WCI columnist, pediatrician, and WCICON speaker, Dr. Margaret Curtis, joins Dr. Jim Dahle today on the podcast to help answer your questions. They debate the age-old questions of paying down debt vs. investing and if it's better to rent or buy in this market. They answer a workplace 401(k) question and discuss how you know if you are getting good advice at a fair price.


 

Rent vs. Buy in This Market

“Hi, Dr. Dahle. I have a rent vs. buy question. We live in Houston, Texas, where rent is significantly cheaper than the cost of owning. Should we just rent forever? What else should we consider? I'm an engineer, and my husband is a physician. We're debt free and not looking to change jobs or locations in the foreseeable future. Calculating with my husband's income of $370,000 and using the 2X rule, we can afford to purchase a $700,000 home.

Assuming 20% down with a current interest rate of 7.75%, the monthly mortgage is upward of $5,800 with taxes and insurance. I can rent the exact same home for 40% less than my mortgage at $3,500. Why not just rent forever and invest the $2,000 difference between the mortgage and the rent? Thank you so much for all that you do. We've been avid followers since 2015 and wouldn't be where we are without you.”

Dr. Jim Dahle:

Thanks for that great question, Melody. Rent vs. buy, renting forever. What do you tell her?

Dr. Margaret Curtis: 

I thought this was a great question. Usually the rent vs. buy question comes from people who are early in their career—maybe in medical school or in training—and the answer to them is usually you should just rent because you don't know where you're going to be. You've really got better things to do with your time than maintaining a house and better things to do with your money like managing your student loans. But this is a couple who are established in their careers, they're established where they live, and they're just wondering if they should forego expensive home ownership and rent. I think there are arguments to be made for both sides.

The cost of a mortgage is just the start of your homeowner cost. There's also obviously your taxes, and there's home repair. And it can really add up, whereas rent is all you're going to have to pay. As Americans, we tend to think of home ownership as a path to wealth because historically homes appreciate over time, and for some people, it's sort of a forced savings account. But this couple, obviously, is very disciplined and high achieving, and I'm sure they have the discipline to save that difference every month and invest it wisely for the long term. I think you could certainly make an argument for them renting long-term.

It wasn't clear to me from this question if they want to be homeowners. Another question I hear a lot right now is, “Should we buy right now when the rates are high or should we wait until rates go down?” The answer to that is that we don't know that rates are going to go down. They could just as easily go up again. We're actually still in fairly low-interest rate territory if you look at the long-term history of mortgage rates. I think the answer to that question really is to figure out how much house you can afford right now, including your interest payment, and then buy that house and be happy with it. But if they don't want to be homeowners, if that's not the right fit for them, then they should rent and not worry about what everyone else is doing. That was my take on this question. What do you think?

Dr. Jim Dahle:

The mortgage rate thing cracks me up. Our first mortgage in 1999 was 8%. Our second mortgage in 2006 was 6.25%. The home we're in now, by the time we paid it off, it was at 2.75%. That was not normal. Normal mortgage rates are 6 or 8%. People talk about them being high. I view that as far closer to what normal is going to be than what we experienced in the last few years. People who are expecting mortgage rates to go back to 3% or 4%, I think they're up in the night. I don't think that's going to happen. If you're not going to buy at a rate of 6% or 7% or 8% or 9%, you're probably not buying anytime soon. Maybe never. I don't think you can let the interest rates by themselves scare you off and keep you from buying.

I think it's important that we talk in general about this and then talk specifically about their situation. In general, a rent payment is going to be higher than the mortgage payment on the same house, and it has to be that way or real estate investing makes no sense whatsoever. As a real estate investor, their only source of income is rent, and they've got to cover all their expenses and get a profit off of that. They've got to be able to pay the mortgage, and they've got to be able to pay insurance, utilities, repairs, vacancies, property management fees, all that stuff. Plus, they presumably have a little bit of positive cash flow. The natural situation is that rent should be more than a mortgage. That is clearly not the case in their situation. I've run into other people—it's often the Bay Area, it seems like—where the cost of a mortgage, even when rates were low, was outrageous compared to what they could rent basically the same or a similar house for. I don’t know that I expected to see that in Houston, though apparently they're seeing it in Houston as well.

You've got to look at your individual situation if that varies from the general rule, and in this case, it does. In that case, buying in this situation only gets you two things. One, it's a speculation play, that for whatever reason, that house is going to continue to appreciate like crazy. And maybe it will, maybe it won't, but that seems like a little bit of a risky thing to bet on. And two, some people just like owning. You can paint the walls. You don't have to ask anybody permission to do stuff. I think there's some value to that. A lot of people want to own a home. It's one of their life goals. As you mentioned, I think if that's not one of your life goals, then you may come out with a better deal renting. But pay attention to it year to year to year. I wouldn't be surprised at all if in two or three years those numbers reverse themselves. Whether rents go up or whether the cost of housing goes down or flatlines or whatever, I wouldn't be surprised if that situation reverses itself. I'd pay attention to it and be willing to change if, at some point down the road, ownership does make more sense. As a general rule, I'm a big fan of ownership, though. I think most docs probably aim to own their home at some point during their career.

Dr. Margaret Curtis: 

I agree. One of the benefits of a mortgage is that you know exactly what you're paying every month for the next 15 or 30 years. Of course, you don't know that with rent. Rent always goes up over time—as do home repair costs, as do insurance costs and taxes. You just have to watch that number and see what it does and be prepared. She said she had a $2,000 difference between rent and mortgage. Maybe part of her investing is into a fund so they could, at some point, buy a house, if that makes sense for them in the future.

Dr. Jim Dahle:

Absolutely. This question comes up in many different variations. One variation you see essentially is people wondering should they buy a house when they're ready to buy the house, when their life is at the place that they should buy a house. Or should you wait until it seems to be a good deal? Whether that's because rates are low or it's because rents are high relative to the cost of buying a house. Should it be more driven by your personal life or more driven by the macroeconomic environment? I've always leaned toward your personal life, but when you see it get really out of whack, like in this sort of situation, it makes you wonder if that's the right advice to be giving out.

Dr. Margaret Curtis: 

I agree with that because the flip side of waiting until the market seems right is that you can then buy because you have fear of missing out, because everyone else is buying, because it seems like a good market to get into without really thinking through your personal reasons for doing it and then coming to regret it. I think we've seen that some in the last few years. People rush to invest in real estate when rates are really low and when everyone's all excited about investing in real estate. Some people who are doing it, even now, investing maybe isn't the right move for them. I think in a few years we are going to see properties come onto the market when people realize it wasn't actually the right move for them. I think you just have to buy what you can when the time is right for you personally. When you have a down payment saved up, when you're stable in your personal life and your professional life, then go ahead and pull the trigger and don't worry so much about what the interest rates are doing. The payment is going to be the same. It's just some is going to the bank and some is going toward your equity. You can't control everything.

Dr. Jim Dahle:

Recognize that sometimes this is going to work out well for you and sometimes it's not. We bought a house in 2006. We knew things were bubbly. It was not a complete mystery that chances were good that things could implode in 2006. Prices had been going through the roof for the prior three years. We hedged a little bit in that we bought a house that was much less expensive than what we could afford. Our mortgage was about 1X our income. Then, when we went to move in 2010, it was a completely opposite environment. It was a total buyer's market. We looked at 30 homes and the only one that sold over the next six months was the one we bought. None of the rest of them even sold. Obviously, we got a much better deal on the second home than we did on the first home. In fact, we sold that first home after nine years still at a loss. Luckily the second home was much more expensive than the first home. It ended up working out fine for us overall. But basically, we were just buying when it made sense for us to buy in our personal lives. It's possible that it doesn't always work out well for you doing that, but I think as long as you stay within some reasonable guidelines, you'll be OK in the end.

Dr. Margaret Curtis: 

I agree. I think one more thing I would say about that is that people get very caught up in this idea of real estate appreciating, and it typically does. But real estate is so hyper-local—even neighborhoods within the same city can have different appreciation patterns. There's a real estate cycle that people write entire books about; none of it really based on a lot of science. You can't always count on appreciation either or you can't account on a certain amount of appreciation. You just have to buy a house because you want to live in it and it works for you. Then, the appreciation is a nice extra, but you can't bank on it, literally.

Dr. Jim Dahle:

I'm not even sure it's that nice. We might be better off if homes didn't appreciate.

Dr. Margaret Curtis: 

Why do you say that?

Dr. Jim Dahle:

Because what happens when your home appreciates? Well, your property taxes go up. Mine have gone up, I don't know, maybe 100% in the 13 years I've been in this home. The only time appreciation really hurts you is when you're not in the game, when you don’t own anything at all. That's the fear. We all fear if we wait to buy, it's going to get so expensive that we won't be able to afford to buy it all. We'll pay some ridiculous price later. I think that's the fear that drives a lot of people to maybe buy before they're 100% ready to buy.

Dr. Margaret Curtis: 

I agree. I think our answer to this caller is if renting is right for you, then keep on renting and investing. Obviously, you're doing great.

Dr. Jim Dahle:

Yeah, I agree. And watch it because that might change.

More information here: 

Is Renting Better Than Buying? Why We're Financially Independent and Renting

How to Buy a House the Right Way

 

Pay Off Mortgage Early or Invest Extra Cash Flow? 

Let's get onto another question. It's another one of those classic questions that everybody has that has no right answer and should make for a decent debate. But this one comes via email. I'll read this one.

“After saving up a 20% down payment, we recently bought a home with a 7.8% interest rate. We've been setting aside all extra cash flow to build up our down payment. Now that we're in the house, I'm debating what to do with that excess cash flow of roughly $6,000 per month. I was planning on putting all of it in my taxable brokerage account, but considering the high interest rate, should I overpay my mortgage instead? Or should I do a split? Please note that I take the standard deduction and I'm maxing out retirement accounts, funding my HSA and doing my Backdoor Roth. This $6,000 is excess cash flow.”

Wow. What a great position to be in, to be maxing out everything. They didn't mention student loans, so presumably, the student loans are gone and they still have $6,000 to do whatever they want per month. I don't know, I might look at some of that and think about spending it.

Dr. Margaret Curtis: 

Yeah. Maybe it's time to go have a little fun after all this hard work you've been putting in. Congratulations on your new home and on doing so well. I think that you're in a good position and whatever choice you make is going to be a good one. There are situations where it's clearly better to invest or clearly better to pay down debt. If your debt is credit card debt at 19%, you should be paying that off like a house on fire. If you have a mortgage rate at 2.5% and you haven't maxed out your retirement accounts, then you should be maxing out your retirement accounts and investing.

