Good Debt and Bad Debt – Podcast #76

[00:00:20] Welcome to the White coat investor podcast number 76. Good debt and bad debt. Splash Financial as a leader in student loan refinancing for doctors offering fixed rates as low as three point seven five percent APR. Hundreds of you check your rate with Splash each month and it only takes minutes to do so. They don't charge any application or origination fees and have no prepayment penalties meaning you maintain your payment flexibility. Splash's new lower rates can save doctors tens of thousands of dollars over the life of their loans. Go to White Coat investor dot com slash splash financial today to get your rate in minutes.

[00:00:59] I actually have a blog post coming up soon on Splash so I'd love to get an e-mail from you about your experience if you've applied to refinance with Splash. I'd like to know what rates you offered, what terms you were offered, what you liked about the experience, what you didn't like about it, whether you were looking at the resident program or the attending program etc. So if you've done that recently or if you do that after hearing this on the podcast please send me an email and let me know what your experience was like.

[00:01:23] Our quote of the day today comes from Albert Bartlett who said the greatest shortcoming of the human race is our inability to understand the exponential function.

[00:01:32] Thanks for what you do. I know you're likely on your way into work or maybe on your way home from work after a hard long day and I just want to be the first to thank you because I know chances are very good that nobody else said thank you today and I appreciate what you're doing. It's hard. It's difficult. It took a long time to do. I know you're paid pretty well to do it but it cost you a lot of money to get in a position to be paid. So thanks for what you're doing.

[00:01:56] All right. Thanks to those of you who are leaving us questions at speak pipe dot com slash White coat investor. We will use those recorded questions on future podcasts so if you'd like to hear your voice on the White coat investor podcast here's your chance.

[00:02:12] I've got a question to answer from Dustie on Twitter. He actually gave me two questions, the first one I think is a little tongue in cheek. He said Should I use this ATM. And he included a picture of a bitcoin. And I guess if you've got bitcoins you should use that ATM to get your bitcoins out because who knows what bitcoin is going to do from here going forward. His more serious question was as a soon to be attending working with residents. What is the best way to get them thinking about financial topics without overwhelming them? I'm already planning on buying the white coat investor book for all residents I work with. Well I think the books are a great way. The nice thing about the book is they have to show at least a little bit of interest. So you're not preaching to an uninterested crowd. If they're not interested they just read the book and chances are good it will just sit on the shelf for a little bit until they finally realize they need it then pull it off and read it and maybe thank you for a year later. So I think that's a great way to do it. Just give them a book. I think dropping little pearls is helpful as well particularly when they realize that you're different from some of their other attendings in the way you're managing money and that will give you a lot of opportunities to maybe explain why.

[00:03:20] I found also that these conversations tend to happen after midnight a lot more than before midnight. I think we're all a little bit more open. Maybe our defenses are down a little bit but we're willing to talk about more serious stuff like that after midnight. Not sure exactly why that is but that's something I've always found to be true in the emergency department. If you want to really get to know the nurses in the emergency department wait till after midnight and you wouldn't believe what you're talking about.

[00:03:45] Next question comes from the Facebook group. This is Bruce on the Facebook group he said what do you think of CPA, CFA, CFP, CHF, and other financial certifications and designations for those looking to hire someone with these qualifications. Do you trust any of them? If so which do you recommend? Also would you encourage anyone looking to learn more about finance and portfolio management to perhaps get one of these designations under their belts. Well first of all Bruce has listed off all the designations that I think actually do matter. I think those designations are the highest ones in their fields and they're quite impressive and respectable designation. No none not them take as long to get as an M.D. or a DDS or JD or anything like that other than perhaps the CPA but they all at least show a commitment to the field for an advisor who says I'm going to be here for the long term, this is what I'm doing with my life. I'm somebody you can trust and I have at least this basic level of knowledge and had to pass a test to get there.

[00:04:44] With the CPA designation, a certified public accountant. I'd like to see them have the personal financial specialist designation as well. So a CPA slash PFS. A PFS is basically a CFP, Certified Financial Professional in addition to their CPA.

