Today, we are answering your questions. We talk about capital gains taxes when selling a vacation home, and then we get into the age-old debate about if it is a good idea to buy a house during residency. Dr. Jim Dahle gives advice on things to think about when you are shopping for a new car, and then he gives ideas for things to think about when considering buying into a practice. Finally, we answer a few questions about taxes.


 

Selling a Vacation Home and Capital Gains Taxes 

“Hi Jim. Thanks for everything you do. I'm going to be selling a vacation home, not a rental, in early 2024, and we'll have a long-term capital gain of about $150,000. I have about $20,000 of capital losses carried over from last year from tax-loss harvesting, but I'll be in the 20% capital gains bracket. So, I'll owe the IRS about $26,000 for the capital gain.  I'm a W-2 employee, so I've never paid quarterly taxes. Do I need to send the IRS a check for $26,000 for the first quarter of 2024 to avoid a penalty, or can I wait until April 2025 to settle that up and write a check then? It's possible I could harvest more losses in 2024 from my taxable account if there's a market downturn sometime in 2024. If I write the check and then harvest losses later, I assume I'll just get a refund in April 2025. Is there anything I'm missing here? Thanks a lot.”

If this is your primary residence, you could still owe capital gains taxes on that. Only the first $250,000 or the first $500,000 if you're married is exempt. If it's your secondary home, I don't think any of that applies. You would pay capital gains from the very beginning on that. Same thing if it's an investment property. Not only do you have any depreciation you've taken—recaptured at up to 25%—but anything above and beyond that is taxed at long-term capital gains rates, assuming you've owned it for at least a year. One thing you can get around this with, especially if it's rental property, is you can exchange it. You can do a 1031 exchange. You have to identify the similar property—the IRS has a pretty broad definition of similar property—and you have to identify it within a couple of months. You have to close on it within six months. That's one way you can defer and potentially eliminate the capital gains taxes completely.

Obviously, if you have some losses saved up, this is a great place to use them. You can offset up to $3,000 a year in ordinary income using capital losses that you've harvested, but you can offset an unlimited number of capital gains using harvested tax losses. Another great reason to harvest losses is if you'll ever sell your vacation property or your home or some rental properties or your business or your practice or whatever. It is a great reason to be carrying forward a bunch of tax losses to offset that.

But it sounds like you may just want to sell, you don't want to exchange, you don't have enough losses yet at least to offset those gains and you may be paying some capital gains taxes on this sale. The question is, how do you do that? Well, you have to settle up with the IRS every April. The bottom line is you'll pay for it in April if you haven't paid for it before. But the federal tax system is a pay-as-you-go system. You're supposed to pay as you go along. What that means for employed income is your employer's withholding money from every paycheck and they're required to withhold a certain amount. They're given charts and computers and calculators to determine exactly how much they're supposed to be withholding from your paycheck, depending on what you put on your W4. Then, it's a little too much or it's a little too little, and you settle up with the IRS come April. As long as you're close, there's no penalties.

If you have a lot of income that nobody's withholding anything for you on, then you may have too much to settle up with the IRS in April. They don't like that. If you're outside of what they call the safe harbor, you may be penalized and actually have to pay some interest. They don't put you in jail or anything. It's not the end of the world. There are some tax forms that help figure out exactly how much that penalty is. I've paid it before. It's probably no worse than some of the other things we do in personal finance. It's not a big deal. It may be worse to pay a bunch extra and get a huge tax refund because the IRS doesn't pay you interest on what you overpaid. You're just out of luck there. The goal is to hit it exactly, but it's very hard to hit exactly. So, you try to get in the safe harbor.

For high earners, the safe harbor is No. 1, you can just pay everything you owe. If you've paid everything you owe as you went along using quarterly payments and withholdings, and you get within $1,000, then there are no penalties. If you pay at least 110%—it's only 100% for lower earners—of what you owed last year between quarterly estimated tax payments and other payments and withholdings, then you're good to go. You're in the safe harbor. If you did not pay that much, then you may not be in the safe harbor and you may have to pay some penalties. It's not the end of the world if you have the money. If you don't have the money, then it becomes a big problem. Because now you can't settle up with the IRS come April. Now you're definitely going to be paying some penalties and interest for as long as it takes you to pay that after April 15. Even if you file an extension and don't do your tax return until October, you still have to pay your tax in April.

What can you do in your situation? It's not that big of a gain. You're talking about $20,000 in taxes or something. You can just have a little extra withheld from your paychecks. If you ask them to just withhold another $1,500 a paycheck, you're good to go. If they withhold $1,500 and your employer does it every month, then that'll get you into the safe harbor almost surely. The fun thing about withholding is withholding is all treated the same, whether it's withheld in February or whether it's withheld in December. The IRS doesn't care. They do care when you pay your quarterly estimated payments. If you made the money in the first quarter, you're supposed to pay it in the first quarter. But they don't care for withholding. You could just kind of cruise along where you're at this year and hope you harvest some more capital losses. If you don't, come November, you could jack up your withholding from your main W-2 gig quite a bit, have a bunch withheld from your November and December paychecks, and be OK. There are lots of ways you can do this, but the bottom line is there's a difference between how much is paid as you go and what you actually owe in tax. That difference is sorted out come Tax Day.

More information here:

Short-Term vs. Long-Term Capital Gains

10 Tax Advantages of Real Estate – How Many Can You Name?

 

Should Residents Buy a Property to Keep as a Rental After Training? 

“Hi, Dr. Dahle. I'm a third-year internal medicine resident. I'm actually calling in just a few miles away from where you practice. I've been a big fan of yours for a number of years. In fact, whenever I teach the medical students or the residents, I make sure to include financial wisdom that I pick up from your book, blog, and podcast. My question is about real estate. I know that you're very forthcoming about residents not buying homes. Confession, I purchased a small condo during residency that I'm going to rent out after I leave. It's in a great area where I feel confident it'll become a cash flow asset for me. I'm moving shortly to a new location for fellowship, and I'm thinking about doing the same thing. I have enough for a down payment, thanks to my wife, and we're wondering about buying something and renting it when we leave to have another asset. I know you routinely recommend that residents don't buy homes. I’m wondering if you have any advice on this.”

Obviously, in the retrospectoscope, it's easy to know when to buy a house and when not to. In 2002, it was a great time to buy a house. In 2006, not so good. 2010 was another great time to buy a house. But in 2022, maybe not. However, that's not how you buy houses. You buy them in advance. If you want to make money on a house, you need to own it long enough that the appreciation, for the most part, is larger than the transaction costs. The typical transaction costs on a property are about 15% round trip. Maybe 5% to get in, maybe 10% to get out. That's not just the realtor's commission; that's all the expenses. If it's a $500,000 house, you're talking about a $75,000 round trip. You need it to appreciate in the time you own it from $500,000 to $575,000 in order for that to work out well for you.

If you're going to be in there for three years, you need it to appreciate about 5% a year. If you're going to be in there for five years, you need it to appreciate about 3% a year. If you're going to be in there for one year, you need it to appreciate 15% that year. And that doesn't happen very often. It does happen from time to time. I'm sure whatever you bought in 2020 and are selling now, you're probably doing just fine. You probably made a killing on it. You gambled and won. But I would estimate that you only win about one-third of the time when you're in there for three years and probably half the time when you're in there for five years. In general, if you're not going to own it for five years, it's probably not worth doing. People think renting is just terrible. Renting is not terrible. I've rented houses. It's not that big a deal. You can rent a nice place; you can rent a place with a backyard that your dog can run around in. Every now and then, you go to some weird geographic area where you literally can't rent what you need. Fine, buy a house. It might cost you something, but you have to buy because there's nothing to rent. But for the most part, you can rent what you need.

Just recognize that until people have bought and sold a house or two, they don't realize there's a lot more to it than just comparing a mortgage payment to a rent payment. People think, “Oh, well, the mortgage payment is less than the rent payment. Of course it's a good idea to buy.” There's a lot more that goes into it than just a mortgage. Think about a real estate investor. What are the expenses? You have the mortgage payment, you have property taxes, you have insurance, you have repairs, you have management, you have vacancies, you have snow removal. You have all the crap you need to buy to do the lawn or whatever. All those expenses go into it. You have to look at everything and compare that to the rent, including the time value of your money that you're using for any down payment. The New York Times has a nice rent vs. buy calculator that can help inform this decision. But you'll generally see that what I'm telling you is the truth. Most of the time if you're renting for three years or less or if you're going to be in it for three years or less, you shouldn't be buying it. Three to five years or more is usually a good idea to buy. That's just the way it works out in general. It's a rule of thumb. Anybody can find an exception to it, of course.

Does this change if you keep it longer as a rental? Well, yes. Now you have more years for it to appreciate and overcome those transaction costs. Even if you live in it for two years and you rent it out for eight more, well, now you've owned it for 10 years. You're spreading those transaction costs out over 10 years and you're much more likely to come out ahead. However, what happens is people don't buy the place they live in and rental properties in the same way. They tend to look at rental properties in a very cold calculated fashion. What do the numbers show? What can I rent it for? What's it going to cost me? What are my expenses going to be?

