By Dr. Jim Dahle, WCI FounderYou've probably heard the phrase Buy This, Not That before. There's a book with that title. WCI Columnist Francis Bayes even did a version of this idea in 2023. Today, we're going to go over a potpourri of financial wisdom in “Buy This, Not That” style.
Buy a Used Car with Cash, Not a New One on Credit
The amount of money that Americans throw away on transportation is unbelievable. I am a firm believer that the reason most middle-class folks are not wealthy is sitting in their driveway. Cars depreciate rapidly, and more expensive ones cost more to finance, insure, maintain, and repair. When I see someone with a five-figure car loan, I just shake my head and honestly feel sorry for them for not understanding this principle. Few of us agree with everything Dave Ramsey says, but he's got two auto rules of thumb that I think are pretty darn good.
The first one is that you shouldn't have cars and other things with motors (boats, planes, motorcycles, snowmobiles, RVs, etc.) that are worth more than half of your annual income. If you make $200,000 a year, you should have no more than $100,000 in cars. If you're a resident married to a stay-at-home spouse, that limit is going to be $30,000. Maybe a $10,000 car and a $5,000 car would be even better.
The second rule of thumb is that you shouldn't buy a brand new car until you're a millionaire. At that point, it becomes a relatively trivial part of your financial world, rather than something that is preventing you from building wealth.
Both of Ramsey's rules of thumb are worth following. I would also add my own rule to the collection: “Never have a car loan of more than $10,000, even if you're a doctor or expect a high income later.” Get used to paying for your stuff with cash using “saved money.”
Buy Index Funds, Not Actively Managed Funds
The data showing that you should invest in low-cost, broadly diversified index funds instead of actively managed mutual or exchanged traded funds is overwhelming. Yet only half of the money in mutual funds is in index funds, and plenty of those are not low-cost or broadly diversified. Why buy something that is almost guaranteed to underperform? The benefits of index funds are even more pronounced in a taxable account. An actively managed fund will have higher management fees, more bid-ask spreads, higher commissions, more short-term capital gains, more non-qualified dividends, and more manager failure. Who needs it?
Buy Term Life Insurance, Not Whole Life Insurance
Life insurance is designed to treat the financial catastrophe of having a breadwinner die young. Term life insurance is “pure” insurance; you're paying only for what you need. Young, healthy people can buy millions in term life for a two-figure amount per month. Whole life insurance, on the other hand, is a combination of unnecessary insurance and a poorly performing investment. No wonder such high commissions have to be paid to get it sold.
Buy a House in a Good School District, Not Private School Tuition
If you live in a good school district, you can send your kids to the local public schools for free. Well, not for free, but it might as well be since you're going to pay the property taxes supporting those schools either way. Private school tuition can be as much as $40,000 per year. From kindergarten, $40,000 x 13 years = $520,000. If you have four kids, that's over $2 million in private school tuition. You're telling me you couldn't find a decent house in a decent school district for $2 million? I'm skeptical.
A house might be a consumption item, but it's the least bad one to buy. Not only does it shelter your family, but it generally appreciates over time. If you have school-age kids, owning a house in a good school district pays two kinds of dividends. It pays you “saved rent” dividends, and it pays you “saved tuition” dividends.
Buy Individual Disability Insurance, Not Group Disability Insurance
While the most important thing about disability insurance is to have SOMETHING in place, some disability insurance is clearly better than other disability insurance. An individual disability policy generally has premiums that do not go up over time. It can go with you when you leave your current employer, and it is more likely to pay out (and for longer) in the event of a disability. Group life insurance policies have escalating premiums. They are not portable, and they can be filled with so many holes in coverage that they resemble Swiss cheese. Not sure where to get a good individual disability policy? We can help with that.
Buy Retirement Accounts, Not Annuities
Retirement accounts are products made to be bought; annuities are products made to be sold. The tax breaks available in a 401(k) or a Roth IRA are dramatically better than those available in an annuity. Both retirement account money and annuity money grow in a tax-protected way, but that's where the similarities end. Both annuities and Roth IRAs are funded with after-tax money, but the earnings coming out of a Roth IRA are tax-free. Those coming out of an annuity are taxable at ordinary income tax rates. And the earnings come out first. And the fees are significantly higher. Retirement accounts often provide better asset protection, better estate planning benefits, and better investments. While annuities have their uses for some people late in life, funding one before maxing out your retirement accounts is almost surely a mistake.
Buy Experiences, Not Stuff
The data in the happiness literature is very clear. In general, the purchases that bring the most happiness are shared experiences with people we care about, not the stuff that fills our houses and garages. Not convinced? Go to an estate sale sometime. Nobody wants the decedent's old stuff. What isn't being thrown away is sold for pennies on the dollar. The average estate sale brings in $18,000, and the estate sale company takes 30%-40%. How many years of your life did you work so you could get $12,000 worth of stuff?