This person, I think, is somewhere in the middle. Where exactly that spot for you is where you'll make more money with one vs. the other is highly individual and you have to do some math. You have to figure out how much interest you're paying, if you are itemizing your deductions, figuring out what kind of tax benefit you're getting (although the tax benefit alone is not a reason to keep a mortgage). This is something I've said before and I kind of harp on it because it drives me bananas. There are even some financial advisors who say keep your mortgage because of the tax write-off. A tax write-off is not free money. It's just a discount on money you're paying. You pay less in taxes but you're still paying the same amount to the bank. That, by itself, is not a reason to keep a mortgage.

There are downsides to paying a mortgage. You're less liquid. You're losing diversity because you've got more of your equity in one piece of real estate. But there are upsides too. You save a ton of interest, you have more security because you know you own your home outright and you might just be happier paying off your mortgage. It might be more in line with your values to not have a mortgage. Again, either way, I think this person is going to do just fine.

Dr. Jim Dahle:

I agree they're going to do just fine. They're maxing everything out, and they have $6,000 left over every month. Of course they're fine. I think the advice you give is kind of the standard advice. That's what I've been telling people for years. Figure out how you feel about debt. What are the interest rates? What are your alternative investments? But this is a mortgage at 7.8%. That's a heck of a guaranteed return on an investment. You can go put your money in a money market fund right now. You pick the best money market fund out there, and you might make 5.3% right now. That's the best guaranteed investment you can get.

This person's taking the standard deduction, so that interest is not helping them on their taxes in any way, shape, or form. They're truly after-tax paying 7.8%. That's really attractive to me. I would probably still max out the HSA and the 401(k) and all those tax-protected accounts, but I don't think I'd build a taxable account if I had a 7.8% debt. I think all that extra money, that $6,000 a month, would go toward it. They don't say how expensive their house is, but I'll bet that mortgage is gone in five years. If you're throwing $6,000 a month at it, it wouldn't surprise me if it's gone in five or seven years, maybe 10 years at the most. It's just going to be paid off so fast. Where else are you going to get almost an 8% return? Bonds aren't going to give it to you. A lot of people think the long-term return on stocks is only 7% or 8%. I don’t know if that's necessarily true, but that's what a lot of people believe. If you have to take a bunch of risk to make even 9% or 10% or you can get 8% guaranteed. I don't know. I find that pretty attractive.

Dr. Margaret Curtis: 

At what point would you suggest someone not pay down their mortgage and invest? Do you go off of the really safe investments like T-bills? Or do you look more at the stock market investing? What's your cutoff?

Dr. Jim Dahle:

Part of it is there's a lot of value in a tax-protected account, not only from taxes. There's also those estate planning, those asset protection benefits down the road. I feel a little bit differently if you're investing in a tax-protected account. In this case, it's a taxable account vs. paying off the mortgage. And I think that's a much harder case to make for investing. Obviously, if you've got a mortgage or a student loan at 2% and you put 5% in a money market fund, I'm not going to criticize that person for carrying their debt for a while. That's a no-brainer. And obviously, if you've got 30% credit card debt, that's a no-brainer to pay that off. In the middle, it’s a little bit more of a debate.

But for me, if you can do better than you can get with bonds and cash by paying down that mortgage, it makes you wonder if you should have bonds or cash in your portfolio at all. Money that you would be putting into that could go toward the mortgage. In some ways, a loan functions as a negative bond in your portfolio. I think we're going to be seeing more of that. Based on what the Feds are talking about, we may see another quarter-point or half-point interest rate rise in 2023. I don't know, when you start getting up there at 6%, 7%, 8%, 9%, I think I'd pay off the debt. I'm a little bit debt-averse compared to most people too, but that's pretty attractive to me.

Dr. Margaret Curtis: 

I think you're right. I understand that and I think the math certainly makes sense. I'm not entirely debt-averse when it's low-rate debt, but this is getting up there and this person also has room to do both. You could make an argument for paying down the mortgage earlier. Of course, you have to make sure you don't have a prepayment penalty on your mortgage. Pay down the mortgage faster and invest. My answer to a lot of these questions is what does your financial plan say? What's your asset allocation? Are you enough in bonds? Are you enough in stocks? Really go back to that. And that often answers that question for you. But as long as this person is investing in accordance with their financial plan, then I think there's some room for them to just stuff a little extra in a taxable account. I think there's a lot of good answers here.

Dr. Jim Dahle:

A lot of people can't decide. It’s a hard decision. They're afraid of regretting what they chose. You can split the difference. You're going to do the “wrong” thing with half of it, but that also means you're going to do the right thing with half of it. I've got a partner who splits his retirement account contributions 50% Roth, 50% tax-deferred. He knows one of them is wrong. He doesn't care. He's like, “I know I'm doing the right thing with half of it.” That's good enough for him. Maybe you're one of those people that'll help you to avoid regret down the line. That is perfectly fine.

Dr. Margaret Curtis: 

It's also perfectly fine to pay off a mortgage just because you hate having a mortgage. If it makes you feel better, if it's aligned with your values, it's fine to pay it off even if it's at a lower interest rate. There's nothing wrong with that. There's nothing wrong with being debt-free. It's a great place to be, actually.

Dr. Jim Dahle:

We paid ours off, and ours was 2.75% when we paid it off. Granted, you could only make 1% in a savings account. You could only make 0.25% in the money market account at the time. But we paid it off because I felt like we were borrowing money to do all the frivolous stuff we were doing. We bought a car, we went on vacation. It felt like we were borrowing at 2.75% to do that. I would be OK borrowing at 2.75% for a necessity or even an inexpensive luxury but not for the stuff we were spending money on. That just didn't sit right with me. Since money's fungible, we ended up paying it off.

Dr. Margaret Curtis: 

It's true. A lot of people who wouldn't dream of carrying a credit card balance are OK with having a high interest-rate mortgage. It's really the same thing. It's just debt. It's just debt that you owe. That makes a lot of sense to me. We still have a mortgage on our place. We owe about $140,000, but our interest rate is 2%. We're keeping the mortgage for now and investing the rest. That makes sense for us. We can put it in our local bank in a CD and make double that. But I agree with you about the importance of paying down debt and the math with this situation. It does kind of lean that way. The 7.8% return on your investment is a great return.

Dr. Jim Dahle:

The question comes up a lot with regard to whether to use a down payment or not, too. Do you save it up or do you use that money to invest? Obviously, getting to 20% down payment gives you some benefits. One, if you want to sell the house, if it's gone down in value, it provides you a little bit of safety that way and you don't have to bring money to the table to get out of the house. It also helps you avoid private mortgage insurance. That's assuming you didn't do a physician mortgage for those who put down less than 20%. But it's a little bit of the same debate, isn't it? Whether to use that money for a down payment or whether to leave it invested.

Dr. Margaret Curtis: 

I'm so risk-averse. I'm so traditional in a lot of ways when I look at money that the thought of a no down payment mortgage makes me really nervous for no really good reason. I'm sure someone could come up with lots of reasons why I'm wrong, but that's just where I come from.

Dr. Jim Dahle:

Well, some people want to put down even more than 20%.  It's a little bit of the same question. Do you wait to buy so you can come up with 30% or 40% or 50% or whatever? Or do you get in, in case it starts appreciating like crazy?

Dr. Margaret Curtis: 

I think now we're back to the question of when do you buy, which is when it's right for you. I think my answer to this person is again, they're doing great and there's not a wrong answer here. But it certainly makes sense to at least partially pay down this mortgage at this interest rate.

Dr. Jim Dahle:

If you knew that your interest rate was going to be 7.8%, would it give you a pause to go, “Well, maybe I'm going to save up for another year and put down 35% instead of 20%?”

Dr. Margaret Curtis: 

It depends on the price of the house, depends on my income, depends on how much I was stretching to buy it. I don't think there's an easy answer to that question. I think I'd have to sit down and do some math.

Dr. Jim Dahle:

Yeah, that's a hard question to answer for sure. I'm sorry all you guys are dealing with this issue. I'll tell you what. One of the best things about being debt-free—we've been debt-free since 2017—is this is something I no longer have to deal with. It's wonderful to never have this debate with myself, never talk to my wife about it, never have this issue. I bought a truck last month and you know what? We didn't even think about going to get a loan for it. We paid cash for it. We just never have this debate anymore. It frees up at least a little bit of mental bandwidth, and that's kind of a nice side benefit of being debt-free.

Dr. Margaret Curtis: 

That really is. We hit a milestone recently when we sold our house in Maine. We didn't have to buy a new place. We sold our old place and we put a big chunk of money in the bank. It is amazing the difference it makes psychologically and emotionally. Everything else seems like less of a big deal. It's really nice.

Dr. Jim Dahle:

It's a nice side benefit of wealth in general and cash in particular, I think.

More information here: 

Should You Pay Off Your Mortgage Early? 

How We Became Accidental Landlords: Turning a Primary Residence into a Rental Property

 

If you want to learn more about the following topics, check out the WCI podcast transcript below. 

    • Can you have a 401(k) as an employer and open a solo 401(k) too?
    • How do you know if you are getting good financial advice?

 

Milestones to Millionaire

#146 — Urologist Pays Off $300,000 in 2 Years and Finance

This doc has paid off $300,000 of student loans only two years out of training. He put nearly half of his income toward his loans every month. Not only was he paying big bucks toward his loans, but he also started his emergency fund and maxed out a 403(b), 457(b), and invested in an HSA and brokerage account. He became financially literate in med school and the rest is history.

 

Finance 101: Contribution Limits

Contribution limits for various retirement and savings accounts are set to increase in 2024 due to inflation. For people under 50, the 401(k) and 403(b) employee contribution limit will rise from $22,500 to $23,000. Those aged 50 and above can contribute up to $30,500 in total. The total contribution limit for these plans will also increase to $69,000 in 2024. 457(b) limits will rise to $23,000. IRA contributions will also increase, from $6,500 to $7,000, with an additional $1,000 allowance for people 50 and older. SEP-IRA contributions will also align with the $69,000 401(k) limit.

SIMPLE IRA and SIMPLE 401(k) contribution limits are set to increase from $15,500 to $16,000 in 2024. HSA contribution limits will also see adjustments, going from $3,850 to $4,150 for singles and from $7,750 to $8,300 for those with family coverage. Flexible Spending Accounts (FSA) will have a limit increase from $3,050 in 2023 to $3,200 in 2024. The compensation limit for 401(a) plans, used to calculate retirement contributions, will rise from $330,000 to $340,000. Lastly, the phase-out threshold for Roth IRA direct contributions will start at $146,000 and phase out entirely at $161,000 for singles and $228,000 for married couples filing jointly. It is important for people to be aware of these changes and consider adjusting their contributions accordingly. It's worth noting that with inflation on the rise, the real value of your income can be significantly impacted. Talk to your employers and really fight for cost-of-living raises to help counter the decreasing purchasing power of your wages over time.

 

To learn more about contribution limits, read the Milestones to Millionaire transcript below.


