By Dr. James M. Dahle, WCI Founder
Personal finance and investing writing is generally a pretty dry subject, whether it is a book, an article, or even this blog. There will never be a line stretching around the corner of the bookstore of people camping out for the third volume of a series on investing for retirement. It just isn't Harry Potter, Star Wars, or Twilight kind of material.
Steve Martin wades into personal finance
So when something even mildly entertaining on the subject comes along, it might get played and replayed for decades to come. Thus it is with the infamous Steve Martin Saturday Night Live “Don't Buy Stuff You Cannot Afford” video. Of course, if you've never seen it, it's new to you, so here's the best link to it. You'll want to watch this before finishing the rest of this post.
The best comedy, of course, is based on reality. It allows us to see ourselves and our silliness from another perspective. My favorite line is
“It's in the book; it's only one page long.”
It's true, though, that the difference between wealth and endless poverty is not complicated. Like losing weight, it is simple, but not easy. Nothing has changed since Dickens penned this quote in David Copperfield:
“My other piece of advice, Copperfield,” said Mr. Micawber, “you know. Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty ought six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and in short, you are forever floored. As I am!”
The “don't buy stuff you can't afford” concept is so simple, yet I would venture to say that the majority of Americans, and probably the majority of doctors, live with debt hanging over their heads. A religious leader, J. Reuben Clark, said this to his people near the end of The Great Depression, although I suspect many of them had already learned it from personal experience over the previous decade:
Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours; it never has short crops nor droughts; it never pays taxes; it buys no food; it wears no clothes; it is unhoused and without home and so has no repairs, no replacements, no shingling, plumbing, painting, or white-washing; it has neither wife, children, father, mother, nor kinfolk to watch over and care for; it has no expense of living; it has neither weddings nor births nor deaths; it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.
Many financial columnists and advisors like to talk about good debt and bad debt. While I'll readily admit that some debt is far worse than other debt, I don't really buy into the idea of good debt. But at the same time, you don't want to be so debt-averse that you make stupid mistakes.
I knew far too many military physicians who, after long years of training when their pay-back period arrived, realized they didn't want to be in the military. For many, their aversion to student loans was the major motivator to their military service. It was too late before they realized that they had traded financial loans for time loans, and, in the end, it was really the same thing.
Likewise, spending an extra year “saving up” to pay for part of medical school may, in the end, cost the physician a year of attending-level income. Trading $10,000 now for $250,000 in a few years reminds me of Esau selling his birthright for a bowl of porridge. In a similar vein, paying down a 4% mortgage or a 2.9% student loan instead of funding your 401(k) probably isn't the brightest move either. Moderation in all things.
But far too many of us have adopted society's view that living in debt is normal. As Dave Ramsey says, “Don't be normal!” Let's talk about a few different types of debt and what you can do to minimize the damage that debt does to your financial life.
Don't Buy Stuff You Can't Afford
#1 Mortgages
There are really four key things to do in this area.
Most Residents Shouldn't Buy a House
Don't buy a house if you're not financially ready to buy a house. Most students and residents shouldn't be buying houses. Period. 3-5 years (closer to 5, really) is usually only enough time to break even on it. Despite what you think now, it would be unusual for you to continue living in it on an attending salary even if you stay in the same area, which you probably won't. Plus, you really don't get any significant tax breaks for owning a home until you're an attending. If you don't have 20% of the value of the home saved up, you should really think long and hard about whether you should be renting instead of owning. (If you still decide to go forward with it, at least use a doctor mortgage and avoid PMI.) That would be a very rare medical student/resident, or even a new attending.
Don't Buy Too Much House
There's nothing that says doctors have to live in big, nice houses. I mean, you don't want a house where people are getting shot out front, but you don't have to live at the top of Snob Hill, either. If your payment with a 15-year fixed-interest mortgage is more than 20% of your salary, you're probably buying too much house. Yes, I know housing costs a lot in Manhattan and San Francisco. Yes, you can probably spend more than 20% without going broke. Yes, it probably isn't the end of the world if you get a 30-year mortgage instead of a 15-year. But realize that the more you spend on housing, the less you'll have for other consumption items or vacations, and the longer you'll have to work until retirement.
Get the Right Kind of Mortgage
Usually, if you have a decent income and you didn't get too much house, this part is easy. People usually only have to get creative with their mortgage when they haven't followed the first two points above. 30-year mortgages cost more. Complicated mortgages like interest-only, balloon payments, and some types of adjustable-rate mortgages often cost more in the long run. Not putting 20% down costs more, no matter what they call that cost. (It can take the form of PMI, higher interest rate, higher closing costs, more points, but be assured that cost is there.)
Don't Borrow Against Your House
Last, you probably shouldn't borrow against the house. Most of the people who got into trouble in the 2008 housing crash were treating their home like an ATM. The best way to ensure you'll be underwater on your mortgage is to put zero down and every time your home appreciates, take that equity out and spend it on a trip to Paris.
#2 Student Loans
Most of us are pretty familiar with this one. Although these loans go away if you die, they, like taxes owed, cannot be discharged in bankruptcy court. The key here is to minimize the damage. If you have some assets, use them for medical school. If your parents, grandparents, or rich uncle can help, accept it and vow to pay it forward later. Spend as little as you possibly can when you're living on borrowed money. Remember that by the time you pay them off, things you buy may really end up costing you two or three times the sticker price.
