have invested with and they’ve certainly been doing a good job with my investment. It’s interesting that they kind of take a little bit different approach. They don’t take all your money upfront. They call for your money as they have investments to invest in. I think it’s been a year or a year and a half since I committed to invest $100,000 with them, and I think I’ve probably only invested about 70 so far, and that’s perfectly fine. I stay fully invested elsewhere and when they are ready for more money, that’s my month’s investment allocation. It keeps them investing only in the properties that they think are the very best ones and doesn’t give them additional pressure to invest money when they don’t see a good deal. I appreciate that about them. I would certainly feel comfortable investing with this team, if you’re looking to do that sort of real estate investing.

Quote of the Day

Our quote of the day today comes from Peter Lynch who said,

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

That is absolutely true. People start bailing out of the market two or three years before a market peak and really lose a significant part of the run-up. Most of the time you are better off just buying and holding, riding the market all the way up and getting all of the gains and then riding the market all the way down and getting all of the losses, but not having to incur all the transaction costs and tax consequences of buying and selling all the time, much less doing what most people end up doing, following their emotions and buying high and selling low.

Announcements/Reminders

Don’t forget to get in your submissions for the Financial Educator of the Year. We’re looking for physicians and dentists who’ve been doing a great job teaching their colleagues and their trainees these financial principles. It’s simply impossible for me to go all over the country and give all these talks myself, but there are people that are only going to be reached by a talk that comes to their residency program, or their medical school, or their grand rounds, or their medical staff meeting for their hospital.

For those of you who are willing to give those talks, that’s wonderful. Thank you very much. I put out some slides a few months ago in a blog post you can use to help give these talks. If you’d like to nominate somebody you know doing this sort of work, please send it to awards@whitecoatinvestor.com. Email around 250 words or so describing what they’re doing and that will enter them into our contest to get $1000 cash, just to say thank you for educating all of those doctors out there.

Another thing to remember, I think for those of you who are mostly or only listening to the podcasts, I view these podcasts a little bit like the blog. They’re kind of continuing financial education. They are great to pick up some pearls of wisdom here and there but they’re not a framework for you to really learn finances.

Even if you start at the beginning and listen to all of them, I just haven’t put them in any sort of an order to help you really have that framework to understand all these concepts of personal finance. So if you need that framework, if you don’t have your initial financial education, I recommend you also do something else to help you get that framework in place.

Probably the most common thing to do is to read books. I have a  list of great financial books here.  As well as both of my books, The White Coat Investor: A Doctor’s Guide To Personal Finance And Investing, and The White Coat Investor’s Financial Boot Camp are set up in a specific format to help you develop that framework to hang the other principles on and really understand how they work.

If you want a little bit more help, we also have our online course, Fire Your Financial Advisor! It takes you through step by step and helps you write your own financial plan. Now at the end of that, you may still decide to use a financial advisor and that’s fine. The course will teach you how to get good advice at a fair price, but it will also give you the framework you need to insert the things you hear on the podcast or you read on the blog into an appropriate place in your financial understanding. So make sure, if you have never done any sort of initial financial education, that you get that done in addition to what you’re doing, listening to podcasts and reading the blog.

Financial Advice for Those Starting a Family

A listener asked me to comment on any sort of tips or financial advice I would give to physicians who are starting a family.

A lot of the advice is kind of common sense stuff. Realize that this is going to have dramatic impact on your finances. So much so that when people hear a story of somebody who hit financial independence at 40 and find out they don’t have any kids, they just dismiss it because their financial lives are so different, having children versus not.

But realize that this decision to have children has some pretty dramatic changes on your retirement dates. For example, we had our first three kids fairly close together, two and a half years apart, each of them, and then our fourth child is about six years later. So we had a pretty good gap there. At that point we were certainly financially literate, and so the decision whether to have another child meant we either were empty nesters at 52 or at 58, which is obviously very different if you’re thinking you might enjoy an early retirement.

Think long and hard, particularly as you get older, about having children. It really does have an effect on when you can retire. Now, obviously, you can retire with kids still in school. Some people still travel the world with teenagers and homeschool and that kind of stuff. But for the most part, as your kids get into high school, they’re going to be involved in activities and they are not going to be able to miss a lot of days of school and still get good grades. You’ll probably want to be a little bit more stationary. Now, if that situation is just fine with your early retirement goals, then no big deal.

But for a lot of us, we look at that and go, well, I might as well work. The kids are in school all day, five days a week, so I might as well continue to have some sort of work that I find meaningful. Just realize that that can have significant consequences on what early retirement might look like for you.

Now of course, when you add more people to your family, you’re going to have some additional expenses. That might come in the form of a larger house. You need more bedrooms, for instance. You might pay more in utilities because the kids won’t turn the stupid lights off. You might also end up having to buy a lot more food. Now in the beginning, that’s not much because the kid doesn’t eat much but as they get older, and you get a bunch of teenage boys, you are spending a lot more on your grocery bill. Transportation.  You’re going to be hauling them all over the place. You’re going to wear your cars out sooner. You’re going to burn a lot more gas. You’re going to probably get them a car when they’re 16 to drive themselves around, because you’re sick of doing it.

Your insurance is going to be higher. Both your auto insurance and your umbrella policy is going to cost more money while you have a teenage driver on there. The kids have their own activities. If you haven’t seen the Keeping Up with the Joneses that goes on with kids activities, you haven’t seen anything.

I mean, private school is just the beginning. Maybe you’re paying $10,000-$30,000 a year for private school. Maybe you also have them in ballet, a traveling sports team, it just goes on and on. It can be really expensive to have children. You look at some of these surveys and they estimated that it costs a quarter million dollars raising a child to age 18. I know there are doctors out there who spend far more than that but it doesn’t mean they have to cost that much. I’ve got a family down the street with 12 kids. They are clearly not spending $250,000 per kid raising these kids to age 18. There are ways to economize, there are ways to cut back, there are ways to do it cheaper. But either way, it’s not cheap.

This is really mostly a lifestyle decision. What do you want out of your life? Do you want to raise a family? Do you want to have children? If you do, this is going to work out. You are in the top 1, 2, 3% of incomes in this country. If you can’t raise a kid, who can afford to raise a kid?

If you want kids, go ahead and do it. Don’t let the financial consequences dissuade you. But don’t kid yourself that there aren’t financial consequences. Plus, if you don’t have any kids, you’re never going to have any grandkids, and everybody tells me they are so great that you should have them first.

Reader and Listener Q&A Municipal Bonds

There was a question asked in the Facebook Group that basically boiled down to, what do you do if you’ve invested in a bunch of muni bonds in your taxable account, and then your tax bracket drops in retirement, as it does for most people, such that muni bonds no longer makes sense for you?

Municipal bonds are not taxed at the federal level. They’re basically tax-free income, the yield from them is tax-free. As a result of that, they have a lower yield than a typical taxable bond, whether it’s a treasury or a corporate bond or whatever. And so it still makes sense after tax for those of us in high income or high tax brackets to invest in municipal bonds.

But if that changes, you could have a scenario where you used to belong in municipal bonds and no longer do. So what do you do?  If you’ve chosen to invest in individual municipal bonds, you’ve gone to a broker or whatever and bought these individual bonds, the problem is the transaction costs are fairly high. It’s not a super liquid market when you want to get out of them.

So you end up losing a fair amount of your value of the investment when you try to get out. If you have instead invested in municipal bonds in the way I do, with a low cost, broadly diversified, very liquid mutual fund such as those offered by Vanguard, it’s a lot easier. You basically just liquidate it, and can walk away and reinvest in whatever you would like to invest in.

Obviously, if there’s been some gains in that fund, or some gains in the individual bonds, there’s going to be tax consequences to selling. But the nice thing about bonds and bond funds is, most of the time there’s not a lot of gains. Sometimes there’s a little bit of losses, and so the tax consequences of selling them usually aren’t that high.

Most of the return from a bond or a bond fund comes in the form of yield. And so you’ve been paying the taxes on it as you go along if any taxes are due. So it’s not that big of a deal to change. It’s actually usually more of a big deal to go from owning stocks in a taxable account to owning bonds in a taxable account than vice versa, just because you’ve usually have a lot more gains and you may have significant capital gains taxes to pay.

If you’ve decided you no longer belong in municipal bonds,  you may want to hold the individual bonds until they mature, just to avoid those costs of selling. If it’s a fund, you can probably transition much more rapidly, but do, like anytime you sell anything in a taxable account, look at the basis, look at the value, see what the tax consequences are going to be. It’s possible it could even be an opportunity to claim some losses you can use on your taxes. You can deduct up to $3000 of capital losses against your ordinary income every year and actually reduce your taxes.

Advice for Approaching the Decision to Retire

“So we’re expecting our third baby later this year and thinking about that and planning, I find myself thinking that bouncing two demanding careers and a full time family life, it’s just too much for us. Particularly my current role is not compatible with having a young baby at home due to international travel expectations. So I’m thinking I’d like to either quit or see if my employer can offer some part time, no travel option. I’ve run a lot of retirement scenarios and I feel pretty confident that we’re going to be FI or very close to it at the time we’ve exhausted all of our parental leave options, probably next year. So I want to ask you if you have any other advice on how to approach financial decision making for such a potentially big change in our lives.”

This listener starts her question saying she isn’t my target audience because neither of them are physicians. But I want her to know she is my target audience. Just because you’re not a doctor doesn’t mean you’re not my target audience. Since the very beginning of this blog and this podcast, I’ve always been trying to help high income professionals of all types. Yes, I happen to relate to doctors best because I’m a doctor. I went to medical school, I can speak the language and relate to doctors, but most of what I’m teaching and talking about is far more tax bracket specific than it is profession specific. So I wouldn’t feel like you’re a second class citizen if you’re listening to this podcast, and you’re not a physician or a dentist.

Her question here really is, what do you do if you’re almost financially independent and you kind of want to make a lifestyle change such as have a baby? Well, the options are many, right? You can quit, you can cut back, you can ask your employer to change your job, you can change the job yourself. There’s lots of things you can do. And it really boils down to, what do you want out of your life? If you want to be a stay at home parent and you can afford to do so, go be a stay at home parent.

If you feel like you would miss out on your professional life or you’re worried that your income will drop and never recover, which is a serious concern, or you’re worried that you just won’t like it. Well, try to keep your foot in the door somehow. Whether that’s asking your employer to make your job a little bit easier, letting you work from home, cutting back to part time.

A lot of places in medicine part time works very easily. Anesthesia and radiology and emergency medicine and hospitalist medicine, those sorts of shift work specialties lend themselves very well to part time work. It really works well for those who want to go home and be a stay at home parent. Not only can you work shifts when your spouse is at home, but it’s easy to ramp up or ramp down shifts as you go. So I guess that’s really what it comes down to is, what do you want? It sounds like she can afford to do either thing that she wants to do. So just figure out what it is that you want to do.

Insurance Options for Active Duty Physicians

“I’m a military resident and I was wondering what your opinion is, or recommendations are, in regards to life insurance and disability insurance options for active duty physicians.”

Life and disability insurance for active duty physicians is tricky. Of course, you have Serviceman’s Group Life Insurance. That’s $400,000,  five year level term that they won’t turn you down for. So get that. That’s a no-brainer.