Buy a Practice, Not a Doctor House
Young dentists are often faced with the choice to buy into a practice or get a big mortgage on a fancy house. Buy the practice first. The practice is an asset, which may double or triple your income. The house is a consumption item. The same principle applies to many physicians buying into a partnership or purchasing shares of a surgical center, dialysis center, endoscopy center, lab, radiological center, or practice real estate. The doctor house will be just as enjoyable at 40 when you can afford it as it would be at 35 when you can't.
What do you think? What other “buy this, not that” items would you add to the list?
Buy American when you can.
Avoid items made in PRC. You can find a lot of quality clothes and shoes made in the USA if you are patient and look. The same with furniture and linens. It helps to keep Americans employed (This is your patient base, doctors!) It reduces the impact on the environment versus items shipped thousands of miles. And it helps the nation to maintain economic strength, which is good for your children and grandchildren.
Buying American also helps to avoid so many small consumption items that clutter up our homes and lives and end up in the landfills anyway. (Think about the dollar spot in Target and checkout line impulse purchases. ) Ultimately, hundreds or thousands of unnecessary small junk purchases avoided yields thousands more dollars in your accounts, all the better to buy more experiences.
My home is filled with many things made in many places, but I am conscious to shop for quality American-made goods when I can and try to avoid those made in China when possible.
This was a great post. We all have these choices.
Agree
How do you feel these considerations apply to those of us in the money irrelevancy category? I’d kind of like to buy an ultra luxury vehicle, and the price would be less than the daily fluctuations in my net worth due to changes in the stock market. But at the same time it feels wasteful. How do you stop caring when it really doesn’t matter?
If you want to buy it, then buy it. If it’s not going to make you any happier, then give the money away instead. That’ll probably make you a little happier and someone else a lot happier.
You have the opportunity to spend totally according to your conscience if you have that wealth status. If that means an ultra luxury vehicle, so be it. If that is meaningful to you, then do it. But if the idea is to spend an excess of money, consider unique ways to spend for others’ benefit. There was a story about 15 years ago about a family in Savannah, Georgia, that moved from a multimillion dollar house to a very nice house worth half as much. It was plenty for them and they used the remainder to provide housing for others. So maybe you could buy the nicest car you have ever had AND donate transportation (used cars for next families, bus passes, a van for a school or daycare) and still spend less than the super premium vehicle. You weren’t asking me, but your comment was thought provoking.
In the military, we tell young troops:
Buy a (free, mandatory) premarital counseling, not a huge ring on layaway. Buy condoms, to avoid buying diapers. Buy a (funded GI bill) education, not a diploma from a for-profit diploma mill. Buy a beer for a friend, not a stupid, conspicuous tattoo that looks stupider after a payday weekend.
Roger that! And, great advice for youngsters in general.
Why do you recommend term life insurance over whole life insurance when some whole life products offer tax advantages, like tax-deferred growth and the ability to borrow against the policy without triggering a taxable event? It seems these features could provide significant financial benefits in the long run e.g. 10 Pay Whole Life
Haha.
Are you serious or just trolling me? If serious, read this then come back with any questions:
https://www.whitecoatinvestor.com/what-you-need-to-know-about-whole-life-insurance/
https://www.whitecoatinvestor.com/downsides-whole-life-insurance/
Thanks for the response. I totally get that whole life insurance has significant downsides for most people, especially when it comes to the high costs and relatively low returns compared to other investment options. But I’m still curious about those niche cases where it can make sense—like when it’s used for estate planning in very specific situations, such as through an ILIT to protect assets from estate taxes.
I know this might be a high bar and only applicable to ultra-wealthy individuals with estates over $13 million, but aren’t there scenarios where the combination of tax advantages and asset protection could actually be worth it? I’m wondering if anyone here has come across cases where whole life insurance was used successfully in this kind of strategy. Would love to hear more about how often that actually plays out in real life.
There are legitimate uses of whole life insurance as discussed here:
https://www.whitecoatinvestor.com/appropriate-uses-of-permanent-life-insurance/
But ILITs aren’t the only way to avoid estate taxes by any means. Just having an estate tax problem does not mean you need a whole life policy. We anticipate an estate tax problem and we are solving with a trust that doesn’t not own any life insurance.
Thanks for your reply, What would be some examples of trusts that could work effectively in this situation? I’d love to learn more about alternative strategies.
