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CYAI – It’s Back! Afford both college AND med school for the kids?

Home Personal Finance and Budgeting CYAI – It’s Back! Afford both college AND med school for the kids?

  • jfoxcpacfp jfoxcpacfp 
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    medical school scholarship sponsor

    I think this is still an aggressive allocation at this age.

    The liquid funds you need to net out in terms of asset allocation. He has 1.8M cash but 2M in loans. So his net cash position is 200k debt.

    So his AA is (according to my reading):

    Home : 2M (with mortgage 375k)

    Real estate : 3.5M (with debt 1.5M)

    Liquid assets 1.8M

    Taxable brokerage : 250k

    Other liabilities (auto, cc): 125k

    Business: 4M

    This to me is a more aggressive AA than a 110% index ETF allocation.

    With property, you can be required to save a significant amount to fund a property so it can be lumpy and cash will often need to be accumulated.

    As an example, I currently have 900k in cash equivalents in a retirement account. My plan is to buy a property with this at some stage. I have a loan on another property in my taxable account with 450k loan. So in my mind, my net cash position is 450k. This may seem like a lot, but it is less than 5% of assets. To me, my portfolio is more risky than a 100% ETF stock portfolio, despite what seems to be a large dollar amount in cash equivalents, due to the inherrently higher risk in the properties I have and also the undiversified risk. I would view the OP’s portfolio as possibly riskier than mine, although it depends on the nature of the business and real estate.

    Click to expand…

    Interesting contra. I don’t agree, but I appreciate your POV. Of course, there is still a lot we don’t know, but one piece of info that he provided me that we didn’t include in the details is that he is strategically adding employees to be able to remove his need to be present in the business. This is very important as it adds much intrinsic value to the practice.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #220649 Reply
    jfoxcpacfp jfoxcpacfp 
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    Ultimately this is not question about math, but of psychology and behavior. It is fascinating to ponder what drives a true one percenter, in both income and net worth, to ask the question in the first place?  Fear, ignorance, insecurity, something else? This is not to impugn the good doctor, he seems to have a good head on his shoulders, and that is what makes the question all the more curious. He doesn’t seem to be a miserly Scrooge McDuck type either, amassing money just for accumulation’s sake. After all, he gives generously, spends a lot, though not compared to his income, and invests the rest. Seems reasonable. It would be interesting to hear what he has to say about his motivations for the question.

    Click to expand…

    I asked him a version of the same (your last sentence above). I think what it boils down to insecurity over having no formal financial education and wondering if they are making some obvious mistakes. I’ll reach out and see if he wants to post his own thoughts, will update if he does.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #220658 Reply
    Avatar Kamban 
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    My thoughts

    1. Yes he can afford it easily.

    2. The biggest chunk of his wealth is the $4M business. I take it it is his family practice business. Is he solo. What happens if the typical “run over a bus” scenario occurs ( I never wish it but always tell people to plan for it). Can that be sold for $4M or it may be worth far less.

    3. I do not agree with the market timing strategy but an see his point of view of keeping large amount for real estate purchases. Sometimes real estate purchases requires large cash offer to be made quickly in order to secure funding and have the seller choose you over others. But there should be a plan for it; otherwise it is idle money.

    4. I am surprised that at age 46 he has managed to amass such an amount of wealth.

    #220682 Reply
    Avatar StarTrekDoc 
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    I would say it’s because of his tithing 🙂

    #220813 Reply
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    Avatar EntrepreneurMD 
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    Hi Johanna, this is  Dr. Don. Thank you so much for the opportunity to allow me to post my question regarding fully finding the education of my two wonderful children.

    I very much appreciate and take to heart your feedback as well as that of XRAYVSN and the forum participants. I will do my very best to respond to those taking time out of their busy schedules to comment here, give some more clarity as to my financial circumstances and thought process (which may be full of absurd misconceptions) and if there’s enough interest from participants, ask them some follow-up questions to further understand other positions. I am a sponge here, and reasonable recommendations like those you already gave can lead me to make significant changes as I believe an openness to rethink my positions is integral to continued success.

    Thank you!

    #220839 Reply
    hatton1 hatton1 
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    DR Don/EntrepreneurMD congrats on your success.  I hope you have protected yourself medico legally.  That is my only concern for your future.  Your kids should be fine.

    #220915 Reply
    Liked by childay, Peds
    Avatar EntrepreneurMD 
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    Regarding that emergency fund of about $1.8M. Lots of people seem to question such a large number, and in what vehicle to park it.

    I’ve read the general consensus is a 6 month emergency fund, but my original thought process wast to keep it around 1 year of expenses as it essentially serves as an insurance policy for hard times for my business, commercial real estate expenses and personal expenses for a family of four. I kept the funds in online savings accounts and 12-24 month CD’s (laddered) with current returns 2.4-3% to 1- beat inflation and 2- to guarantee the funds cannot lose value.

    My current annual expenses (and keep in mind they grow with the business) are about $1M for the business, $300K for the commercial real estate, $170K for annual living expenditures, about $360K income taxes, $110K goes to IRA’s, $7K to HSA. These expenses also include debt service. The grand sum of annual expenditures therefore comes out to about $1,950,000.