[00:05:01] The CFP is probably the mainstay in the financial planning field more people that are actually once your business probably actually have this designation is the most well-known one. If you go to forums and ask how long people studied and work to pass that they'll tell you about 200 hours. So granted 200 hours doesn't seem much when you're put it in 80 hours a week as a resident. But 200 hours is far more than the vast majority of the alphabet soup of designations out there. CFPs are also required to have three years of work experience which I think, granted it can be in sales, it doesn't necessarily have to be in really given true advice but at least it represents something. CHFC is similar to a CFP as well. There is a little more coursework, there may not be a test for that one I can't quite remember. I'd have to look it up but it's a similar designation. Typically the people they get CHFC however come from the insurance industry. So it's not uncommon to see an insurance person that has a CHFC designation along with their CLU designation which has more insurance focused.

[00:06:14] Now you have to be a little bit careful I think when you're hiring someone that comes from the insurance side to give you financial advice just because I think there's a little bit of a little bit of bias there to maybe sell your insurance products that you don't really need. You have to be a little bit careful there. But the designation is about the equivalent of a CFP.

[00:06:32] The most difficult one to get a of these is a CFA, a chartered financial analyst. And the reason why is that it takes three difficult tests. These are tests that everybody doesn't pass. I can't remember what the pass rates are but I want to I want to say something around 70 percent. There's three different levels of them. You can't take them right after another. I think you have to wait six months between them or 12 months between them or something like that and they actually you know require quite a bit of study for each of those levels. So if your adviser has a CFP and a CFA they actually put in some work and are clearly going to be in this field for the long run. Unfortunately most of those with the CFA are managing money, you know working running a mutual fund, they're running a private equity firm. Those sorts of things. And so most of the financial planners you run into aren't going to have CFA.

[00:07:21] Next question is from James on the Facebook group said going beyond the 4 percent rule I want your opinion of different draw down strategies in retirement given that the sequence of returns matters so much. What asset allocation do you recommend at the beginning of retirement? What about the strategy of going very conservative at the beginning of retirement to avoid the potential lose half your money in the first years of retirement and shifting to a more aggressive allocation as you age?

[00:07:45] That's a great question. Ok the 4 percent rule is not a rule in any way shape or form. It's a useful number that tells you about how much you need to retire and the idea behind that is that you can take out about 4 percent of your portfolio each year, adjusted up for inflation each year, and expect to not run out of money over thirty years. It's not really designed to be the exact method anybody uses to spend their money in retirement and I don't know a single person who follows the 4 percent rule like it's you know dogma but it's a good guideline. That's about the ballpark you ought to be in. The point of the study that came out with the 4 percent rule was that it's not the 8 percent rule. You just can't take out that much money even if your portfolio averages 8 percent a year you can't take out 8 percent a year because of sequence of returns risk. And what that is is that's the possibility that despite have an 8 percent average returns you get the crappy returns first and the good returns later. And if that happens and you're withdrawing money from the portfolio you're going to run out of money even if you're only taking out the average return. And so you've got to be a little bit careful with that. So there's dozens and dozens maybe hundreds of different draw downs strategies. How you should spend your money, how much you can take out each year. I think the best guideline is the one advocated by Taylor Larimore, he's the 94 year old battle of Bastogne veteran and considered to be you know the king of the Bogle heads over at bogleheads dot org and basically what he does is he adjust as he goes. Every year he takes a look at his portfolio. How much is in there and if it's been a bad year he spends a little bit less, if it's been a good year, he spends a little bit more. Gives away a little bit more and I think that's a great strategy to follow. You know just be flexible and the more flexibility you incorporate into your system by minimizing your fixed expenses, the better off you're going to be and the more options you're going to have in retirement. And so that's the strategy I advocate is just adjusting as you go.

[00:09:43] So what asset allocation do you recommend at the beginning of retirement? Well here's the deal I don't really recommend a specific asset allocation for anyone at any time so I can't really answer that question much. But the idea he's getting at here is should you have a less aggressive asset allocation around the time of retirement. And the answer is probably yes. And the reason why is that helps minimize the sequence of returns risk. So we are talking about the last five years before you retire and maybe the first five years in retirement that's the time when you should be the least aggressive in your investing with the idea that if you actually increase your stock allocation throughout retirement rather than decreasing it as you age it may actually decrease the chance of you running out of money. And so there's some pretty good data suggests that's been true in the past, we don't know if it's going to be true going forward, but it's a reasonable way to manage your money in retirement.