Try to have a little income through school. It really is possible to hold down a job of some kind through at least three years of medical school. I did H&Ps for a local surgical center. I knew some people who donated to the sperm bank. Others worked at the gym and studied in between customers. Even a little income goes a long way. This isn't the time to have a stay-at-home spouse. Even if you have to watch the kids after school hours so he/she can have an evening job, it'll be worth it. Perhaps try to take out loans only for medical school expenses, not living expenses. Most importantly, go to the least expensive medical school you can get into. I assure you that the education at Boston University is not three times better than the one distilled at the University of Massachusetts. Five years after graduation it will be difficult to find someone who will care much about where you went to medical school.
#3 Car Loans
Always Pay Cash
I like to drive nice cars as much as the next guy. Every time I get another one, it is nicer than the last. But I always pay cash for it. Not only do you save on interest, but you usually save on the price of the car. Plus, you get to feel like a crack dealer when you walk in with $6,000 in 20s that you pulled out of the ATM that morning. (Word to the wise—you'll need to call your bank before trying to withdraw $6,000 using your ATM card.)
Buy It Used
Don't buy a depreciating asset on credit. If you can't afford to pay cash for a new car, you can't afford a new car. Buy a nice used one. Don't have the cash for a nice used one? Buy a beater. Can't save up $1500? Start pedaling. And if you're going to own a second car before you're an attending, there had best be a second job to go with it.
I am convinced that a large percentage of Americans spend their retirement funds on driving nice cars prior to retirement. Consider Mike, who buys a new car for $60,000 every three years. He can probably sell it for $40,000. He will likely spend more maintaining, repairing, and insuring the car than his friend Joe who drives the beater down the street. Joe bought his car for $3,000 and will drive it into the ground over the course of six years. Mike's annual cost of car ownership is about $5,000 a year. Joe's is about $500 a year. Over 40 years, $4500 invested at 5% real (after-inflation) is equal to about $544,000. Considering the average person 55+ has less than $100,000 saved for retirement, $544,000 would go a long way.
The money you save driving beaters isn't limited to the purchase price, either. They're usually economy cars, so you save on gas. You save on insurance because you only need liability coverage. You save on licensing fees and, believe it or not, you save on repairs. Not only are parts cheaper on inexpensive sedans, but you also save by avoiding repairs in the first place. When you have a new car, you feel like you need to get every dent and ding and broken electric mirror fixed. But no one fixes a dent on a $1,000 car. Plus, if you get hit due to the fault of someone else, you make a profit. It doesn't take much to total a beater. A fender-bender will usually do it. And insurance companies will usually pay you more for the car than you can sell it for. I had one car I bought at auction for $8,500 and drove for 4 years before it was totaled. I think the insurance company paid us $8,000 for it. Cost of ownership? $125 a year. Not too bad. I might have been able to sell it for $5-6,000 if I was lucky.
If you're currently making car payments like most “normal Americans“, I suggest one of two options. First, sell the car and buy a beater. Then save up for the car you want. Second, pay off the car. When it is paid off, continue making the same car payment into a bank account set aside as your “car fund”. When it comes time to buy your next one, you'll have the cash to do so.
#4 Investment (Margin) Loans
Don't buy securities on margin. Trust me on this. Eventually, the value of the stock or fund WILL drop precipitously. It isn't a matter of if, it is a matter of when. And when it does, you'll get a margin call. If you don't have the cash to cover it, your security will be sold and you will just have bought high and sold low, even if you didn't want to. If you do have the cash to cover it, why did you borrow the money in the first place? If you want to read a horrifying story of a margin investor during the market crash of 2008, check out this thread from Bogleheads.org.
#5 Convenience Card Debt
Did you notice that title didn't say Credit Card Debt. Credit cards aren't for credit. They are for convenience. You know, booking flights, buying stuff online, avoiding trips to the bank or ATM, etc.
Studies show you'll spend more when you use something different than cash. As I recall, the order was something like this: Gift Cards > Credit Cards > Debit Cards > Check > Cash. So aside from the costs of borrowing, you'll simply buy more when you use a convenience card. If that doesn't bother you, and you're saving an adequate percentage of your income, go ahead and use a rewards card of some type.
But many of us probably shouldn't use a card at all, and it's easy to tell which camp you're in: Have you carried a balance on your credit card in the last two years? If the answer is yes, you shouldn't buy anything on a credit card. One other question to ask yourself: Do you currently have a revolving credit card balance? If so, you shouldn't be on this site; you should be on this one. Paying off your credit card debt is probably the best investment available to you. You might make as much as 29% guaranteed.
#6 Medical Debt
Get health insurance. Never go without it. I don't know how closely you are associated with your billing department, but you don't want YOUR wallet on the receiving end of the bills I see come out of mine. Not only do cash payers get screwed over by having to pay the whole bill on their own, but without an insurance company to negotiate with hospitals, pharmacies, and all those “filthy-rich” doctors, the whole bill turns out to be much higher. I don't know about you, but our negotiated rates are 30-90% of what our self-pay folks are billed. It turns out that more bankruptcies are caused by medical debt than by buying too many espressos on the credit card.