You can also, if you have insurance before you come into the military, which is probably a smart way to do it, just buy term life insurance before you become a military doc, and you can take that with you and that continues to work as well. You will notice however that once you are in the military it’s a little bit harder to buy insurance of all types.

I did not have trouble buying term life insurance in the military. The only caveat there was that it didn’t cover death from acts of war, but if you read most insurance policies carefully, you’ll notice that most of them don’t cover that.

I would just go and shop for term life insurance the usual way. Go to my list of recommended agents, call one of them up and say I need to get some term life insurance. You can use a site like termforsale.com or insuringincome.com, without giving any of your personal information. You can see the going rate for the various kinds of policies for somebody in your age and health status.

Disability insurance is much more tricky, however. If you have a policy before you go on active duty, a lot of times it will continue to be in effect, but it’s worth talking to your agent and/or the company to make sure. That happened to me when I went on active duty, I already had a policy that I bought during civilian residency.

I asked them, “Is this going to pay out if I’m disabled while I’m on active duty?” And it basically came down to yes, as long as I’m not disabled from an act of war. So we chose to continue to pay those premiums throughout the time I was in the military.

Obviously, you also have the military disability program that is going to cover you. Now, that’s not that great of a program. It doesn’t pay that much. Most doctors do not feel comfortable living on just the amount that military disability will pay, but it’s not nothing. You can’t just ignore it because it is a meaningful disability policy, particularly if you’re severely disabled, especially when you combine it with the fact that once you go on disability, you’re also getting Tricare, which helps.

But if you actually want to go out and buy an individual disability insurance policy while you’re active duty, the approach to take is to call up an independent insurance agent. They can sell you a policy from any company and just ask them that question. I think most of the time what they’re going with these days is a MassMutual policy for the active duty docs.

Health Savings Accounts

“We have a flexible spending account through my current employer. However, I hear there are a lot of benefits of having a HSA health savings account from an investment standpoint period. I want to know if I can have an HSA in addition to an FSA. If so, do I have to purchase my own health insurance since that would be more expensive versus going through employer-sponsored health insurance plan? Please advise how I can take advantage of this health savings account.”

Can you have an HSA in addition to an FSA? And the general rule is no, because an FSA usually comes along with a low deductible health plan that doesn’t qualify for an HSA. So would you purchase a high deductible health plan on your own just to be able to contribute to and invest in an HSA? No. If your employer is going to pay for your health insurance, take the health insurance they’re paying for, even if they’re only paying for a third of it or half of it.

First, you make the health insurance decision, which health insurance plan is right for you, and that’s usually the one that somebody else is helping you pay for. If you have a lot of health problems, you hit the maximum out of pocket every year. A high deductible plan is probably not the right plan for you.

But if a high deductible plan is the right plan for you, be sure to use a health savings account. It’s the best account available to you. If you’re investing, it’s triple tax free. You get a deduction when the money goes in, it grows tax protected and when it comes out, so long as you spend it on healthcare, it comes out totally tax free. You can also use it for other expenses after age 65, penalty free but not tax free.

If you save up your receipts as you go along, you might be able to pull out a big chunk of it, totally tax and penalty free and buy a sailboat with it just based on healthcare expenses you had in the past that you paid for just from your cashflow.

What to do with a Frozen Pension Plan

A listener has a frozen pension plan that he needs to do something with. He wanted to know should he roll that over into his 401..

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[Editor’s Note: This guest post was submitted by longtime WCI reader, physician spouse, and personal finance freelance writer, Ryan Trettevik. We have no financial relationship.]

I never thought embarrassment was an emotion I’d feel when entering our info into TurboTax, but that’s exactly what happened this year. My husband transitioned from a resident to a fellow in 2018. He was doing a non-ACGME fellowship that included half time attending work so his income significantly increased. As I entered the numbers into TurboTax our federal return cranked higher and higher, eventually landing on a big tax refund of $9,000.

How did this happen? Well, despite the fact that we’re married and have two kids, my husband’s W-4 was set to single with zero allowances. In prior years this had worked fine. The extra withholdings made up for most of the taxes owed on my 1099 income and we had a tax bill of a couple hundred dollars each April. However, when his income increased in 2018 (and we added our second child) the settings on his W-4 meant the small extra withholdings we were used to had changed to much larger extra withholdings.

What’s Wrong With a Big Tax Refund?

What’s wrong with a $9,000 tax refund? That’s gotta be better than these folks that were hit with a $8,000 tax bill, right? Wrong. We had loaned the government $9,000 dollars interest-free. I don’t know about you, but we don’t go around giving out interest-free loans. Or at least we didn’t know we did.

(Sidenote: I’m comparing a big refund and big bill with the assumption that you have the cash to pay your tax bill. Getting hit with a large tax bill and not having the money to pay it is certainly worse than a large refund.)

Not only had we given the government a silly loan, but I hadn’t opened the solo 401k I was eligible for with my 1099 income because we didn’t have money to contribute to it. If we hadn’t loaned the government that money, we could have filled more tax-advantaged space!

I was embarrassed. There I was, avidly reading all the personal finance blogs and books I could get my hands on, taking the coursework for a CFP certification, and I hadn’t checked our tax withholding in a year where there were major changes to the tax laws, our income significantly changed, and we had another kid. (Wait, maybe that’s my excuse, we had an infant and a 2-year-old!) I figured our tax withholding would be off and even mentioned that to my husband, but I hadn’t realized how far off it would be and I didn’t take the time to calculate it.

When Should You Adjust Your Tax Withholdings?

You probably don’t need one more thing to do when transitioning to a fellowship or attending position. You’re adjusting to a new level of responsibilities when it comes to patient care, you might have new teaching responsibilities, maybe you’re even adjusting to a new city. Plus, there are all the boxes on the WCI financial waterfall to take care of such as adequate disability and life insurance. Even with all of that on your plate, I’m going to suggest you add one more task to your list: Check your tax withholding and adjust it as needed.

This is particularly important when you transition to an attending because if you are withholding too much, the money can go further in that first year with an increased income. For example, in future years, $9,000 won’t make a difference as to whether or not we can fill all of the tax-advantaged space available to us. When you only have six months of an increased income in the year you graduate from residency, overpaying your taxes creates a more significant reduction in the amount you have to put towards other important goals like paying off student loans or saving for retirement.

Plus, as I mentioned earlier, my husband was getting paid half-time in his fellowship. If he had gone straight into a full-time attending position, we would have been giving the government a five-figure loan.

After making this blunder, I did a bit of reading on when you should adjust your W-4. There are certain life changes that should remind you to check your withholding and adjust your W-4 as needed. These include:

#1 Large Changes in Income

There aren’t many fields where someone’s income doubles, triples, or quadruples from one year to the next. Physicians are somewhat unique in this experience, making those transition years an important time to check your withholdings. Other times you’ll see a big change in income could be when you start or stop a second job.

Ryan Trettevik and husband Brad Harris

Things like significantly increasing your pre-tax retirement contributions, large amounts of student loan interest deductions, or alimony expenses can also adjust your income, and therefore should lead to changes in your withholdings.

If you’re married, a large change in the difference between your income and your spouse’s income (even if the total household income hasn’t changed significantly) could mean you need to adjust your withholdings. W-4’s aren’t coordinated for married people, or for single people with multiple jobs, so it’s important that you use a withholdings calculator to set both of your exemptions accurately.

#2 Big Life Changes

Have a kid? Is your kid no longer a dependent? Did you get married? Divorced? Buy a home? All of these will change your tax situation. It turns out you’re required to adjust your W-4 within ten days of an event that lowers your exemptions, such as divorce.

#3 Eligible for New Deductions/Credits

Large medical expenses, big gifts to charity, dependent care expenses, education credits, etc. could affect your taxes enough to change your withholdings.

#4 Having Taxable Income Not Subject to Withholding

This type of income would include a side hustle taking off and increasing your self-employment income, capital gains, or IRA distributions.

#5 Major Changes to Tax Law

This is a good time to double check your withholdings since it might not be clear how tax law changes will affect your specific situation.

These are the most common reasons people need to adjust their W-4. While our situation may have been somewhat unique since we were accounting for the taxes on my 1099 income by withholding more on my husband’s W-4, there are plenty of you that are going to fall under one of those categories. Four of those categories actually applied to us in the last tax year and we still didn’t check our withholdings. Oops!

Considerations for Married Couples

As you can see, things can be more complex for married couples than for single filers. Changes for one spouse affect the couple’s overall tax picture and are unaccounted for on the other spouse’s W-4. If you file married filing jointly, you’ll want to use your combined income when figuring out allowances. You can then claim all of the allowances on one spouse’s W-4 or divide the allowances between them.

Check Withholdings Early in the Year

It’s best to check your withholding early in the year to make sure can get your withholding as accurate as possible from the beginning, but it’s better to check anytime in the year than never. You can change your payroll exemptions as often as you like. You don’t need to get it perfect the first time if your life situations change again later in the year, you can adjust things accordingly.

Tax Withholding Calculators

Not sure where to start? Enter your info here. Is the calculator perfect? No. But we learned it’s a lot better than not attempting to figure out your proper tax withholding. Once you get your results, you can adjust your W-4 appropriately. We adjusted this immediately for this year once I saw our mistake and will check on it again later this year when we have a better idea of my husband’s income to be sure additional tweaks aren’t necessary.

This took a total of 5-10 minutes. Going through these steps will ensure you aren’t giving the government a loan when you could be putting that money to work for you. It will also ensure that you aren’t surprised by a large tax bill that you aren’t prepared to pay or a penalty for underpaying.

Putting Our Refund to Use

We’ve made the best of this small blunder and used the refund to fill retirement accounts for this year sooner than we planned. It’s nice to get a jump start on filling those accounts as it will let us move on to the next buckets we’re trying to fill sooner, but the perfectionist in me would have preferred to fill more tax-advantaged space last year. Ideally, you’re all smarter than me and won’t run into this issue. If that’s not the case, I hope that sharing this experience will help someone else avoid this first world problem!

How do you determine the number of withholdings to claim each year? Are you changing your withholdings going into 2019 tax year? How has the new tax law affected the amount you withhold? Comment below!

The post What’s Wrong With a Big Tax Refund? appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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Warning: We’re getting into the weeds today. This is definitely NOT a back to basics post.

As discussed in a previous post, the Section 199A pass-thru business tax deduction has forced us to revamp a large part of our financial lives. This deduction, designed to keep pass-thru business owners (sole proprietorships, partnerships, and S Corps) competitive with C Corps after the Tax Cuts and Jobs Act of 2017, is our new largest deduction (it used to be retirement account contributions and charitable deductions). Rearranging our financial lives in order to maximize it is well worth our time and effort.

Roth vs Tax-Deferred 401(k) Contributions

For a long time, I have generally recommended that doctors in their peak earnings years preferentially use tax-deferred retirement accounts. This allows them to get a tax deduction now, enjoy tax-protected and asset-protected growth, and most importantly, score some extra money from the arbitrage available between their high marginal tax rate now and their usually lower tax rates later. However, I have also been careful to point out that there are exceptions to this rule, one of which is being a super-saver.