When we go buy a place we're going to live in, we start imagining where our furniture is going to sit in it and where we're going to put our stuff and wrestling with our kids on the carpet in that room. It becomes a much more emotional decision. When you mix those two together, sometimes bad things happen. You end up buying a place that's perfect to raise your kids in, perfect to live in for residency. It really doesn't make sense as a rental property. If you can somehow divorce yourself from that mindset that you're trying to get a place that's perfect to live in and buy it purely based on the numbers—that this is a rental property you would buy, whether you lived in it for a couple of years during fellowship first or not—then I think this sort of approach is OK. I find it hard to believe that if you were designing a real estate empire with a portfolio of real estate properties, you would pick one condo in the place you did med school and one condo in the place you did residency and one condo in the place you did fellowship and have that be your portfolio. That doesn't make any sense to me as an investment.

There are a couple of advantages to that. One is if you keep the thing less than five years total and live in it for at least two of the last five years. Then, you can exclude some of the capital gains as a resident. You can do that once every couple of years. That's one advantage. The other advantage is you don't have to have that 5% transaction cost to buy it because you already own it. When you convert a place you live in to a rental property, you get to skip those expenses. A lot of times people aren't exactly reporting to the lender that it's no longer an owner-occupied place. They can often just keep the same mortgage they've been having and that's usually at a better rate, especially these days, than they can get for a rental property mortgage. You may want to read your mortgage and see what the bank says about you doing that, but that's certainly a very common practice. Those are the only advantages of taking a place you've been living in and turning it into a rental property. They may or may not be enough to turn a bad deal into a good deal. You need to look at the numbers.

The rule of thumb is the same I would've told you in 2020—that you're probably not going to come out ahead buying a property. You're probably going to be better off just renting during your residency, during your fellowship, during your med school. But you didn't listen then, I'm pretty confident you're not going to listen now. Especially now that you've actually come out ahead by not taking my advice, I'm sure you're going to do the same thing again. But those are the things to be thinking about. Try to think about it as an investment from the get-go and buy it like an investment, and I think it's going to work out better for you than if you don't do that.

More information here: 

10 Reasons Why Residents Shouldn't Buy a House

Should I Purchase My Residence During Residency?

 

What Questions to Ask When Considering Partnership

“Hi, Dr. Dahle. Thank you for all that you do. I am a young vascular surgeon nearing the end of my two-year contract of my first job and will be considered for partnership soon. I am employed by a physician group, and we are contracted out and work for a private hospital.

When considering partnership, are there any specific questions that I should ask the physician group to determine whether it is a good choice financially and for a prolonged career? The buy-in for my particular group is quite high at about $600,000, and there is a five-year vesting period. It appears that the group has been quite profitable over the past few years, but I was unsure of how to best gauge this other than asking physicians who have retired from the practice and asking the group how much the value of their share has gone up over the past several years.”

The truth about partnership is the time to ask about partnership and understand all these details is before you start working for them in the first place. This is kind of weird that you have worked for them for two years and then you enter into some weird vesting period over five years. That's a little bit weird. Five years is also a pretty long time. Most of these partnerships, particularly in my field of emergency medicine, are 1-3 years, and most of them are sweat equity. You work for less for 1-3 years. These are your pre-partner years. Then, you make partner, and you make the same as everybody else. That's the way most of these small democratic groups work. But they don't have a lot in assets.

The only thing I'm really buying into with that sweat equity is the ability to make a higher hourly rate, No. 1. And No. 2, is my share of the accounts payable when I leave the partnership. In my case, that's probably a five-figure amount. It might not even be a very high five-figure amount the way we calculate it. That's the first question, especially if you have to pony up cash. This is real money for somebody early in their career—$600,000 is not a small amount of money. That's a lot of cash. You're probably going to have to borrow some of it. I'm not necessarily against that, but the point is that it's a lot of money. You need to ask, “What am I getting for that? Is what I'm getting going to appreciate? What are the risks to this business?” You need to understand the business you're buying into. What are the risks to it? Is it like our business where basically we have one customer, the hospital? We have one contract. The entire business is a physician group that is dependent on one contract. If we lose that contract, the business has no value whatsoever other than the accounts payable, which will be rapidly distributed. Are you getting part of an office building? Are you getting some equipment? What are you actually getting for your $600,000? I think that's the first thing to understand.

Second, understand how the system works exactly. What do you get if you leave in a year? What do you get if you leave in two years? What do you get if you leave in five years? What do you get if you get fired? What do you get if you quit? What do you get in 20 years? What if you cut back and work half-time? Or what happens if you go on the parent track for two years? What happens in all of those situations? I think understanding that is really important. Other questions to consider? The most important thing in a partnership is the people in the partnership. You have to ask, “Are these people who I want to be professionally married to for the next 10-40 years?” Are they people you trust? Are they people who have integrity? Are they people that you think are going to try to get theirs and leave you with whatever's left? The details and the money can usually be worked out if they're good people that you're working with. If they're not good people, no amount of due diligence, no amount of legalese in the contract is going to save you. You need to determine: are they good folks?

I think it's also worth paying for some professional help here. You've only done this no times in your life. You may only ever do it one time in your life. How can you be expected to be an expert in it? We have a resource for this. If you go to whitecoatinvestor.com/recommended, you'll see all our recommended resources. Or you can go to the website, go onto the Recommended tab, and you will see a line called Contract Review and Legal Services. We have a number of firms there. Some have advertised recently on this podcast. Resolve is one company. If you go to whitecoatinvestor.com/resolve, you can use the code WHITECOAT10 to get 10% off their services. They'll review your contract. They'll not only review employee contracts, but they'll review partnership contracts. You can get a sense of whether this is kind of what most of these look like or whether yours is really bizarre that it's five years long for vesting and get a sense for whether you're being treated fairly. I actually really recommend you do that. I think it's worth a few hundred dollars.

You are going to spend $600,000 on this thing, why not spend $400 or $500 figuring out if you're getting a good deal? Almost surely you're going to learn something from working with these sorts of folks. You're going to learn something that helps you to get paid more, that helps you to be happier, that helps you to understand how this is going to break up better. I can't imagine this isn't going to be worth the money to get this contract reviewed. I would recommend doing that.

It sounds like a great opportunity. For most docs, the medically related businesses they own turn out to be the best investments in their entire career. Whether that's a surgeon buying a surgical center or a gastroenterologist buying a building that they can do their own scopes in or an emergency doc buying an urgent care or just buying into a partnership and owning a practice. I'm a big fan of ownership, but you don't want to just own anything and you don't want to pay too high of a price for it. And this is a big price. You're buying something that's going to cost a lot. The value needs to be there. You need to do your due diligence and really understand what you're getting into. I'd get that contract reviewed. I would learn everything you possibly can about the business, and I would really take some time to get to know the partners and decide if you want to be in business with them for the next several decades.

More information here:

A Step-by-Step Guide to Starting a Medical Practice

 

To read more about the following topics, see the WCI podcast transcript below:

  • Advice for buying a new car
  • S Corps don't mix well with a W2 Job
  • Estimating taxes when your income is hard to predict
  • Helping your kid with their business

 

Milestones to Millionaire

#155 — Pediatric Dentist Gets Back to Broke and More

This pediatric dentist has gotten back to broke and a little beyond. In only a few years out of training, her net worth has had nearly a half-a-million-dollar swing. She began her financial literacy journey in college, and by the time she completed training, she was well-versed in how to save and invest and grow her finances. She is also a lovely example of an immigrant family working together and working hard to give new opportunities to the younger generation.

 

Finance 101: Way to Earn More Money as a Doc

There are so many ways that anyone, but especially docs, can boost their income. The trick, as always, is to remember that balance is incredibly important to your well-being. It wouldn't do you any good if you added a side hustle or two and ended up burning out of your career altogether. Be aware of your needs, what balance feels like to you, and look at what ways of boosting your income would fit best for you. Here are a handful of simple suggestions:

  1. See more patients and work more hours, although be careful that it doesn't lead to burnout.
  2. Take on administrative roles within your profession, such as becoming a medical director.
  3. Pursue side gigs whether related to your field or not, like consulting or expert witnessing.
  4. Monetize a hobby or interest, such as starting a blog or offering handyman services.
  5. Consider changing your specialty if it offers higher earning potential.
  6. Learn new medical procedures, as they often pay more than traditional clinical work.
  7. Specialize in a niche within your profession to become more efficient and increase income.
  8. Expand your team by hiring additional professionals to work under you.
  9. Renegotiate your contract to ensure fair compensation.
  10. Invest in passive income sources like rental properties, index funds, or bonds.
  11. Join a larger and more efficiently run practice to boost your income.
  12. Consider leaving academic medicine for higher-paying private practice opportunities.
  13. Pursue additional degrees, like an MBA, to access higher-paying leadership roles.
  14. Explore cash-only medical practices to bypass insurance and potentially offer better deals to patients.
  15. Practice geographic arbitrage by moving to an area with lower living costs and taxes.
  16. Offer ancillary services, such as labs or X-rays, to increase your income.
  17. Take paid surveys during your free time to supplement your earnings.

Again, remember to balance financial goals with personal well-being. Life is just not about making more money, but it is certainly easier to save, pay down debt, and build wealth when your income is higher. Maximizing your time and your efforts can have big rewards on your financial life.

For more details about how to earn some extra money, read the Milestones to Millionaire transcript below.

 


 

At some point in our financial lives, it will be time to buy a home.

