By Dr. James M. Dahle, WCI Founder
I have been thinking about this post for weeks but have been hesitant to write it, primarily because nobody likes to hear “I told you so.” Over the years I have heard lots of people talk about how it is best to live a highly leveraged life to maximize returns, to avoid having any cash around lest it cause a drag on returns, and to not worry about their “doctor income” because it is so stable. I have tried to provide consistent, gentle, but firm warnings against these mindsets. It is always best to learn from the mistakes of others, but some of us just have to learn these lessons on our own.
The Role of an Emergency Fund
A classic emergency fund consists of 3-6 months worth of household expenses stored in a relatively liquid asset with stable principal such as a money market fund or a high-yield savings account. (Funny how 1% is considered high yield these days isn't it?) I can't believe how many thank you emails I have received from readers/listeners over the last couple of months thanking me for telling them to put some money aside for a rainy day. It's not complicated to build an emergency fund, but when you need it, nothing else will really do.
It's not popular to point out on social media that most Americans don't have any savings. While I believe that just about anyone can save something, there is no doubt it's harder to have significant savings on a low income. But for my readers, who typically already have or soon will have a six-figure income (more likely $200-400K+ in household income), there really is no excuse to not have significant savings. I hope if you didn't learn this lesson before the CoronaBear that it is now imprinted on your psyche in such a way that you will never forget it and pay it forward to your family, friends, and colleagues in the future.
The local plastic surgeons are sending faxes to the emergency departments about their new 24/7 wound care clinics. Dentists are advertising that they are still open for emergencies. Many Americans are worried they can't wait a few weeks for their $1200/person stimulus payments to show up. 1/3 of rent was not paid in April, just two weeks after stay at home orders were given. Businesses are applying for federal and state disaster loans. Within 2 weeks of the quarantine starting, 1/7th of the restaurants in Alaska had gone out of business permanently. There is a severe lack of savings in our society. As Steve Martin famously said in the classic Don't Buy Stuff You Cannot Afford, “But where would I get this ‘saved' money?'” It only comes from one place–making more than you spend and setting it aside. Simple, but not easy.
The family visits the ever-classic Neon Canyon
Debt-Free Living
I took out my first debt as a college freshman at 18. I paid it off at 35, about the same time I paid off my “time-debt” for medical school. After that time our only debt was the mortgage on our home, which we paid off after 7 years in 2017. Since that time, we have run our lives without any debt beyond the typical rewards credit cards paid off automatically at the end of each month. This minimizes our fixed monthly expenses (no mortgage, no rent, no student loan payments, no car payments, etc) and allows us to immediately and dramatically reduce our personal expenses in a time of lower-income. This, in turn, lowers our personal stress and allows us to make better long-term decisions and even be opportunistic in a downturn with our purchases and investments. When others are forced to sell, we're in a position to buy.
The Pay Cash Mindset
As part of that debt-free living mindset, we also pay cash for what we buy. If we don't have cash, we don't buy it. So before we buy anything, there is a period of time where we save up for what we are going to buy. This includes everything–cars, boats, furniture, vacations, home improvements, WCICONs whatever.
Many of you may recall that we have been doing a major home renovation in the last few months. Before ground was broken on it, we had the money in cash ready to pay for it. Over the course of 7 months, approximately 250 people have been over to the house to work on it at one point or another. When the time to pay them all finally arrived in the midst of the CoronaBear (3/4 of the total cost was due in the last couple of months), there was no need to sell stocks low or worry about our dramatically decreased income in order to pay them. The money was sitting in cash; all we had to do was write a check.
Was it easy to leave that money in cash while the market was zooming upward in mid-2019? Perhaps not, but it was the only option for us because we were committed to paying cash. When the bills were due and stocks were selling at 2016 prices, it turned out that was the right decision. Stocks are for long-term money and debt is only for true necessities. Cash is for everything else.
What do you think? What have you learned during the CoronaBear about the importance of cash savings, living debt-free, and using cash for purchases? Comment below!