Now there is no dictionary definition of super-saver, but the idea behind it is if you are going to be well into the top tax bracket in retirement, you may want to rethink the traditional tax-deferred advice and instead make tax-free (Roth) contributions and maybe even do some Roth conversions, even at the top tax rate.

There are a number of advantages for the very wealthy to having a larger portion of their portfolio in Roth accounts:

  1. No required minimum distributions forcing you to move money from a tax-protected account to a taxable account
  2. More of your portfolio is in tax-protected accounts and thus grows faster
  3. A larger percentage of your heirs’ inheritance can be stretched
  4. More ability to lower your tax bill in retirement
  5. A good hedge against rising tax rates
  6. Less likelihood of having an estate tax problem
  7. Better asset protection since more of the portfolio is in a retirement account instead of a taxable account

Despite those advantages, it’s still the right move for most docs to do tax-deferred contributions because of that arbitrage between tax rates. However, over the last few years as The White Coat Investor has seen unexpected financial success, more and more I have found myself looking at our tax-deferred contributions and wondering if we were doing the right thing.

  1. We are certainly super-savers. Despite the kitchen renovation that has exploded into tearing off multiple walls of our house this Fall (more on that in future posts), generally living on 5-10% of your gross income has an interesting side effect of causing your portfolio to grow very rapidly despite large charitable contributions.
  2. It seems a virtual certainty at this point that our marginal tax rate in retirement will at least be the equivalent of the 32% tax bracket and quite possibly 37% if our success continues for just a few more years. (Ask me how this feels knowing there was no Roth TSP while I was in the military with a taxable income under $100K).
  3. It is now quite possible that we will have an estate tax problem I never expected, especially if the estate tax exemption is lowered at some point in the future. While I fully expect to cure our estate tax problem by simply increasing gifting and charitable contributions, having more money in Roth accounts instead of tax-deferred + taxable accounts does reduce the size of our estate and provide more options.

All of that already had me thinking about changing over to Roth 401(k) contributions for the employee portion of our 401(k)s, but when the TCJA was passed, it was the final nail in the coffin. Not only was it quite likely that we were better off with Roth contributions, but now we weren’t even getting a 37% deduction on our solo 401(k) employer contributions since they are subtracted from the Ordinary Business Income on which the 199A deduction is calculated. We were only getting a 37% * 80% = 29.6% deduction. It seems really silly to take a 29.6% deduction now knowing we would be paying at least 32% at withdrawal on that money. So we have decided to stop making those contributions starting in 2019.

The Mega Backdoor Roth IRA

So are we just going to invest in taxable? No way. Tax-protected growth and asset protection is just too valuable. Instead of making “employer contributions” to our solo 401(k), we’re going to make employee after-tax contributions. We get no deduction for these contributions, and, if the 401(k) allows it, we can either do an instant Roth conversion of those funds inside the 401(k) or transfer the money to an outside Roth IRA, tax-free.  This process (after-tax contributions + instant Roth conversion) is known as a Mega-Backdoor Roth IRA. If you thought a Backdoor Roth IRA was awesome, wait until you get a load of just how much money you contribute to a Roth IRA each year through a Mega Backdoor Roth IRA.

What we were doing before:

  • $32K tax-deferred employer (self-match) contribution into my partnership 401(k)/PSP (I no longer make enough clinically to max it out)
  • $30K tax-deferred contribution into partnership Cash Balance/Defined Benefit Plan
  • $19K tax-deferred employee contribution into my WCI 401(k)
  • $37K tax-deferred employer contribution into my WCI 401(k)
  • $19K tax-deferred employee contribution into Katie’s WCI 401(k)
  • $37K tax-deferred employer contribution into Katie’s WCI 401(k)
  • $7K HSA contribution
  • $6K into my Backdoor Roth IRA
  • $6K into Katie’s Backdoor Roth IRA
  • Total tax-deferred contributions: $144K
  • Total HSA contributions: $7K
  • Total tax-free contributions: $12K
  • Total tax-protected contributions: $163K
  • Total tax-protected contributions adjusted for taxes (45.2% marginal rate): $98K

What we are doing now:

  • $19K tax-deferred employee contribution into my partnership 401(k)/PSP (New plan this year allows employee contributions)
  • $32K tax-deferred employer contribution into my partnership 401(k)/PSP
  • $17.5K tax-deferred employee contribution into my partnership Cash Balance/Defined Benefit Plan (New plan this year affects my contribution)
  • $56K after-tax contribution into my WCI 401(k)/Mega Backdoor Roth IRA
  • $19K tax-deferred contribution into Katie’s WCI 401(k)
  • $37K after-tax contribution into Katie’s WCI 401(k)/Mega Backdoor Roth IRA
  • $7K HSA contribution
  • $6K into my Backdoor Roth IRA
  • $6K into Katie’s Backdoor Roth IRA
  • Total tax-deferred contributions: $87.5K
  • Total HSA contributions: $7K
  • Total tax-free contributions: $105K
  • Total tax-protected contributions: $199.5K
  • Total tax-protected contributions adjusted for taxes (45.2% marginal rate): $160K

I’m ignoring the savings we do for our kids (Roth IRAs, UGMAs, 529s) and our taxable account contributions (actually the majority of our savings these days) here. But just looking at the tax-protected accounts, we’ve gone from sheltering $163K to sheltering $199.5K. If you actually adjust those tax-deferred amounts for our current marginal tax rate of 45.2%, we’ve gone from $98K to $160K, a 63% increase. But wait, there’s more.

Katie’s Pay Cut

By going to after-tax contributions for Katie, Katie no longer needs to make as much money as she used to in order to max out the 401(k). So I gave myself a raise and cut her pay dramatically. Yup, our family is voluntarily contributing to the gender pay disparity. But there is a method to our madness. Think about it. The White Coat Investor, LLC files taxes as an S Corp.

How much salary does she need to be paid in order to be able to contribute $56K to a 401(k) as employee tax-deferred and employee after-tax contributions? Well, $56K plus enough to cover her payroll taxes. How much did she need to be paid in order to contribute $56K to a 401(k) as employee tax-deferred and employer tax-deferred contributions? Well, $37K/20% = $185K + enough to cover her payroll taxes. So she can take a 75% pay cut and still max out that account.

“What? I still don’t get it? Why do you want to pay her less?”

Because, my young padawan, every dollar she gets paid as salary costs us 15.2% in payroll taxes. If we pay her $185K, we pay 12.4%*132,900 = $16,479.60 in Social Security taxes and 2.9%*185,000 = $5,365 in Medicare taxes. So we want to pay her as little as possible while still being able to max out that account and justify the salary to the IRS. (Since her job description is so flexible and those types of jobs typically don’t pay very much, that’s pretty easy to do. How many of you are paying full-time employees less than Katie is paid part-time?)

The issue, of course, is that the 199A deduction, at least at our income level, is partially based on the salaries our company pays. So if we pay her less money, our 199A deduction shrinks proportionally. That’s no good. So what’s the solution? We just pay me more. So she took a big pay cut and I got a big raise. Yay me! Overall, the total salary paid by the company will be similar so the 199A deduction will be similar.

So why did I get the raise instead of her? Are we sexist? Nope. Remember I have that other job down at the hospital. Even if I were only making $56K with WCI, I would still pay the maximum Social Security tax each year. That’s not the case for Katie whose only job is with WCI. The bottom line is that we’re saving Social Security taxes on the difference between the 2019 Social Security wage base ($132,900) and the salary we pay Katie (about $64,000). ($132,900-$64,00) * 12.4% = $8,544. There is no Medicare tax savings of course, since we’re getting the same total salary as a couple and it’s all subject to Medicare. And half of that SS tax we would have paid for Katie is deductible, so it’s really only $6,613 we’re saving but hey, $6,613 more than covers a luxurious six-day heli-skiing vacation. It’s real money.

Other Retirement Account Changes #1 Cash Balance Plan Contributions

The careful reader will notice a few other changes in our retirement account line-up for 2019. My cash balance plan contribution went down. I’m pretty annoyed with it, but we changed plans this year. The new one admittedly has a better design, but its structure has a nasty side effect for young super-savers. Whereas the old plan let everyone contribute up to $30K, in the new plan the contribution limits are determined by age.

  • <35 $5K
  • 36-40 $7.5K
  • 41-45 $17.5K
  • 46-50 $40K
  • 51-55 $80K
  • 56+ $120K

I turn 44 in 2019, so it’ll still be a couple of years before this change works out better for me.

#2 Partnership 401(k) over WCI 401(k)

You will notice I am now using my $19K employee contribution at the partnership 401(k) instead of the WCI 401(k). It made a lot of sense to use it in the WCI 401(k) when I was making more money practicing medicine than running WCI. Now the situation is reversed. I don’t actually make enough clinically to max out the partnership 401(k) even if I use the employee contribution there, but I can contribute more overall if I use the employee contribution there instead of our individual 401(k). Our partnership’s new 401(k)/PSP actually allows employee contributions now, so I will just do that.

#3 Tax-Deferred Partnership 401(k) Contributions

You will also notice that I am doing tax-deferred contributions to my partnership 401(k). Remember that income is not eligible for the 199A deduction because medicine is a specified service business and our taxable income is well over the $315-415K limit. So that deduction is still worth 37% (federal) to us rather than 29.6% like it would be in the WCI 401(k). Maybe we’ll be in the 37% bracket in retirement, maybe we won’t, but we’ll certainly be in a bracket higher than 29.6%. At least for 2019, we’ll continue to do tax-deferred contributions if they are available to us. We’re only talking about $19K here anyway, the rest (both the profit sharing portion and the cash balance contribution) have to be tax-deferred.

You will notice Katie’s employee contribution is also tax-deferred. That income is deferred from her salary, and so doesn’t count toward Ordinary Business Income for the 199A deduction, so it still provides us a 37% (federal) deduction. We’ll continue to use that for 2019 for the same reasoning outlined above.

Additional Complexity Using a Mega Backdoor Roth IRA

It’s pretty obvious to see the advantages of these changes for us. We’re able to protect a ton more money after-tax, really maximize the value of our retirement accounts, and even lower our payroll taxes (pretty much a free lunch in our case). The big downside, unfortunately, is additional complexity. As if our financial lives weren’t complex enough already.

For years we’ve had the WCI 401(k) at Vanguard. Vanguard’s individual 401(k) has its issues. The customer service isn’t awesome, they don’t allow IRA rollovers, and until recently, they didn’t let you buy the lower cost admiral shares funds. But it was good enough for our purposes for a long time. The big problem now, however, was that the Vanguard individual 401(k), at least the off-the-shelf version, doesn’t allow after-tax employee contributions or in-service conversions/rollovers, the two features necessary to do a Mega Backdoor Roth IRA. As I looked around at the other off-the-shelf individual 401(k)s, (Fidelity, Schwab, eTrade, TD Ameritrade) I found that none of them really allowed this. I would need to go to a customized plan and I was going to need professional help to do so. And professional help is rarely free and often quite expensive.