Sponsor: SoFi

 

Today’s episode is brought to us by SoFi, the folks who help you get your money right. They’ve got exclusive rates and offers to help medical professionals like you when it comes to refinancing your student loans—and that could end up saving you thousands of dollars. Still in residency? SoFi offers competitive rates and the ability to whittle down your payments to just $100 a month* while you’re still in residency. Already out of residency? SoFi’s got you covered there too, with great rates that could help you save money and get on the road to financial freedom. Check out the payment plans and interest rates at sofi.com/whitecoatinvestor. SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS 696891

 

WCI Podcast Transcript

Transcription – WCI – 343
INTRODUCTION 
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 343.

Today’s episode is brought to us by SoFi, the folks who help you get your money right. They’ve got exclusive rates and offers to help medical professionals like you when it comes to refinancing your student loans – and that could end up saving you thousands of dollars.

Still in residency? SoFi offers competitive rates and the ability to whittle down your payments to just $100 a month while you’re still in residency. Already out of residency? SoFi’s got you covered there too, with great rates that could help you save money and get on the road to financial freedom. Check out the payment plans and interest rates at sofi.com/whitecoatinvestor.

SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS 696891

All right, welcome back to the podcast. There has been some confusion. It's probably my fault. I've got to be more careful how I speak. Our WCI champion program, remember, this is the program where we try to pass out copies of the White Coat Investors Guide for Students to every first year in the country.

This year we're trying something new. We're not just giving it to the medical students and dental students that the book is really aimed at. We're also offering it to PA, NP and pharmacy students. Again, you got to be a first year. You got to be in some sort of a brick and mortar institution where you can actually pass the books out. But if you are interested in that, you can sign up, whitecoatinvestor.com/champion

All the champion has to do is literally pass out the books. We send you a few boxes of books, one for everybody in your class. You pass them out, you get some swag from us. That's it. That's the whole program.

Last year we managed to get the book into the hands of 70% of first year medical and dental students. We're hoping to better that this year. So please help us get the word out, boost financial literacy. This knowledge is so valuable. You might be saving each of your classmates literally millions of dollars over the course of their career, so you can really be their hero. Just sign up whitecoatinvestor.com/champion

Okay, we're doing another friends of WCI episode. We've done at least one of these in the past and I think they make for some awesome episodes. My partner today in this endeavor is Dr. Margaret Curtis. You may know her from her work as a columnist on the WCI blog. You may also know her from serving as a panelist and this year being a speaker at WCICON coming up in February in Florida. But I don't know that she's been on the podcast before. So, Margaret, welcome to the podcast and thanks for being here as a friend of WCI.

Dr. Margaret Curtis:
Thank you so much for having me.

Dr. Jim Dahle:
All right, just for those who don't know you, who've never read any of your work, who didn't see you at WCICON, give us the 30 second introduction about you.

Dr. Margaret Curtis:
I'm a pediatrician. I'm married to a urologist. We have the dual physician family. I used to live in Maine, actually just moved back to Vermont and I started writing for WCI actually back in 2018, but I've been a columnist for two years and I write a lot about family and work life and contract issues.

Dr. Jim Dahle:
Maine just had a bit of a tragedy in the news the last couple of weeks.

Dr. Margaret Curtis:
It did, sadly. Yeah. Actually it was in Lewiston in Maine, which is where I practiced for many years. So that hit close to home. It felt like my community.

Dr. Jim Dahle:
I bet it did. Feels like you're under attack when that sort of thing happens.

Dr. Margaret Curtis:
Yeah. Yeah. It was really heartbreaking and I'm thinking a lot about my colleagues who are there, who were on the front lines of that.

Dr. Jim Dahle:
All right, on a happier note, before we get into the content we have today, which we've got some awesome questions from the WCI audience, we've got to talk about this comment that came in on the blog today. And this came in on one of the blog posts. I did a blog post a few months ago about doctors that were worth a lot of money. In this case, it was two docs that were worth around $50 million a piece.

This comment comes in this morning and it says, “I immigrated with $32 and studied for my USMLE and got into pediatrics residency and did fellowship in neonatology. I got married in 1999. My wife also worked and we made sure that we saved one salary. When I was done with my fellowship, we had $140,000 in the bank and we bought our house with 50% down. I built my neonatology practice and we ran the practice well.”

And here's where it gets interesting, “And saved $4 to $5 million a year. We sold the practice in 2013 for $30 million. We have several good investments including vacation homes and fancy cars like Ferraris, Porsches, but we also believe in charity and we give away at least $1 to $2 million a year.

I continue to work part-time and make a salary of $500,000 part-time. We travel, drink good wine and good food and enjoy life. I'm 54 years old and my wife is 52 years old. We have a net worth of $75 to $80 million managed by professionals. 75% equity, private equity, and tax efficient funds. The rest, cash and bonds.”

I have always said that intra specialty pay variation can be dramatically higher than the inter specialty pay variation, but this is off the charts. This is on the moon. What do you think about when you hear about a pediatrician making enough money that he can put away $4 or $5 million a year?

Dr. Margaret Curtis:
That is really astonishing. And I think it really shows the pay variation between procedural and non-procedural specialties and the benefits that come from owning your own business. Really, he didn't get that much money by clocking in and out as a neonatologist, although they do tend to earn on the higher side for pediatricians, but by owning the practice and by subbing out to, I assume his group worked for many different hospital groups. So, it's pretty remarkable. Congratulations and well done for him. That is a pretty amazing example of what can happen when you stack up all those benefits on top of each other for many years.

Dr. Jim Dahle:
Yeah, I'm assuming that he's got a number of other docs and APCs, etc, working for him.

Dr. Margaret Curtis:
Yes, I'm sure he does and I'm sure they contract out with all those different services they provide and do lots of procedures. So, it's a pretty astonishing story.

Dr. Jim Dahle:
Yeah, it's super impressive. You got to be the high end for pediatricians I've heard about, but pediatricians out there are making five figures. Typically working part-time at that income, but it's just a massive, massive variation.

All right. Well, let's get into our first question off the Speak Pipe. And this is going to be good because there's always lots of good debate and topics to discuss about this. I think it's a rent versus buy question. So, let's take a listen.

 

RENT VS. BUY IN THIS MARKET?

Melody:
Hi, Dr. Dahle. I have a rent versus buy question. We live in Houston, Texas where rent is significantly cheaper than the cost of owning. Should we just rent forever? What else should we consider? I'm an engineer and my husband is a physician. We're debt free and not looking to change jobs or locations in the foreseeable future. Calculating with my husband's income of $370,000 and using the 2X rule, we can afford to purchase a $700,000 home.

Assuming a 20% down in current interest rate of 7.75%, the monthly mortgage is upwards of $5,800 with taxes and insurance. I can rent the exact same home for 40% less my mortgage at $3,500. Why not just rent forever and invest the $2,000 difference between the mortgage and the rent? Thank you so much for all that you do. We've been avid followers since 2015 and wouldn't be where we're without you.

Dr. Jim Dahle:
All right, thanks for that great question, Melody. Rent versus buy, renting forever. Man, what do you tell her?

Dr. Margaret Curtis:
Well, I thought this was a great question. Usually the rent versus buy question comes from people who are early in their career, maybe in medical school or in training, and the answer to them is usually you should just rent because you don't know where you're going to be. You've really got better things to do with your time than maintaining a house, and better things to do with your money like managing your student loans.

But this is a couple who's established in their career, they're established where they live, and they're just wondering if they should forego expensive home ownership and rent. And I think their argument is to be made for both sides.

The cost of a mortgage is just the start of your homeowner cost. There's also obviously your taxes, there's home repair and it can really add up. Whereas rent is all you're going to have to pay. As Americans, we tend to think of home ownership as a path to wealth because historically homes appreciate over time and for some people it's sort of a forced savings account.

But this couple, obviously, is very disciplined and high achieving, and I'm sure they have the discipline to save that difference every month and invest it wisely for the long term. So I think you could certainly make an argument for them renting long term.

It wasn't clear to me from this question if they want to be homeowners. And another question I hear a lot right now is, “Should we buy right now when the rates are high or should we wait until rates go down?” And the answer to that is that we don't know that rates are going to go down. They could just as easily go up again. We're actually still in fairly low interest rate territory if you look at the long-term history of mortgage rates. So, rates could go up again.

And I think the answer to that question really is figure out how much house you can afford right now, including your interest payment and then buy that house and be happy with it. But if they don't want to be homeowners, if that's not the right fit for them, then they should rent and not worry about what everyone else is doing. That was my take on this question. What do you think?

Dr. Jim Dahle:
Yeah, the mortgage thing cracks me up. The mortgage rate thing. Our first mortgage in 1999 was 8%. Our second mortgage in 2006 was 6.25%. The home we're in now, by the time we paid it off, it was at 2.75%. That was not normal. Normal mortgage rates are 6 or 8%. So people talk about them being high, I view that as far closer to what normal is going to be than what we experienced in the last few years.

And people that are expecting mortgage rates to go back to 3 or 4%, I think they're up in the night. I don't think that's going to happen. If you're not going to buy at a rate of 6 or 7 or 8 or 9%, you're probably not buying anytime soon. And maybe never. I don't think you can let the interest rates by themselves scare you off and keep you from buying.

I think it's important that we talk in general about this and then talk specifically about their situation because in general a rent payment is going to be higher than the mortgage payment on the same house, and it has to be that way or real estate investing makes no sense whatsoever.

As a real estate investor their only source of income is rent and they've got to cover all their expenses and get a profit off of that. They've got to be able to pay the mortgage, they've got to be able to pay insurance, utilities, repairs, vacancies, property management fees, all that stuff plus presumably have a little bit of positive cash flow. And so, the natural situation is that rent should be more than a mortgage.

That is clearly not the case in their situation. And I've run into other people, it's often the Bay Area, it seems like, where the cost of a mortgage, even when rates were low, was outrageous compared to what they could rent basically the same or a similar house for. I don’t know that I expected to see that in Houston though, but apparently they're seeing it in Houston as well.

And so, you've got to look at your individual situation if that varies from the general rule, and in this case it does. And in that case, buying in this situation only gets you two things. One, it's a speculation play, that for whatever reason, that house is going to continue to appreciate like crazy. And maybe it will, maybe it won't, but that seems like a little bit of a risky thing to bet on.

And two, some people just like owning. You can paint the walls. You don't have to ask anybody permission to do stuff. And so, I think there's some value to that. A lot of people want to own a home. It's one of their life goals.

And as you mentioned, I think if that's not one of your life goals, then you may come out with a better deal renting. But pay attention to it year to year to year. I wouldn't be surprised at all if in two or three years those numbers reverse themselves. Whether rents go up or whether the cost of housing goes down or flat lines or whatever, I wouldn't be surprised if that situation reverses itself. I'd pay attention to it and be willing to change if at some point down the road ownership does make more sense. As a general rule, I'm a big fan of ownership, though. I think most docs probably out to aim to own their home at some point during their career.