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A timely reminder. Lately, it had become popular not to have a classic Emergency fund- any cash not in the upward looking market was considered wasted. “How often do you think both spouses will lose a job or get disabled at the same time?” was a common refrain on social media. Now we know, it can happen.
One trend I’m seeing, that worries me, is that some people are veering sharply away from paying down even moderately-high interest loans to investing- since the “market is so low”. My crystal ball is as cloudy as the next person’s. So I don’t know if the market will pick right back up and make that the right thing to do or if it will languish for sometime and make that a risky bet. Somewhere in the middle is whereI’d likely choose to be, in their shoes.
How much of an emergency fund do you recommend residents to have?
Maybe our income can be seen as extra stable since our incomes haven’t been decreased during this pandemic? My university considers us student workers and subsequently, the university president says our program is not allowed to decrease our salary.
Do you still recommend 3-6 months? Do you recommend a flat savings amount?
I agree resident incomes tend to be pretty stable…except perhaps in Philadelphia!
3 months of resident expenses isn’t a ton of money though. We’re already talking about a 4 figure amount, no? How much more do you really want to reduce it?
As a retired doctor I should be worried but I am not. I developed a large e fund prior to retiring. I think psychologically knowing I have enough cash to live on for 3-4 years keeps panic at bay. Paying off your mortgage and never leasing cars as well as using CC wisely are also good habits to develop.
I’m not sure retirees really have an “emergency fund” although they may have a cash allocation in their nest egg. At some point in your career, there is a shift there. I think an emergency fund is really a concept for those with a smaller nest egg.
Hi Doc, as a dentist (and someone able to financially withstand 3-6 months instability personally and professionally ), I’m somewhat disappointed by the paragraph mentioning dentists. You state, “Dentists are advertising that they are still open for emergencies. ” You put this in the paragraph about people not having enough savings, so my interpretation of what you are saying is that dentists are doing this to make up for their lack of financial responsibility?
I just opened my dental office in NH yesterday. I performed 2 surgical extractions, where I had to remove painful teeth for patients. These types of procedures result in an aerosol of blood and saliva, and I had to space patients out far enough to keep them and my employees safe. The type of dentistry we are doing, and the pace we are doing it at, is about 5% of what we normally do, so when we are “advertising that we are open for emergencies”, we are honestly just here to help our patients get out of pain and keep them out of the hospitals for toothaches. I left the office 100% sure I didn’t even do enough dentistry to cover the overhead, but I have to at least feel good that I helped people get out of pain, in the safest way possible.
Please understand that yes, there are business obligations that dentists have, but when we “advertise” about opening for emergencies, this is to let patients know, “don’t go to the Urgent Care…call your dentist” for the toothache.
Thank you!
Elizabeth DiBona, DMD
DiBonaDental.com
I think you’re reading something into that paragraph that was never intended.
You’ll be pleased to know I have four kids and a wife going to the dentist today for routine care and one visit to the orthodontist.
Oh good, I was wondering if all physicians were thinking we are just thinking about our income. We genuinely care about our patients and have been spending an incredible amount of time preparing for reopening! Glad you and your family are back at the dentist!
Best,
Elizabeth
Thanks for clarifying Jim. You could include how overall ER volume has been down and bad for ER Docs’ income as well.
For sure. I could have written something about pretty much every specialty. I saw an article this morning suggesting thousands of primary care clinics were about to go out of business. Seemed a bit overly pessimistic, but there is no doubt we’re pretty much all affected.
Perhaps the other side to that coin is that some dentists (like physicians, so that we don’t single dentists out in particular) *are* advertising needed services because they have more leverage or obligations, which goes back to the original premise of the article.
I was just demonstrating that things are bad all over the economy, including the doctor economy, with numerous examples. The intent wasn’t to single out specialties by any means.
Simple practices like having a healthy amount of liquid savings and no debt free isn’t ‘sexy’, but they really work.
We paid off our mortgage back in February, and it’s incredibly reassuring to know that we no longer have to make that monthly payment during these chaotic times. Plus, we got a far better guaranteed return on that money than we would have from buying bonds at today’s yields. With the mortgage gone, we’re now investing 50% of our gross income into stocks.