#7 Other Consumer Debt
Needless to say, if I don't think you should buy a car on credit, I certainly am not going to advocate getting a boat, plane, second house, time-share, ATV, furniture, vacations, TV, etc. on credit. I don't care if they're offering a 0% interest rate. Get into the habit of saving for what you want. Not only will you save more money in the long run but you'll quickly learn that having more stuff doesn't make you any happier. Or at least that's what I used to say to my wife when she'd ask when we were going to finally get around to putting some furniture in our dining room. We've learned that by not buying stuff we could not afford, we can now afford to buy anything we want.
In summary, avoid debt as much as possible. Pay off debt, particularly high-interest, non-tax-advantaged debt, as soon as possible. Realize that, in a low-interest-rate environment, paying off debt may be the best investment available to you, especially since the return is guaranteed. Remember that everything you own owns a piece of you. It is far better for your stuff to own a piece of your past than a piece of your future.
What do you think? Why is it so hard for people to buy stuff for cash? Is there good debt? Why or why not? Comment below!
First of all, I want to thank you for taking the time to write this blog. I completely agree with your points in your article regarding loans. I do have a question to ask you though. I have no debt except for a 3.25% 15 year fixed mortgage (I paid 1.125 points to get the interest down). As a result of having a frugal wife (who is also a doctor), we are able to save about 50-60% of our disposable income after taxes and retirement/FSA contributions. With the low interest rates and the poor economic outlook for investing, do you think it is better to pay off the loan faster or to use the surplus to invest(in a diversified portfolio of no-load, low-expense mutual funds/ETF’s)? We do already have a one year emergency fund in money market accounts and we are funding Roth IRA’s (converted from traditional after tax IRA’s) as well as 529 plan for our daughter. I’ve already asked this question on the Bogleheads forum and got mixed answers. Thanks in advance for your thoughts/comments about what we should do.
I suspect your marginal tax rate is in the highest bracket with a two-physician income. If you have enough other deductions that your mortgage interest is fully-deductible, that means your after-tax mortgage rate is 3.25%*(1-0.35)=2.11%. It might be even better depending on your state taxes. Given that inflation is currently 3.57%, I suppose I wouldn’t be in too much of a rush to pay down that mortgage. It is essentially free money. Even if you can’t deduct your interest, 3.25%<3.57%. It isn't like investing on margin, because there are no margin calls on your mortgage. So I would go ahead and feel comfortable investing in a taxable account and stretch that mortgage out a few years.
Great blog. I am a recent grad of residency and realizing the importance of financial knowledge; and also I am a complete novice when it comes to planning. What would you tackle first in my situation?
me:
$236,000 student loan locked in at 4.25%
$18,000 private student loan locked at 5.7%
no credit card debt
significant other with:
$8000 student loan debt locked at 1.8%
$5000 car loan locked at 4%
no credit card debt
We currently rent, and are checking out the area of my first job for a year or two to make sure we like it before settling on a house purchase. I’ve been told many options on what to do. For example, be aggressive in paying off any student loans, vs buy a house now while the housing market is in the toilet, vs invest, vs savings. I am sure the correct answer incorporates a combination of all. Just looking to see where you would put your priorities in this scenario.
-Leo
PS: I Ordered a bunch of books you recommended to get my learn on.
and Anna Karenina is not one of them?? 🙂
Leo-
Thanks for your comments. I’ve sent you an email addressing some of your concerns.
Awesome blog here, tons of much needed info for us new grads. Was curious as to your advice on my situation and what you would pay down/invest in first.
Practice acquisition loan = $562,000 @ prime + %2.75 variable, refinancing option at 12months
Student loans = $105,000 @ %6.8 fixed
Seems to me the best thing is to get the practice loan down as fast as possible due to size. I also want to max out my tax deferred investments as well, your thoughts?
Phillip-
Hard to say without more information. Prime is currently 3.25 (and has been for a year) so that’s a 6% loan. The interest on that ought to be completely tax deductible to you as it is a business expense. So in reality, probably somewhere around 4% right now. On the other hand, your student loans are at 6.8% right now and probably not deductible (again, don’t know your income). I’d probably lean toward paying off the student loans after maxing out your retirement accounts. Some good advice from a book I’m reviewing now suggests 10% of income for retirement savings and 10% for debt reduction. Then, when debt gone, 20% for retirement savings. That’s not a bad rule of thumb.
Good luck. It’s scary sometimes having all this debt isn’t it?
What book are you reviewing? Will it be an upcoming post?
I’ll be honest James, it’s been over a year and a half, and I can’t remember what book it was I read that in. I may have already reviewed it, I just can’t remember.
Do you stick by this rule of thumb of 10% income goes to retirement and 10% to debt reduction?
It’s not bad. Honestly if I had a big student loan I’d be doing something like 30% to debt and 20% to retirement by living like a resident!
Happy 1 Year Anniversary of the Millionaire Club!! I have paid off over $100k in student loans this year which puts us in the 30+% category. Thanks so much for all of your help.
And we do want to bring you in for a visit!
The second one comes a lot faster! The first million is the hardest.
When you speak of the 30/20 split is that before or after income taxes
It matters but it doesn’t. The point is that if you have student loans you should be severely restricting your lifestyle until they’re gone. I recommend new attendings live like a resident for 2-5 years after residency so they can build wealth. Whether that money goes toward retirement savings or debt reduction doesn’t matter as much as long as enough is going toward the student loans that they’re gone within 5 years of completion of training.