[00:10:38] He talks about the potential of losing half your money in the first years of retirement. Boy if you're going to lose half your money in just a few years of retirement you're investing way too aggressively. I mean if you're 100 percent stocks and you just retired and you have a nasty nasty bear market like 2008 yeah you could lose half of your money. So I think you probably ought to be something besides 100 percent risk, risk on all the time as you go into retirement. Otherwise you are risking losing half your money.

[00:11:07] Next question from the Facebook group as well. This comes from Doug who says how does one still enjoy traveling or vacations when in their early attending phase when trying to live like a resident? Any advice or percent of income living expenses that is reasonable to spend on those activities.

[00:11:22] Well none of us want to be a monk right. Here's the deal though. When I say live like a resident I'm talking about living like the rest of America. Right. The average household income something like sixty thousand dollars a year. That's what a resident makes. So you can go do what the average American is doing. You can go on a trip, you can go on a vacation, you can have some fun. You can buy some stuff. OK. I'm not telling you to go live a Mr. Money Mustache lifestyle where you're spending twenty four thousand dollars a year. OK. Go ahead. Go spend 60 thousand dollars a year, heck you give yourself a little bit a raise from residency give yourself a 25 percent raise. Give yourself a 50 percent raise. Spend ninety thousand dollars a year. Even so you're going to have plenty to carve out and use to build wealth, to pay off your student loans, to save up a downpayment for your dream house, to catch up to your college roommates with their retirement savings. There's going to be plenty there.

[00:12:14] What you can't do though is have a lifestyle explosion as you come out of residency. You can't go straight to spending 200 to 250 thousand dollars a year. And I usually starts with a big fat Dr. House and a couple of cars bought on credit. That's what you can't do. So can you still enjoy traveling a vacation? Absolutely. Go on a vacation. Go travel some. But this isn't the time in your life to take that 20000 dollar vacation to Fiji. You can be able to do that later. But this isn't the time, you're living like a resident. OK so maybe if you got lots of miles and you really shop around maybe you can do a trip to Iceland. If you stay in an Airbnb when you go there and you watch where you eat out you know. Maybe you can go down and spend some time at the lake, maybe you can go on a camping trip you can drive across the country and stay with family. You know those are the kinds of things that of course you can do but you can't take you know a 20000 dollar international vacation with your family of eight every quarter in those first few years out of residency. You're supposed to be living like a resident. And so I'm not going to give you a specific percentage of income. But the idea is that you are saving enough to pay off your student loans within five years of finishing residency that you are able to save up a down payment on your house and that you're able to max out your retirement accounts if you're doing all that and you have some leftover feel free to go spend it on vacation.

[00:13:35] All right next question. This actually three questions from one listener that came in by e-mail. Let's just go through them one by one. The first one is as a recently graduated resident, after listening to your podcast on advice for new attendance I want to share something I did that I think could benefit some of your listeners. All right so here's a tip from a listener. Moonlighting usually picks up in the senior residency making a thousand dollars or more a shift is a great extra money. After signing a new contract for your job I found that many do not allow you to contribute to the employer 401k until six months into their new job. Sometimes that can be 12 or even 18 months too. If your job starts in July you will probably miss out on contributions for that year. What I did from January my senior residency year until I started my new job I maxed out my 401k for the previous year aggressively using the funds from my moonlighting job to solely fund this. I feel that in the first years of attending as much pre-tax money you can stash away if financially able is a decent alternative to use this extra money.

[00:14:30] All right a couple of caveats I think I'd give on that recommendation. First of all you can't put the moonlighting money into the residency 401k or 4O3b. You can live on the moonlighting money and defer your income from residency into the 4O3b or 401k. Yes money is fungible and so it's basically the same thing but just bear in mind that that's what's actually happening. Secondly even in that last year residency in that first year of attendinghood I think that's the time we use a Roth accounts if at all possible. Yes tax deferrals always nice but save that for your peak earnings years and the year you leave residency and especially the years in residency are not your peak earnings years. Use the Roth accounts if you're able to. There's a Roth 403b, a Roth 401k. Use those. Do your personal Roth IRA, do a spousal Roth IRA if you're able to. But yes I think that's a great way to realize a way to get more money into retirement accounts. If you only have a tax deferred 401k and you want to do this fine use the tax deferred 401k but as soon as you walk out of residency convert it to a Roth IRA. Same thing.