A Customized Mega Backdoor Roth IRA Plan With mysolo401k.net

After shopping around a bit, I settled on mysolo401k.net. The fees were low and their website actually discussed the Mega Backdoor Roth IRA in detail. I thought that was a good sign. Within minutes I had the head of the company, Mark Nolan JD, on the phone answering my questions. It was such a good experience I thought they would make a great new affiliate partner for The White Coat Investor. It’s always easier to plug companies that I actually use. At first, they agreed to not only pay me an affiliate fee for new business I brought them, but also discount their fees from $795 up-front plus $125/year to $700 up-front plus $125/year. Win-win-win. Shortly after I did a podcast mentioning them, they backed out of the agreement and decided to just lower their fees to $500 up-front and $125/year. Lame for me, but it’s still a win for you and for them. Maybe I can talk them into sponsoring a podcast or something down the road.

Choosing a Fund Custodian

There was an incredible amount of paperwork involved. Pages and pages and pages and pages and pages. You see, mysolo401k.net isn’t going to function as the custodian of the funds. They had to go to either Schwab or Fidelity. I already had accounts at both (partnership 401(k) at Schwab and HSA/Credit Cards at Fidelity), but decided to go Fidelity because I thought I might just use the 0% ER index funds there. Of course, when there are two companies involved and 4 new accounts (a tax-deferred and an after-tax for both of us and we didn’t bother with the Roth accounts since we figured we’d just do rollovers to our Vanguard Roth IRAs) a few minor things were screwed up and had to be redone. But I was impressed with how much better the service was from both companies than what I’ve come to expect from Vanguard.

Once I got our 401(k) money over to Fidelity, I was disappointed to discover that I couldn’t buy the 0% ER Index Funds after all. No biggie, I just paid a $4.95 commission and bought Vanguard ETFs. This isn’t my first rodeo, but I was surprised that Fidelity didn’t want my business in that respect.

“Checkbook” 401(k)

Another great feature of having a 401(k) plan actually designed by someone who knows what the heck they are doing is that this is a self-directed “checkbook” 401(k). That means I can invest it in anything I want (except Fidelity 0% ER index funds apparently.) I suspect I will eventually take advantage of this feature to move some of my very tax-inefficient debt real estate/hard money loan funds out of taxable and into tax-protected.

Take Home Points

This post is long enough, let’s wrap it up. Here are the take-home points:

  1. If you qualify for the 199A deduction, you might want to consider Roth and Mega Backdoor Roth 401(k) contributions.
  2. If you want to do a Mega Backdoor Roth IRA in your i401(k), you’re going to need a customized plan.
  3. After-tax 401(k) contributions allow you to max out your 401(k) on much less income.
  4. Maximizing your use of retirement accounts helps you reach your financial goals faster and protect assets from creditors, but often introduces a lot of complexity to your financial life.

What do you think? Have you done a Mega Backdoor Roth IRA before? Did you make any changes to your retirement plans in response to the new 199A deduction? Comment below!

The post A New Reason to Use the Mega Backdoor Roth IRA appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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[Editor’s Note: This post is republished from WCI Network partner, Physician on FIRE and explores the struggle between living a life of minimalism vs frugality and how finding a happy medium may be the best way to achieve FI. Enjoy!]

For centuries, most people were both minimalist and frugal. Not necessarily by choice, but out of necessity. Go back a century or more and you’ll find smaller homes, goods that were more expensive to produce and transport, and a whole lot of people that couldn’t afford to be anything but frugal and minimalist. Today, many American families have the luxury of choosing to be frugal, minimalist, or neither. Minimalists are a small but growing subset of the population, and many families in the middle class and above would not be considered frugal, at least not to the extent previous generations might have been.

Nevertheless, many of us, particularly those with a bent for financial independence, strive to be frugal and perhaps minimalist, too. Personally, I’ve found that the two concepts are often at odds with one another. I appreciate both concepts for the benefits they provide, but struggle to embrace them simultaneously.

Minimalism versus Frugality

I’m not saying there’s no common ground. There is at least a little bit, and we’ll get to that eventually — but first, let’s talk about the many ways in which they are incompatible.

Frugality employs a scarcity mentality.

A frugal person does not like to waste anything. If something doesn’t have a purpose, you find one for it or assume you will eventually. You look for value in everything and are very price sensitive. Frugality is a good way to pursue financial independence.

Minimalism employs an abundance mentality.

A minimalist does not like to waste space on anything that doesn’t have value. If something doesn’t have a purpose, it’s gone. You look for value and function and are not necessarily price sensitive. Minimalism is more easily practiced as you approach or have achieved financial independence.

The Difference Between a Minimalist and a Frugal Person

A minimalist will discard things based on rules.

A frugal person scoffs at such rules.

For example, the minimalists have given us the following rules:

  • 90/90 Rule: If you haven’t used it in the past 90 days and won’t use it in the next 90 days, you can let it go.
  • 20/20 Rule: Don’t hold onto “just-in-case” items if you can replace them for under $20 without going more than 20 minutes out of your way.

If I followed the 90/90 rule, I wouldn’t have anything seasonal. No snowblower, skis, or winter jacket. No rakes. No fertilizer, lawn mower, or hummingbird feeder. Ok, I don’t actually own a hummingbird feeder, but you get the point.

The frugal person in me shuns the 20/20 rule as well. I have many non-essential items that can be replaced for under $20 with a click of the Amazon button or the swipe of a credit card. But at some point, I’ve paid for them and had a use for them. The minimalist in me asks if I will again find a purpose for them some day, and the frugal me shouts back, “YES! Well, probably… I think”

A minimalist will pay top dollar for a high quality item that serves multiple purposes.

A frugal person will own multiple items that each serve an individual purpose.

We have a food processor, a blender, a KitchenAid mixer, a handheld chopper of some sort, and more knives than a late night infomercial. If you need any food mixed up or chopped up, I’m your guy. I can cut stuff six ways ’til Sunday.

A minimalist has a couple good sharp knives and perhaps one device to do all the blending, mixing and chopping. It sits tidily in its own spacious drawer or appliance garage.

A minimalist has a small wardrobe. Quite possibly brand-name and purchased new.

A frugal person has an expansive wardrobe, quite possibly purchased used.

Minimalists have been known to have a few copies of identical clothing, and may wear the same style outfit on a regular basis. If something hasn’t been worn in the last few months, it will find a new home when donated to a local thrift store.

A frugal person purchases the minimalist’s seldom worn clothing at the thrift store. He might still have the polyester disco shirt he last wore at a theme party in 1999. The minimalist buried deep down inside wants to part with it, but it stays, as does the afro wig whose locks haven’t been graced with a pick since 1999.

i’m sure i have that wig in storage… somewhere

A minimalist has a half empty (or is it half full) fridge and freezer.

A frugal person has a full fridge, freezer, beverage fridge, and chest freezer.

As a frugal person, I shop at Costco. I buy in bulk and I buy extra when something is on sale. I have friends who purchase fractional portions of livestock and others who hunt and butcher their kill. I seem to buy craft beer at a rate faster than I drink it, and end up “cellaring” a good number of beers to be enjoyed at a later date. A minimalist shops locally for groceries needed in the next few days and picks up a bottle of wine or six pack of beer with the intention of consuming it. Buying in bulk is out of fashion, and the minimalist is willing to pay the going rate rather than wait for a sale.

A minimalist is less likely to have a large lawn and more likely to hire its maintenance.

A frugal person does all the yardwork, owns a full complement of lawn and garden tools, and quite possibly stores them in a shed.

A minimalist has minimal need for a large yard, and might have none living in a townhome, condo, or apartment. A frugal person might have a similar living arrangement, but if they’ve got a yard, you can bet they’re willing to put in the time and energy to maintain it.

For example, I’ve collected the Ryobi 40V cordless electric lawn mower, chain saw, weed whip, and leaf blower. I’ve also got a snow blower, a seed spreader, a wood maul, and countless garden tools and hose attachments. I don’t pay anyone to do my yardwork, but I’ve paid plenty to acquire the tools and storing them all takes up some serious real estate in the garage. Yet, I somehow feel frugal for putting in the sweat equity.

A minimalist reads online, purchases e-books, and may have a Kindle Unlimited subscription.

A frugal person has shelves full of books, many purchased used, already read, and untouched for years.

Books take up space. Fill a moving box with paperbacks and hard covers and then try to move them. It’s not easy. A minimalist recognizes this and reads mostly electronically.

Like the frugal person, a minimalist will also borrow books from friends and the public library. Unlike the frugal person, the minimalist will not hang onto many books once purchased and read.

Me? Yeah, I’ve got books from my childhood on these shelves. For now.

Where Frugality and Minimalism Converge

I was born with the Frugal Gene. Or if I wasn’t born this way, I was raised by parents who absolutely love a good deal and think minimalism means having only one pole barn for storage. And even by this extraordinarily forgiving definition, they’re far from minimalists. And that’s okay; it works for them.

Personally, I would like to find a happy medium between frugality and minimalism. While it wasn’t difficult to contrast the two mentalities, there is some common ground.

Adopting a minimalist mentality, I’ll buy fewer things in the future. That will save money, even if I do spend a little more on the quality goods I do purchase.

A minimalist doesn’t need as much storage space. Not only does that mean fewer shelves, plastic tubs, and closet space, but also a smaller home. That’s less house to rent or buy, cool or heat. There’s some additional savings.

Becoming more minimalist, as I have attempted to do, results in box after box of donations. I have taken monthly trips to the Habitat Restore, Salvation Army, or Goodwill, resulting in many receipts. Although I carry no mortgage, I donate plenty of money, and so I itemize my deductions. Every box of donations lowers my tax bill. A frugal win.

Minimalism and Financial Independence

Finally, I feel it’s simply easier to choose minimalism when you are in a position of financial independence. You can afford to replace items needed after parting with what you thought you’d never use again. You’re able to spend the extra dollars for the high-quality object that might do more or last longer. It’s easier to adopt an abundance mentality when your personal resources are indeed abundant.

Interested in hearing more about this internal struggle? This post was the basis for ChooseFI podcast episode #29. The Aspiring Minimalist versus The Reluctant Frugalist.

Do you have minimalist or frugal tendencies? Neither? Which characteristics would you rather adopt? Have you found a happy medium? Let me know below!

The post Minimalism versus Frugality: Can They Coexist? appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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I’m always impressed when I see a doc doing more than one thing. Sometimes that is practicing medicine full-time while being a single parent. Sometimes it is starting a business while practicing medicine. Likewise, I am impressed when somebody takes their online business into a new medium, mostly because I know just how much work it takes to do so.

Take a look around at your favorite physician financial bloggers. How many of them also do a podcast? Look at your favorite financial authors. How many of them also blog successfully? How about your favorite podcasters? How many of them do a great job running a Facebook Group or online forum? So when I heard that Jimmy Turner (i.e. The Physician Philosopher) was putting out a book less than a year and a half after starting his blog, I paid attention, especially since he isn’t already retired or even about to FIRE. In fact, he’s still establishing himself in an academic career working well more than one full-time equivalent. The Physician Philosopher’s Guide to Personal Finance

The first I heard about the book was when Jimmy asked me to write the foreword last November. You may not be aware of this, but it is considered a great honor among authors to be asked to write a foreword. It makes you look like an expert and helps promote your own books and is usually a pretty trivial task since foreword are rarely longer than 2 or 3 pages. Basically, if an author can look through the book and be assured that there is nothing crazy written in it, he will agree to do the foreword.