My general recommendation for a retirement savings rate for attendings is 20% of gross. But that assumes you’ve gotten rid of the loans already. If you haven’t gotten rid of the loans, live like a resident.
Great website! I just turned 50 and am very happy with some of the financial decisions I’ve made, and shaking my head at the stupidity of some of my other ones. Still, some of the “stupid” ones allowed me some good life experiences and you never know how long you will live. “All things in moderation” as you have noted.
One experience I may share is that driving a “beater” car may not be as straightforward as it sounds, especially if you are a woman who has to drive to hospitals at strange hours sometimes. I owned my last car for 10 years, 5 with it paid off. I saved some money, but also experienced some stressful and inconvenient breakdowns that cost not only money, but time and peace of mind. Plus, I had the hassle and cost of renting cars if I took any road trips (to avoid a really serious breakdown in unfamiliar territory). When the beater failed altogether, I decided to get a healthy new tank, even though I couldn’t pay cash for it. (I love the feeling like a crack dealer idea though!).
As you have noted previously, we all have things that are worth it or not to us personally. The key is to know how much you are really sacrificing for what you think is important. One book I read and liked in the past is “Your Money or Your Life” which coaches you through determining what your real hourly income is (after taxes, gas, business expenses, child care, etc) and using this knowledge to understand what your spending decisions are REALLY costing you in life energy.
Looking forward to reading your book!
Welcome to the website.
“Beater” means different things to different people. My contention is that both new cars and old cars break down, and both expensive and inexpensive cars break down, and that you don’t need to spend a ton of money to get a car that is unlikely to break down. A 3 year old Mazda 3 (say 30-45K miles) right now blue books for $10K. I think it is very easy to get reliable transportation for that price and have driven cars for 1/5 and 2/5 of that price for the last 8 years with one significant breakdown that required 1 hour of my time to deal with. Oh, and I had to get a battery jumped on a cold morning once too.
I think people sometimes (maybe not you) pay too much for a car out of an irrational fear of breakdowns they aren’t actually preventing anyway.
Great information and advice! I have a personal story on beater cars to share. My dad when I was growing up used to only buy beater cars with cash and he was able to fix them himself, until one day on the way to the airport across a very remote part of Russia in a negative 40 degrees temp the car suddenly broke down. Both my dad and I came very close to dying – I was 20 and he was 44. We already said our goodbyes as not a single car passed in over 2 hours with no heat and frostbite already set in when a bus appeared out of nowhere and I practically had to jump in front of the wheels for it to stop. Of course, I missed my flight to the US that day, but learned a very valuable lesson – no beater is worth your life or life of a loved one. My dad now only buys new cars and I only buy the best SUV or truck I can afford and pay them off within a year. Just something to think about.
Not sure what to say to that except that if you routinely drive when it is minus 40, you might want to spend a little more on a car AND put some extra clothing and blankets in it!
I think I am indeed biased by my own experiences. Ha Ha! I’ve had several cars and a lot of breakdowns in the last 30 years. The older and smaller the cars, the scarier the breakdowns have been. Even with AAA and a cell phone I’m still a sitting duck until a (usually dodgy) tow truck driver appears. I do love feeling secure in an SUV w/ four wheel drive to deal with unplowed roads and crazy suburban mom minivan drivers. 🙂 At least I didn’t go for the “upgrades” like leather seats and electronics. Amazing how that kind of stuff almost doubles the price for the exact same vehicle! I will have to try a Mazda next time (even if it is a new, SUV one). 🙂
Got your book yesterday! Do you do speaking engagements? I’m on the board of our state medical association and it occurs to me that while doctors aren’t the greatest at organizing politically, the best way for us to practice the way we want to and say “no” to ridiculous demands is to acheive personal financial security. We have an annual meeting and usually have a keynote speaker and a few seminars.
Yes, I do speaking engagements. I’ve done one already this year and have a couple more coming up, one to a county medical association.
What would it take to book you to speak to our docs?
Send me an email and we can discuss a date although my available dates in 2015 are filling up fast!
Even though I’m not a doctor (I’m a university librarian) I have an interest in personal finance (with what I make I have to)and find this web site interesting. After reading the Millionaire Next Door several years ago I am aware that physicians’ financial lives aren’t as wonderful as the general public believes them to be. Now not to be a jerk, grammar Nazi but in the line “Can’t save up $1500? Start peddling.” Did you mean “pedaling” as in a bicycle, or “peddling” as in selling drugs? 🙂
PS: I’m ordering a copy of your book for our collection.
Pedaling. Thanks for the correction. I’m ashamed that one sat there for 3 years.
Here’s a working link to the SNL video: http://www.nbc.com/saturday-night-live/video/dont-buy-stuff/n12020
Thanks. Didn’t realize the link had gone bad. I’ll fix it.
Hello,
My husband and I are trying to determine how much to spend on our first home purchase. He’s been an attending for a year and I’m just finishing fellowship. I hoped to clarify a point made above:
“If your payment with a 15 year fixed-interest mortgage is more than 20% of your salary, you’re probably buying too much house.”
… Do you mean 20% of your gross or net combined salary?
I appreciate your help!