Here’s one example: https://www.whitecoatinvestor.com/spousal-lifetime-access-trust/
A GRAT or an ILIT are others. Charitable trusts might be an option too:
https://www.whitecoatinvestor.com/charitable-trusts-crats-cruts-clats-cluts/
That’s very helpful, thanks!
It’s been a while since we’ve seen an insurance salesman in the comments section. Welcome back.
I’m buying back my time, particularly time flexibility: yard mowed, laundry service, house cleaning, etc. None of these requires skill or any specific expertise, nor am I particularly averse to doing any of these. However, they are tasks in which their value is simply in them being done, not necessarily done by me. It doesn’t matter *who* mows the yard, simply that the yard is mowed. Not mowing my own yard allows me to play some soccer with my son, which is priceless.
Buy Bitcoin Not ______
Bitcoin DCA return since 5/2020 when I started recommending it on the forum 134%
S/P 500 DCA return since 5/2020: 42%
Bond DCA return since 5/2020: A lot lower than the S/P
Insert Biden “C’mon man”…At least start recommending people put a portion of their portfolio into Bitcoin. It is just math and common sense at this point. It’s really bad financial advice to not recommend it at this point and since that is the entire purpose of this website you have really dug in against something. It has cost a lot of your readers a lot of money over the years. Its just sad to me.
You could have at least had the courtesy to start recommending it in 2011.
If one could buy past performance, following your suggestion makes sense. You may have noticed that I’m not a fan of a speculative investments but my readers are free to make their own decisions.
I’m amazed how many years you’ve hung out here given how sad it makes you.
I’ve been here since 2011 (you know this). I agree with so much of what you say and recommend your advice to so many people.
Of course I did not know Bitcoin existed in 2011 and definitely would not have understood it if I did. I really started learning about it in 2017 and 2018 and like most I was very skeptical of it. I listened to people that I respect like yourself and many others who did nothing but bash on it back then. As I continued to learn about it while keeping an open mind, I eventually had the ability to change my opinion. That started to occur in 2018 but really occurred for me in 2019. So obviously I would not have recommended it in 2011 and you know this as I have written it many times over. It’s disingenuous to suggest it.
I’ve also had many online discussions with you about the “speculative” nature of Bitcoin in the past. I’ve even linked a good paper on it for you in the past. Here it is again in case any of your readers want to see it:
https://medium.com/@TeddyBitcoin/bitcoin-is-a-speculative-asset-9de06a6b0621
I know you have financial goals with the website/team/platform you have developed. It’s always been in your mission statement. But what has also been in your mission statement is helping those white coats escape the perils of wall street/traders/high fees etc (I’m paraphrasing here). As feedback from someone who has been here for over a decade, you are partially failing with your second goal. What makes me sad is I’m unsure if this is only your ego getting in the way, or if it has to do with the first part of your mission which is to run a profitable business. I don’t know the answer. But I hope one day you see the light, and admit the mistakes you have made along the way. I made mistakes in relation to Bitcoin from 2014-2019 and have admitted it repeatedly. It sucks to admit, but it sucks even more to continue making the mistake.
My position on Bitcoin has been consistent for 13 years and I’m not sure why you think it’s going to change. Let me reiterate it.
# 1 Bitcoin is a speculative investment.
# 2 WCIers should limit their investment in speculative investments to no more than something like 5% of their portfolio.
# 3 There are no called strikes in investing. You don’t have to invest in everything to be successful. It’s okay to watch from the sideline.
# 4 I don’t invest in Bitcoin for several reasons, none of which have changed in the last 13 years.
Any SUV recommendations for purchasing/leasing with three kids that are still in car seats and trunk space for a dog? We lease a Suburban ($1000/month) and Explorer ($483/month) right now. I am looking to replace the Suburban with a lower monthly cost vehicle that still gives me enough space for three toddlers and a dog. Hybrid would be great too for gas milage cost. Full disclosure, hard for me to not buy American being a Detroiter but open to suggestions!
We liked our sequoias but not American (although maybe built here). Make sure you’re not okay with a minivan, they’re really designed for this sort of thing.
Not getting a minivan when you have three or more kids in car seats is the vehicular equivalent of buying whole life or actively managed funds–you’re just paying more for a less effective option. Nobody looks cool with three car seats in there. The minivan is cheaper than most (large) SUVs, more fuel efficient, holds more cargo, handles better, is easier for kids to get in and out of, is easier to reach car seats for buckling younger kids in, and fits better in most garages and parking spaces. Unless you’re towing a massive RV or boat every weekend, it shouldn’t even be a debate.
Love my new Grand Highlander Hybrid. Paid cash for it, and I’m pretty sure the kids in car seats will be learning to drive it in 15 years!