I was pleasantly surprised to find that not only was there nothing crazy in it, but that it contained a ton of great stuff. There are only so many principles of personal finance and if you’re still learning major principles after reading dozens of financial books there is something wrong, so I can’t claim that this was a life-changing book. For me. It could very easily be a life-changing book for you, however. In fact, The Physician Philosopher’s Guide to Personal Finance could be worth millions of dollars to you over the course of your lifetime.

The subtitle of the book is “The 20% of Personal Finance Doctors Need to Know to Get 80% of the Results.” Early in the book, he explains the “Pareto Principle.”

Navigating personal finance and debt management is just like driving a car.  Cars can be complicated, if you want them to be.  If you wanted to understand everything there is to know about cars, you would need a keen understanding of fluid hydraulics, friction, gear ratios, piston mechanics, and how to appropriately wire the sound system.  It’s certainly possible to learn all of this.  There are books on automobile mechanics and physics, not to mention schools that you could attend for a complete education.

I am willing to bet, though, that when you get into your car these areas of expertise do not cross your mind.  All that most people really want is to understand the 20% about cars that help them accomplish a car’s purpose: getting from point A to point B safely and in comfort…You could learn everything else there is to know, but it wouldn’t help you get from A to B more safely or in more comfort.

Personal finance is the exact same way.  We can make it as complicated as our hearts desire…The truth of the matter is that you need to know 20% of personal finance and debt management to get 80% of the results.

Chapter Summaries

The book includes the following chapters:

  • Chapter 1. Introduction
  • Chapter 2: Personal Finance Basics
  • Chapter 3: Conflicts of Interest
  • Chapter 4: Financial Choices in Medical School
  • Chapter 5: The Pareto Principle for Residency
  • Chapter 6: Student Loan Debt Management Part 1: Income-driven Repayment and Public Service Loan Forgiveness Programs
  • Chapter 7: Student Loan Debt Management Part 2: Private Refinancing of Student Loans
  • Chapter 8: Personal Finance During Residency
  • Chapter 9: Live Like a Resident (AFTER residency)
  • Chapter 10: A Tale of Two Doctors
  • Chapter 11: Investing After Residency (Vehicles and Portfolios)
  • Chapter 12: How much do I need?
  • Chapter 13: Asset Protection
  • Chapter 14: The Balance

Chapter 2 is a great orientation to concepts like budgeting and compound interest. By the end of it, he’s already got you making a written financial plan and telling you what needs to be in it. Chapter 3 contains all of the usual warnings about interacting with the financial services industry that we discuss on this blog all the time. Know how advisors are paid, know how much you’re paying, make sure you’re getting good advice, and don’t buy whole life insurance. Chapters 4 and 5 are aimed at specific time periods in the financial life of a doctor–medical school and residency. We also discover that Jimmy spent the first two years of medical school at the bottom of his class before becoming the student body president and eventually a chief resident. He gives solid advice to minimize debt:

Let’s look at a different example: say you are trying to decide whether to split an apartment with a classmate using medical school debt to pay the expense. On your own, the apartment would cost $1,000, and with a roommate it’s only $500.  That’s a potential savings of $6,000 per year.  It would cost you $24,000 over the four years ($6,000 x 4 years) of medical school to live alone.  However, we are forgetting something we introduced earlier: the interest on the debt.  From the day you make your decision, the loaned money you use for living expenses will accumulate interest. If the loans are at 6.5% interest, how much will your choice to live alone cost by the time you start paying off loans as an attending?  The answer is that the $24,000 initial cost will grow into just under $38,000.  All because you wanted to live alone during medical school.  That’s an expensive decision.

The point here isn’t that you should live with a roommate.  The point is that if you can save yourself $500 per month, you are saving yourself $38,000 in debt when you finish training.  Minimizing debt matters in the end.

He also recommends against investing in residency:

The most common question that I get from residents and attendings alike is whether they should be paying down debt or investing.  For many, paying down debt and getting a “guaranteed” 5 – 7% on their money is the best bet.

although he makes exceptions for those with no debt, those going for PSLF, those who are offered an employer match, and those who qualify for the saver’s tax credit. Long-term WCI readers won’t be surprised by his advice about cars and owning homes.

Chapters 6 and 7 are all about student loan management. Chapter 8 is a little funny, because after he told you not to bother investing during residency, he spends an entire chapter explaining how to do it well!

Chapter 9 continues the logical progression into attending hood and focuses on living like a resident for a few years on an attending income in order to build wealth. I think his admonition to focus on the big five expenditures:

Traditionally, the “big three” expenses are housing, transportation (cars), and food.  I’d also add in childcare (or private school) and vacations. If people get these five categories right in the first few years after training, they’ll likely have enough money left over to accomplish their goals.

He also introduces his 10% rule and with it an explanation that will please doctors who are turned off by Spartan/Mr. Money Mustache style lifestyle recommendations.

For every increase in pay or bonus that you receive, take 10% of that money and spend it on whatever your heart desires (fancy food, stuff, entertainment, etc.).  Put the other 90% towards wealth accumulation (paying down debt or investing)….

For example, when my family’s take home pay went from $5,000 per month in my (non-accredited) regional anesthesia fellowship to making $15,000 as an attending physician, I took 10% of this raise (or $1,000) and I applied this money towards lifestyle creep.

So, how did I spend my 10%? Well, I spent it on the one thing that every financially minded person tells you not to spend your money on … I financed a car.  The year I finished training was the last year the car I financed was being made.  While I am not a huge believer in financing cars, I couldn’t have taken it home any other way. To make myself feel better, I should say that this isn’t just any car; it’s a Chevrolet SS.  A four-door sedan with naturally aspirated V8, which produces 415 horse-power and is controlled with a 6-speed manual transmission. Oh, and it can fit three car seats in the back (“Daddy go faster!”).

I am not done yet, though.  The car payment costs us about $650 per month.  According to the 10% rule, I still had another $350 to spend, and so my wife and I bought a monthly membership to a country club, which gave us access to a swimming pool, two golf courses, six tennis courts, a driving range, and the clubhouse for food.

Have I committed personal finance blasphemy? Well, since I was following the 10% Rule, I recognized that I was still going to reach my financial goals.  Using the other 90%, we increased our net worth by over $250,000 in one year.

Moderation in all things. This example also demonstrates the strength of the book. When a financial advisor writes a book, it’s not personal. Sure, they might cite a few examples from their clients, but it’s just not the same as reading what somebody else that used to be in your situation actually did and why.

The next chapter is heavily influenced by Dr. North and Dr. South of The Millionaire Next Door fame, but these doctors are Dr. Jones (Get it? keeping up with Joneses?) and Dr. EFI (Early Financial Independence.)

Chapter 11 is about investing after residency and contains the usual admonitions to use retirement accounts and index funds, diversify, don’t mess with your investments, keep costs down, make it automatic, and rebalance.

Chapter 12 is an introduction to FIRE. The majority of the book clearly aims at early career docs to whom Dr. Turner relates best as the only non-FI member of the WCI Network. It’s good for these docs to spend a few minutes thinking about the end of their career and what retirement might look like for them.

Chapter 13 is about asset protection, but not in the traditional sense. It includes an admonition to be good at your job (and not just to avoid being sued) but also includes all the various types of insurance you should have. It also includes reasons to undertake a side hustle and to learn behavioral finance so you don’t panic in a bear market. But there’s nothing there about learning your state’s asset protection laws, LLCs, trusts, or family limited partnerships. Chapter 14 finishes with a recipe for living a balanced life to avoid burnout.

All in all, the book hits all of the highlights to get a physician started on the right foot. It is written by an early career physician and aimed at early career physicians. It is personal and easy to read. I agree with this review:

Overall the book is well written and easy to read. One does not need to be an expert or even be perfect when it comes to financial decisions. The author lays out many different aspects of wise saving and wise spending. Many professionals, not only physicians, receive little to no training in regards to proper money managing. Dr. Turner provides an uncomplicated approach and break down to an otherwise complicated, labyrinth of a subject.

I truly wish I had read this book during my medical training to finish with a game plan….Entire volumes of work can be written about specific financial topics however Dr. Turner is able to provide a wonderful synopsis in this book. This would be a wonderful place to start if you have never read a book about money. Even if you have read multiple books, his fresh insight is uplifting and encouraging. Well done!

It’s a great book and will be even better if you just skip over the foreword!

Buy The Physician Philosopher’s Guide to Personal Finance today!

What do you think? Did you read The Physician Philosopher book? What did you like or dislike about it? Comment below!

The post The Physician Philosopher’s Guide to Personal Finance – A Review appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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Podcast #105 Show Notes: How to Think About Money with Jonathan Clements

How should you think about money? As a tool to make your life and others’ lives better and happier. I’ve mentioned before how it is important to really take a hard look at your spending and make sure you are spending your money in a way that maximizes your happiness. Jonathan Clements, our guest in this episode, is a previous Wall Street Journal columnist, the blogger behind humbledollar.com and the author of eight books, including one of my all-time favorites, How To Think About Money. In fact, it might be the best financial book I’ve read in the last 5 years, certainly for me now with where I am at in my financial life. In this book, he gives us the “big picture” helping us to get our mindset right about your money. In this episode, we discuss how to use money to create a better, happier, more enriched life.

Podcast #105- How to Think About Money- Interview with Jonathan Clements - YouTube

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Quote of the Day

Our quote of the day today comes from Nassim Nicholas Taleb, who said,

“When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns, in short, being fooled by randomness.”

How to Think About Money

Jonathan has a family story about how his grandfather and his siblings frittered away a great family fortune. Between that story that was passed down through the generations and his early adult years as a 25-year-old father, with a wife, who was pursuing a PhD, trying to live in New York City on a junior reporter salary, it really drove home the importance of managing costs and being frugal. He learned about managing money from basically living with no money during those early years and the net result is he has been in a position where he hasn’t had to work since his early 50s. He says it has been a wonderful few years for him to be able to essentially explore the world on his own terms.

I think it is pretty impressive he was able to do that on mostly a journalist salary while many doctors are living paycheck to paycheck on quite a substantial income. We see people becoming financially independent all the time on much lower incomes just through careful management like Jonathan was able to do. Of course, he points out that he wrote several books and all those advances went straight into savings and he spent 6 years working on Wall Street at Citigroup as their Director of Financial Education for the US wealth management business. But that money hit prepared hands so when that money came, he knew what to do with it. I think that hopefully is the case for a lot of my listeners that pick up on this in medical school and residency so when the big money comes as an attending physician, their hands are ready to receive it and they know what to do with it.

So what was the key for Jonathan?

  1. One of the things that is crucial to make sure you actually use that money properly is knowledge. You need to know what you’re doing.
  2. You need to have the capacity to save.