Gross. I also use the mortgage total should be no greater than 2X gross salary rule. So if you’re making $200K a year and have a $100K down payment, no more than a $500K house.
Great post. Simple and obvious is so often truly wise. Added note to the “beater car” section: if you do not carry collision coverage, and a collision is your fault, your insurance company will pay you zero. We got a great deal on a car from a family friend for our daughter. Such a great deal that we didn’t carry the collision coverage. But we didn’t factor in that the actual value was higher than our cost, so when she totaled it…too bad, so sad. Buying a car for a 16 year old…another post.
Regarding the used car advice, I mostly agree with you on that with a few exceptions. I think buying a 2-3 years old car and driving it down until it breaks is the best bang for your buck. However there are some genuine points against that.
1) Not everybody drives a car just to get from point A to point B. If that was the general human psychology, you would have only seen Mazdas and Toyotas and no other cars on the road. Also, there would have been a zero new car sales and car companies/dealers would go bankrupt. Cars can be a genuine passion for someone, like financial blog is a passion for you. And yes BMW is a great car or for that matter Audi or similar luxury brand. Passion is the number one reason for these cars to sell and of course that is not a good decision financially.
2) Newer cars have advanced safety features that older cars don’t. Many people including myself are willing to pay a premium for advanced safety- like that of a Tesla. One reason luxury cars are expensive in that they have better safety like better brakes, e.g.
3) You were extremely lucky with your old cars or you have a lot of knowledge on cars. I have almost always bought old cars and have had mixed experiences. Cars are so complex that unbelievable number of things go wrong with them. One friend of mine bought a car for 1200$ and spent ~ 4000$ in repair over the next 3 yrs. Also, used car dealers can be a big ripoff as well. Buying a used one from private party is a big risk and most people ask way too much for their used cars. I have had so many people lie about their cars.
4) I also think that sometimes new cars or even a lease can be a great deal as you can get 20-25% off MSRP and 0-1% APR. I have also seen people getting a lease for < 100$ per month for a small new car on a great deal. There are websites on that.
So my point is that in general, your point about the used car is better is true in most cases but there are also a lot of exceptions that should be acknowledged.
If you can afford to indulge your passion, and possess the latest safety features, then go ahead and buy it. If you can’t, I would recommend you drive something you’re less passionate about and that is less safe, but still reasonably safe, until you can do so.
I don’t think spending $1200 on a car + $4000 on repairs is a terrible outcome. That’s $5200/3 years = $1733/year. Not a bad price. If you buy a BMW, it probably depreciates $5000 a year for the first 5 years. The used car buyer is way ahead of that, and that’s assuming all the new car repairs and maintenance were covered under warranty.
Just because someone asks “too much” for their car, doesn’t mean you have to pay it. I find it rare for someone to insist I pay them more than the private party blue book value for their car once I show them what their car is objectively worth. But even if they are crazy, you just move on. It’s just a bucket of bolts. There’s another one for sale down the street at an appropriate price.
I disagree that “new cars or a lease” is ever a “great deal” compared to the price of transportation you get from an older car. Only an idiot pays MSRP, so a discount from that is expected. Might there be a few exceptions out there where new works out better than slightly used? Sure. But you sound like someone trying to justify buying something you couldn’t afford. Don’t feel like you have to justify your car purchasing habits to me. You’re a big boy. It’s your money and your life. Do what you want with it. Just realize that there are consequences attached to the choices you make and a big part of why I owe nothing to anybody and can retire a decade out of training is because I didn’t buy fancy new cars until I could afford them.
I actually agree with you and I apologize if I sounded like I was trying to take an opposite stance. I have always purchased used cars myself except on 1 occasion (for some of the reasons mentioned above). I meant that from a pure financial perspective, all your comments are 100% on spot. I was just mentioning the reasons why anyone would even buy a new car. Being a bit of a car enthusiast myself, I can understand the psychology of someone who splurges on a new car. I have to suppress my urges and think rationally when it is time for me to buy another car. So far I have succeeded in that.
Also, I am a big fan of yours and only recently “discovered” the treasure that is your blog site. You are doing something that is unique and extremely valuable for everybody (not just physicians). I really appreciate your knowledge and it has definitely changed the way I think about money!
I think your blogs should be included in the medical school curriculum 🙂
Our last car was bought brand new. I’m all for anyone buying a brand new car if that’s what they want. But they need to be able to afford it. When you only have $5K, you can’t buy a brand new car.
This website is amazing. Thanks! You mention that having a mortgage at less than 4%, and student loans at sub-2% may be worth not paying off quickly. I have a 30 yr fixed 3.375% mortgage, and a 1.85% student loan; I had planned on paying my mortgage faster (at a 15 yr interval since there are no prepayment penalties). Would that be a mistake given the rather low interest rate? One of my concerns is that I have too much money in a “high interest” rate savings account (1.4% APY) and haven’t figured out what to do with it outside of my 403b’s and IRA’s. I am thinking of real estate, but the market is high. I wanted to “make money” by not paying interest. Is that reasonable?
Thank you.
It depends.
https://www.whitecoatinvestor.com/pay-off-debt-or-invest/
I’ve paid off my low interest debt and am now debt free. But I didn’t do it the very first moment I could. Moderation in all things.