Yup, timeless advice. Given by you, me, financial advisors, Cory Fawcett, Dave Ramsey, the Bible, my grandmother, etc.
Still new, still debated, still ignored by many.
Amen to that!
A little over three years ago, I did a guest blog for PoF discussing my $500k emergency fund:
https://www.physicianonfire.com/top-5-reasons-physician-holds-500000-cash/
I am in the process of updating it for (hopefully) a future posting on his site. The pandemic has created a lot of concern for my family and myself, but in large part due to the large cash cushion, running out of money (or being forced to sell stocks low or raid retirement funds) is not one of them.
VagabondMD it was your post that lead me to sale some funds last year to create a 3-4 year cash cushion as I prepared for essentially retired life this year (I left the rest in about 85 % equities). I must admit as I watched the market continually go up I wondered if I should have kept the money in the market but I reminded myself I sold for “piece of mind” and right now my mind is feeling pretty relieved.
Thanks for the update and feedback. Good luck with your retirement. 🙂
When we bought a small vacation cabin in the Catskills two years ago, planning to use it ourselves but also rent it out, our number one criterion was that it had to be affordable for us to own even if it never rented for a single night. It took us three years of looking to find a suitable property. We bought the cabin for all cash and it costs us $6,000 a year to own (property taxes, insurance, heating oil, electric, phone and internet). As it turned out, renting it out covered the cost of ownership for us last year. This year of course we have had a number of cancellations but we are not worried about covering our costs because we made sure it was affordable for us in the first place. From what I have been reading many Airbnb owners who were relying on rental income to pay their mortgages are now in trouble.
Amen.
Cash ALWAYS looks stupid. Right up until you need it. Then it is GENIUS.
“The local plastic surgeons are sending faxes to the emergency departments about their new 24/7 wound care clinics. Dentists are advertising that they are still open for emergencies. Many Americans are worried they can’t wait a few weeks for their $1200/person stimulus payments to show up. 1/3 of rent was not paid in April, just two weeks after stay at home orders were given. Businesses are applying for federal and state disaster loans. Within 2 weeks of the quarantine starting, 1/7th of the restaurants in Alaska had gone out of business permanently. There is a severe lack of savings in our society.”
I completely agree with the very last sentence. A lack of prudent liquidity was your point. Your examples could use a touch up. Promoting and reopening, closing a business, taking advantage of favorable government programs etc. do not lead to the conclusion of a lack of liquidity. About the only thing is not being able to pay next months rent. Not your best paragraph. Comes off privileged rather than shining light. Not the intent.
Man, I don’t think another paragraph on this blog has ever been so directly targeted for criticism before.
It certainly wouldn’t win me any points in an English class, but I’m sure I’ve got tons of poorly written paragraphs on this site.
Dentist here….. WCI is right. As with many medical specialties much if not most of dentistry is elective. Plastics, ophthalmology, even emergency medicine in many places is much slower if not stopped completely right now. When elective procedures stop…. so does the money. Folks that work in those fields should be aware of the elective nature of their work and realize that consumers will consume less of it when they have less money. Better have savings to handle those scenarios. Nothing wrong with trying to drum up some business during a downturn either. Just saying WCIs paragraph was fine… don’t look to get offended or make something bigger out of it than it than it’s needs to be. Keep it coming Jim!
Thanks for this reminder. It’s easy to get caught up in the desire to leverage everything when times are good. I always feel like I’m too risk averse. Perhaps that’s because I remember trying to find a summer internship as an engineering major during the dot com bubble burst, or trying to start retirement accounts in residency during the great recession. My money is probably not working as hard as it could, but I’d rather not rely on a house of cards where if one little things goes wrong, it all goes down.
