Dave Denniston, CFA, is a regular reader of this website (and has purchased advertising from time to time) and recently wrote one of the best physician-specific personal finance/investing books out there entitled Freedom Formula for Physicians: A Prescription for First Class Financial Health for Doctors. As a long-time reader of this site, I suspect Dave knows exactly what this review is going to say. He has clearly learned from the reviews I have done of books written by financial advisors in the past- he left out the hard-sell of his services and “gets” the doctor-specific stuff that most of these books leave out- the backdoor Roth IRA, the student loan management stuff (PAYE, PSLF), and the asset protection piece. He even quotes me at several places in the book (and I think alludes to me in several others!) However, as I'm sure he expected, I've got a few bones to pick with his investing chapter which we'll get in to.
Overview of the Freedom Formula For Physicians
Where this book really excels, however, is in seeing the forest despite the trees. If you're having trouble seeing the big picture, get this book. His first chapter, Plan and Prosper, talks about coming up with a vision of where you want to be 10 years from now, and then taking that and making a 3 year and a 1 year plan. This chapter generated some good discussion between my wife and I, although all of my ten year plans seem to involve me working a lot less and spending more time outdoors, and yet I keep working more! A later chapter, apparently inspired by one of my posts, is about seven critical mistakes doctors make with their money and helps round out the big picture perspective of the book. Here's an excerpt:
What happens when people win the lottery? All of their “extended family” and “friends” who never cared before, suddenly show up with hat in hand…In your case, you've won a lottery too, although you earned your money through blood, sweat, tears and hours and hours of studying and working for an average to below-average wage while accumulating debt. Now, you are in practice and you are the “rich doc….” Can't you help out your [family and friends?]…No. You can't. You are not a bank. You are not going to do underwriting for, and credit checks on, friends and family. You do not have loan loss reserves. You're probably not even going to charge them interest. Let's call a family “loan” what it is: a gift! I love helping people and I love giving gifts, but within reason. Would you give a $50,000 Christmas gift to your brother? Maybe $1,000 or $2,000 if you feel badly that he is going through hard times, or you believe in his business….Be generous, and give gifts selectively to those you love and care about. Just don't expect the money back.
The second chapter is the one about getting out of debt. It dives into the details of IBR and PAYE (although I have no idea why he prefers the acronym PER instead of PAYE for the Pay as you Earn program.) He finds an interesting hybrid between the behaviorally-focused “Pay Your Smallest Debts First” and the mathematically correct “Pay Your Highest Interest Rate Debt First” by suggesting you pay the smallest if the interest rate difference is 3% or less, and the highest interest rate if the difference is greater. That chapter also included a page or two on budgeting with the usual minor suggestions- cut out Starbucks, shop your insurance around. I thought it was pretty weak that he didn't focus on the big stuff here- the house payment, transportation costs etc. But he hit them elsewhere in the book when he encouraged you to focus on your five biggest bills.
The Taxes Chapter
The tax reduction chapter was pretty good. He accurately points out that the best way to reduce your taxes is to save for retirement in retirement accounts. I found the suggestion that residents should tax-gain harvest any inherited stocks they might have to be good, but rarely applicable. Shoot, if you had a bunch of stocks, why didn't you use them to pay for med school? Nice problem to have, I guess.
The Investing Chapter
The investing chapter, titled “Investing 201: The Advanced Course on Investments” is meant to be part 2. But part 1 is in a different book, which I think is a terrible way to write a book. Even worse is that Investing 201 consists of a bit on asset allocation and risk tolerance (so far so good) before diving into tactical asset allocation, market timing, The January Effect, Trend-Following, and Annuities. I have no idea what was in Investing 101, but I thought Mr. Denniston really missed a great chance here. There was no discussion of keeping costs low, staying the course, index funds, avoiding investment products made to be sold instead of bought, real estate investing, estimating necessary savings rates, calculating returns, Fama/French, rebalancing techniques, estimating amounts needed, Roth vs traditional etc etc etc. The remainder of the book is aimed at such a basic level, to dive into this stuff in the only chapter in the book on investing seems a major error to me. And 5 pages in the book dedicated to the relatively easily debunked January effect? (See here, here) Ugh. I mean, these things are fun to talk about and argue about (and we do that a lot around here), but have no place in a book that's explaining the basics of IBR and Backdoor Roth IRAs. It just doesn't fit the rest of the book.
The Best Chapter in Freedom Formula For Physicians
The best part of the book is the estate planning chapter, entitled Eight Actions You Must Take To Protect Your Spouse and Kids. I thought he really nailed this one with his explanation of community property vs common law property, and the use of Pay on Death/Transfer on Death accounts.
Overall, I thought the book was very good, strongest in its discussions on personal finance and weakest in its discussion of investing. I'll be adding it to my list of recommended books. It would be a great selection for your annual Continuing Financial Education. Buy it now on Amazon, or roll the dice and leave a comment in hopes of winning one of the two review copies I was given.
What do you think? Have you read the book? What did you like or dislike about it? How about the gifts vs loans excerpt? Do you loan money to family or friends? Why or why not? Comment below!