A physician mortgage can be a good vehicle for a young doctor who’s just out of school and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you’re further advanced in your career or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then, later on, potentially refinancing that loan to a better rate with a shorter time frame could be a great move.

Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage.

You can do this, and The White Coat Investor can help.

 

WCI Podcast Transcript

Transcription – WCI – 352

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 352.

At some point in our financial lives, it will be time to buy a home. A physician mortgage can be a good vehicle for a young doctor who's just out of training and has a more effective place to use their money than on a big down payment.

These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you're further advanced in your career, or deeper into your journey to financial freedom, buying a home with a conventional mortgage and then later on potentially refinancing that loan to a better rate with a shorter timeframe could be a great move.

Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage.
You can do this and the White Coat Investor can help.

Welcome back to the podcast. It's February now. Shoot. We're on our way to the WCICON. Super exciting. We're going to be down in Florida within the week as you're listening to this. You can still come to that by the way. We'd love to have you if you want to come, probably virtually at this point I suspect if you're still signing up at this point.

But if you can commit three days to improving your financial life and personal wellbeing, here's what you can expect from the virtual version. You get access to more than half of the sessions live stream or on demand at any time. And the rest of the presentations will be available in the lifetime CME course that's included with your registration.

So, you get everything, you get most of it live as it's happening, but you'll get it all eventually. You'll get live Q&A with the conference speakers. You'll get breakout sessions, connect with like-minded White Coat Investors, and you can earn up to 16 CME or dental continuing CE credits. You can sign up for that at wcievents.com. Cool stuff.

Something else cool we're going to be doing this month, I guess I better tell you about it. It's only three weeks away by the time you hear this. I get invited to come out and speak at medical schools and dental schools all the time. I can't go to all of them. There's too many schools. I can't go to all of them every year and give you all lecture. I love coming and speaking to you but the truth is it's not a very financially beneficial opportunity. Most schools aren't willing to pay me to come and speak to you as students. And frankly, I can't get to all of you at once anyway.

We've done something different the last few years, which has worked really well. We call it the Student Webinar, and you can sign up for that whitecoatinvestor.com/studentwebinar. It's called “What Medical and Dental Students Need To Know About Money.” It's going to run February 21st from 06:00 to 7:30 PM Mountain Time. That's 05:00 o’clock Pacific. That's 07:00 o'clock Central, that's 08:00 o'clock on the East Coast. If you're in Alaska or Hawaii or in Europe, you're going to have to adjust accordingly.

“What Medical and Dental Students Need To Know About Money.” This is the lecture I would give you if I came out and spoke to you at your school. This is totally free. It can literally make a difference worth millions of dollars to you over the course of your career. You cannot afford to wait until the big paychecks start rolling in in five years or 10 years or whatever to learn about money.

You're going to learn in this webinar why your patients need you to be financially literate. We're going to learn the secret to being a financially successful doctor. We're going to learn how to not worry about student loans. And for those of you to whom this applies, how to invest during medical school. We'll also talk about how to save money during residency interviews and why buying a house during residency may not be such a great idea. All of that, you can sign up, whitecoatinvestor.com/studentwebinar. I'd love to see a whole bunch of you there.

All right. This podcast is driven by you. We love your questions. We want to help as many of you as we can. If you want to leave a question for us, you can do that at whitecoatinvestor.com/speakpipe. Let's take our first question out the Speak Pipe. Here's Chris talking about selling a vacation home.

 

SELLING A VACATION HOME AND CAPITAL GAINS TAXES

Chris:
Hi Jim. Thanks for everything you do. I'm going to be selling a vacation home, not a rental in early 2024, and we'll have a long-term capital gain of about $150,000. I have about $20,000 of capital losses carried over from last year from tax loss harvesting, but I'll be in the 20% capital gains bracket. So I'll owe the IRS about $26,000 for the capital gain.

I'm a W-2 employee, so I've never paid quarterly taxes. Do I need to send the IRS a check for $26,000 for the first quarter of 2024 to avoid a penalty, or can I wait until April, 2025 to settle that up and write a check then?

It's possible I could harvest more losses in 2024 from my taxable account if there's a market downturn sometime in 2024. If I write the check and then harvest losses later, I assume I'll just get a refund in April, 2025. Is there anything I'm missing here? Thanks a lot.

Dr. Jim Dahle:
All right, Chris, great question. First of all, yeah, if this is your primary residence, you could still owe capital gains taxes on that. Only the first $250,000 or the first $500,000 if you're married is exempt. If it's your secondary home, I don't think any of that applies. You would pay capital gains from the very beginning on that. Same thing if it's an investment property. Not only do you have any depreciation you've taken, recaptured it up to 25%, but anything above and beyond that is taxed at long-term capital gains rates, assuming you've owned it for at least a year.

One thing you can get around this with, especially if it's rental property, something you've been renting out at least part of the time, is you can exchange it. You can do a 1031 exchange. You have to identify the similar property and the IRS is a pretty broad definition of similar property. You have to identify it within a couple of months. You have to close on it within six months. So, that's one way you can defer and potentially eliminate the capital gains taxes completely. Consider that.

Obviously if you have some losses saved up, this is a great place to use them. You can offset up to $3,000 a year in ordinary income using capital losses that you've harvested, but you can offset an unlimited number of capital gains using harvested tax losses. So, another great reason to harvest losses is if you'll ever sell your vacation property or your home or some rental properties or your business or your practice or whatever. Great reason to be carrying forward a bunch of tax losses to offset that.

But it sounds like you may just want to sell, you don't want to exchange, you don't have enough losses yet at least to offset those gains and you may be paying some capital gains taxes on this sale.

The question is, how do you do that? Well, you have to settle up with the IRS every April. The bottom line is you'll pay for it in April if you haven't paid for it before. But the federal tax system is a pay as you go system. You're supposed to pay as you go along. And what that means for employed income is your employer's withholding money from every paycheck and they're required to withhold a certain amount. They're given charts and computers and calculators to determine exactly how much they're supposed to be withholding from your paycheck, depending on what you put on your W4. And then it's a little too much or it's a little too little and you settle up with the IRS come April. And as long as you're close, there's no penalties.

If you have a lot of income that nobody's withholding anything for you on, then you may have too much to settle up with the IRS in April. They don't like that. If you're outside of what they call the safe harbor, you may be penalized, that you actually have to pay some interest. They don't put you in jail or anything. It's not the end of the world. But basically they expect you to have paid as you went along and you didn't. And so, you got to pay them for the fact that you used your money for the last six months or nine months or three months or whatever.

And so, there's some tax forms that help figure out exactly how much that penalty is. I've paid that before. It's not the end of the world. It's probably no worse than some of the other things we do in personal finance. It's not a big deal. It may be worse to pay a bunch extra and get a huge tax refund because the IRS doesn't pay you interest on what you overpaid. So you're out of luck there. The goal is to hit it exactly. It's very hard to hit exactly. So you try to get in the safe harbor.

For high earners, the safe harbor is number one, you can just pay everything you owe. If you've paid everything you owe as you went along using quarterly payments and withholdings, you get within a thousand dollars fine, no penalties. If you pay at least 110%, it's only 100% for lower earners, but it's 110% for high earners of what you owed last year between quarterly estimated tax payments and other payments and withholdings, then you're good to go. You're in the safe harbor. If you did not pay that much, then you may not be in the safe harbor and you have to pay some penalties.

It's not the end of the world if you have the money. If you don't have the money, then it becomes a big problem. Because now you can't settle up with the IRS come April. And now you're definitely going to be paying some penalties and interest for as long as it takes you to pay that after April 15th. Even if you file an extension and don't do your tax return until October, you still have to pay your tax in April.

What can you do in your situation? It's not that big of a gain. You're talking about $20,000 in taxes or something. You can just have a little extra withheld from your paychecks. If you ask them to just withhold another $1,500 a paycheck, you're good to go. If they withhold $1,500 and your employer does every month, then that'll get you into the safe harbor almost surely.

The fun thing about withholding is withholding is all treated the same, whether it's withheld in February or whether it's withheld in December. The IRS doesn't care. They do care when you pay your quarterly estimated payments. If you made the money in the first quarter, you're supposed to pay it in the first quarter.

But they don't care for withholding. You could just kind of cruise along where you're at this year, hope you harvest some more capital losses. If you don't, come November, you could jack up your withholding from your main W-2 gig quite a bit, have a bunch withheld from your November and December paychecks and be okay. There's lots of ways you can do this, but the bottom line is there's a difference between how much is paid as you go and what you actually owe in tax. And that difference is sorted out come tax day.

 

SHOULD RESIDENTS BUY A PROPERTY TO KEEP AS A RENTAL PROPERTY AFTER TRAINING?

All right, let's take another question. This one's also about real estate. This one's from Dan.

Dan:
Hi, Dr. Dahle. I'm a third year internal medicine resident. I'm actually calling in just a few miles away from where you practice. I've been a big fan of yours for a number of years. In fact, whenever I teach the medical students or the residents, I make sure to include financial wisdom that I pick up from your book, blog and podcast.

My question is about real estate. I know that you're very forthcoming about residents not buying homes. Confession, I purchased a small condo during residency that I'm going to rent out after I leave. It's in a great area where I feel confident it'll become a cash flow asset for me.