Dr. Margaret Curtis:
No, I agree. One of the benefits of a mortgage is that you know exactly what you're paying every month for the next 15 or 30 years. And of course, you don't know that with rent. And rent always goes up over time as do home repair costs, as do insurance costs and taxes. So you just have to watch that number and see what it does and be prepared. And maybe part of your investing, she said she had a $2,000 difference between rent and mortgage. Maybe part of her investing is into a fund so they could at some point buy a house, if that makes sense for them in the future.

Dr. Jim Dahle:
Absolutely. This question comes up in many different variations. One variation you see essentially is people wondering should they buy a house when they're ready to buy the house, when their life is at the place that they should buy a house. Or should you wait until it seems to be a good deal? Whether that's because rates are low, it's because rents are high relative to the cost of buying a house.

Should it be more driven by your personal life or more driven by the macroeconomic environment? I've always leaned toward your personal life, but when you see it get really out of whack, like in this sort of situation, it makes you wonder if that's the right advice to be giving out.

Dr. Margaret Curtis:
I agree with that because the flip side of waiting until the market seems right is that you can then buy because you have fear of missing out, because everyone else is buying, because it seems like a good market to get into without really thinking through your personal reasons for doing it and then coming to regret it.

And I think we've seen that some in the last few years, people who rush to invest in real estate when rates are really low and when everyone's all excited about investing in real estate. And some people who are doing it, even now, investing maybe isn't the right move for them. And I think in a few years we are going to see properties come onto the market when people realize it wasn't actually the right move for them.

I think you just have to buy what you can when the time is right for you personally. When you have a down payment saved up, when you're stable in your personal life and your professional life, then go ahead and pull the trigger and don't worry so much about what the interest rates are doing. The payment's going to be the same. It's just some's going to the bank and some's going towards your equity. And you can't control everything.

Dr. Jim Dahle:
And recognize that sometimes this is going to work out well for you and sometimes it's not. We bought a house in 2006. And we kind of knew things were bubbly. It was not a complete mystery that chances were good things could implode in 2006. Prices have been going through the roof for the prior three years.

And so, we hedged a little bit in that we bought a house that was much less expensive than what we could afford. It was about 1X. Our mortgage was about 1X our income. And that was on a low income that was on a military income.

And then when we went to move in 2010, it was a completely opposite environment. It was a total buyer's market. We looked at 30 homes and the only one that sold over the next six months was the one we bought. None of the rest of them even sold. And obviously we got a much better deal on the second home than we did on the first home. In fact, we sold that first home after nine years still at a loss. And luckily the second home was much more expensive than the first home.

And so, it ended up working out fine for us overall. But basically we were just buying when it made sense for us to buy in our personal lives. It's possible that it doesn't always work out well for you doing that, but I think as long as you stay within some reasonable guidelines, you'll be okay in the end.

Dr. Margaret Curtis:
I agree. But I think one more thing I would say about that is that people get very caught up in this idea of real estate appreciating and it typically does, but real estate is so hyper-local, even in neighborhoods within the same city can have different appreciation patterns. There's a real estate cycle that people write entire books about, none of it really based on a lot of science. And so, you can't always count on appreciation either or you can't account on a certain amount of appreciation. You just have to buy a house because you want to live in it and it works for you. And then the appreciation is a nice extra, but you can't bank on it, literally.

Dr. Jim Dahle:
I'm not even sure it's that nice. We might be better off if homes didn't appreciate.

Dr. Margaret Curtis:
Why do you say that?

Dr. Jim Dahle:
Because what happens when your home appreciates? Well, your property taxes go up. And mine have gone up, I don't know, maybe 100% in the 13 years I've been in this home.

Dr. Margaret Curtis:
Yeah, they probably have. Yeah.

Dr. Jim Dahle:
And the only time appreciation really hurts you because you're going to need a place to live. If you sell one house, you got to move into another one that's also appreciated most of the time. The only time it really hurts you is when you're not in the game. When you don’t own anything at all. That's the fear. We all fear if we wait to buy, it's going to get so expensive, won't be able to afford to buy it all. We'll pay some ridiculous price later. And I think that's the fear that drives a lot of people to maybe buy before they're 100% ready to buy.

Dr. Margaret Curtis:
I agree. I agree. So I think our answer to this caller is if renting is right for you, then keep on renting and investing. And obviously, you're doing great.

Dr. Jim Dahle:
Yeah, I agree. And watch it because that might change.

Dr. Margaret Curtis:
Yeah.

 

PAY OFF MORTGAGE EARLY OR INVEST EXTRA CASH FLOW?

Dr. Jim Dahle:
Okay. Let's get onto another question. And it's another one of those classic questions that everybody has that has no right answer and should make for a decent debate. But this one comes via email. I'll read this one. It says “After saving up a 20% down payment, we recently bought a home with a 7.8% interest rate. We've been setting aside all extra cash flow to build up our down payment.

Now that we're in the house, I'm debating what to do with that excess cash flow of roughly $6,000 per month. I was planning on putting all of it in my taxable brokerage account, but considering the high interest rate, should I overpay my mortgage instead? Or should I do a split?

Please note that I take the standard deduction and I'm maxing out retirement accounts, funding my HSA and doing my backdoor Roth. This $6,000 is excess cash flow. Thanks for your insight.”

Wow. What a great position to be in, to be maxing out everything. And presumably they didn't mention student loans, so presumably the student loans are gone and still have $6,000 to do whatever you want with a month. I don't know, I might look at some of that and think about spending it.

Dr. Margaret Curtis:
Yeah. Maybe it's time to go have a little fun after all this hard work you've been putting in. No, congratulations on your new home. Congratulations on doing so well. And I think that you're in a good position and whatever choice you make is going to be a good one.

So, there are situations where it's clearly better to invest or clearly better to pay down debt. If your debt is credit card debt at 19%, you should be paying that off like a house on fire. If you have a mortgage rate at 2.5% and you haven't maxed out your retirement accounts then you should be maxing out your retirement accounts and investing.

This person I think is somewhere in the middle. And where exactly that spot for you is where you'll make more money with one versus the other is highly individual and you have to sort of do some math. You have to figure out how much interest you're paying, if you are itemizing your deductions, figuring out what kind of tax benefit you're getting.

Although the tax benefit alone is not a reason to keep a mortgage. And this is something I've said before and I kind of harp on it because it drives me bananas. There are even some financial advisors who say keep your mortgage because of the tax write-off. A tax write-off is not free money. It's just a discount on money you're paying. So you pay less in taxes but you're still paying the same amount to the bank. That by itself is not a reason to keep a mortgage.

There are downsides to paying a mortgage. You're less liquid. You're losing diversity because you've got more of your equity in one piece of real estate. But there are upsides too. You save a ton of interest, you have more security because you know you own your home outright and you might just be happier paying off your mortgage or it might be more in line with your values to not have a mortgage. Again, either way I think this person is going to do just fine. Well, what do you think?

Dr. Jim Dahle:
Well, I agree they're going to do just fine. They're maxing everything out and they got $6,000 left over month. Of course they're fine. And I think the advice you give is kind of the standard advice. That's what I've been telling people for years. Figure it out how do you feel about debt? What are the interest rates? What are your alternative investments?

But this is a mortgage at 7.8%. That's a heck of a guaranteed return on an investment. You can go put your money in a money market fund right now. You pick the best money market fund out there and you might make 5.3% right now. That's the best guaranteed investment you can get.

This person's taken the standard deduction so that interest is not helping them on their taxes in any way, shape or form. They're truly after tax paying 7.8%. That's really attractive to me. I would probably still max out the HSA and the 401(k) and all those tax protected accounts, but I don't think I'd build a taxable account if I had a 7.8% debt. I think all that extra money, that $6,000 a month would go toward it. They don't say how expensive their house is, but I'll bet that mortgage is gone in five years. If you're throwing $6,000 a month at it, it wouldn't surprise me if it's gone five or seven, maybe 10 years at the most. It's just going to be paid off so fast.

Where else are you going to get almost an 8% return? Bonds aren't going to give it to you. A lot of people think the long-term return on stocks is only 7 or 8%. I don’t know if that's necessarily true, but that's what a lot of people believe. And if you got to take a bunch of risk to make even 9 or 10% or you can get 8% guaranteed. I don't know. I find that pretty attractive.

Dr. Margaret Curtis:
At what point would you suggest someone not pay down their mortgage and invest? Is it really, do you go off of the really safe investments like T-Bills? Or do you look more at the stock market investing? What's your cutoff?

Dr. Jim Dahle:
Part of it is there's a lot of value in a tax protected account, not only from taxes. There's also those estate planning, those asset protection benefits down the road. And so, I feel a little bit differently if you're investing in a tax protected account.

In this case, it's a taxable account versus paying off the mortgage. And I think that's a much harder case to make for investing. Obviously if you've got a mortgage or a student loan at 2%, and you put 5% in a money market fund, I'm not going to criticize that person for carrying their debt for a while. That's a no-brainer. And obviously if you've got 30% credit card debt, that's a no-brainer to pay that off. In the middle, it’s a little bit more of a debate.

But for me, man, if you can do better than you can get with bonds and cash by paying down that mortgage, it makes you wonder should you have bonds or cash in your portfolio at all. Money that you would be putting into that going go toward the mortgage. In some ways, a loan functions as a negative bond in your portfolio. And so, you got to wonder when those rates get as high as 7.8%.

I think we're going to be seeing more of that. Based on what the Feds are talking about, we may see another quarter point or half point interest rate rise in 2023. So, I don't know, you start getting up there 6, 7, 8, 9% I think I'd pay off the debt. I'm a little bit debt averse compared to most people too, but that's pretty attractive to me.

Dr. Margaret Curtis:
Yeah. I think you're right. I understand that and I think the math certainly makes sense. I'm not entirely debt averse when it's low rate debt, but yeah, this is getting up there and this person also I think has room to do both. You could make an argument for paying down the mortgage earlier. Of course, you have to make sure you don't have a prepayment penalty on your mortgage. Pay down the mortgage faster and invest.

My answer to a lot of these questions is what does your financial plan say? What's your asset allocation? Are you enough in bonds? Are you enough in stocks? Really go back to that. And that often kind of answers that question for you. But as long as this person is investing in accordance with their financial plan, then I think there's some room for there. Just stuff a little extra in a taxable account. I think there's a lot of good answers here.

Dr. Jim Dahle:
Yeah. And if you really can't decide, and a lot of people can't decide. It’s a hard decision. They're afraid of regret and what they chose. You can split the difference. You're going to do the “wrong” thing with half of it, but also means you're going to do the right thing with half of it.

Dr. Margaret Curtis:
Yeah.

Dr. Jim Dahle:
If that helps you, I've got a partner that he splits his retirement account contributions 50% Roth, 50% tax deferred. He knows one of them is wrong. He doesn't care. He's like, “I know I'm doing the right thing with half of it.” And that's good enough for him. And maybe you're one of those people, that'll help you to avoid regret down the line. And it's perfectly fine.