It is silly to keep a lot of money in cash paying 1.4% while paying 3.375% in mortgage interest, no?
I was intrigued by your thoughts on buying a car. We currently have three vehicles. Our minivan we purchased because leasing with our cherubs and the amount of miles we drive was not prudent. My mom had to have her previous car replaced (which was paid off) a couple of years ago and we ended up leasing an inexpensive car for her. Then that brings me to our third car, a lease as well, which I let my hubby convince me to upgrade to a “nicer car” after my paid off car from residency was totaled on my way home from a shift one morning.
I came across your podcast and you have me thinking about how to progress towards financial freedom. Paying three car payments doesn’t help in that regard. Oh I forgot to mention that the payments are $240, $450 and $475 respectively. I wish I could have gone into the Honda dealer and the BMW dealer and paid cash for our cars.
You’ll figure it out. Lots of docs have made that mistake. Pay off the one you own and then start saving up. When the leases are up, buy a car you can afford with cash.
Thanks for getting back to me. I appreciate it. I will have to start figuring out the saving for the next car by the time the leases are up. 🙂
Just keep putting that car payment into a bank account after the car is paid off.
I love that I found your blog! Just ordered the book as well.
I am married to a psychiatrist who started med school late. I’m a stay at home dad. She’s now 48 and we haven’t been able to see eye to eye on budgeting, saving, though she’s the one who told me to check out your blog so that’s a good sign. In any case, after reading this post I wanted to ask what your thoughts on leasing a car vs buying a used car are? I’m not averse to buying a beater (I bought a $75 used post office jeep at auction once. Great car!) but my wife wants to avoid the maintenance cost of owning. What do you think?
Leasing is generally the most expensive way to drive a car. If your wife wants a new car that’s under warranty and has maintenance agreements, why not buy new with cash and then when it is no longer under warranty, YOU drive it until the wheels fall off and get her a new one. Better yet, help your wife realize that she pays that maintenance cost whether she wants to or not. It’s embedded into the cost of a new car or a lease. Amazing how often we get suckered by the word “free” isn’t it?
I agree with WCI and to add to this, buy during the end of season for the outgoing model. You should shop around and negotiate hard.. Pitch the dealers against each other. You can get up to 20-25% off MSRP as the dealers want to get rid of the previous years cars. Don’t sell for at least 5 years. The longer you keep the better it is.. In my case, I get sick of the car after that 5 yr mark and must get rid of it 🙂
There are rare deals on leased vehicles where you can stack multiple discounts and offers to get a good deal on a lease. This is the exception rather than the rule. There is a website leasehackr.com (I have no relationship to that) that tracks such deals. . I have seen some people get great deals on leased cars (some as good as 0$ per month for a leased car! or many times < 100$ per month .. Unbelievable but true) but that is mostly in California and extremely rare. You have to be flexible with any car model and extremely savvy with negotiating with the dealer. Some German luxury cars have good deals as well.. like < 300$/month for a 60K car.
But again, if you drive a car to get from one point to another and don't give a damn to the pleasure of driving, you should buy a 2.5 yrs used Japanese car (to have a 6 months buffer, in case anything was wrong with the car the seller hides it) and drive it for 30 years or until it breaks down. This is the only way to minimize losing money on a car.
Also, to be even more frugal, find a dealer and buy the car from Manheim auction.. white colored Govt fleet, on which no other dealer is bidding. You can get a good car @ a very cheap price @ Manheim, but it is some work and you have to pay 500$ commission to the dealer, who bought the car for you. I have done this as a resident and got a 2 yr old 40K$ car for 16K$ with typical miles and excellent condition.
But as WCI says, just leasing a car without doing a lot of homework is usually the most expensive option and one should avoid that financial mistake.
I’ve also bought one at an auction. Great deal, but certainly not my favorite car I’ve ever had.
If you are looking for the mythical 2.5 year old Japanese car (especially Honda and Toyota, more often than not, you would be better to buy new. the depreciation is that small. The only exception would be if you purchase an ex-lease car through outlets like Hertz that routinely sells $1500-3000 below the dealer market.
Manheim Auctions is strictly a dealer auction. The only people with access to that auction are those with a dealer license or those (like me) who have consigned vehicles for sale at the auction. For the average consumer, it is probably the worst place to buy a used vehicle as you do not have the ability to drive the vehicle prior to purchase. Many Manheim locations have reminded dealers that they should not be bringing in customers to attend the sale as it violates the terms of sale of the auction.
WCI…Great blog and provides good perspective on all things financial…I find myself in a bit of a quandary. I recently moved to europe for work (i’m actually an airline pilot and not a doctor so I apologize if this is a forum solely for the medical professional). We sold everything (house, cars, furniture, etc.) during the move and are sitting on a pile of cash….with having zero debt I’d love to put the cash in a index fund but at 25,000+ the market feels over valued and on a precipice so I have a hard time deciding what to do. We will need to return to the U.S. in a few years so will need some cash to buy the house, cars, and furniture etc. Any insight would be appreciated. I max out my 401K contributions and use a back-door Roth
Wow. I’ve gotten this question two comments in a row (on different threads.) These posts may help:
https://www.whitecoatinvestor.com/dont-rely-on-predicting-the-future/
https://www.mdmag.com/physicians-money-digest/investing/dahle-how-to-survive-the-coming-bear-market
I swear I did a post exactly answering this question at some point, but I can’t seem to find it. Maybe I should write it.