[00:15:36] OK a second question was I was curious what the term good debt means. I've heard anecdotally that it could be to carry some form of debt for your credit score. Can you expand on this? Is buying things on a credit card and then paying it off each month? This is what I do in accumulating good debt credit. I've been told through family and friends once I pay up my two months completely my credit score will get worse and that I should specifically keep a balance of some my credit card so that my credit score stays optimal for when I go to apply for a mortgage loan et cetera. I feel it's kind of silly holding credit card debt at 18 percent. I don't do it but wanted your opinion if I should be listening to this advice.

[00:16:11] I don't know what my credit score is. I'm confident it's over 800. But I don't know. I haven't checked. And frankly I don't care.

[00:16:18] The reason why is I don't plan on borrowing money ever again in any meaningful way anyway. And so I think people who are living their lives to maximize their credit score or tracking their credit score on a weekly or monthly basis or worshiping at the altar of the credit score are making a serious mistake. OK. The numbers that matter in your life are things like your savings rate, your rate of return on your portfolio, your income, your net worth. Those are the numbers that matter and numbers that don't matter are your credit score. Once you have a score over about 740 to 760 anyway you're going to get as good of a mortgage loan as you can possibly get. So there's no benefit to getting you know a score of eight hundred forty three. It's just isn't going to do you any good. So at a certain point you don't pay any more attention to it. And the truth is that most docs have enough debt that just making their required payments is going to give them a score over 740 to 760. A credit score basically as a score of whether or not you pay back your debt, whether you do what you say you're going to do. And if you do that your credit score will be adequate to get a great mortgage. People want to lend you money. They're going to do all they can to lend you money. And so unless you're skipping payments or doing all kinds of things wrong, your credit score is going to be fine to get a mortgage, you don't need to do anything special about that.

[00:17:41] But he brings up this term good debt. Good debt is not usually applied to this idea of using a credit card or much less carrying a credit card balance. It's usually applied to this idea that some debts are better than others. I don't deny that's true. Some debts are better than others. The terms are better maybe they're tax deductible or maybe the interest rate is lower. You know some debts are better than others but I don't draw hard and fast line between good debts and bad debts. And the reason why is they all cost money. When you borrow money it costs money. And so this traditional idea that the good debts were mortgage debts or debts on investment properties or student loans and the bad debts were debts on boats and cars and credit cards and pets and whatever else you want to borrow money for. And yes I suppose it's it's better to borrow money on something that's going to appreciate or something that's going to give you a higher income or something that you absolutely need to get to work. That kind of a thing. But the truth of the matter is all debt kind of works the same. And so unless you have a better use for your money then paying down that debt pay off the debt. And if nothing else it gives you a little bit of a psychological reprieve. It lifts a burden off your shoulders and gives you the ability to take risks in your life and in your career that you might not otherwise take. So even low interest rate debt 1 to 3 percent. I'm amazed when people pay that off just how much happier they are. And so I would consider even if you have low interest rate debt and you know some other things you could do with that money that you consider prioritizing that debt, get it out of your life. And I'll bet you don't go back into debt after you pay it off. It just seems silly sometimes to do that.

[00:19:22] Now that said if you aren't maxing out your retirement accounts and you got a 2 percent student loan I would probably max out my retirement accounts for paying off that 2 percent loan with extra payments. You know, Is that good debt? Well that pretty good debt. 2 percent you know stretched out over a pretty good time period but I'm not sure I really like to get into the terms good debt and bad debt.

[00:19:46] Third question, for taxable retirement accounts I've heard you refer to target retirement Vanguard mutual funds as tax inefficient funds. Any post or information you can send me to so I can learn more about this? I want to keep my portfolio as simple as possible. So the target fund seemed to be a broad and easy way to do this. Most of my accounts are largely made up of this fund both in taxable and nontaxable accounts but if I can learn how and why in a taxable account this is not a good idea I will look to switch my taxable account portfolio to maybe just the individual stock components of the target retirement fund.

[00:20:16] OK. Here's the problem with target retirement funds. I think they're fine. They're a great place to start. If you only have one type of retirement account and that's available in there, sure use it. The problem with it is most docs at least by mid career have six or seven different accounts they're investing in. Maybe an old 401k they're current 401K, couple of Roth IRAs, a taxable account and that fund may not be available in all the accounts.