Dr. Margaret Curtis:
It's also perfectly fine to pay off a mortgage just because you hate having a mortgage. If it makes you feel better, if it's aligned with their values, it's fine to pay it off even if it's at a lower interest rate. There's nothing wrong with that. There's nothing wrong with being debt-free. It's a great place to be actually.

Dr. Jim Dahle:
Yeah. Part of the reason we paid ours off, and ours was 2.75% when we paid it off. Granted, you could only make 1% in a savings account. You could only make 0.25% in the money market account at the time. But we paid it off because I felt like we were borrowing money to do all the frivolous stuff we were doing. We bought a car, we went on vacation. It felt like we were borrowing at 2.75% to do that.

I would be okay borrowing at 2.75% for a necessity or even inexpensive luxury, but not for the stuff we were spending money on. That just didn't sit right with me. And since money's fungible, we ended up paying it off.

Dr. Margaret Curtis:
It's true. A lot of people who wouldn't dream of carrying a credit card balance are okay with having a high interest rate mortgage. And it's really the same thing. It's just debt. It's just debt that you owe. So that makes a lot of sense to me.

We still have a mortgage on our place. We owe about $140,000, but our interest rate is 2%. We're keeping the mortgage for now and investing the rest. And that makes sense for us. We can put it in our local bank in a CD and make double that. But I agree with you about the importance of paying down debt and the math with this situation. It does kind of lean that way. The 7.8% return on your investment is a great return.

Dr. Jim Dahle:
The question comes up a lot with regards to whether to use a down payment or not too. Do you save it up or do you use that money to invest? And obviously getting to 20% down payment gives you some benefits. One, if you want to sell the house, if it's gone down in value, it provides you a little bit of safety that way and you don't have to bring money to the table to get out of the house.

It also helps you avoid private mortgage insurance. That's assuming you didn't do a physician mortgage for those who put down less than 20%. But it's a little bit of the same debate, isn't it? Whether to use that money for a down payment or whether to leave it invested.

Dr. Margaret Curtis:
Yeah. I'm so risk averse. I'm so traditional in a lot of ways when I look at money that the thought of a no down payment mortgage makes me really nervous for no really good reason. I'm sure someone could come up with lots of reasons why I'm wrong, but that's just where I come from.

Dr. Jim Dahle:
Well, some people want to put down even more than 20%. It's a little bit of the same question. Do you wait to buy so you can come up with 30% or 40% or 50% or whatever? Or do you get in, in case it starts appreciating like crazy?

Dr. Margaret Curtis:
Well, I think now we're back to the question of when do you buy, which is when it's right for you. And I don't mean to take us totally off track here, but anyway, I think my answer to this person is again, they're doing great and there's not a wrong answer here, but it certainly makes sense to at least partially pay down this mortgage at this interest rate.

Dr. Jim Dahle:
If you knew that your interest rate was going to be 7.8%, give you a pause to go, “Well, maybe I'm going to save up for another year and put down 35% instead of 20%.”

Dr. Margaret Curtis:
Depends on the price of the house, depends on my income, depends on how much I was stretching to buy it. I don't think there's an easy answer to that question. I think I'd have to sit down and do some math.

Dr. Jim Dahle:
Yeah, that's a hard question to answer for sure.

Dr. Margaret Curtis:
Yeah. So it's a very vague answer.

Dr. Jim Dahle:
Yeah. I'm sorry all you guys are dealing with this issue. I'll tell you what. One of the best things about being debt free, we've been debt free since 2017, is this is something I no longer have to deal with.

Dr. Margaret Curtis:
That's great.

Dr. Jim Dahle:
It's wonderful to never have this debate with myself, never talk to my wife about it, never have this issue. I bought a truck last month and you know what? We didn't even think about going to get a loan for it. We paid cash for it. And we just never have this debate anymore. And it frees up at least a little bit of mental bandwidth and that's kind of a nice side benefit of being debt free, I think.

Dr. Margaret Curtis:
That really is. We hit a milestone recently when we sold our house in Maine. We didn't have to buy a new place. We sold our old place and we put a big chunk of money in the bank. And it is amazing the difference it makes psychologically and emotionally. Everything else seems like less of a big deal. It's really nice.

Dr. Jim Dahle:
It's a nice side benefit of wealth in general and cash in particular, I think.

Dr. Margaret Curtis:
It really is. It's pretty amazing.

Dr. Jim Dahle:
All right. Well, those of you out there on the front lines who are dealing with these questions, who are struggling with “How much to put down whether to buy a house? Is now the time? Can I max out retirement accounts? How much to spend?”

They're tough questions and it's tough to take care of all that on top of the stresses of your daily profession, whether you're a physician or a dentist or an attorney or a small business owner or an engineer, a tech worker, whatever. You're doing something hard. That's why you get paid so much. That's why you're part of the high income professionals that listen to this podcast. And if nobody's thanked you for that hard work you do on your day to day, let me be the first today. So thank you for that.

Dr. Margaret Curtis:
Absolutely. And I also think it can be helpful to remember that at high income levels, if you're doing most things right, you're going to be fine. It's kind of the 80/20 rule. If you get 80% of things right, the other 20% you can afford to mess up on a little bit and you're going to be fine.

Dr. Jim Dahle:
Yeah. It's nice to be rescued from our bad mistakes by our income, isn't it?

Dr. Margaret Curtis:
Absolutely.

Dr. Jim Dahle:
Okay, next question. This one comes from Colton on the Speak Pipe. Let's take a listen to this.

 

CAN YOU HAVE A 401(K) AS AN EMPLOYER AND OPEN A SOLO 401(K) TOO?

Colton:
Hi Jim. This is Colton from Billings. First of all, thank you for everything that you and your team do at the White Cone Investor. I have a 401(k) question for you. I currently work as an associate dentist in a group practice with plans of partnering. At the moment, I have access to the company 401(k), but have been told that once I partner, I'll no longer be able to contribute.

I understand that when companies decide to use a 401(k), they have to offer it to everyone employed. And so, I was wondering about the idea of opening a solo 401(k) once I partner, if everyone else has access to the 401(k) the company currently provides. Is that doable? I know that a lot of dental practices instead will open a SIMPLE IRA, but if I could do a solo 401(k), I think that would be a whole lot better. What are your thoughts?

Dr. Jim Dahle:
Wow. He's about to get himself into a lot of trouble. That's my thought. Here's the deal. When you have a practice that you're the owner of, that you're an employee of, that you're a partner in, this is one business entity. And that one business entity can have one retirement plan, essentially.

You cannot as an owner offer one 401(k) to your employees and go off and open your own 401(k) for yourself. Likewise, you cannot have a 401(k) that only benefits you. That's the whole point of all these testing rules for 401(k)s. They're to keep owners from getting all the benefits or the highly compensated employees from getting all the benefits and hosing low paid employees, the non-highly compensated employees. That's why 401(k)s and other retirement plans have all these specific testing rules.

But trust me when I say you cannot get around these. If you do, the penalties are very large. It is not worth doing. You cannot go open a solo 401(k) when you make partner. Your option is to offer the same plan to yourself as you do to the employees. Now that plan might be a 401(k), it might be a SIMPLE IRA, it might be a SEP IRA.

Whatever it is, though, you will not be able to do something different than what you're doing for them. And in a lot of ways, you won't be able to get nearly the benefit that you're offering to them unless you offer them significantly awesome benefits. That's the bottom line for how a company 401(k) works.

Dr. Margaret Curtis:
Yeah, I felt like I didn't really understand the situation. I had more questions than I had answers. I don't understand what reason he was given for not being given access to the 401(k) once he makes partner. So that's my first question is why can't he contribute to the 401(k)? What are the other partners doing? How are they all saving? Because access to a retirement account is a huge benefit. And so, he needs to dig into that a little bit more, I think.

It didn't really make sense to me. It occurred to me that maybe the person running the plan just doesn't understand how this works. I have run into office managers and plan managers and benefits folks who just didn't understand. I had a practice, someone I worked for once who had founded the practice and set up the benefits and he said, “Oh, we don't have an IRA, we have a SIMPLE.” And I said, “Well, actually a SIMPLE is a form of IRA.” And his point is that it may be the people who are administering your plan just don't really get how this works.

I can't think of any valid reason why you wouldn't be able to access this 401(k) after you make partner. And if you can't or whatever the glitch is, you should be able to negotiate around this because this is a big deal. I don't think I'd take partnership if it meant that I couldn't have any access at all.

Dr. Jim Dahle:
Well, I agree. Somebody's confused. Because it's unlikely that this doc would not be able to contribute something to the plan. He may not be able to get $66,000 in there, maybe not even able to get $22,500 in there because of the testing. And that comes down to the fact that the other employees are not putting any money in. If nobody is saving anything other than the match they get, maybe they're not even putting anything in there and getting the match, that absolutely can limit how much the partners and the highly compensated employees can put in.

But it's unlikely that they wouldn't be able to put anything in. So I think somebody is confused. You need to go back and talk to the plan administrator and the TPA and all that and figure out, “Well, how much can I really put in?”

The other solution you can do here is by getting the other employees to actually contribute to the plan. When everybody is using this plan, when everybody is maxing it out, it gives the highly compensated employees the option to put more into the plan without failing the testing.

And so, this was a big thing for us at WCI when we put our 401(k) in. We were like, “Well, how much do people want to save?” And it turns out some people would rather have big old 401(k) contributions and relatively small salaries. And in a small practice you can make those adjustments so that you can do that.

The other thing to keep in mind, and people fear this all the time, they're like, “Oh well I don't want to put too much in the 401(k) because then I'll be penalized when it fails the testing rules.” What they don't understand is what the penalty is. A penalty is you have to put money into the accounts of your non-highly compensated employees. That's it. You don't pay the IRS anything. Nobody comes after you. You're not getting audited. You have to make an additional contribution into your employee's retirement accounts. That's the penalty.

And I understand that some people don't want to do that because their employees don't value the 401(k) or whatever. But that was not a bad thing to me. I look at that and I go, “That sounds like the best penalty in the world. I get to pay people more, I get to help them save for retirement.” That's not a bad penalty to me.

But I can understand if you're a dentist and it's just you putting money into a 401(k) and you have 12 employees or something and you're going to end up putting more in as their matching dollars than you're even going to be able to save yourself in the 401(k). I can understand why you might want to minimize the cost of that 401(k).

But I think a big part of this is a lack of education for the employees on the value of the retirement account benefits that you're providing. And I think if you really educate well, those penalties aren't nearly as large and you're able to put more into your 401(k) yourself.

Dr. Margaret Curtis:
Yeah. Maybe you need a little educating of both your plan manager and some of the employees and get everyone on the same page so you can all be contributing to your 401(k).

Dr. Jim Dahle:
And the truth is, if you study your practice, sometimes the right answer is not a 401(k). Sometimes it's a SIMPLE IRA. To make things more confusing, there's not only something called a SIMPLE IRA, but there's something called a SIMPLE 401(k), which is very similar or a SEP IRA or no plan at all. Sometimes it just makes sense to not have a plan and do your retirement savings in a taxable account.