I'm moving shortly to a new location for fellowship and I'm thinking about doing the same thing. I have enough for a down payment, thanks to my wife, and we're wondering about buying something, rent it when we leave, to have another asset. I know you routinely recommend that residents don't buy homes. I’m wondering if you have any advice on this. Thanks for all you do. It seriously means a lot.

Dr. Jim Dahle:
All right, Dan. Thanks for asking your question. Obviously, in the retrospectoscope, it's easy to know when to buy a house and when not to. 2002, great time to buy a house. 2006, not so good. 2010, great time to buy a house. 2022, maybe not. However, that's not how you buy houses. You buy them in advance. And if you want to make money on a house, you need to own it long enough that the appreciation for the most part, now there's other factors in it, but for the most part you need the appreciation to be larger than the transaction costs.

The typical transaction costs on a property are about 15% round trip. Maybe 5% to get in, maybe 10% to get out. And that's not just the realtor's commission, that's all the expenses. If it's a $500,000 house, you're talking about a $75,000 round trip. You need it to appreciate in the time you own it from $500,000 to $575,000 in order for that to work out well for you.

If you're going to be in there three years, you needed to appreciate about 5% a year. If you're going to be in there for five years, you needed to appreciate about 3% a year. If you're going to be in there for one year, you needed to appreciate 15% that year. And that doesn't happen very often. It does happen from time to time. I'm sure whatever you bought in 2020 and are selling now, you're probably doing just fine on. You probably made a killing on it. So congratulations to you on that. You gambled and won. But I would estimate that you only win about a third of the time when you're in there for three years and probably half the time when you're in there for five years.

In general, if you're not going to own it for five years, it's probably not worth doing. People think renting is just terrible. Renting is not terrible. I've rented houses. It's not that big a deal. You can rent a nice place, you can rent a place with a backyard that your dog can run around in it. Every now and then you go to some weird geographic area where you literally can't rent what you need, fine, buy a house. It might cost you something but you have to buy because there's nothing to rent. But for the most part you can rent what you need. And that's okay.

Just recognize, lots of people don't, until they bought a house and sold a house once or twice or three times. They don't realize there's a lot more to it than just comparing a mortgage payment to a rent payment. And they're like, “Oh, well, the mortgage payment is less than the rent payment. Of course it's a good idea to buy.” No, no, there's a lot more that goes into it than just mortgage. Think about a real estate investor. What's his expenses? Well, you got the mortgage payment, you got property taxes, you got insurance, you got repairs, you got management, you got vacancies, you got snow removal. You got all the crap you got to buy to do the lawn or whatever. All those expenses go into it. So, you have to look at everything and compare that to the rent, including the time value of your money that you're using for any down payment.

There's a lot more that goes into it. The New York Times has a nice rent versus buy calculator that can help inform this decision. But you'll generally see that what I'm telling you is the truth. That most of the time if you're renting for three years or less or if you're going to be in it for three years or less, you shouldn't be buying it. Three to five years or more, it's usually a good idea to buy. That's just the way it works out in general. It's a rule of thumb. Anybody can find an exception to it, of course.

Now, does this change if you keep it longer as a rental? Well, yes. Now you got more years for it to appreciate and overcome those transaction costs. Even if you live in it for two years and you rent it out for eight more, well, now you've owned it for 10 years. So you're spreading those transaction costs out over 10 years and you're much more likely to come out ahead.

However, what happens is people don't buy the place they live in and rental properties the same way. You tend to look at rental properties in a very cold calculated fashion. What do the numbers show? What can I rent it for? What's it going to cost me? What are my expenses going to be?

When we go buy a place we're going to live in, we start imagining where our furniture is going to sit in it and where we're going to put our stuff and wrestling with our kids on the carpet in that room. It becomes a much more emotional decision. And when you mix those two together, sometimes bad things happen. You end up buying a place that's perfect to raise your kids in, perfect to live in for residency. It really doesn't make sense as a rental property. If you can somehow divorce yourself from that mindset that you're trying to get a place that's perfect to live in and buy it purely based on the numbers, that this is a rental property you would buy, whether you lived in it for a couple of years during fellowship first or not, then I think this sort of approach is okay.

But I just find it hard to believe that if you were designing a real estate empire, portfolio of real estate properties, that you would pick one condo in the place you did med school and one condo in the place you did residency and one condo in the place you did fellowship and have that be your portfolio. That doesn't make any sense to me as an investment.

The only advantage there… Well, there's a couple advantages. One is if you keep the thing less than five years total and live in it for at least two of the last five years. Then you can exclude some of the capital gains as a resident. You can do that once every couple of years. That's one advantage.

And the other advantage is, you don't have to have that 5% transaction cost to buy it because you already own it. When you convert a place you live in to a rental property, you get to skip those expenses. And a lot of times people aren't exactly reporting to the lender that it's no longer an owner occupied place.

And so, they can often just keep the same mortgage they've been having and that's usually at a better rate, especially these days. Then they can get for a rental property mortgage. You may want to read your mortgage and see what the bank says about you doing that, but that's certainly a very common practice. Those are the only advantages of taking a place you've been living in and turning into a rental property. And they may or may not be enough to turn a bad deal into a good deal. You got to look at the numbers.

The rule of thumb is the same Dan as I would've told you in 2020. That you're probably not going to come out ahead buying a property. You're probably going to be better off just renting during your residency, during your fellowship, during your med school, whatever. But you didn't listen then, I'm pretty confident you're not going to listen now. Especially once now that you've actually came out ahead by not taking my advice, I'm sure you're going to do the same thing again.

But those are the things to be thinking about. Try to think about it as an investment from the get go and buy it like an investment and I think it's going to work out better for you than if you don't do that.

 

QUOTE OF THE DAY

All right. Our quote of the day today comes from Thomas Edison who said, “We should remember that good fortune often happens when opportunity meets with preparation.” Boy, isn't that the truth? I’m so lucky when WCI started making money, and before when we came into those attending level paychecks back in 2006, that it met prepared hands. We knew what to do with money by the time we started making it. And so, it was pretty awesome what was able to happen in our personal finances by hitting the ground running when we started making money, not just coming out of residency but also when WCI started making money. And it's made all the difference. Make the preparation in your life so that when the opportunity shows up, you're ready for it.

 

ADVICE FOR BUYING A NEW CAR

All right, let's talk about new cars. This question is from Jacqueline on the Speak Pipe.

Jacqueline:
Hey Dr. Dahle, this is Jacqueline from Georgia. I have a question about getting a new vehicle. 11 years ago I purchased my car, it was used and I bought it in cash. I have loved her really well, but she is getting on up there in age and maintenance costs. It's probably about time to think about retiring her. I haven't been in the car market in a long time and I'm not sure how much it's changed during COVID or in the wake of COVID. So I wanted to get your advice. How do you think about navigating getting a new vehicle? Any tips, tricks, best practices that you can pass along would be greatly appreciated.

I also wanted to get your reaction to a piece of advice a couple people have given me, that I'm honestly having a little bit of a hard time squaring. I've heard from a couple people that it makes sense if you want a new vehicle to lease it, otherwise you should buy a used vehicle. I'm not sure I totally can follow when, if ever, it would make sense to lease a vehicle. Generally, what's your thoughts about whether to lease or to buy? Does it make sense to lease a vehicle? Are you okay with buying new? Let me know what your thoughts are. Thanks for everything that you have done for me and for my family. We're incredibly grateful for you.

Dr. Jim Dahle:
All right, Jacqueline, you have provided a great segue for me to tell everybody about my new truck. My new truck finally got here. I ordered it in December of 2021. This is a super duty. It's an F-250 with an off-road package and all the bells and whistles. It's platinum and it's got a huge sunroof and it's got everything automated and it's awesome. It's a great truck. I ordered it in 2021. At the end of 2022 they told me we're not going to get to your truck but we'll give you a similar deal on a 2023. And that was when I changed it from a mid-level trim package to the platinum trim package because I no longer needed all six seats since one of my kids had moved out in the meantime. And they told me, well, we're not going to start building those till summer.

The bottom line is it took me 21 months to get a new car. The car I ordered I was willing to pay essentially full price for. I think actually I got a pretty good deal on it because I ordered it from a dealership in Iowa. I think I got it for 2% under invoice. And this was at a time when if dealerships could get one on the lot, they were just adding $10,000 to the sticker price, which is significantly more than invoice to start with. It ended up being a pretty good deal, but I waited a long, long time for it. I’m very happy to have a new car though.

Here's the deal with new cars versus used cars. This is actually the first new car I've driven in my life. I'm 48 years old. By the time this thing came I was 48. The whole rest of my life I've been driving cars that were bought used. Now Katie's had a new car since 2016. She's still driving it and now has 150,000 miles on it. Maybe it's not so new anymore, but that was also a new car. And that was the first new car she's ever driven in her life.

I think the first thing to think about is when you can afford to just kind of piss away some money. Dave Ramsey uses a million dollars as the drawing line. He says nobody with less than a million dollars in net worth should be buying a new car. I think that's a pretty good place to draw the line.

Clearly, financially speaking, buying a new car is not smart. Now the markets fluctuate, and there's been some times, especially in the last few years, where you just didn't get much of a discount for buying a used car. And maybe there's some few oddball times when you can say I'm not getting enough of a discount to buy used. But most of the time it makes sense to let somebody else take that huge depreciation hit that occurs when you drive a new car off the lot. You might put 10,000 or 20,000 miles on the car that first year. So, buying a year old car with 20,000 miles on it, that can save you 10 or even 20% of the value of a car. It can be pretty substantial what you can save there. Sometimes more, depending on the model.