[00:20:41] So if you got to set up an asset allocation in one account you might as well do it in all your accounts because you ought to be looking at all the accounts that are designated for one goal as one big account and your asset allocation ought to be spread across those accounts. The issue with the target retirement fund in a taxable account is that it contains taxable bonds and for a typical high income professional like a doctor, You don't want to hold taxable bonds in a taxable account. You want to hold tax exempt bonds or municipal bonds and so they don't have target retirement funds for high income professionals. They don't have them for taxable accounts. And so by definition when you buy that in a taxable account you've got bonds that are less efficient than what you probably want in your portfolio. And so it's probably not a great idea to have that in your taxable account. You know if you're willing to give up a little bit in return for simplicity you can do that but I think it's probably a bad idea for most.

[00:21:37] Next question I was told by my employer that if I moonlight I will have to give the check to them first. They will process the check and pay me after tax so I will not get a 1099 but still a W2. In that case can I claim any tax deduction for CME medical license etc that you had suggested when moonlighting as a contractor? That's a wacky employment agreement. First thing I do is go back and read my contract to make sure it actually says I have to do that. I'd be very hesitant to sign a contract that required that. And the problem here is you're losing the benefit of getting that 1099 money.

[00:22:12] It's basically being converted into W2 money so now you have no self employment income. You can't use that to open up an individual 401k. You're not going to be filing a schedule C where you can deduct all kinds of expenses like your medical license and your CME costs and your scrubs and that sort of stuff. And so it's not you know it's not ideal for sure. But if that's the agreement you signed with your employer and you're not ready to quit that job you may be stuck doing that. Kind of sucks though I think for an employer to put an employee in that position. I suspect there may be some government agencies or universities maybe that have contracts like that. I feel sorry for you guys that have them though.

[00:22:51] By the way those tax deductions for CME and medical license and that sort of stuff. If you've got a W-2 job and ten ninety nine job technically you have to split that deduction. If 90 percent of your income is coming from the W-2 job and only 10 percent from the 10 99 job and you're using that CME for both jobs technically you only get to take 10 percent of the deduction on Schedule C. I don't think that's what most people are doing. But that's the way the law's written.

[00:23:19] Next question I've been looking into refinancing periodically over the past year, mostly to just check on rates and see what they would do during the year after reading your blog about fixed versus variable rates. I have a question for you. What would you consider to be the minimum difference between rates of fixed and variable refinance options to justify picking a variable rate over a fixed rate? Or is there even one in your opinion? For example in my case I have a hundred sixty five thousand dollars in loans I'll be making 250000 dollars a year. When you try to live like a resident pay off my loans and three to five years. However many of the fixed and variable rates I've been quoted only differ by a range of point five point nine percent. But the goal of paying off loans quickly I'm comfortable with the idea that a variable loan rate could increase because I might still come out ahead in the end if it does not do so too rapidly. However my question is whether you would deem the gap between these fixed and variable rates, 4.07 and three point one five respectively, too small to justify picking the variable rate i.e. is there a minimum difference between a fixed and variable rate you would want or even expect to see to feel OK about the rate potentially increasing?

[00:24:24] That's a good question. I think if you're not getting much of a difference it's not worth it, you might as well just take the fixed rate. But bear in mind when you get a fixed rate loan you're buying two things you're buying a variable rate loan and you're basically buying an insurance policy. You're paying the lender to run the interest rate risk for you. And there's a cost for that insurance just like any other insurance. So if you can afford not to run that risk or you can afford to run that risk yourself, than I would do so. The idea behind taking a variable rate loan over a fixed rate loan is that you can afford the maximum payment that would come out of it number one and number two that this rate would have to increase early in the payback period and increase rapidly. For example in this case this doc could take the three point one five percent variable loan if rates went up by half a percent. The doc still ahead because the fixed rate was four or seven. In fact even if the rates went up one percent or more as long as they didn't do it in the first year or two of this three to five year loan the docs still going to come out ahead. And so it is not some terrible sin to take a variable rate loan as long as you can afford it. And as long as you know you're willing to run that risk yourself. And in retrospect I think I would have taken a lot more variable interest rate loans as interest rates have fallen over the last decade or two. That's actually been the winning thing to do for that entire time period. We're now in a time period where it seems more likely that the rate increases we've seen in the last year or two are probably going to continue for the next year or two. And so I would expect rates to rise a little bit but it looks like the Fed's been raising them about point two five percent every six months or so. And at that rate if you're going to pay off your loans in three years. Yes I would take a you know 1 percent lower rate that's variable and run that risk myself. So what can I give you for a guideline? I think over 1 percent on a loan that you're going to pay off in less than five years is probably worth taking a variable rate less than point two five percent. I would just take the fixed rate. Anything in between I think it it depends on how comfortable you are running that risk yourself.