 

QUOTE OF THE DAY

All right, let's do our quote of the day. This one comes from Thomas Stanley. You may not know Thomas Stanley. Stanley and Denko. They were the authors of Millionaire Next Door. And he said, “At the end of the day, success cannot be purchased.” And that's because the things that really matter in life, they're not financial things.

Although we talk about finances all day long on the podcast, remember that in the end, that's probably not the thing that's going to make you feel happy and make you feel successful. Pay attention to the other more important things in your life, your health, your relationships, those sorts of things. And keep that in mind.\\

 

HOW DO YOU KNOW IF YOU ARE GETTING GOOD FINANCIAL ADVICE?

Okay, we have another reader question. This one comes in via email. The reader says, “We've taken your advice to get advice at a fair price.” Okay, that's great. “I know if I am getting a fair price or at least a price I'm comfortable with. What I'm less sure of is how do I know if the advice I am getting is in fact good advice? I've read your book and the blog for some time, but I struggle to know if I'm ready to dive into the do-it-yourself world or if I should stick with a flat fee financial advisor for a while longer.

But then the question of ‘Am I getting good advice?’ comes back up. Does this person really have my best interest at heart? So, what do you think? When is someone ready to DIY? And if we aren't ready, how do we know if the advice we're paying for is good?”

Dr. Margaret Curtis:
That's a great question. I love this question.

Dr. Jim Dahle:
It's a great question. It's harder to answer. My mantra is good advice at a fair price. And I can tell you what a fair price is. That's pretty straightforward. Too many people don't know the answer to that, but it's not that complicated. It's basically a four figure amount a year. If you're paying someone between $1,000 and $10,000 a year to do financial planning for you, manage your investments, you're paying a fair price.

If you're paying somebody $50,000 a year, you're probably paying too much. If you're trying to get it for $300 a year, you're probably not paying enough to actually get decent advice. So, the price is actually pretty straightforward. The advice I think that is hard.

Dr. Margaret Curtis:
That is hard. But this is a great question because this is someone who was where we all started out, which is “How do I know what I should be looking for and how do I know when I'm ready?” The question of where do you find the advice and how do you learn to vet advice is a great one. It's really a two part question.

Obviously I believe in the White Coat Investor mission and message or I wouldn't be doing this, but I still think it's important to go elsewhere to double check your sources. The places I look for, one is the White Coat Investor Forum. It’s a great place. A lot of really smart people who will give you good advice. I tend to stay away from the social media sites because I think there's less quality control.

There are lots of other good websites out there. Bogleheads is a great one. Some things in the Bogleheads Universe. And then I tend to also look on just what I'd call legacy sites like Investopedia or the major media outlets have financial sections. And a lot of that information or advice isn't relevant to doctors, but you can still get a basic financial education.

And what you're trying to do is keep reading until you see the themes emerge and you can spot the outliers. And once you can do that and you start to anticipate what the answers to questions will be, then you know you've reached a certain level of competence. You've reached the kind of consciously competent level. You don't have to get to expert level, but you have to be aware of the themes. Once you can spot the outliers, you can start digging into why they're outliers and figuring out why they're saying what they're saying.

For example, most reputable, most responsible financial advisors will tell you to stay away from whole life insurance for good reasons. But whole life insurance can be appropriate if you're planning for a child with a disability. Once you can spot that outlier answer and dig into it, it'll make sense. And I think that's sort of how you know when you're ready to either DIY or to just oversee a financial advisor.

Because even if you hire someone to help you with this stuff, you still need to know what they're doing and why, because no one will ever care about your money as much as you do. And because there are people out there who either don't have the best intentions or sort of stray off of the straight and narrow for whatever reason. That was how I got to where I am today and that's the advice I give most people who are starting out.

Dr. Jim Dahle:
It's hard though because once you know enough to really recognize good advice, you're very close to knowing enough to be able to do it yourself. It's not that far apart. And this stuff is not that hard to do. If you've been able to learn nephrology, if you've been able to learn neurology, if you've been able to learn how to do pediatrics, that is far more complicated than managing your portfolio and being your own financial planner.

You don't have to know everything about financial planning and investment management to do this stuff yourself. You only have to know the parts of it that apply to you. And the thing people don't realize is it's not either or. It's not black and white. It's either do it yourself 100% hardcore, or turn everything over to your financial person.

There are lots of gradations in the middle. You can have them help you design the financial plan, help you implement it, and then you kind of maintain it. You can have them design it and you implement it and maintain it. You can do a checkup once a year with an hourly rate financial advisor, see how things are going there. There are just so many options in between. It's not all one or all the other.

I think the key is knowing yourself a little bit and knowing what works for you and what doesn't work for you. I think this is a little bit difficult for lots of people and I think to be honest, a lot of people's confidence trails their knowledge by about a year. When they finally go DIY, they look back and say, “I probably could have done that a year ago, but I just didn't feel confident in my ability to do it.”

Is there anything we should be doing to kind of boost people's confidence that they can do this as a DIY project?

Dr. Margaret Curtis:
That's a great question. I think you're right. If people's confidence tends to trail their actual competence, I think that's very true among physicians and other high earners who like to know what they know and obviously are very highly educated and have trained very hard for the jobs that they have. Jumping into something feels very foreign to them.

I think the message is that you don't have to get everything right. You don't have to know everything, you don't have to have everything at your fingertips. And it's okay to start with one area of your finances first. You don't have to get everything all at once. So maybe you start with just asset allocation within your retirement plans. That's a great place to start. Or maybe to start with a household budget. That's a great place to start.

I can think of some situations in which it's reasonable to have a financial advisor, regardless of your own level of financial education. One is when you're starting out. So, you're watching and going along with them stepwise until you say, “Oh, I could actually do this.”

And another is when you have a big change in your life. You have little kids or you decide to cut down to part-time, or you just don't want to do it anymore, and then you let someone else take over but you know enough that you've got a structure in place and you can supervise them maybe from a distance as they go along.

Hopefully everything we do is increasing people's confidence and saying that message that you can actually do this yourself. And it just takes a little time and a little handholding to get to people to that point where they can. But absolutely people can do it themselves. It's just a question of giving them really clear steps.

Dr. Jim Dahle:
Yeah. I wouldn't feel like everybody has to do it themselves, but I think the message ought to be you can. If you have interest in doing this, then you're likely to develop both the knowledge and the discipline you need to do it successfully. I think a lot of people just aren't interested, though.

Sometimes I think the best service I can do for those folks is just connect them to someone who's going to give them good advice at a fair price. And that's why we keep a list of recommended financial advisors. So you can go, “Okay, this person, maybe we aren't going to have a 100% perfect fit. Maybe I'm still going to be paying thousands of dollars a year to them, but I know I'm not going to be hosed.” That's what I can tell you. When you're picking somebody off the WCI recommended list, you're not going to be hosed, either with price or with the quality of the advice. And I think there's some value in that as well.

Tell us about your own personal experience throughout your career with advisors. Have you used an advisor for a while? Do you use one now? Have you been a DIYer the whole time? Where have you been at with financial advisors?

Dr. Margaret Curtis:
When I met my husband, I was a medical student. He was already an attending. So, he had two advisors. One was a guy who worked for one of the big financial companies that has a lot of products. Like you could buy their mutual fund and that kind of thing and pay a percentage of assets under management. That was where some of his money was. And then some of it was with a banker who his family had known for a long time. He was kind of a guy at Morgan Stanley.

They were both good people and they were both trying to do their best by us, but they both had other agendas. And the first guy had a fee structure that just cost us a lot of money. And the second guy was managing what money was there, very conservatively. He was all about capital preservation. So we really weren't getting the benefits of all the boom times that were happening. And this is 20 plus years ago.

At the time we got married, I was a resident. We had little kids. I had zero time or energy or interest in managing our finances. Neither one of us had. My husband had started his own practice. So we were really maxed with everything we were doing at work and at home.

And then eventually what got me interested in financial planning was our tax bill because we paid the alternative minimum tax, I think three years in a row. And I had just had it. And our accountant at the time said, “Well, a great way to save on taxes is to refinance your mortgage and have higher interest payments.” And I thought that doesn't quite seem right. This is one of the reasons this is such a bugaboo with me.

I started doing some online research and I found the White Coat Investor among other sources and started educating myself and eventually transferred over all our assets to our own management. We had stopped using the first advisor years ago, and eventually, maybe five years ago, we took our accounts from Morgan Stanley and put them under our own control.

That's where we're at now. We don't have an advisor. We want to do some real estate investing. And I think at that point we would. We've had a single family home rental in the past, but if we get into more advanced real estate investing, I would get an advisor, at least for the first few years to make sure I'm doing everything right in terms of taxes and then see how we feel. We might take it back over from that person, or we might just let it continue under their management. Because again, like I said, I think it has so much to do with where you're at in your life, and we may decide that we're very happy having someone else do the tax planning and the finances for us and let us enjoy kind of a semi-retirement.

Dr. Jim Dahle:
I think most listeners kind of know my story with financial advisors. The last true financial advisor I had, the classic financial planner investment manager, was as a resident. I felt like I was ripped off and decided I was going to embark on my own.

The wonderful thing about being your own investment manager from the beginning is you get to practice on a four figure portfolio and then it becomes a five figure, six figure, seven figure, hopefully an eight figure portfolio, whatever it is as it grows.

And so, it can be really intimidating to people to move tens of thousands or hundreds of thousands of dollars around between investments, but it's not that intimidating if you've been doing it for 20 years. It's really the same orders you put in on four figure investments years ago. It’s a lot more money, but it's the same game. And so, I think that is a real benefit of starting out in the beginning and you just become much more comfortable with it as the years go on.

Dr. Margaret Curtis:
Yeah, that is a great point.

Dr. Jim Dahle:
Okay. There's some red flags out there, though, that I think this person is asking, “How can I recognize bad advice? How can I recognize good advice?” Let's give them some red flags. What are the red flags you would say, if your advisor's doing this, you ought to have a red flag go up in the back of your mind that maybe you're not getting good advice?

Dr. Margaret Curtis:
Well, the first most obvious one is, are they trying to sell you something? Do they have a great investment for you that's only going to cost you 5% a year? Something like that. Looking to see what their agenda is and how they're going to make money off of this advice they're giving. Another is, are they really out of line with what you've read in other sites? He's promising you something that no one else is promising you.

Dr. Jim Dahle:
5% returns a year.

Dr. Margaret Curtis:
Exactly. If it sounds too good to be true, it probably is. The third is any kind of a guru. I've been reading all this stuff about Sam Bankman-Fried, following his trial, and people really bought into not just the product, but him as a person and this image. And we see that over and over again. Every few years another guru comes along and people fall for it, fall for the hype.