As a general rule, don't buy new cars until you're rich. Once you're rich, spend your money however you like. And if you want a new car, go get a new car. I certainly have done it. You should not feel bad doing it. My definition of the good life definitely includes a few luxuries along the way, and a new car is one of those luxuries.

I love the fact that you can order it exactly the way you want it. You can go buy a new car right off the lot, whatever they have there, but I like the idea of being able to get it exactly the way I like it. The colors, the features, the trim levels, the add-ons, whatever, all that stuff. I like that opportunity and I think that's cool and I have the money so I can afford it. And so, that's probably the way I'm going to buy all my cars going forward.

But there's a lot more savvy ways financially to buy a car. And if you have a better use for your money, and especially if you're not rich yet, I think you ought to take advantage of some of those things.

For example, I have bought a car at an auction. I've gone down to the auction, bought the car. I paid $1,850 for it. I drove it for four years. This is as an attending. As a physician, I bought this car in 2006, $1,850. I sold it four years later having put one set of used tires on it, replaced the windshield wipers and swapped out the battery on the one day it didn't start at the hospital, one cold morning. I got a jump and swapped out the battery on the way home. That's all the money I put into it for four years. And then I sold it for $1,500. I'm confident I could have sold it for $1,850 but my wife wouldn't let me because we sold it to one of her friends. That was an extremely economical way to pay for four years of transportation.

And so, there are deals out there. Maybe you can't get a $2,000 car that is as reliable as that one was. Maybe you have to pay $5,000 or $6,000 or $7,000 for that sort of a car these days. But my point remains, you can get reliable transportation for less than $10,000. And so, in my view, it makes very little sense to take out a car loan of more than $10,000 and really probably more than $5,000. That seems silly to borrow money to get a depreciating asset.

Now some people say, “Well, I can get a car loan at 2% and my money market fund is paying 5%.” Okay, that's true. Are you going to do that with your microwave, too? Are you going to do that with a stick of gum? At what point are you going to quit playing those games and concentrate on the things that actually help you to really be financially successful, which is boosting your income, carving out a huge percentage of it and investing it in some reasonable way. These little games we play with credit cards and these little games we play with arbitrage in $10,000 car loans just don't really move the needle for most of us in the long run.

Okay, what do you look for? Where do you buy used cars? Well, the safest place, but also the most expensive place, is to go down to some sort of dealership or car lot where they provide some sort of warranty or guarantee or 37 point checklist and pre-certify it. It's a certified pre-owned car or whatever. That's probably the safest place to do it because you know those folks are going to be down there and you can go back down and complain and whatever. That's one option.

Another option is to just buy it from a private party. I've done this lots of times, as well. You usually get a better price. Now some might argue that the better price is because you know less about the car and it's going to be as is and you can't go back and complain about anything. It's not certified and that sort of stuff. But the fact is it's cheaper. Whether you are buying it off of Craigslist, in our area in Salt Lake, it's KSL. They have classified ads. It's associated with one of the local online newspapers.That's where most people list their cars around here. And I bought cars off that, no problem.

You call them up, you ask them a few questions about it, make sure it's actually something you'd want. You go over, you test drive it, you kick the tires, you walk around, you can take your mechanic over. They might let you take it to your mechanic to look it over. You give them a wad of cash, and they give you the title, and it's your car. And maybe you find out something is wrong with it a few weeks later and you got to fix that, but whatever, it's dramatically cheaper than buying a new car.

That process, however, is really intimidating for a lot of people and can be somewhat time consuming compared to just going down to a dealership. But I think overall you're going to get a better price buying your cars in that manner. If that really bothers you, maybe you can buy it from a friend or a family member or somebody else that you trust a little bit more. They might give you a sweetheart deal on a car. There's other places to buy a car, obviously, but you're almost always going to be coming out ahead driving used cars.

So, do that until you get rich. And then you know what? One of the benefits of being rich is you don't have to do that anymore. And it's pretty fun. You can buy a brand new car and you don't even have to go to the dealership and fight with them. You can send emails and just buy it basically online, and they can even deliver it to your house. You never even have to talk to the salesperson if you don't want to and eliminate that hassle from your life if you'd like to do that.

But you also had another question about leasing a car. And just because somebody tells you that it's smart to lease, it doesn't mean it's smart to lease. It's not. Leasing is like renting a car for three years. We're not talking about a house here with huge transaction costs where you want to make sure you're going to be in it for more than three to five years before you decide to buy it. That's not the case with a car. It doesn't take that long owning a car before you're better off buying it and selling it.

It reminds me of these climbers I ran into in Yosemite once. The first time I went to Yosemite, we were camping in Camp Four – total dirt bag existence. I think we were either about to graduate from medical school or had just graduated. They were looking for a campsite to share. So they shared our campsite. And we were there the first night and we'd bought some rump steak or something, some cheap steak, and we're cooking it over the campfire there, and they were looking at it like it was the world's greatest meal.

And so, we shared that with them and heard their story. They'd just come from Australia. There were a bunch of British climbers. They just spent three or four months in Australia and when they got there, they felt like it didn't make sense to rent a car. So they bought a car. Some cheap old beater in Australia and then when it came time to leave, they were trying to sell the car, they're trying to sell it out in front of the airport before the flight left. And they couldn't do it. They couldn't find anybody to buy the car at any price out there before they left. And so, they literally left the title and the keys and the car in front of the airport, got on the plane and left. They still probably came out ahead from renting the car for three or four months in Australia.

Leasing is essentially renting a car. That's what leasing is. Dave Ramsey likes to call it fleecing because it is generally not a good financial deal. It doesn't change if your business pays for it. If somebody else pays for it, sure, lease me a car, I don't care. But a lot of times if somebody else is paying for the car, they're willing to make your car payments just like they're willing to pay a lease, and you can actually own the car when you're done.

So, no, I'm not a fan of leasing. While I'm sure somebody can come up with some cockeyed scenario where you can actually come out ahead, leasing as a general rule is something to avoid. If you want a new car, buy it. Buy the car. Even if you're swapping them out every three years, which is probably the most expensive way to buy a car, you're probably still coming out ahead of leasing a new car every three years.

I'd avoid the leases. If this is still a significant part of your financial life, buy something used. If it's no longer a significant part of your financial life, go ahead and buy new and enjoy it. New cars are fun.

 

S CORPS DON’T MIX WELL WITH A W-2 JOB

Okay, let's talk about something besides houses and cars. Let's talk about side gigs. Let's talk about S Corps. This question is from Mike on the Speak Pipe.

Mike:
Hi Jim, this is Mike from Ohio again. I have a side gig where I make about $250,000 currently set up as an LLC, taxed as a sole proprietorship. I also have a W-2 job where I'm making the low seven figure range.

My accountant suggested that I switch my side gig over to be taxed as an S Corp so I can take a portion of the income as distribution and avoid FICA taxes. I tried to research this a little myself and it seems like this might not be a good idea in my specific case because I've already maxed out both the employer and employee social security taxes at my W-2 job.

From my understanding, only the excess social security tax paid by the employee is refundable and the excess social security tax paid by the S Corp would not be refundable. Therefore, I would end up paying an extra 6.2% tax on my S Corp wages to save the 3.9% on my S Corp dividends. Am I understanding this correctly or am I better off switching to S Corp taxation?

Also, is it possible to have a payroll company not withhold the social security taxes from both the employer and the employee with the understanding that I already paid this from my W-2 position?

Dr. Jim Dahle:
Okay. Yeah, you understand it well, your accountant does not. What is it with accountants these days? Come on, accountants out there, get your act together. I had somebody trying to convince somebody else, I got this email this week, trying to convince a White Coat Investor that they had missed the deadline for a Roth conversion. They had to do it by the end of the year. No, you can do a Roth conversion anytime. There's no deadline on Roth conversions. The only deadlines in the backdoor Roth IRA process are with the contributions. You have until tax day to make that contribution. Sure, everything is cleaner if you do it during the calendar year, but there's not actually a deadline at the end of the calendar year for anything but avoiding the pro-rata calculation on backdoor Roth IRA process.

At any rate, I think your accountant is giving you bad advice. I wrote an article that ran in June of 2020 on the blog. It's called Why an S Corp Doesn't Mix Well With a W-2 Job. And it's exactly what you've identified. If you form an S Corp for your side gig, you're going to pay that employer half of payroll taxes twice. It's going to get paid at your W-2 job and you're going to pay it again and you're going to pay the employee half, too, but at least you can get that back. And so, that's going to eat up any savings in Medicare tax that you have from forming an S Corp. In your case with a W-2, it doesn't make sense.

If your main gig had been a partnership, this is my situation. I'm paid on a K-1 both at WCI and I'm paid on a K-1 at my physician partnership. This is not an issue. I'm paid on a K-1 and a W-2 at WCI, but the point is I'm not being paid as an employee in two places. When you get paid as an employee in two places, they withhold social security taxes from both places and you can get the employee portion back, but not the employer portion back.

So, no, I think this is a terrible idea for you to elect to have your LLC taxed as an S Corp. I wouldn't do that. And I might question some of the other advice that your accountant's given you quite honestly.