    Due to the strength of this fund, when I had my current office building built about 3 years ago I was able to put a down payment of about $1.5M on the project plus furnishings before the construction loan kicked in for this $3.8M project.

    In November of 2019, my 5 year arm on the house (take out purely to help fund the commercial project) resets to a higher rate and I plan to take about $360K from emergency funds to pay off the mortgage. My credit card debt of about $50K at 0% will reset in January of 2020 at which time I will either need to transfer to new 0% cards or pay this off as well and give up the 3% free money.

    As the business grows, I was considering hiring a third physician extender (I currently have 2) which should come at a cost of about $200K annually (including ancillary staff and expenses), at which time I would consider cutting back from 3 1/2 days a week in direct patient care to 2 1/2.

    Knowing this situation, what would you do? 1- Size of emergency fund? 2- liquidity vehicles: savings, CD’s, stock market, bonds, etc? This is in the context of about $10M invested in other appreciating assets including the business, the commercial real estate, tax advantaged retirement accounts, a taxable investment account and primary residence.

    #221085 Reply
    jfoxcpacfp jfoxcpacfp 
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    Love the name – much better than Dr. Don – maybe I should ask future applicants what they would like to be called! I hope you will become a regular contributor here as you have much home-spun wisdom to add. And don’t discount common sense over book learning – it has obviously taken you much further than many who have worked hard to follow all the rules 😉

    I hope several of the participants will follow up with questions and comments – this could be a very educational discussion that many new docs who are in traditionally “lower” paying specialties (quotes because I think it’s obvious you have broken that glass ceiling) can learn from.

    Speaking of specialties, I would appreciate some education from the readers. When is it a specialty, when is it a sub-specialty, and when is it neither? And, if neither, what do I refer to the doctor’s line of work as? I feel ignorant asking, as I think I should know, but it has never come up in convo’s with clients. Thank you to anyone who will take the time to enlighten me!

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #221091 Reply
    Avatar EntrepreneurMD 
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    Generally, family practice, internal medicine, pediatrics, and sometimes ob/gyn are referred to as primary care. Essentially, everyone else is a specialist, including general surgery, oncology, urology, nephrology, orthopedic surgery, neurosurgery, radiology, pathology, ENT, neurology, gastroenterology, psychiatry etc.

    A subspecialty is a field that any doctor takes extra training in and goes a step beyond a specialist. Examples can be an ophthalmologist who is a retina specialist, a cardiologist who is an electrophysiologist, a neurologist who has advanced training in sleep medicine, a gastroenterologist who focuses on the liver/gallbladder/pancreas (hepatologist), forensic psychiatry etc.

    #221099 Reply
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    Avatar Dont_know_mind 
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    That’s a great achievement EntrepreneurMD.
    With the emergency fund, given your funding requirements, I would probably keep it the same.
    Can you pay off the fixed rate earlier ?
    Also I would keep it in shorter instruments.
    Recently, I had 700k in a 6 month CD and found a property I liked but then realised I had to give 4 weeks notice to access the funds, which was a headache with settlement and I ended up selling some index funds to make sure I was not going to be short. In the end, I did get the funds (700k) before settlement and also had extra from selling index funds and I forfeited 2 months of interest on 700k which is annoying.
    Anyway, the extra interest is not much but you have to check what the penalty loss of interest is if you have to access it early. Also whether they can not pay for a certain period if it is a crisis etc.
    I think I will keep the funds I need for an emergency or likely to use for a future property in the next 3 years in more liquid instruments going forward. The CD seems callable but actually when I got around to accessing it before the 6 month term, there were silly conditions that they may not be able to release at 28 days notice sometimes etc and it was a hassle not worth the extra interest when it came time to call it in early.
    Holding some cash is uncomfortable but a very reasonable strategy but you have to stick with your plan.
    As Kamban mentioned, I am wary of timing economic cycles. I think it is a guess. I have lost more from trying to market time stocks than I’ve gained. But I have made a lot buying distressed property when I had cash and others didn’t so it can work well there. But I’ve had no success calling for recessions and I too once had a belief that things were going to turn to Japanese but I lost so much money with that type of bet I don’t think that way anymore.
    I agree with your strategy of accumulating cash or at least a very comfortable buffer and am doing the same, but I am waiting for good investments rather than a recession necessarily and I think we should not get too tied up in a prediction about the future. If you position to be ok whatever the outcome – recession in the next year, bull market for another 10 years, everything in between, then you will be ok.
    To me that means not having extreme portfolios like 50% cash or 200% risk assets (unless you are very young), but your cash levels to me are not high or end of the world type stuff. In fact I think you are probably carrying more risk than the average 100% index portfolio (but others may disagree). You could possibly do better by deploying the 1.8M on risk assets but you may also blow out, so I think you are being sensible. I do tend to deploy leverage judiciously and avoid it at this late stage in the cycle. Things could keep going for a while but they have been going for a while.
    The main irritation is having 1.8M earning interest at a lower rate than the 2M in loans. But the loans will be tax deductible presumably and the earned interest is taxable so the after tax difference is less than it seems. I guess that’s where things are and annoying but it is probably ok. You can restructure a bit by putting more in 529’s etc going forward or now. There is a cost to flexibility which you have to weigh up.