None of this should be about one single person or one single person's advice. It should really be about financial institutions and long-term trends and good data because no one else has got it figured out.

Dr. Jim Dahle:
A few other red flags that ought to pop up. I think you're absolutely right when you're talking about looking for the themes. Does this gel with what you're reading about on good blogs? Does this gel with what you're hearing on good podcasts? Does this gel with the good financial books you're reading? Does this gel with what people are talking about on forums? I think absolutely finding the themes is really important, but a few red flags that ought to pop up if they're trying to pick stocks for you.

If some relatively low level financial advisor could pick stocks well enough to beat the market, he should not be managing your $350,000. He should be managing billions, billions and billions of dollars if he's a talented stock picker. So, what does that tell you? He's probably not a talented stock picker, and that's not some terrible insult. Most people aren't. Most people are not talented stock pickers. So if they're trying to pick individual stocks for you that is a red flag that ought to go up in your mind.

Likewise, if they're trying to pass money out under separately managed accounts to other people, pick stocks for you, that should be a red flag. If they're putting you into high expense ratio mutual funds. You're already paying this person. You might even be paying them 1% a year. You shouldn't be paying another 1% to a mutual fund manager. Mutual funds are now essentially free. Zero basis points, two basis points, five basis points, 10 basis points. That's all the same as free. You shouldn't be paying for mutual funds.

If they're pawning investments on you that are 0.8%, 1%, 1.2% expense ratios, that should be a huge red flag. And likewise, along the same lines, if they're actively managed mutual funds, that should be a red flag. The data is very clear that you're almost always better with index mutual funds than actively managed mutual funds. That should be another red flag.

If they're trying to sell you whole life insurance or annuities, that ought to be a red flag, especially if that comes up in your first few visits with them. This is something that is like an estate planning topic way down the road that maybe there's some use for you to use one of those. But if you're in the first visit, you have probably stumbled into an annuity salesman masquerading as a financial advisor. So I think those are all big red flags.

All right. What about designations? What's the value of a CFP or some of the equivalent designations out there? Do they have to have it? Is it useful at all? What are your thoughts on the designations?

Dr. Margaret Curtis:
Well, certified financial planner is kind of the gold standard, I believe, for individual financial planners. And honestly, I don't know a whole lot more beyond that. I think probably as important as that is how they charge, how you pay them. Are you paying them a flat fee? And what does that include? Versus assets under management as a percentage. You should look for someone who was charging you just a flat fee and doing no more than what you think you need.

Dr. Jim Dahle:
Yeah. I like to see a CFP. A CFP requires three years of some sort of financial experience. It's often in sales. It might be insurance sales, it might be mutual fund sales, but three years of some sort of experience and they have to take a test. If you look on the forums when people are talking about taking this test, they average about 200 hours of studying for the test. So, there's some body of knowledge there. Most of it is honestly in compliance and the legalities of being a planner and not so much in financial planning itself, but there's a fair amount of content there about financial planning.

I like seeing it though because to me it demonstrates a commitment to the profession. I think the message has to be, though, that a CFP is not enough. You cannot just see somebody with a CFP and assume that you're by necessity getting good advice from them.

I think you've mentioned that there are CFPs at plenty of insurance companies whose primary job is selling insurance products. And the CFP is not a guarantee in any way, shape or form that you're either paying a fair price or getting good advice. But I do like to see people have it. And if I see somebody who's been practicing as a financial planner for 10 years and hasn't bothered, that raises a red flag in my mind, “Why didn't you go get a CFP?” And that's a question I would ask.

Dr. Margaret Curtis:
I think that gets back to something that I feel very strongly about, which is that I do think everyone does need a fair amount of financial literacy, even if you're going to hand your stuff over to a planner, or even if your spouse is going to be managing your finances.

There are so many stories of people who come to the end of their marriage or their spouse dies and they suddenly realize their finances are a mess and they'd never bothered to look into it.

And even if it's not your thing, even if you really don't like it, you don't feel like you have the bandwidth, you need to have a basic understanding of where your money is and what's being done with it. And that's true whether it's your spouse, your brother, or your financial planner. And it's not hard to get a basic level of education. That's what we're trying to get at here, but I think it's really important for everyone.

Dr. Jim Dahle:
Yeah. Mike Piper gave a great talk at the Bogleheads conference. I wrote a blog post about this a few days ago, it hasn't run yet. But he called that partner, that less involved partner, the partner who is less involved in the finances, the oversight committee.

And that person's really important for a couple of reasons. One, it may become your job. Death, disability, divorce, dementia, delirium. It all happens. All these notable Ds in our lives.

You may become the finance person whether you want that job or not, but number two, you have an important job as an oversight committee. There are people out there that are trusting their spouse to manage the money for the household and the rest of their lives. And yet that spouse who is managing the money has all the money in Tesla stock. And they need oversight. People need someone making sure you're not doing anything crazy. So, absolutely, that person can be just as important to the finances, the relationship as anything else.

Dr. Margaret Curtis:
I totally agree.

Dr. Jim Dahle:
All right. Margaret, it's been great to have you here.

Dr. Margaret Curtis:
Oh, thank you so much.

Dr. Jim Dahle:
These episodes go great. I think people like to hear a little bit of debates and a little bit of alternative viewpoints. And we thank you for what you've done for the White Coat Investors as a columnist. I’m looking forward to hearing your talk at WCICON.

Dr. Margaret Curtis:
Two talks actually.

Dr. Jim Dahle:
Two talks. What are you going to be speaking on this year?

Dr. Margaret Curtis:
One is going to be on an advanced contract topics for physicians and one is going to be on how to survive a toxic workplace.

Dr. Jim Dahle:
Wow. They both sound terrible as far as situations to be in. I hate negotiating new contracts and obviously everybody hates a toxic workplace, but pretty important topics to know.

Dr. Margaret Curtis:
Well, hopefully I can steer people out of ever having to be in a toxic workplace and or know how to get out of one. And I hope they'll be interesting. So, I hope people will come to the conference. It's going to be really fun.

Dr. Jim Dahle:
Yeah. I’m looking forward to that. By the way, if you're still interested in signing up for that, you still can. wcievents.com is where you can sign up for the conference. It's going to be great. We're in Florida this year, first week of February. Looking forward to seeing as many of you there as we can.

 

SPONSOR

All right. Our sponsor for this episode has been SoFi. And as I mentioned at the top of the podcast, SoFi can help medical professionals like you save thousands of dollars with exclusive rates and offers for refinancing your student loans. Visit sofi.com/whitecoatinvestor to see all the promotions and offers they've got waiting for you.

SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS 696891

Don’t forget about the WCI champions program. We need champions to volunteer. That is a person in a first year class of an MD, DO, DMD, DDS, PA, NP or pharmacy program. And all you got to do is pass out the books. That's it. Please sign up if nobody in your class has yet done so.

Thanks for those of you who've been leaving us five star reviews. That helps us to spread the word about the podcast. It's almost as useful as the word of mouth, friend to friend, spreading of the word goes.

This latest one says, “WCI isn't just for docs.” He said, “I previously left a 5 star review, but want to update it. Wish there were 6 stars. Jim provides information that other financial podcasts don’t discuss. For example, in a recent episode he covered filing the IRS 5500 for solo 401(k)s. His blog had details that other blogs and newsletters missed. Had I not listened I could be facing a $100,000 IRS penalty. Highly recommend the podcast and WCI website.”

Well, we're very grateful we were able to save you $100,000 and hopefully that will be the minimum amount that most long-term WCI podcast listeners can benefit from their time with us here.

Thank you for what you do. Thank you for being here today. This podcast is about you, your feedback and comments and questions are what drive the podcast. So thank you so much for that. If you want to leave a Speak Pipe question, you can at whitecoatinvestor.com/speakpipe.
Dr. Jim Dahle:
Till next time, keep your head up, shoulders back. You've got this.

 

DISCLAIMER 
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

 

Milestones to Millionaire Transcript

Transcription – MtoM – 146
INTRODUCTION
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 146 – Urologist pays off $300,000 in two years.

Today’s episode is brought to us by SoFi, the folks who help you get your money right. They got exclusive rates and offers to help medical professionals like you when it comes to refinancing your student loans – and that could end up saving you thousands of dollars.

Still in residency? SoFi offers competitive rates and the ability to whittle down your payments to just $100 a month while you’re still in residency. Already out of residency? SoFi’s got you covered there too, with great rates that could help you save money and get on the road to financial freedom. Check out the payment plans and interest rates at sofi.com/whitecoatinvestor.

SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS 696891

All right, we've got a great guest on today who's paid off a big fat student loan in just a couple of years. We'll bring him on, but stick around afterward. We're going to talk a little bit about retirement account contribution limits for 2024.

 

INTERVIEW

Our guest today on the Milestones to Millionaire podcast is Scott. Scott, welcome to the podcast.

Scott:
Thanks for having me.

Dr. Jim Dahle:
Tell us about yourself. What part of the country do you live in? How far are you out of training? What do you do for a living?

Scott:
Yeah, I live in Pennsylvania. I am two years out of training. I'm an urologist in a community practice.

Dr. Jim Dahle:
Okay. And what have you accomplished that we're going to celebrate with you today?

Scott:
I paid off my student loans, which was $300,000 in two years.

Dr. Jim Dahle:
Two years, $300,000. Pretty awesome. Pretty awesome. All right, let's do the numbers. What was your income over those two years?

Scott:
Yeah. My income was about $450,000 both years.

Dr. Jim Dahle:
$450,000 gross.

Scott:
Yes, correct.

Dr. Jim Dahle:
So after taxes, what? $300,000-ish something? $300,000, $350,000, something like that?

Scott:
Roughly, yes.

Dr. Jim Dahle:
Basically, half your income went toward these student loans for the last two years. Is that about right?

Scott:
Yeah, I was putting probably between $5,000 to $10,000 every month into this. So much of what was left over after house payment, I certainly didn't live on rice and beans, but a lot of the money was going towards that before I paid for anything else that I wanted to do.

Dr. Jim Dahle:
Okay. So, did you invest any money during the last couple of years or did everything you could carve out to build wealth go toward this debt?

Scott:
I actually was able to max out all of the investments that you typically recommend on your show. I read your book as a medical student, I developed an emergency fund and opened a Roth IRA as a resident, which I maxed out. And then as an attending over the past two years, I've maxed out a 403(b), 457(b) and HSA, which I invest back into the market. And then actually opened a brokerage account too and put a couple thousand dollars a month into that on top of the loans.

Dr. Jim Dahle:
Man, have you done anything wrong yet?

Scott:
I'm sure there's a few things that I probably could have held off purchasing such as vacations or a home or whatnot, but I was very fortunate to be able to spread things out. For full disclosure, I did get some loan forgiveness from my job. I used geographic arbitrage for that as well. So, that helped quite a bit, but ultimately that only probably covered about $80,000 of my loans. I actually had some money left over from that when I made the last payment a couple weeks ago.