It's really sad, Mike. You work your butt off. I assume you're a doc. You have a couple of gigs here. You're working really hard if you're making $250,000 at your side gig and you rely on professionals to tell you what the right thing is to do with your money and yet then you have to go and research what they tell you on a blog on the internet and leave a Speak Pipe for a podcasting physician to tell you what's up. It's really frustrating to pay somebody thousands of dollars to give you advice and then get crummy advice.

Anyway, thanks for what you're doing out there, Mike. No thanks to those in the financial services industry who don't know what they're talking about. If you're going to be professionals, learn this stuff in and out. If you're going to market your stuff, your services to doctors, understand a doctor's financial life and the issues they face. Maybe you need to read my blog, too. I don't know. There's not that many of these things. I feel like if you're an accountant that deals with docs you have to know this stuff but sometimes it doesn't happen.

 

ESTIMATING WHAT YOU NEED TO PAY IN TAXES WHEN YOUR INCOME IS HARD TO PREDICT

All right, let's take Jacqueline's question. Hopefully her accountant isn't as bad.

Jacqueline:
Hey, Dr. Dahle, this is Jacqueline from Georgia and I have a question about taxes. In my family, I am the designated tax preparer, but my husband and I are also newlyweds and this is only my second year of doing our taxes and I could use all the help I can get.

Here's what I'm worried about. My husband and I are both W-2 employees, but our incomes are a little variable month over month. My husband's affected by his call schedule and my income is affected by an annual bonus that's a little bit hard to predict. These are of course great problems to have, but I'm worrying that I might not be estimating what we're going to owe in taxes as well as I could. I'd really like to avoid underpayment and penalties.

What I've been doing is every four months or so, pulling our most recent pay stubs, sticking it into the IRS calculator, seeing what the IRS thinks we're going to need to pay and adjusting our withholdings to meet that. Is that the best practice? Is there something better that I could do? I also am aware of but not really familiar with quarterly estimated payments and I'm not sure if that's where that comes into play. Thanks for all of your advice. Let me know what you think we could do to navigate the situation as well as we can.

Dr. Jim Dahle:
Well, don't go get Mike's accountant. Maybe Mike should come hire you to do his taxes. You seem to have a little bit better handle on it than his accountant does. Here's the deal. If you're afraid that you're going to under withhold, then withhold more. Worst case scenario, you get a bigger tax refund. It's not the end of the world. Basically you lost the use of that money for 1 to 16 months, 4 to 16 months really. It's not the end of the world. Withhold a little more and quit worrying about it so you don't have to do this calculation every four months.

Another thing you could do. You could look at what percentage of your income you paid in taxes last year because although the tax amount changes quite a bit year to year, what I've found is that the percentage doesn't change all that much. I calculate it out every year and I'm usually paying between 32 and 34% of my income in taxes between federal income taxes, payroll taxes, and state income taxes. That's just what it's been for the last few years for me.

And so, I know if I set aside about that much money, that that's what I'm going to pay in taxes. When I pay it is not quite as important to me. Whether it's withheld, whether it's made as quarterly estimated payments, whether I use it to settle up with the IRS come next April, whether it's paid as these cool payments you can pay from your business to your state income taxes so you can still deduct your state income taxes. These are the PTech payments for those of you business owners out there. You ought to know about this if your state allows them. It doesn't really matter. You just want to make sure you have the money.

Because your big fear is that you're going to have under-withheld and the IRS is going to go, “You have to pay another $30,000 in taxes.” And you're going to be like, “I don't have $30,000.” That's the big fear. The smaller fear is the IRS is going to go, “Hey, you have to pay $30,000 and you have to pay $600 in interest.” And you're like, “No problem. I have the $30,000, here you go. Bummer that I have to pay $600 in interest.” But that's not the end of the world.

When you are a high income professional and you're paying lots and lots and lots of money in tax, like most of us are, sometimes you're going to guess wrong. And you'll get a tax refund back and you let the IRS use your money for free or sometimes you really didn't get into the safe harbor and now you have to pay a little bit of interest. They don't put you in jail. This is not tax evasion; you just missed your estimate. So, don't sweat it too much.

I have been on both sides of this. I have paid that interest. I have loaned the IRS way too much money before and had a huge tax refund. It's hard to estimate. So, don't beat yourself up about doing it.

In your situation where you're both W-2s, you can almost surely adjust with withholdings if you need to by changing your W-4 throughout the year. If you feel like an adjustment needs to be made, you almost surely don't have to do quarterly estimated tax payments.

For someone with a main W-2 gig and a small side gig, you can usually do that as well. But if you're in a situation like Mike and your side gig makes $250,000, you're not going to be able to account for those taxes by adjusting your withholdings. You're going to have to make quarterly estimated payments. And they're not that hard. You send them in, it's basically a little tiny tax form. It's like a third of a page with eight questions on it like your address. What's your name, what's your address, what's your social security number, what quarter is this for? Those sorts of questions.

And you mail that in or you can do it on electronically at EFTPS and you send those in on April 15th and June 15th. Notice that's only two months between April and June and then on September 15th. And then the quarter 4 one is due January 15th. So, you get four months for the fourth quarter, two months for the second quarter. That's the most annoying cash flow issue I deal with each year. But that's the way the system works.

So, I don't think you have to do quarterly estimated payments yet, though, unless you really have some other source of income other than those W-2 jobs. It does sound to me like you're sweating this too much. If you're having to look at it multiple times a year and make adjustments, I think you're worrying about it a little too much. Just have a little extra withheld and sleep better at night.

 

HELPING YOUR KID WITH THEIR BUSINESS

All right, here's an email I got and I got some follow up emails on it, as well. Basically, the white coat investor said this. “I'm seeking advice for my daughter. She started a macaroon selling business when she was 13. She is going to be 15 this year. My wife helps her a little. I want to create either an LLC or an S Corp for her business. Part of the reason is to help her from a tax perspective, that's interesting, but most importantly is for her college applications.

Question one, for tax purposes, do you recommend an LLC or an S Corp? My tax advisor said S Corp and my financial advisor I know said LLC. I was wondering if you have an opinion. LLC sounds simpler, but I read that marketing expenses are more available with an S Corp.

Question two, do you happen to know if it would make any difference in terms of college applications if it is an LLC or S Corp? Is one more impressive than the other? Also, should the business be in my daughter's name or my wife's name and my daughter's an employee? Thanks for any input you can provide and thanks for all your advice and guidance over the years.”

Okay. Well, I had to dive into this more with some follow-up emails. It turns out that this business makes about $1,000 a year gross. It's great, his daughter started a business, but this is not like the next Apple or something.

Forming an LLC or an S Corp seems silly for a business with $1,000 in gross revenue. The fee each year in California for an LLC is like $800. That's going to be more than the profit for this business. Just paying the annual LLC fee in Utah, I think it's $15 or $20. So maybe it's not so bad if you're in a state with a low fee, but give me a break. It's a $1,000 kid business. You don't need an LLC, you don't need an S Corp. You just put it on a Schedule C, it's a sole proprietorship. It goes on her taxes, Schedule C, she's got to pay a little bit of payroll tax in it. She won't even have to pay any income tax.

So, forming an LLC or an S Corp to try to save taxes on $1,000 that the kid isn't going to pay anyway? What are you going to do? Call half of the distribution and try to save some social security tax and some Medicare tax? That's just silly. Way too much hassle for what's going on here. Just put it on a Schedule C. Yes, report the income. Don't cheat the IRS. Although let's be honest, most kids are doing this. We got some kids in the neighborhood that make bread and sell bread. I don't think they're reporting it on their taxes. Now if you want to put the money in a Roth IRA, you better report it on your taxes and pay some taxes on it.

But let's say she makes $1,000. Let's say $500 of it is profit. And she's got to pay the payroll taxes on that. She's not going to owe any income tax on it. What's the payroll taxes? Well, it works out to be about 15%. 12% in social security, about 3% in Medicare tax. About 150%, it's about $75. We're talking about $75 in taxes, and you want to form a corporation to try to save some of that $75? I don't think you have any idea what kind of hassle we're talking about when you form a corporation.

So, this is just crazy to do any of this. And what the heck? What is going on with the accountants for white coat investors out there? Your tax advisors said form an S Corp for this? Are they insane? That’s stupid advice. Accountants! What are you doing out there? Quit giving this sort of advice to white coat investors. It's a $1,000 business! An S corp? Really?

And this thing about college, what the heck? It's great. Your kid formed a business, learned some entrepreneurship lessons. I'll bet if her major is in business or something, this is going to impress somebody. Heck, it might impress me even if she just wants to go into humanities. It's great. She can talk about it in her college applications, what she learned from forming a business, that she learned about marketing and hard work and maybe she had some challenges she can write about in her college essays, but nobody cares if that business has LLC or Corp after its name. Give me a break. I cannot imagine anybody on an admissions committee is going to care about that.

Now, should this business be in your daughter's name or your wife's name? Technically when you start a business in a state, a lot of times you're supposed to register it with the state. You're supposed to get licenses. In fact, if you're doing food preparation, the regulations are actually pretty complex.