    #221173 Reply
    hatton1 hatton1 
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    Interesting discussion.

    #221206 Reply
    Avatar EntrepreneurMD 
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    Johanna, Dontknowmind, hatton1 this may not be the best financial move but for me it is the best emotional/psychological move and as Johanna noted, my instincts got me to this point:

    Generally, I don’t buy anything I CAN’T pay off within 5 years (not that I have to), including real estate. I paid off the 7500 sq ft home within 5 years on less than half of my current income. I know that Dontknowmind mentioned paying off the current loans early. I borrowed a total of $2.3M for the new office building ($3.8M project), 21 months later we are down to $1.9M total debt. When the residential mortgage resets at the end of this year I will pay down by another $400K (home mortgage balance and probably credit card balances), bringing the debt down to $1.5M essentially 2 years after financing the project. If I otherwise don’t accelerate payments at all the debts will be paid off within the next 8 1/2 years. Certainly if I don’t find that great opportunity in the equities markets or real estate opportunities my instincts are to accelerate debt payments rather than invest in THIS market. Others may do things differently. My take is the interest payments are a guaranteed cost, market investments are not a guaranteed return. What I’m saying is, I’d rather take the roughly $500K annual reserves over the next 3 years and pay off the $1.5M (all debt) and stay true to my 5 year rule. I tend to lean more towards wealth preservation than more aggressive market returns with funds to be used within a decade.

    Alternatively I can invest the money in the markets and hope the next major correction doesn’t happen over the next 8 1/2 years while the debt gets paid off, but admittedly that thought gives me anxiety! I understand the argument for investing instead as the market returns should outpace my interest rates, but no one can replace the word should with the word would. One of my definite weaknesses – I’m a control freak. CD returns I can get a guarantee on, stock market I can’t control. I’ll have more to say on market timing, and why my thought process would have been very different under different market circumstances where I wouldn’t hesitate to choose the market investment option over debt repayment, real estate or even reinvestment into my personal business. I don’t wish for it, but if the markets were to crash my entire line of reasoning would be completely different. Unlike others here, I just don’t like the vibes I’m getting from the current markets.

    #221324 Reply
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    jfoxcpacfp jfoxcpacfp 
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    Unlike others here, I just don’t like the vibes I’m getting from the current markets.

    Click to expand…

    That’s the problem – you’re treating investing in the stock market as a temporary, short-term activity instead of a long-term process. The businesses long-term investors hold in their portfolios are no more impermanent than your business. And they are more liquid than your real estate and less concentrated than either, especially if you buy and hold quality mutual funds and etf’s and rebalance periodically.

    Are you saying if the market “crashes” you would sell everything just to make the loss permanent? If the value of real estate fell, would you sell all your buildings at a loss – or would you hang on, wait it out, and maybe look to scoop up more?

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #221330 Reply
    hatton1 hatton1 
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    I think your debt repayment plan is sound.  I am curious how your practice is grossing so much.  Are you doing cosmetics stuff or straight traditional FP?

    #221331 Reply
    Avatar EntrepreneurMD 
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    Johanna if the market crashes I will be a heavy buyer, not seller – if I’m going to time, it’s buy low and sell high. I would reassess paying my low interest rate loans earlier than is required to invest in a young bull instead. I’m not talking day trading buy low sell high. I’m talking young to mature bull runs which generally hang around about a decade. I don’t generally wait for the next major correction as I have been a buyer on the dips over the past decade, but there comes a point in the cycle when I am concerned enough to be a seller on the rally’s than a buyer on the dips or else I risk buying high. Ultimately, do I think the markets will at some point be lower than they are now. Yes, I think there is a high probability. Other’s may not. See below:

    This is my take on market timing.  Like anything else, it’s a game of likelihoods, no one can predict. This is my concern about putting money in the current markets. 1- It has quadrupled since the 2009 lows. 2- It is one of the longest bulls we’ve had. 3- It has essentially moved sideways since January 2018 for the most part with the peak August 2018 but no real direction and a recent “head and shoulders chart pattern”, but with a recent uptick, I’d want to see that it break that resistance. 4- The dreaded yield curve has inverted. 5- The trade war is unlikely to go away any time soon. 6- The bond markets are flashing warning signs 7- election uncertainty. 8- Once we hold the 2% inflation target with such a tight labor market, the Fed will have no more reason to be support the stock market. 9. When a major correction happens, the markets tend to bottom out at the peaks of the last bull market, or about Dow 15K.

    Obviously I don’t expect an imminent correction, as I still have about $1.8M in IRA stock market investments and even if it corrected I would have no problem riding it out thru the next bull market and beyond, given my age and FI cushion. I’ll always be in the market the question will be to what degree so it’s not temporary, just the level of investment for me depends on the amount of risk I’m willing to take in a mature bull and the opportunities (or lack thereof) to mobilize my resources to other investments not just 3% CD’s.

     

    #221359 Reply
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