What Jonathan meant by that, is you need to have your monthly fixed costs at such a level that when you get the big paychecks, you can save as much of that as possible. If you come out of residency, you buy the big house, you lease the expensive cars and suddenly you’ve got these high fixed monthly costs, there’s no way you’re going to be able to save even if you have a desire to do so. So you need to keep your fixed costs extremely low. And throughout his time in journalism, and at Citi group, he had a relatively modest home in New Jersey, which is where he raised his kids, that he paid off very quickly. And that meant that when he got his paycheck, he was able to save a substantial portion of it.

He had his own column at the Wall Street Journal at the age of 31. He jokes that there are basically only 20 personal finance stories, which meant by the time he quit the journal, he had written each of those 20 stories 50 times. It is an amazing talent to say the same thing over and over again in different words and not have anyone notice!

When you’re trying to teach others how to be wise about their money if you don’t go after the fluffy stuff that doesn’t matter, there isn’t that much to say. And eventually, you’ve said it all. It really speaks to this notion that your investing really is super simple. People make it way too complicated all the time. Buy a diversified portfolio of stock and bond index funds, save regularly, and try not to trade too much. You do all that, and you will end up amassing significant amounts of wealth.

The problem is while it’s simple, it is not easy. That is where the repetition helps. Hearing that same message again and again. Yes, you should be diversified. Yes, you should be holding down costs. Yes, you should be indexing. Yes, you should be saving diligently every month. We need to hear those messages again and again because if we don’t, we’re very likely to stray from the course.

Rick Ferri says that, “You have to keep telling the truth about indexing over and over, because so many lies are being told about it.”

From Here to Financial Happiness

Jonathan’s latest book, titled, From Here to Financial Happiness, is written in a different format than the other books. It’s subtitled Enrich Your Life in just 77 days, and is split into 77 very short chapters.

He said the book really pulled together a variety of threads that he’d been thinking about. He was thinking about questions we should be asking ourselves about our financial life in order to elicit the answers that will help us get the most out of our financial lives and out of the dollars we have. To make sure that we are doing what we need to do to get our financial lives pointed in the right direction. He had been thinking about putting together a step-by-step guide on how to build a more meaningful financial life. He really wants to help readers make connections between their money and the rest of their lives.

“Money is just a tool. It’s something that we use to try to make our time on this earth better. And yet for far too many people, I think money not only gets wasted, but it actually becomes a burden. We look at those surveys, money is the source of misery for so many people. When you talk to marriage counselors, money is the number one thing that people talk about. Money, as much as we prize it in this society, is a source of so much distress. And yet, it doesn’t have to be that way. If you’re smart about how you use your money, no matter how much money you have, you can get so much greater happiness out of it. But to do so, you have to resist your impulses, resist this notion that you know with the snap of your fingers what you should be doing financially and instead, pause and think about how best to use your dollars to improve your life. And if you do that, I do honestly believe that money can buy happiness.”

There are ways in which you can use money to increase your happiness, and I think that’s a big theme throughout all of Jonathan’s writing.

Best Financial Books

I think books are a great way to learn personal finance and investing because the important principles really are timeless. You don’t need something that is absolutely up-to-date to learn this stuff. I asked Jonathan what are his three favorite financial books that he didn’t write? He said,

  1. Mean Genes by Terry Burnham and Jay Phelan.  It’s very entertaining and not just about money. It is the lay person’s introduction to evolutionary psychology and talks about how the hard wiring that we still have from our hunter gatherer ancestors influences the choices that we make today. It turned him on to evolutionary psychology and its importance in thinking, not just about money, but also about our entire approach to life.
  2. Winning the Losers Game by Charlie Ellis. It is one of the most influential investing books that he read in the 1980s. It is still a great read and a great introduction to investing and why you should seriously consider indexing rather than trying to beat the market.
  3. Where Are the Customers’ Yachts? by Fred Schwed. Even though it was written decades ago, what you learn about Wall Street from reading that book is still the way Wall Street is today. It is still a place where people are relentlessly putting themselves first at your expense.

I really like Charlie’s book and I think the most famous example that’s come from his writing has been the idea of investing as an amateur tennis player. He talks about how if you’re an amateur tennis player, you shouldn’t try to win the game, what you should try to do is avoid losing. I think that’s totally true.

Humble Dollar

I asked Jonathan why he started Humble Dollar and what he hoped to accomplish. It hasn’t turned out to be what he originally set out to build which was a place to provide people with the money guide he created that covered every financial topic conceivable. He felt like he had been extraordinarily lucky and wanted to provide this resource to others. He wanted to give back and the only way he knew to give back is to try and share the knowledge that he had built up over the years. So that was the original idea behind Humble Dollar. But in launching the site he thought,

“‘Okay, you know what, I’ll blog every so often.’ And then I started using guest bloggers, and in many ways the bloggers were getting much more notice than the money guide itself. And now the site is running a blog every single day. One time a week it’s by me but the other times it’s by these guest bloggers. And so the site is gone from being just a place where I was going to feature the money guide to really being a living, breathing, daily updated website that tries to help people learn about money and it chews up massive amounts of my time.  I mean it is ridiculous. I tell people, I’m semi-retired and I must work 10 hours, every weekday on it, and at least three or four hours every day of the weekend.”

I am sure many bloggers can relate with those hours. But it is a great resource. If you haven’t checked out Humble Dollar you should.

What Does Work Mean When You are Financial Independent?

I asked Jonathan to tell me how he views work at this stage in his life, retired, financially independent, and yet working.

“This gets back to talking about that book I mentioned, Mean Genes by Terry Burnham and Jay Phelan about the influence of our hunter gatherer ancestors and the way we think today. We are not built to relax, we’re not built to sit around lying on the couch watching TV. We are built to strive. The reason we are here today is because our hunter gatherer ancestors were relentless in their pursuit of survival, and that impetus is still with us. I mean every day, we want to feel like we’re making progress. I mean, that is happiness, feeling like we’re somehow moving the ball forward. We get so much more satisfaction from that than from lying on the couch and eating cheese doodles and drinking margaritas. And I hope for as many years I have left, that I’m going to be able to spend those days striving. And my one trick, it may not be a great trick, but my one trick is to write about personal finance, and to make it understandable for everyday Americans. And I hope to continue performing that trick every day for the rest of my life.”

Take Care of Your Body

Jonathan was a speaker at the WCI Physician Wellness and Financial Literacy Conference last year. He brought his son out to ski with him in Park City during the conference.  He hit the slopes and was appalled to discover that he could no longer ski. It had probably been six or seven years since he’d put on a pair of skis. He got up on a slope and it was almost like he’d completely forgotten how to ski. It really was just a horrible reminder of aging and mortality for him. He said,

“One of the things that I talk about with people is if you’re going to manage your money, so that you can have a long and prosperous retirement, you want to make sure your body last almost as long. There’s no point in smoking two packs a day and retiring with a seven figure 401k. Those two don’t go together. You need to take care of yourself physically but what I see as I grow older is, bit-by-bit these physical capabilities get taken away from you, and it’s just horrible. I really don’t like that part of aging. As they say getting old is not for sissies.”

Why Are Doctors Bad with Money and What Can be Done?

Doctors are notorious for being bad with money. I asked Jonathan, why does he think that is?

“I would imagine it’s in part because doctors do face a unique financial conundrum. They have a truncated career. They often start out with massive amounts of debt. They’ve gone through this period of deprivation where they’ve lived as residents and not only had to work obscene hours, but been paid relatively little, and suddenly, they’re in the workforce. They’re making a decent income. They’ve got this debt to service, they have a relatively short time until retirement. And they have this pent up demand and you put it all together and the risk that they’re going to start making foolish investment mistakes as well as foolish purchasing decisions is enormous.”

We know the way to combat that is to continue to live like a resident. Jonathan suggests pausing and not making those snap decisions about purchasing not only the bigger house and the fancier car, but also, when it comes to purchasing investments.  You just need to restrain yourself.

He feels like if you’re a doctor and you’re used to making life or death decisions, deciding whether or not to buy this stock, or that alternative investment may seem a relatively low key decision by contrast. And you have the self confidence to make those life or death decisions, why wouldn’t you have the confidence to decide between investments. I see both the classic overconfident surgeon that’s sometimes right, sometimes wrong and never in doubt. And then I see doctors who are absolutely paralyzed, paralysis by analysis, and leaving money sitting in their checking account, hundreds of thousands of dollars. So it certainly goes both ways with the confidence. Unfortunately, a lot of people don’t get that message earlier in their career, to live like a resident, take care of business early on. And they find themselves in the second half of their career kind of embarrassed about the sorry state of their finances. What advice does Jonathan have to those doctors who have already kind of screwed it up in the first half of their career?

“Well, if anybody can make up for time lost, it’s going to be doctors because they do have substantial incomes. I mean, if you look at the 20 highest paid professions as identified by the Bureau of Labor Statistics, 14 of the 20 are some form of physician. Doctors do make more than the vast majority of Americans, which means that even if you screwed it up today, if you can get your living costs low, if you could trade down to a smaller home, you can get rid of the leased cars and buy used automobiles and so on. Suddenly, you do have this chance to save substantial amounts. And that in the end is the key to financial success. Despite all the blabbery that goes on CNBC and in the media, in the end, great savings habits are the key to financial success.

And if you’re late to the game, and you’ve screwed up until now, what you need to do is to set yourself up to be a great saver and the way you do that is to lower those fixed living costs, and then you’ll have an opportunity to save in the way that most Americans don’t. If you’re a 55 year old middle manager who’s screwed it up to date, you’re toast, but if you’re a 55 year old physician, with a handsome salary, if you can get your costs low, then you can save a substantial sum and you can make up for lost time.”

Alternative Investments

I asked Jonathan what role does he see for alternative investments in a portfolio? Should investors stick with boring old index funds? Should those alternative investments be for play money only? Or does it make sense to allocate a substantial portion of the portfolio to them?

“I would argue that most investors do not need alternative investments. I mean, the reason you buy alternative investments more than anything, is to provide something that will do well when stocks don’t. But we already have an asset that we know is going to perform well when stocks don’t and that is high quality bonds. If you want great long-term returns, you put your money in the stock market. If you worry about what’s going to happen when stocks turn lower, you include some bonds, it’s as simple as that. And the easiest way to get those, that exposure is with low cost index funds so that you capture as much of the markets return as possible. All these other alternative investments, alternatives other than bonds, more often than not, they’re too high costs. They’re overly complicated. And I think people buy them because they have sort of this patina sophistication. But when we say sophistication, what it really means is people don’t know what they’re buying.”

Factor Investing

I asked about factor investing. What is his take on that? Such as tilting a portfolio towards small and value stocks.

“So I do this Jim in my own portfolio, I have a tilt towards small and I have a tilt towards value. And I do that both within the US and in overseas market. And I will tell you that even though I’ve had these tilts for a substantial period, obviously, for the last 10 years or so, it’s been the wrong thing to do. Right? Tilting towards value and tilting towards small has not benefited, but I do believe that it will over the long haul. But there are no guarantees. If somebody said to me, you know, do I need to tilt my portfolio towards smaller value or any of these other factors, I would say absolutely not. If you just want to buy a plain vanilla portfolio that consists of the total US stock market index fund, a total international stock market index fund, and a total US bond market index fund, go for it, knock yourself out.