I had a partner whose spouse was getting into this and they had to have this fancy commercial kitchen installed in their house. It was like a six figure amount in order to comply with the regulations for food preparation. So, it is no small thing to actually be compliant with this sort of a thing. Now, is your city going to come after you because your kid made $500 making macaroons in your kitchen? Probably not. And that's probably why most people aren't reporting this sort of income anyway.

But it's interesting, I looked into this. Some states do allow minors to own businesses, some states don't. But if you're putting it on the kids' Schedule C, which means it's a sole proprietorship, I don't think the state is going to come after you because you're probably not registering it with the state really.

But if you really want to register it with the state, you better find out if your state allows that. You might have to put it in your name or your wife's name. That wouldn't necessarily mean your daughter would have to be an employee, I don't think. But you could certainly have them be an employee. If they're an employee of a business that is entirely owned by their parents and it's not a corporation, they don't have to pay payroll taxes as long as they're under 18.

That would save the payroll taxes if you put the business in your name, made your daughter the employee, paid your daughter the entire profit as a salary. So, now this business has no profit. You owe no taxes on it and your daughter owes no income tax because she doesn't make a lot and nobody has to pay payroll taxes. So, maybe that's the winning way to do it. Put it in your name, put it on the Schedule C, pay your daughter as an employee of the business. And it works out great for everybody. Maybe that's the best way to do it.

Man. I can't believe some of the advice coming from accountants today. Very distressing. One of the common things we get asked for is “We need some help with accounting. We need help with accounting.” But there just are not that many accountants out there and many of them just don't understand a lot of things about personal finance. It’s really surprising. I think they need to revamp some of the curriculum in accounting school. I don't know.

 

WHAT QUESTIONS TO ASK WHEN CONSIDERING PARTNERSHIP

Okay, let's do another question off the Speak Pipe. This one is about partnerships.

Speaker:
Hi, Dr. Dahle. Thank you for all that you do. I am a young vascular surgeon nearing the end of my two year contract of my first job and will be considered for partnership soon. I am employed by a physician group and we are contracted out and work for a private hospital.

When considering partnership, are there any specific questions that I should ask the physician group to determine whether it is a good choice financially and for a prolonged career? The buy-in for my particular group is quite high at about $600,000 and there is a five year vesting period. It appears that a group has been quite profitable over the past few years, but I was unsure of how to best gauge this other than asking physicians who have retired from the practice and asking the group how much the value of their share has gone up over the past several years. Thank you and happy holidays.

Dr. Jim Dahle:
Okay, great questions. First of all, God bless you. Thank you for what you do. Vascular surgery, lots of training. And when you got to operate, you got to operate now. And so, there's lots of call and I think you work on average more hours than just about any other physician specialty. Thanks for what you do out there. That's great.

The truth about partnership is the time to ask about partnership and kind of understand all these details is before you start working for them in the first place. This is kind of weird that you work for them for two years and then you enter into some weird vesting period over five years. That's a little bit weird. Five years is also a pretty long time.

Most of these partnerships, particularly in my field, emergency medicine, most of them are one to three years and most of them are sweat equity. You work for less for one to three years. This is your pre partner years, then you make partner and you make the same as everybody else. That's the way most of these small democratic groups work. But they don't have a lot in assets.

The only thing I'm really buying into with that sweat equity is the ability to make a higher hourly rate, number one. And number two, my share of the accounts payable when I leave the partnership. In my case, that's probably a five figure amount. It might not even be a very high five figure amount the way we calculate it.

The first question, especially if you got a pony up cash and it's real money for somebody early in their career, $600,000 is not a small amount of money. That's a lot of cash. You're probably going to have to borrow some of it. And I'm not necessarily against that, but the point is, it's a lot of money.

So, you need to ask, “What am I getting for that? And is what I'm getting going to appreciate? What are the risks to this business?” You need to understand the business you're buying into because you're buying a business. What are the risks to it? Is it like our business where basically we have one customer, the hospital? We have one contract. The entire business is a physician group who is dependent on one contract. We lose that contract, the business has no value whatsoever other than the accounts payable, which will be rapidly distributed. Are you getting part of an office building? Are you getting some equipment? What are you actually getting for your $600,000? I think that's the first thing to understand.

Second, understand how the system works exactly. What do you get if you leave in a year? What do you get if you leave in two years? What do you get if you leave in five years? What do you get if you get fired? What do you get if you quit? What do you get in 20 years? What if you cut back and work half time? Or what happens if you go on the parent track for two years? What happens in all of those situations? I think understanding that is really important.

Other questions to ask. The most important thing in a partnership is the people in the partnership. And you got to ask, “Are these people I want to be professionally married to for the next 10 to 40 years?” Are they people you trust? Are they people that have integrity? Are they people that you think are going to try to get theirs and leave you with whatever's left? I think that's the most important thing.

The details and the money can usually be worked out if they're good people that you're working with. If they're not good people, no amount of due diligence, no amount of legalese in the contract is going to save you. First determine, are they good folks?

I think it's also worth paying for some professional help here. You've only ever done this no times in your life. You may only ever do it one time in your life. How can you be expected to be an expert in it? We have a resource for this. If you go to whitecoatinvestor.com/recommended, you'll see all our recommended resources. Or you can go to the website, go onto the Recommended tab, and you will see a line called Contract Review and Legal Services.

We have a number of firms there. Some have advertised recently on this podcast. Resolve is a company. If you go to whitecoatinvestor.com/resolve, they're a company that's advertised on the podcast recently. You can use the code WHITECOAT10 to get 10% off their services.

But they'll review your contract. They'll not only review employee contracts, but they'll review partnership contracts. You can get a sense of whether this is kind of what most of these look like or whether yours is really bizarre that is five years long for vesting, for instance, and get a sense for whether you're being treated fairly. And I actually recommend you do that. I think it's worth a few hundred dollars.

You are going to spend $600,000 on this thing. Why not spend $400 or $500 figuring out if you're getting a good deal? And almost surely you're going to learn something from working with these sorts of folks. You're going to learn something that helps you to get paid more, that helps you to be happier, that helps you to understand how this is going to break up better. I can't imagine this isn't going to be worth the money to get this contract reviewed. So, I would recommend doing that.

But yeah, it sounds like a great opportunity. Most docs, the medically related businesses they own turn out to be the best investments in their entire career. Whether that's a surgeon buying a surgical center or a gastroenterologist buying a building that they can do their own scopes in. Or an emergency doc buying urgent care or just buying into a partnership and owning a practice. Dialysis centers, labs, whatever.

Ownership. I'm a big fan of ownership, but you don't want to just own anything and you don't want to pay too high of a price for it. And this is a big price. You're buying something that's going to cost a lot. The value needs to be there. You need to do your due diligence and really understand what you're getting into. I'd get that contract reviewed, I would learn everything you possibly can about the business and I would really take some time to get to know the partners and decide if you want to be in business with them for the next several decades.

 

SPONSOR

Okay, at some point in our financial lives, it's going to be time to buy a house for almost all of us. A physician mortgage can be a good vehicle for a young doc who's just out of school and has a better place to use their money than on a big down payment. Doctor mortgages, physician mortgages allow docs to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage.

But if you're later in your career or deeper in your journey toward financial freedom, you may want to use a conventional mortgage or even refinance that as rates go down. Especially if you're shortening up the timeframe so you can be mortgage free.

But wherever you are in your financial journey, think about the White Coat Investor because we can help connect you with mortgage professionals and the mortgage that will be most financially beneficial for you. Go to our recommended tab to learn more about all of your mortgage and refinancing options at whitecoatinvestor.com/mortgage.

All right. Don't forget, you can still come to the conference, probably virtually at this point. You can sign up, wcievents.com. You get access to more than half of the sessions live streamed or on demand. Everything else will be available in the lifetime CME course that will be included with your registration.

You get CME credits. You actually get two sets of CME. You get CME for attending the conference, and it's actually a separate set of CME that you get for the online course. Pretty cool, right? But you can use your CME dollars to buy that. You get live Q&A with the speakers, breakout sessions, all kinds of great stuff. Again, you can still register at wcievents.com.

Students don't come to WCICON. You can't afford it. Even virtually you can't afford it. We'd love to have you, but let's be honest, this isn't for you. Most people who come in there are mid-career. There's a few early career and certainly plenty late career, but the majority of people are mid-career.

For you, I got something else, and it's totally free. February 21st, 6:00 PM Mountain, sign up at whitecoatinvestor.com/studentwebinar. I'll tell you what I would tell you if I could fly out and sit down with you and 10 of your classmates and talk about finances for an hour. Come to the student webinar. I'll make it worth your time, I promise.

Thanks for those of you who have told your friends about the podcast. Thanks for those of you who are leaving us five star reviews. A recent one came in from SC nicknane 1233 who said, “Excellent. Best personal finance podcast there is. Listening to this for 6 months is probably going to be worth millions over the course of my career. Thanks for making this outstanding podcast.” Five stars. Thanks.

It's true. Becoming financially literate and financially disciplined is like a superpower. It's so rare in our society. It's like a superpower. And if you can get both of those at the beginning of a career as a high income professional, it is going to be worth millions to you. Instead of retiring with $2 million, maybe retire with $6 million. Learn this stuff. It's well worth it, I promise. It's worth it. It's a little bit of work upfront. It's a little bit of work as it goes along. Totally worth it.