Of course, if I it is money you actually need to buy something in 2-3 years, you SHOULDN’T invest it in stocks, no matter where you feel the market is at or what it is going to do next. In the short run, it’s a gamble.
Thanks for the invaluable resources you continue to provide through your passion for financial wellbeing. I am a hospitalist 3 years post residency. My spouse is in consulting. I am afraid I ran into your blog too late. We seem to have committed a lot of “sins”
Combined Gross Income ($ 380k)
I have $400k student loans
spouse has $180k student loans
No consumer debt
spouse has $350 car payments
We bought a $540k Home 2 years ago. We took out 1 loan and a line of equity to avoid jumbo loan(we having been making only the minimum payments)
I max out 401k ,he doesn’t
no IRA. I opened a stash account last year to try out my hand at investing. no other investments.
70 k in saving (money market) not sure what to do with it.
I am belatedly wiser but very Interested in achieving financial independency. But so overwhelmed. Not sure where to start. I know nothing about financing. Am I a good candidate for your course?
Take a deep breath. Absolutely you’re a great candidate for the course, and if you don’t love it, it’s got a 7 day no questions asked money back guarantee.
https://whitecoatinvestor.teachable.com/p/fire-your-financial-advisor
It sounds like you guys are managing your money separately. I think step one is to stop doing that. Combine your incomes, your expenses, your investments, and your debts and start talking together about money. Maybe taking the online course together will help.
The house isn’t crazy, $540K on $380K is reasonable. I’m not a fan of car payments as I prefer to pay cash, i.e. buy stuff I can afford. So I’d pay that off and then start saving up for my next car.
The elephant in the room is the $580K in student loans. THAT needs to be dealt with right away. Unless one of you has made a bunch of PSLF qualifying payments, you should probably refinance all of that to a lower rate and start paying a ton toward them each month. By living frugally, you can max out your retirement accounts AND pay off those loans within 5 years.
https://www.whitecoatinvestor.com/student-loan-refinancing/
There is no sense in investing in a taxable account (Stash) when your spouse isn’t maxing out his 401(k). Invest there.
As far as your $70K, assuming you’re not going for PSLF, why not put that toward the student loans and get started on knocking those out?
[…] Don’t Buy Stuff You Cannot Afford […]
Your information has been invaluable in becoming financially literate given the lack of education on this topic throughout medical training. I agree with all points, EXCEPT #3, I disagree. As a resident it may make sense to purchase a “beater” or something you can afford. However, a lot of times old crappy cars like these will have a fair amount of maintenance/repair issues or run the risk of breaking down. If you add up these costs it may be better to take a (smaller) loan out for a better car.
However, I don’t believe you’re familiar with the exotic car hacks model. High end cars tend to have different depreciation curves as compared to most and you can leverage a high income by borrowing for a high end (used) car with low miles, drive it for a year or so, then sell at a similar price.
I’m probably biased because I love cars, but it makes no sense to me if someone makes so much money and still drives a POS, running the risk of the car breaking down. Especially with low interest rates now, it’s better to use the banks money to drive better cars and lose less over the course of time because of this variance in depreciation of high end cars.
All cars have maintenance/repair issue and are at risk of breaking down.
I think your argument can be justified to buy a $5-10K car (i.e. borrowing up to $10K), but not to buy a $20-30K car.
I would be very careful buying any car expecting it not to depreciate, but even if that were the case, you’d still likely pay more in insurance, transaction costs etc to drive it.
I disagree it is better to use the bank’s money to drive better cars. I find very few people with that mindset who build substantial wealth or reach financial independence early in life.
I would like to make two comments.
First, if you are going to quote someone extensively, it is important to give credit for the insight. The author’s name is J. Reuben Clark, Jr., an attorney. public servant and an LDS leader.
https://en.wikipedia.org/wiki/J._Reuben_Clark
I have to confess that I have not heard of this man before today. However, his advice is almost “word for word” the advice that I received from my grandparents who were his contemporaries. They had no affiliation with the LDS Church and probably were never exposed to that quote.
Second, I get the opportunity to talk to a good number of medical students and pre-med students. A good number of the students are very receptive of financial education and as a retired CPA, I give them as much information as possible and tehy soak it up like a sponge.
However, a lot of times, the issue is with the spouse. After years of living a meager lifestyle, the spouses are looking to get to the typical “physician’s lifestyle” after training. If what you are teaching is going to be successful, spouses have to be included in the education since often, they are the financial decision maker in the household.
I completely agree that it’s so important for partners to be on the same page. Without that, any financial plan is destined to fail. My wife and I read personal finance books together, developed are written plan together and so on. It’s become another joint activity for us to bond over. Wasn’t necessarily easy to get on the same page in the beginning but definitely worth it!
TPPS – I get your points. I love your enthusiasm. However, I can’t buy having a bonding experience reading a financial planning book together. Really?
Sure, why not? Money is about values and people spend, save, invest, and give according to their values. So getting on the same page about money is really getting on the same page about values. How is that not a bonding experience?
WCI and (TPPS) – Not trying to start a gender issue, but I seriously doubt most wives (women) would consider reading a financial book together with spouse as bonding. Just a perspective and… certainly not trying to damper anyone from increasing financial education or interest. This would be a good survey topic for the Forum.