That is a great portfolio, it’s going to be better than what 90% of Americans own. If you want to tilt towards value and towards small, I believe over the long haul that that will add, but there are no guarantees and it does mean that you will go through long periods like we’ve seen of late, where your portfolio will do less well than those who simply have a cap weighted portfolio that replicates the global markets.”

Certainly, when large growth stocks do well, you feel that pain. I think, particularly the last two years, I’ve noticed that large growth has been outdistancing small value by quite a bit. And I think it takes a real serious commitment to smaller value to stick with it through times like that. That’s why I always tell people, don’t tilt your portfolio more than you believe that these are really going to outperform in the long run. I think a lot of people do have trouble with it and end up bailing out of strategies like that, just at the wrong time and end up buying high and selling low in the stock market overall.

“Well, the problem is that when we say to ourselves, the stock market, we all think about either the Dow Jones Industrial Average or the S&P 500. I mean, that’s the headline number that gets reported on the evening news, that’s in those stories we read about in the newspaper the following morning. And in the case of the S&P 500 what that really is more than anything is a large cap US index with something of a growth tilt. So, if you own anything else, you own smaller stocks, you have a value tilt, you have a substantial portion in foreign stocks, there will be periods when you do not do nearly as well as the S&P 500. But what people forget is that you go back to the first decade of the current century, and if you would have owned the S&P 500 you would have lagged behind bonds, you would have lagged behind small stocks, you would have lagged behind value stocks, you’d have lagged behind developed foreign markets, you would have lagged behind emerging markets. In the first decade of this century, the S&P 500 was one of the worst places you could have invested. Today it looks totally different, but 20 years from now, I think it may look totally different again.”

It certainly does swing, it’s a very cyclical thing. You do have to stay the course, whatever your plan is, I think it matters more that you stick with it than what the actual plan is. People tend to change investments at just the wrong time.

Dollar Cost Averaging

I asked Jonathan what are some of the other important behavioral traps that high earners fall into?

“This notion that if you have a higher income, or you have a larger portfolio, that somehow you should have something..

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[Editor’s Note: This guest post was submitted by physician financial blogger and Los Angeles resident, the Darwinian Doctor. It’s a timely post considering that earlier this week we ran 12 Reasons California is a Terrible Place for Doctors to Build Wealth. Darwinian Doc’s parents had a small amount of money saved up for retirement but still had a chance of making it work for them until the death blow of moving to California to be closer to Darwinian Doc and family. When you try to stick it out in California, you’ve got to come up with creative ways to overcome the consequences of negative geographic arbitrage. Here’s The Darwinian Doc’s solution to solving both his childcare problem and helping out his parents. We have no financial relationship.]

“Just Support Us When We’re Older”

When I was in high school, I was always surprised that despite living in a rental house, my parents still somehow found some cash to pay for my music lessons and other extracurricular activities.  Clearly, if we had enough to pay the tutors, we couldn’t be in such dire financial straits, right?

Whenever I asked my mom about money, she would joke and reply, “Just support us when we’re older.”  

As I went through college and then medical school, I often ended up being the one to fill out the forms for financial aid.  I realized that unless my parents had a secret stash of gold bars under the floorboards, they had very little saved for retirement.  I also realized that my mother hadn’t been joking at all about likely needing financial help later on.

How to End Up at Retirement Age With No Retirement Accounts

After a brief foray into the dry cleaning business, my dad spent the majority of the 1980s as a commercial real estate broker. That work dried up in the recession of the early 1990s, starting an increasingly grim decade of austerity for my family, complete with a repossessed house and all the awful money stress that comes along with stuff like that.  My father tried to keep us going by starting a construction business, and eventually, my mom went back to work as a hair stylist to make ends meet.  

Needless to say, during this time my parents had little ability to consider retirement planning.  The majority of their time was spent just trying to make ends meet. There was no 401(k) account, no employer match, nor was there any inheritance coming.  

In recent years, I’ve learned that this situation is very common.  Studies have shown that nearly half of working-age Americans have no retirement savings at all!  In 2013, the average American working-age family had only $5000 in retirement accounts. 

A Crash Course in My Parents’ Finances

After I left for college, my parents’ money situation seemed to get better.  The real estate business picked back up, and they seemed more comfortable. My mom was able to stop working again.  Over the next decade, they retired and moved to Nevada for the low cost of living. But I still had no real clue about the particulars of their financial health.  

It was the birth of my first child that started to open the door to the murky area of my parents’ finances.  Shortly after he was born, my mom decided that she wanted to move to Los Angeles to be closer to her grandchild.

My wife and I were ecstatic at the thought of free childcare, so after a few months, my mom made the move.  Leaving my father to temporarily fend for himself in Nevada, she took up residence in a studio apartment by our home.  After my wife went back to work, my mom shared childcare duties with our nanny. My wife and I paid for her studio, which was around $1200 a month.  My mom usually traveled back to Nevada over the weekends to make sure my dad was getting along okay in her absence.

After another year or so, my dad sold their house in Nevada and came to Los Angeles as well.  They moved from the studio to a larger apartment near our house where the rent was about $3000 a month.  It was by no means a fancy apartment; this was just the going rate in our area of Los Angeles at the time.

We offered to pay for half of their rent, which prompted, for the first time, a frank discussion about their finances.  

I learned that even with splitting the rent, my parents didn’t have enough cash flow to cover their rent and living expenses in the long term.  Although they were much better off than those dark days in the 1990s, I learned that the vast majority of their retirement portfolio consisted of:

  • A condominium (rented)
  • Cash from the Nevada house (in CDs)
  • Social security

The total cash flow from these assets yielded just over $1500/month.

My Wife and I Inadvertently Doomed Their Meager Retirement

On one hand, my parents both helped immensely with childcare, and my son (and now sons) benefitted enormously from their loving care. On the other hand, by luring my parents from their cheaper existence in Nevada, I doomed the sustainability of their retirement.  

In Los Angeles, the expensive rent, food, and utilities alone would eat through the value of their portfolio in about 10 years. And if one of them became sick and needed to go to a care facility? Their assets would be gone in a few years at most.

Solving the Problem

Wracked with guilt, I debated the situation endlessly with my wife.  I wanted a solution that improved my parents’ quality of life, while not completely derailing my own desire for financial independence. We eventually came up with a few options to stabilize my parents’ living costs:  

#1 Allow my parents to move in with us

This option was a non-starter.  My wife told me in no uncertain terms that we would likely end up divorced if my parents shared a roof with us.  Getting a divorce would violate the “one house, one spouse” rule of financial wellness, so we moved onto the next option.

#2 Buy a nearby duplex and have them live rent-free in one unit

It turns out that duplexes in Los Angeles, like single-family homes, are crazy expensive.  We would have had to take on another sizeable mortgage to purchase an LA multifamily property, even if we used my parents’ cash for a downpayment. This made us uncomfortable, and to top it off, we realized that the rent from the second unit alone wouldn’t come close to covering the costs of the new mortgage.  Charging my parents rent would defeat the purpose of this option, so we decided against this as well.

#3 Move to a house with a larger lot and build an accessory dwelling unit (ADU) for them on our land

We ended up choosing this option.  We moved to a property with a larger plot of land of about a third of an acre and expanded our garage to an ADU (accessory dwelling unit).  An ADU is just a fancy term for an in-law suite or granny flat. It has all the essentials, including a bathroom, kitchen, and sleeping space.  

While Los Angeles has historically made the process of legally building an ADU about as easy as placing an IV in a screaming 2-year-old, recent changes to state laws have made the approval process much easier.  In California, there is now the general recognition that increased utilization of existing land to create more housing units is a good way to ease the housing crisis.  

The Accessory Dwelling Unit (ADU) Solution: A Win-Win

We took bids, got over the sticker shock, and then forged ahead with our plan to make a fully permitted ADU.  Our priorities were speed and quality of construction, as well as minimizing legal risk. So we went with a licensed and bonded contractor who would obtain all necessary permits from the city.  

We took out a low-interest personal loan from my parents for $150k and paid for the rest out of our savings.  The construction was about $175k by itself, and the appliances and fixtures cost another $25k. We didn’t want to pay for a designer or full-service architect, so my wife and I selected and purchased everything from the dishwasher to the flooring. This was significantly more annoying and time-consuming than I thought it would be.

I’m surprised that the contractor bid didn’t include things like the HVAC unit, the bathroom tiles, or the oven, but this seems to be a universal phenomenon amongst LA contractors.  

The garage before conversion.

Was an ADU a Good Financial Decision?

So this all begs the question: Was this a good investment in addition to being a good long term solution for my parents’ needs?

Let’s consider some of the benefits from this situation (in no particular order):

  • Added value to our property
  • Free childcare (about 25 hours a week)
  • The relationship between my kids and their grandparents
  • Economies of scale for utilities, food, and toiletries

When we delve deeper into the numbers, first to consider is the $150k loan we received from my parents.  With their blessing, we will pay the personal loan back to them over a 10 year period, plus 3.25% APR, to help improve their cash flow. This is $1466/month.

I’ve committed to supplementing the loan repayment to a total of $3000 a month for them to use as they please.  This seems like a lot of money, but considering the amount of childcare my parents provide, this is actually quite a bargain.  

Finally, considering that we were previously burning through over $36k annually on just their rent alone, my parents simply have to live in the ADU for 5-6 years before it essentially pays for itself.

Looking down the road a few years, I envision being able to get by without a full-time nanny as both kids start going to school full time.  After my kids come home from school, they can hang with their grandparents until my wife and I get home from work.

Looking even further down the road, I see a place where my parents can safely age in place.  If minor health problems arise, I’ll be able to intervene conveniently and frequently, as they’ll literally be in my backyard.  

The specter of more serious health problems that might need a long term care facility haunts me still, but one problem at a time, right?

Conclusion

It took about 6 months from start to finish, but the occupancy permit finally came through.  My parents are set to move into the ADU next week and will have 600 square feet of newly constructed living space all to themselves.  

The finished Accessory Dwelling Unit.

As long as we all continue to get along, this arrangement should be mutually beneficial.  My parents can be deeply involved in the lives of their grandkids while allowing me to help support and repay them for the sacrifices they made to allow me to become a physician.  

Of course, I wish they had the means and foresight to have ample retirement savings to support themselves in retirement. They actually ended up better off than most retirees, but the expensive cost of living of Southern California did them in.  

Unexpected family expenses can easily derail your journey to FIRE (or moFIRE). But by paying upfront to stabilize parental living costs with something like an ADU, you can get back on track.  

Do you have an accessory dwelling unit as part of your home? How have you used it? How have you helped out non-financially independent parents? Comment below!

The post The Accessory Dwelling Unit (ADU) Solution appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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I love California from Mt. Shasta to San Diego. I love Yosemite, Sequoia National Park, the Sierras, Joshua Tree, and Idyllwild. It has awesome beaches, great mountains, and great deserts all in the same state. The weather is always spectacular and the cities have tons of fun stuff to see and do. Sure, it has a nasty little earthquake and forest fire habit, but there are lots of opportunities in California that can’t be found anywhere else. In addition to these unique aspects, many people have family in California and want to live close to them. Given the plethora of academic institutions there, many subspecialists have found a niche for their practice that cannot easily be replicated elsewhere. Other docs, due to religious, racial, or political issues feel strong ties to the diversity available in California.