Dr. Jim Dahle:
Okay. If you can't consider that as part of your income, maybe your income was a little higher, it basically was. But what made you pick up my book in medical school and read it?

Scott:
I was thinking of that. I honestly don't remember. I think someone told me about it and I knew nothing of financial literacy and I read it and I remember thinking, “Well, this is actually pretty simple.” Because I was a little bit intimidated by it. These terms kind of go right over your head. And I read it and I thought this actually makes this very clear. I know what I need to do. I wasn't able to focus on a ton in medical school actually anything. But in residency I was able to put a little money here and there and then really became aggressive as an attending. And I read all your blogs, I listen to all your podcasts. You helped me a ton. So thank you.

Dr. Jim Dahle:
Our pleasure. Of course. Tell me, when you got accepted to medical school and you looked at that price tag and clearly there was nobody standing behind you ready to give you hundreds of thousands of dollars to pay for your school, what did you think about borrowing $300,000 to pay for your school?

Scott:
I didn't feel good about it. But it was the only way I could go to medical school. My parents were teachers so didn't have the ability to pay for my school, which I think made me take it a little bit more seriously. Not that if someone has school paid for, they don't. But yeah, it was a tough pill to swallow and I'm very debt averse, so that debt has bothered me since I matriculated into medical school, which is why I opted to get rid of it as quickly as I could.

Dr. Jim Dahle:
Did you ever consider even for a moment not going to medical school because you're going to have to borrow that much money?

Scott:
No, I probably should have. I tell people nowadays to really think about those things before they take out the loans. It kind of is like monopoly money at that age though. And looking back, although I went to a state school that was not that expensive, relatively speaking, I probably would've even tried to take out a little bit less loans if I could go back and do it again. But it's not like I was living lavishly during that time either.

Dr. Jim Dahle:
All right. Well, this is pretty cool. Let's say there's somebody out there, they're coming out of medical school. They owe $300,000 or $400,000. What advice do you have for them if this is the first time they've really heard anything about student loans and what to do with them?

Scott:
Yeah, I think literacy comes first. Either they hopefully hear about it from someone or maybe they do it on their own. And then, like you say, developing a plan. I'll admit I did not write one down, but I thought about this every day. So, I didn't follow your number one tenant, but I constantly thought about this. I had spreadsheets for all of my investments and everything.

But I think having a plan, and then really like you say, “living like a resident.” And I didn't live exactly like a resident. But we rented for several years, bought cars at 2008 Toyota. So, there were some things I splurged on that weren't too terribly expensive, but there was a lot of things that I delayed until I got these loans gone and have a little bit more freedom now.

And to be perfectly transparent as well, my wife is a physician, but actually we had separate loans and have kept separate bank accounts. My money was completely paid off by myself and she has completely paid off her loans as well because we both kind of felt like that was our responsibility because we took it out before we met each other. So I know you always say people write in and we'll talk about the high earning physician couple. I am one of those, but we did split our loans separately, so it's almost as if I was doing this on my own.

Dr. Jim Dahle:
Yeah. Now that you both paid off your loans, do you have any plans to combine finances or are you planning to keep them separate?

Scott:
Yeah, I think we probably will at this point. It's not too hard these days with how easy it is to transfer money just via your phone and whatnot. But we probably will combine it. We do have a combined account for our mortgage, but we have several other bank accounts that are separate and we both wanted to be responsible for the debt we took out, not leaning on the other one. We both have offered to help the other one with loans and we both said no.

Dr. Jim Dahle:
That's interesting too to feel that way about it. Very cool though. But you both done it so it gives you a sense of pride of having accomplished something hard. It's almost like we're in training wheels for financial independence. If you can knock off student loans in two years, you can hit financial independence relatively early.

Scott:
Absolutely.

Dr. Jim Dahle:
Tell us about the increase in lifestyle you took when you became an attending. You said, “Oh, we didn't live perfectly like a resident.” And to be honest, almost nobody does. But how much did you inflate your lifestyle when you became an attending?

Scott:
I would say moderately. My wife and I actually waited to get married until we were attending so we could pay for the wedding ourselves because wedding costs have ballooned and neither of us wanted to put our parents in a financial hole. They're both kind of near retirement and I think they should enjoy what they've earned. We were able to pay for that.

We did buy a house after about two and a half years of renting but my wife has been out three years and I've been out two years. So, we rented all through residency, bought a house after about a year that I had started working. Kind of got lucky because interest rates are a little bit… We locked in at a lower rate than they are now. Not a crazy house. We actually bought a house where if one of us just completely quit working, we'd be able to afford it. That was kind of something that was important to me. So, it's a very nice home, but it's not the standard like Doctor McMansion that people probably think of.

We both have our cars paid off and my car is quite old. We do like to travel, and we went on some nice trips. Our friends got married in Jordan, so we went to Jordan and Dubai. We had a very delayed honeymoon and then we just went to Italy as well.

I would say in the middle. I'm not doing it as aggressively as some people are and kudos to them, but I felt like we had a pretty good plan where I knew where our money was going and what we could spend on.

Dr. Jim Dahle:
Yeah, you couldn't have spent that much because half your money went towards student loans and you still maxed out retirement accounts. So, this couldn't have been that much you were spending.

Scott:
All the fun stuff we did was after all the money was accounted for both of those.

Dr. Jim Dahle:
You paid yourself first, I think is the phrase it's usually used.
Scott:
I did, yeah.

Paying off your student loans in two years, did it turn out to be easier or harder than you thought it was going to be two years ago?

Scott:
I think it was probably easier. Once you start throwing that much money at it per month, it really does drop down. And like I said, having some help from my employer certainly made it a lot easier. It was easier. It bothered me though. I'm very debt averse. I think financially, mathematically people would say I probably should have put all that money in the market, but the debt bothered me emotionally enough that I just wanted to get rid of it. And getting rid of it was a huge relief and probably one of the things I'm most proud of in my career so far.

Dr. Jim Dahle:
Yeah. Okay. This month you've got $5,000 or $10,000 coming in after tax that was previously going to student loans. What are you going to do with it?

Scott:
Me and my wife have agreed that we're probably going to invest about 50% of our income and that's to ideally put us in a position to be financially independent in maybe 10 to 15 years. And then we only have to work if we want to. And I think the rest of that is honestly probably going to be doing things we enjoy. I need a new vehicle, will probably travel a little bit more, although I think some of those bigger trips are not going to be for a few years.

Yeah, I look at money as creating freedom and so I want to put us in a position where we are free to make our own decisions, and retire early if we want. And if not, then we have extra money to give our family or to give to charity or spend on those silly things that maybe you shouldn't ideally spend on.

Dr. Jim Dahle:
Well, you've done pretty awesome, Scott. You've clearly developed financial discipline, you've clearly developed financial literacy. You have accomplished a major financial goal that takes some docs 20 or 30 years to accomplish. You've done it in two. You're going to be able to accomplish anything you want to financially in your life. I have no doubt. So congratulations to you. Thank you so much for coming on the Milestones to Millionaire podcast to share your experience with others and to hopefully inspire them to do the same.

Scott:
Thank you. And I really do want to thank you and your team. You had far been the most instrumental source I've used and I don't think I would've known any of this if I hadn't stumbled across your book. So, it really does help a lot of people and I actually started telling people about it and have actually lectured the medical students on finance now because I enjoy it that much.

Dr. Jim Dahle:
Well, thank you so much for doing that. That goes a long way and of course, it's our pleasure and I'll pass your kind words onto the team.

Scott:
Thank you.

Dr. Jim Dahle:
All right. I was talking to Scott after we stopped recording and we both agreed this stuff really isn't that complicated. It's not that hard. You still have to do it, but it's not that hard. People have done it before you, we've showed you how to do it. You too can be financially successful. It just takes a little bit of financial literacy and a little bit of financial discipline and amazing things happen. When you apply a doctor or doctor like income to personal finance and you maintain that discipline over two or three or four or five years, amazing things can happen in your financial life and give you all kinds of options going forward.

 

FINANCE 101: CONTRIBUTION LIMITS

All right, as I mentioned at the top of the podcast, we're going to talk a little bit about contribution limits. Most contribution limits are indexed in some way to inflation. And so, they go up each year based on these inflation numbers that come from the federal government.

And so, no surprise given inflation's been a little higher than typical over the last couple of years, these limits are going up this year. So, your 401(k) and 403(b) employee contribution limit for 2024 if you're under 50, is going to go up from $22,500 to $23,000. Not quite the increase we had the prior year, but it's still a $500 increase better than a kick in the teeth.

Catch-up contributions are going to stay at $7,500 this year. So, if you are 50 plus, your total contribution limit for 2024 is going to be $30,500. Bear in mind that's not the total contribution of the plan. That amount is going up from $66,000 to $68,000 in 2024. So, it goes up by a couple thousand dollars for those under 50. Obviously, if you're 50 plus, that goes up to $75,500.

That's the total of your employee contributions. Any after tax contributions, you're allowed to make in the plan and any employer contributions, whether they're match or profit sharing or penalty, that's the total amount that can go into a plan. $68,000 for 2024.

All right, 457(b)s are also going up from $22,500 to $23,000 in 2024. They have unique catch-up rules as well. So you'll want to read about the catch-up rules in your plan documents.

IRA contributions are going to increase. Pretty big increase, $6,500 to $7,000 in 2024. Add $1,000 if you're 50 plus. SEP IRA contributions, also up to $68,000 this year, same as the 401(k) and total plan contribution limit.

Simple IRA and Simple 401(k) contribution limits up from $15,500 to $16,000 in 2024. HSA contribution limits, if you're single, it's going to go from $3,850 to $4,150. If you have family coverage, you and a kid, you and a spouse, it goes up from $7,750 to $8,300.

FSA. If you have a flexible spending account, flexible savings account, whatever you want to call it. That goes up from $3,050 in 2023 to $3,200 in 2024. What else can I tell you? The 401(a) compensation limit, that's the amount of earned income that can be used to calculate your retirement contribution. That goes up from $330,000 to $340,000 this year. That's always basically 5X the maximum 401(k) plan total contribution limit.

The Roth IRA direct contribution limit phase out it's going to increase from $138,000 to starting at $146,000 this year. Phases out completely by $161,000 for those who are single and at $228,000 for those who are married filing jointly. So, lots of increases. Obviously, make sure you know what the amounts are. You might have to adjust the dollar amount going in with each paycheck if you want to max them out.

Don't forget too, inflation is going up. If you're an employee, it's a good excuse to ask for a raise. Cost of living raise. Your argument is, “Hey, you're just paying me the same as last year. Dollars are worth less.” But make sure that you're getting raises from time to time if you're an employee. Otherwise, you're going to be getting paid less and less and less on a real basis over time.

 

SPONSOR

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All right, we'll see you on the next podcast. Until then keep your head up, shoulders back. You've got this.

 

DISCLAIMER
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.