[00:26:35] All right next question I'm trying to decide on a one time close construction to permanent loan for remodel edition project we're taking. There's a 30 year fixed at 4.5 percent with some points I pay. Four point six two five percent one, four point seventy five percent one that's no cost, a 10 one arm, another 10 one arm. I read some of your articles saying variable interest rate loans that seemed more geared toward student loans with a quick two to five year payoff. Do you have any advice for me with this on the mortgage side? It seems to me the rates have nowhere to go but up over time. So perhaps the peace of mind with 30 year fixed is the way to go.

[00:27:14] Well rates can certainly go lower. I mean they've been on an uptrend for the last two years and they could easily go back to where they were two years ago. I think the 10 year treasury has gone up something like one point seven percent over the last two years. And so rates certainly can go down. That said if I was taking out a 30 year mortgage. I'm not sure I would take a variable interest rate loan. That's a long time to run Interest rate risk and so I'd probably lean more toward a fixed loan if I thought I was really going to have it for 30 years.

[00:27:46] But it turns out this doc is just doing this for a remodel. When you're looking at a 30 year loan for a remodel you've got to wonder if maybe you're spending too much. I mean if you can take 30 years to pay off a renovation that's that's a heck of a renovation. And it's interesting as I as I got more information from this doc it looks like a half a point that the doc was thinking about paying to get a lower interest rate was ten thousand dollars. If you do the math he's talking about a two million dollar addition or renovation which is obviously a massive project. Most of my listeners can't afford even if they do so on credit. And so the first thing I did was make sure this doc had enough income to justify it. And as you might expect as a doc in a high cost of living area, that's why the housing is so expensive. And as the doctor that was making three quarters of a million dollars so this doc very well might be able to afford it even though it's a stretch even for him.

[00:28:46] So I think the first thing to do though when you're looking at something that big is to give serious consideration to paying with cash as much as you can. Save it up and do it a piece at a time maybe not do as big of a renovation. We're looking at doing a major renovation and that's what we intend to do. We're going to you know delay it if we don't have the money to do it and pay cash as we go along. So paying for renovation over 30 years just seems kind of insane to me.

[00:29:15] But you know if it makes sense to you and this is what you're going to do with your life then I guess it's OK to do. But I'd certainly try to just like a mortgage trying to pay it off in 15 years at least. However his real question was about the variable versus fixed rates over 30 years, 15 to 30 years, rather than two to five years. I agree. There's a lot of time there for something bad to happen. And so I'd be much more inclined to pay a little more to get a fixed rate than a variable rate if I was going to borrow money for that long but truthfully first thing I do is try to figure out a way not to owe money for that long in my life. You know I really don't like owing people money. Even our 15 year mortgage that has had a very good rate. We paid off in about seven years. So I'd be a little cautious with that.

[00:30:04] All right. This episode was sponsored by Splash. Splash Financial as a leader in student loan refinancing for doctors offering fixed rates as low as three point seven five percent APR. Hundreds of you check your rate with Splash each month and it only takes minutes to do so. They don't charge any application or origination fees and have no prepayment penalties, meaning you maintain your payment flexibility. Splash's new lower rates can save doctors tens of thousands of dollars over the life of their loans. Go to White Coat investor dot com slash slash financial today to get your rate in minutes.

[00:30:42] Be sure to subscribe to the White Coat investor monthly newsletter, it comes with free 12 e-mail financial boot camps series to get you up to speed with the other listeners and readers. Head up shoulders back. You've got this. We can help. See you on the next podcast.

[00:30:56] My dad your host Dr. Dahle is there practicing emergency physician, blogger, author, and podcaster. He is not a licensed accountant, attorney, or financial adviser. So this podcast is for your entertainment and information and should not be considered official personalized financial advice.