I loved the SNL link.
It’s definitely been discussed on the forum. I tried a quick search but didn’t find it. I remember being surprised. While the gender disparity you would expect did exist, there was a surprisingly high number of women who were the “money person” in their partnership.
But whether one hates this financial stuff or not, I’m convinced that talking about your hopes and dreams and finances is good for any relationship, even if the “bonding” has to take place afterward!
dude and that is why you and Solenid will have no problems maximizing your finances to achieve maximum happiness 🙂 Weirdly me and my wife are not on the same financial page in regards to spending, I’m super cheap and she loves spending, and we sort of meet in the middle which really makes sure that she doesn’t overspend and I won’t be the richest man in the grave.
As long as we’re talking about President Clark, it may be best to point out that the terminology requested by the Church is not “LDS” but a leader of “The Church of Jesus Christ of Latter-day Saints.”
I’ve used the quote in many places in my work. This may be the only place I didn’t actually name the man.
Without getting into the politics of the topic, can someone explain me the logic of student loan payoff bygoverment?
Genuinely trying to understand how big of a problem is this.
Me and my wife both frugal.
She went to community college instead of NYU to avoid debt.
Still 150k in debt, that we paid last year living frugally.
Keep politics out, help me understand the situation.
If inappropriate, please feel free to delete.
The logic from an individual standpoint is that there are a lot of people who are not making progress in their financial lives because they borrowed way too much for the job they ended up with. They may have made some bad decisions, they made have had a few bad things happen to them, they may have been preyed on a bit by a school and/or a lender etc. A relatable example may be a doc who borrowed $300K for med school and then didn’t match. Forgiveness gives them a fresh start, kind of like bankruptcy.
From a policy standpoint, the idea is that these folks will have more to spend on the economy if they don’t have so much in student loans and it will be more of a stimulus.
Personally, I don’t see much value from a policy standpoint for widespread forgiveness if it isn’t paired with overall education reform aimed at lowering or at least stabilizing the cost of tuition.
I wholeheartedly agree with Dr. WCI that forgiveness ought to be paired with some kind of reform. But let me chime in with my own personal story about this topic, so hopefully readers can understand why many people favor student debt forgiveness (and perhaps develop some empathy)…
I’m married to a doctor and attended graduate school for theology for my own career. Many of the graduates often became pastors, chaplains, and social workers–these are obviously not high paying jobs, yet they usually require both a bachelors and masters degree. Some jobs are actually subject to the “clergy tax” and don’t offer health benefits, so a $60k compensation package doesn’t go as far as a similar paying position elsewhere.
I worked full-time during my graduate schooling, as well as received aid from generous organizations and foundations. Some scholarships even payed for my books. It didn’t cost me a dime to go. Yes I know, I was extremely fortunate.
But during orientation week, the school’s “financial advisor” provided a plethora of information about loan programs they offered. This individual also brought representatives from some private lending companies. They made no mention of scholarships, but made it sound like a 9% loans were the best possible thing and how their “payment plan” wouldn’t be too much for your monthly budget after you graduated. It was NEVER discussed how much a loan might cost you, time to pay it off, average earning potential for graduates, etc. They simply raved about how this school offered the best possible education.
After a couple years, I noticed how dangerous and predatory this actually was as I got to know my classmates. Many took out the maximum amount allowed by the school. Some had low six-figure debt, and would make about $30k after graduation. Utterly no financial education or planning. They were taken advantage of by people offering a slick sales pitch and a nice catered lunch.
If you ask me, the actions of many staff in this learning institution were morally reprehensible. I’m sure many docs have similar stories, too, of financial salesmen offering the world to impressionable young students, yet leaving them with a mountain of debt. Something needs to change in our current broken system.
Well said! The heart of the problem…
Predatory school + predatory lender + financially illiterate students = big mess. Plenty of blame to go around it sounds like to me.
Can you comment on the idea of purchasing a single-family home during residency with a physician loan and having other housemates rent bedrooms and cover the mortgage? It seems that the advice to not purchase a home during residency hinges on the assumption that there is no rental income being made on that home.
Unless I am missing something, it seems reasonable to purchase a home, have others cover the mortgage by renting out the bedrooms, and then continuing to rent long after you have moved out (or do 1031 exchange, etc.).
More generally, the combination of physician loan with house hacking strategy seems to rest on a solid financial logic, would appreciate any thoughts to this end. Thanks!
Surprised to see this comment on this post instead of this one:
https://www.whitecoatinvestor.com/should-you-use-doctor-loans-to-finance-investment-properties/
As far as your strategy, it really comes down to the numbers. Yes, if you can get enough in rent to cover all the expenses despite only putting 5-10% down and not renting out what is probably the best room in the house and you keep it long enough that appreciation covers the transaction costs, sure, it could work out. Good luck finding that situation.
I think what commonly happens is people buy a big house with 5% down, keep the master for themselves, have a $3,000 mortgage, and are collecting $1600 in rent and then move out in 3 years. I don’t think most of those folks are making money doing this. But is it POSSIBLE? Sure. Just not likely. You usually can’t even get a property to cash flow with only 5% down, and that’s assuming you rented out the whole thing, not that you stayed in part of it.