Our emergency fund is technically allocated in a 80/20 stock/bond portfolio in Wealthfront. Does this meet the classic guideline that it should be relatively risk free and highly liquid? No. But we calculated our monthly expenses for 9 months (with no skimping or reduction in quality of life), then rounded up, then added 30% to that and call that the emergency fund, not to be tapped for anything else. So we could sell this even with a 30% drop in the market, and easily use that for 9 months, probably 12 if we actually put some in place some personal spending restrictions. I wouldn’t necessarily recommend this for everyone because obviously you have to have the stomach to watch your e-fund drop by thousands and not make any drastic moves, but we weathered this easily without having to utilize that (you also have to have enough to put 6 months savings + 30% or so to begin with, but not out of reach for most on this blog). That account was up 35% or so at the peak, and now up 18% or so. So we have the safety we need without it being a big “cash drag.”
Judging an ‘emergency’ fund by how it responds to a market drop that immediately recovers by 60% is a little naive IMO. If it drops 40% and stays there while you lose half or all of your income, may be a different story.
I admit that I was one of those people that took viewed an emergency fund lackadaisically.
In my mind I thought that my income as a radiologist would be almost like money in the bank, with a high positive monthly cash flow that was rock solid.
I was fortunate that I did have a lot of cash in my savings account but mainly I had been using that to build up funds to deploy when a real estate deal would come around. This time it was particularly high because I also had set aside worst case scenario for the capital gains tax hit selling my medical office building last year (the capital gains hit from that sale alone in isolation from all other tax deductions was to be around $230k).
Around the time the bear market hit I was lucky that I was told by my CPA that because of all the other deductions I would owe $170k. So the difference just from that was almost a years worth of estimated bare bones expenses.
I too am happy I am completely debt free with no mortgage or student loans. It helped me tremendously as imaging volumes decreased so much that my partner and I put ourself on furlough every other week and the board of directors mandated a 60% reduction in draw compared to our 2019 W2 until volumes rose. Even so I am able to add to my savings about $7k a month so building my emergency fund through the pandemic instead of depleting it.
I was the same way thinking they’ll always still need radiology so I’m in a recession proof job. Man was I wrong. I’m glad I did listen to others with having an emergency fund despite thinking that about my job. Now with my significant salary cut I’m still contributing to my retirement accounts fully while I see others having to cut their contributions to pay their expenses. This recession now even has me thinking I’ll keep a 6 month cushion even when I retire to offset something crazy like this. Granted, without a mortgage that fund will then be much smaller.
not a popular strategy but if you’re young and don’t mind the risk, it’s a lot better financially to have no emergency fund or just a few months. The opportunity cost of having a three-year emergency fund is huge and the gains you’re giving up well easily cover any losses that you have. Even if you needed the money at the very bottom of theRecent dip, when stocks were down 30%, stocks were up 30% the year before so you would’ve come out the same. And if we all agree that the market goes up around 10% a year over a long period of time, you’re giving up huge returns if you have a 1 year or three-year emergency fund.
Jim great post as always. I am definitely one of those ones who decided to invest instead of pay down debt, but luckily do have a 3 month emergency fund. I still continue through this bear invest as per my financial plan, but it does make me nervous that docs have seen a cut in income and I am not debt free. I had always thought our jobs provided a steady income, but this coronabear has shown otherwise.
Nice to be debt free and all such seek that time in your life when you are financially independent
No reason most docs cannot attain that by age 65
I never had an emergency fund but enough bonds if needed
Always fully invested
The end game now is vaccine and antiviral treatments as well as extensive testing
Stay safe
Agree with this post 99.5%. The plastic surgeon and dentist offices might be staying open not because they need to pay their own bills, but to help pay their staff. As a small business owner this was the biggest stress during the 6 weeks we were closed down. Not that the business owners and business as a whole would survive, but that all of our “employee family” would survive. For that reason alone we would have stayed open. The only other thing I don’t agree with in this post is the title…”beat the coronabear”….Some serious assumptions there. Although the market tide has changed, I have concerns as to whether this bear is gone for good. I don’t know if you can say you beat it, if we are still in the first quarter of the game and just don’t know it yet. I hope your title is right and I am wrong.
I agree that worry about my employees and staff is very significant.
The bear market technically ended when the market rose 20% from the low. That doesn’t mean there won’t be a CoronaBear II and a CoronaBear III down the line, but CoronaBear I is over, sorry.