Despite all that, I continue to be surprised and appalled at just how difficult it is for a physician to get ahead in California. In email after email I receive from doctors in that great state I hear similar struggles. The original title of this post was “8 Reasons California…” As you can see, it got worse the more I researched and wrote. The economic costs of practicing in California are above and beyond the so-called “Sunshine Tax.” Perhaps the best possible move a California physician struggling with financial issues can make is to move somewhere else. Where should they go? Practically anywhere else would be better from a financial perspective.

 12 Reasons Doctors Struggle to Get Ahead in California # 1 The High Cost of Living

Everybody knows about this one. Part of this is “Sunshine Tax.” People are willing to pay more to live in places with nicer weather and more to do. Part of it is that, on average, jobs in California typically pay more. For instance, the average teacher in California makes $85K, $36K (61%) more than in my home state of Utah. Nurses make 72% more in California, $100K versus $58K in Utah.

How about for doctors? Well, the salary info isn’t quite clear. For example, one source suggests California docs from family practitioners to orthopedic surgeons are paid 15-18% more than Utah docs. Other sources suggest just the opposite, ranking Utah 24th and California 32nd in average physician salary. But either way, it is clear that the difference between a doc in California and a doc elsewhere is nowhere near the difference in other professions like teaching, nursing, and particularly technology workers!

So what costs more in California? Well, housing is the big one. The average home costs $546K in California. Utah is no low-cost housing mecca, but the average is $325K. It’s $287K in Nevada and $139K in Indiana. $546K might not seem too bad, until you realize that is only 1/3 of the average in the Bay Area–$1.6M. In case it isn’t abundantly clear, the average California orthopedist has to stretch to buy the AVERAGE house in the Bay Area and that house is completely unaffordable for the average California family practitioner.

But the high cost of living doesn’t stop with housing. California may not be Alaska or Hawaii, but a gallon of milk there costs three times as much as a gallon in Illinois. The only state with more expensive gas than California is Hawaii.

Don’t underestimate the effects of these higher costs on your ability to build wealth.

# 2 High State Taxes

Sure, you might get paid a little more in California, but that’s only when you look at your gross income. You won’t notice nearly as big of a difference in your net income. There are two reasons for that. The first is that our country has a progressive income tax. You would think that paying a higher cost of living would be canceled out by making more money, but the truth is that the income tax brackets don’t cut you any slack for that. The tax brackets are only based on your income, not your expenses.

But wait, there’s more. California is also notorious for its state income tax. Check out these brackets from 2018:

That’s right. It tops out at 13.3%. There are federal brackets lower than that. Most docs won’t be paying 13.3%, they just don’t make enough. But they’ll all be in at least the 9.3% bracket, and many will hit double digits. By the time you apply both your higher federal tax brackets and the California tax brackets, there won’t be any of your increased salary left to use for the high cost of living. The only nice thing I can say about California taxes is that at least they don’t have a city income tax like New York City.

I’m not looking forward to doing my first California tax return in 2019. Not only will I be paying 13.3% on every dime I make from Passive Income MD, but I’m told by some Californians that their state income tax return is longer than their federal one! This WCI Network thing would be a lot better if I could talk PoF into moving to Texas, PIMD into moving to Nevada, and TPP into moving to Florida!

# 3 Lots of Wealthy People

A third issue with physicians trying to build wealth in California is that California is seemingly filled with tons of wealthy people. It turns out that 75% of Californians are in the top quintile of income nationwide. In most places in this country, physicians buy houses in the nice neighborhoods and send their kids to the best schools. In California, those docs are competing with dot-com millionaires for those houses. In addition, thanks to the run-up in housing prices, many relatively middle-class Californias are millionaires and multi-millionaires just by virtue of having arrived there before you. Now, those folks can never move to another house in California thanks to the 1978 Proposition 13 that locks in your property taxes until you move, but you still have to compete with them to live in a nice area. Instead of being in the top 1-2%, docs find themselves merely in the top 15% or so.

# 4 Low MediCAL Payments

I was actually surprised that some doctors might get paid more in California, because that has not been my experience talking to friends in my specialty. One of my partners moved here from California and nearly doubled his income. Part of the reason for this is that a large percentage of California ED patients are on Medicaid (called MediCAL to be cute). Nationwide, the average is 32%, but in California, it’s 43%. To make matters worse, MediCAL also pays worse than Medicaid in many states. Utah isn’t exactly known for awesome Medicaid payments, but a level 5 ED visit here pays $133 (compared to $175 for Medicare). In California, it’s only $108. So if you’re in a practice that sees a lot of MediCAL patients, you probably won’t be paid more in California than you might elsewhere.

[Update prior to publication: Of course, right after I write this post, I find out about something good that California is doing for docs. If your patient population is over 30% MediCal, first, I’m sorry, and second, take a look at this student loan assistance program.]

# 5 High Transportation Costs

If you’ve ever driven through California, you may have noticed that it was a rather expensive experience. California has very strict environmental laws, which increase the cost of vehicles sold there. To be fair, California is such a huge market that most car makers have just adopted California standards for all of their US-sold cars. California competes for the highest gas tax in the country at 76.7 cents per gallon. To make matters worse, sales tax on it is calculated AFTER the excise tax is applied, so in a way, you’re double taxed.

What’s worse, however, is that Californians have notoriously long commutes and sit in traffic for lengthy periods of time, so you end up buying more of that overpriced gasoline. Californians commute an average of 28.9 minutes, the fifth longest in the country. To make matters even worse, it’s my observation that Californians tend to drive nicer cars than many other places. Maybe that’s because they’re wealthier on average, or that they wear cars out faster due to all those commuting miles, or perhaps they just look nicer due to less rust from snow and salt. But the urge to keep up with the Joneses in the car department seems quite high as I drive around.

# 6 Health Savings Account Taxes

My favorite investing account is a Health Savings Account (HSA) because this Stealth IRA is triple tax-free. You get a federal income tax deduction when you put money in, it grows in a tax protected manner, and then when you pull the money out, as long as you spend it on health care, you don’t pay any taxes either. In most states, you also get triple tax-free treatment with regards to state income taxes, but not California (and New Jersey.) HSA contributions aren’t deductible in California. Why not? Just because.

# 7 No 529 Tax Benefit

California actually has a pretty decent 529 plan, with nice low-cost investments and reasonable fees. But unlike dozens of other states, there is no state tax deduction or credit for contributions.

# 8 SALT Deduction Limitation

Most doctors in the country had their taxes lowered by the Tax Cut and Jobs Act that went into effect in 2018. That wasn’t the case for many doctors in California. That’s because of the limitation on the SALT (State And Local Tax) deduction. It used to be that all of those state income taxes and property taxes you paid in California were deductible on your federal income tax return. Not any more. You only get to deduct $10K total. Now that hurt me in Utah too, but not nearly as much as a doc who was paying 10% in state income tax plus the property taxes on a fancy new doctor sized California house. It would have been even worse if the proposal to limit mortgage interest as an itemized deduction had gone through too. # 9 LLC/Corporation Annual Fees

Many doctors and other business owners form an LLC or Corporation for various reasons. There is usually a fee that you have to pay to the state each year for this. In Utah, it’s $15. In California, it’s 53 times as high – $800 per year. Ouch. At least you get to pay it with pre-tax dollars since it’s a business expense.

# 10 Weak Asset Protection Laws

Although California’s malpractice environment is head and shoulders over places like Dade and Cook Counties (thanks in part to a $250K cap on pain and suffering), the fact that the people you may damage have higher incomes probably makes up for it. In addition, California is notorious for its weak asset protection laws. Although it protects 401(k) assets, California judges are known to routinely pierce IRAs, at least any amount above and beyond what is “reasonably necessary for the support of the debtor and dependents.” I’ll bet my opinion of that amount is quite different from that of a California judge. Don’t run to whole life insurance instead — only $9,700 in cash value is protected there and annuities get no protection. But at least you’ve got that big house right? Not so fast. This isn’t Florida or Texas. Only $50-150,000 of those millions in home equity you’ve got are protected from your creditors. California doesn’t have an asset protection trust either. One small consolation is the existence of a little known law that allows for a (probably un-qualified) “Private Retirement Plan” which can protect assets in California.

# 11 Highest Priced Disability Insurance

California is also notorious for particularly high disability insurance rates. If you’ll be moving to California for or after residency training, you’ll almost surely want to get your disability policy in place before you go.

# 12 Crazy Legislature/Laws

The California legislature is not known to be a particularly physician friendly body. As a full-time assembly, most legislators are professional politicians. Now, don’t get me wrong, there are crazy anti-doctor laws being debated all the time including this idiotic one in Utah a few years ago. But California seems to go above and beyond. Perhaps the most recent one is illustrative. Although it hasn’t passed (yet), this bill would essentially allow the state to fix all of the prices for physician services as a percentage of Medicare payments. Anesthesiologist Linda Herzberg, MD, described it like this:

When you set payments at percentages of Medicare to a state GDP cap, prohibit physicians from participating in the price-setting commission, and use physician licensing fees to pay for the commission to fix their prices, I’m not too interested in continuing a discussion about how this might work, even if the bill is revised. To quote the CMA letter, “Physicians are not a public utility and should not be treated as such.” If enacted, this bill is more likely to dramatically restrict patients access to care, promote early physician retirements and a physician exodus from California, as well as deter the entry of young physicians into practice in California, than anything we have seen to date.

There seems to be no end of crazy ideas coming from this body. How about this one to tax text messages applied retroactively?

Move or Deal With It?

It’s obviously not impossible to get ahead as a doc in California. One need look no further than our WCI Network partner Passive Income MD. This anesthesiologist and his physician wife own 3-4 different businesses and are doing just fine. Okay, maybe that sentence confirms my hypothesis rather than providing evidence against it. Perhaps this post illustrates the reason why PIMD started looking for additional income in the first place!

If you’re not in that sort of financial situation, you’ve got a hard decision to make. You can leave California and acquire wealth relatively easily simply by seeing patients, carving out a big chunk of your income, and investing it wisely. Or you can stay and make do as best you can. You may want to put more time and effort into building a side business than you otherwise would. You’ll likely need to work longer to reach financial independence. You may need to take on more leverage risk or market risk to reach your goals. You’ll probably find yourself feeling much more middle class than you otherwise would. Hopefully, your partner’s increased salary can help make up some of the difference.

You’ll have some issues, but they’re mostly first world issues unless you have a particularly low income and a particularly high student loan burden. Just realize before you commit to that arduous road that there is another option, and it might only be a few hours drive or an hour flight away.

Now I’m sure I’m going to get roasted for this post by the 12% of my readership from California, but that’s okay. Just don’t expect a response before Saturday as I will be out of cell phone coverage all week while exploring Southern Utah. My staff is now all back from their backpacking trip last week, so feel free to ping them if you need anything while I’m gone.

What do you think? In what other ways is it difficult for physicians to build wealth in California? Have you moved from a high cost of living area to a lower cost area? What was it like? Have you decided to stay in California? What sacrifices have you had to make to do that? Comment below!

The post 12 Reasons California is a Terrible Place For Doctors to Build Wealth appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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