You guys are the best. We appreciate what you do out there. We appreciate if you had a bad day today, and I know some of you did. 30,000 people are listening to this. Surely a whole bunch of you had a bad day. I'm sorry you had a bad day. It happens. Go home, recharge, hit the ground running again tomorrow and get back to what you've committed your life to. It's really a wonderful thing you've done. You should be proud of the decisions you've made and the hard work you've put in in the past. Let's help you do well while doing good.

Keep your head up and your shoulders back. You've got this. We'll see you next time on the White Coat Investor podcast.

 

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 – 155

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 155 – Pediatric dentist gets back to broke and more.

If you're finding our podcast informative and helpful, we would encourage you to sign up for our monthly newsletter. It's totally free and includes useful, actionable information not available on the regular blog posts. It's almost like being in a secret club, a kind of club that can boost your knowledge and enhance your wealth at the same time with no strings attached. It's free. You can quit any time. Sign up today at whitecoatinvestor.com/newsletter. You can do this and the White Coat Investor can help.

This is the Milestones to Millionaire podcast. If you want to come on, you can apply at whitecoatinvestor.com/milestones. As you imagine, it's a big community and there's lots of people actually that want to come on but we love celebrating all kinds of different milestones, so we encourage everybody to apply.

We have a great guest today who's gotten back to broke and more, and we'd like to get her on the line. But stick around afterward, I'm going to talk about some ways that you can boost your income after we finish the interview. Let's get started.

 

INTERVIEW

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

Annie:
Hi. Thank you so much for having me.

Dr. Jim Dahle:
Annie, tell us what you do for a living and where you're at in your career.

Annie:
I’m a pediatric dentist and I'm about two and a half years of training.

Dr. Jim Dahle:
Okay. And over the last year or so, you've hit a number of net worth milestones. Tell us about your net worth.

Annie:
Well, recently, I checked last night, but I have recently reached a net worth of $82,000.

Dr. Jim Dahle:
Awesome. And what is that composed of?

Annie:
I initially came out of training with $365,000 in debt. Right now it's spread out between a taxable account, Roth IRA, I have HSA, I bonds and a high yield savings account.

Dr. Jim Dahle:
Okay. So, a bunch of kind of typical investments. And then you still have some debt, I assume.

Annie:
I have debt, I have some federal loans that are still on pause based on the save plan that I'm under. And then I have a private loan that my mom took out to help me pay for a dental school.

Dr. Jim Dahle:
Okay. So, how much in debt and how much in assets?

Annie:
The debt right now is about $230,000 and assets is $318,000.

Dr. Jim Dahle:
All right. But you really didn't have any assets when you came out of school, so your net worth was minus $365,000.

Annie:
Yes, yes.

Dr. Jim Dahle:
And you have not only become back to broke, I think the net worth you applied to come on the podcast with was $10,000 and now you're up over $80,000. So, you are going the right direction. Congratulations.

Annie:
Yes, thank you so much.

Dr. Jim Dahle:
It's very interesting. As I mentioned before we started recording, we record these episodes sometimes weeks in advance and not necessarily in the same order they're going to run, but the person I just got off the phone with is a doc at the other end of his career with a net worth of $50 million. And so, the fun thing about this podcast is we can celebrate every financial milestone that people reach. And the truth is, the earlier ones are the harder ones. They say the first $10,000, the first $100,000, the first million is the hardest. And it's true because it's all brute force savings.

Annie:
Yeah.

Dr. Jim Dahle:
So, tell us how you did this. You went from minus $365,000 to $82,000 over the course of two and a half years. How did you do that?

Annie:
Well, I will say that I had a pretty good idea of my finances in college. I think when I was starting college, the finances were a huge part of it. I definitely chose a college that I could afford. The one that gave me a lot of aid or grants or I was able to apply for different scholarships, doing work study. Things like that allowed me to graduate from college with only about $9,000 in debt. And they were a subsidized loan. I went directly to dental school after college. There was no interest accruing that I needed to pay for until I had graduated dental school.

I would say definitely starting early. And then choosing my dental school, I also chose a school that allowed me to be a graduate associate, which I don't think any other school allows for, but a graduate associate is kind of like an RA as a dental student. My room and board was taken care of. As long as I was on campus I got to take care of the undergraduates and form their community and form their college experience as well. Taking room and board out of the consideration helped a lot in terms of finances.

And then just making sure I knew what types of loans I had and what I was actually getting into. The dental school I went to was really great and they offered a loan advisor when I graduated, so I was able to get into the right payment plan and things like that. And of course, the COVID loan pause helped a ton in terms of the federal loans.

Dr. Jim Dahle:
Yeah. I'm not getting the impression that you got much help from family with paying for your education. Is that correct?

Annie:
Not in college. My family, we came from pretty humble beginnings. My mom came here, she was an English teacher, so she knew the language, but she was probably the only one of my family that did at that time. When we first moved here, it was my uncles, I have many uncles, many aunts, my mom, we all lived in one house. Each family unit got one room. Me, my siblings, my mom, all in one room.

And then eventually, my mom is very scrappy, so she got out of that situation as quickly as possible. My uncles joined the military. They worked in a factory when they were here. And they've all done very well for themselves. But going to college, I would say it was basically all my own. And then starting dental school, we sort of had more money in the family. Then my mom helped me a little bit with her savings. But then when we were deciding what to do with a massive amount in terms of how much it cost to go to dental school, she took out a HELOC loan against the home and then she helped with that. So, I've been paying that back when I graduated.

Dr. Jim Dahle:
Wow.

Annie:
Yeah. I would not recommend it because at the time the interest rate was much, much lower when I had started dental school. And then now over the past couple of years, interest rate has rapidly increased. So having that is a little bit not ideal.

Dr. Jim Dahle:
Your mother loves you very much.

Annie:
She does. She loves me very much and I love her even more. I wouldn't say that we were helped significantly, but having that kind of support from my mom, and then me being in the opportunities to be able to give that back to her is amazing. That is truly a blessing.

Dr. Jim Dahle:
Yeah, that's pretty awesome. And it's also a good demonstration of how multiple generations working together have opportunities that one generation working by themselves do not have.

Annie:
Exactly.

Dr. Jim Dahle:
Her ability to access credit, which at the time was probably a better deal than the student loans you could have taken out, provided for a lower interest rate. Obviously, some risks of doing that. So far it's working out great because you're paying back the loan.

Annie:
Yeah, yeah. I'm going to pay back the HELOC loan and I can. I think there's like $70,000 left on that HELOC, but initially when she had given me the money, she had some, but then she had to take out some money for renovations for the house and things. That $70,000, I asked her like two days ago, I was just like, “I can give you the money, I could just give you the money.” But she's like, “No, I want you to save it for other things.” And it's at a point where she can do it on her own right now. Eventually she's like, “Take your time on giving me the money, maybe in five years or so”, which is all the support that I could ask for.

Dr. Jim Dahle:
It sounds like a great immigrant family success story to me.

Annie:
Yeah. Thank you.

Dr. Jim Dahle:
Are you a first generation immigrant or are you second?

Annie:
I think it's considered first generation. My mom when she came here, she was quite young.

Dr. Jim Dahle:
Because you weren't born here?

Annie:
I was born here, yeah.

Dr. Jim Dahle:

Oh, you were born here?
Annie:
Yeah, but my mom moved here. But she was quite young when she moved here. I would say one and a half, first and a half generation.

Dr. Jim Dahle:
Very cool. Okay. Your upbringing was relatively humble, relatively modest. What lessons did you learn that have affected how you manage your money?

Annie:
I definitely understood the value of money, especially since there wasn't a lot going around when I was younger. My siblings, my younger siblings, maybe less so, they had more.

Dr. Jim Dahle:
The youngest kids are always the most spoiled one.

Annie:
No, he's doing great. He is not spoiled by any means but we all understand what it actually means to earn money and to save. I'm definitely more of a saver than I'm a spender. I wouldn't say it's necessarily a scarcity type of mindset, but it's more like an appreciating mindset. This is not always something that is guaranteed. Saving for a rain day and understanding that loans that I take out I need to pay back, that's not my money, is something that I definitely learned at a young age.

Dr. Jim Dahle:
Being financially smart, paying off debt, acquiring wealth is obviously something that's important to you. When did it become important to you? When was your financial awakening?

Annie:
I would say probably when I was applying for dental school. I think I did pretty well in college with the work study and the scholarships and things like that but I still came out with a little bit of debt and I was grateful for the government being able for me to have to offset that interest until after I was done with my dental school training. But dental school was a whole different animal. The amount of tuition was just astronomical. And I definitely had to be a little bit more creative in terms of which dental school I could afford to go to.

Dr. Jim Dahle:
And the wonderful thing is you're a good enough student that you had the choice. Lots of people don't have a choice, they only get into one.

Annie:
Yeah, exactly. I was really blessed in that sense. Then considering, I chose that school specifically for the graduate associate position because then I’m not having to pay for room board was huge, and it's a great school. So, I was really, really grateful for that.

Dr. Jim Dahle:
Do you remember the feeling you had when you realized how much you were going to have to borrow to pay for dental school?

Annie:
Yes. I really had to consider because I thought maybe I would have to choose my specialty different or maybe not specialize. I never thought I would have to consider those types of four years in the future things to see whether or not this is something that I could afford to do.

Dr. Jim Dahle:
Well, what kind of advice do you have for somebody that's pre-dental or even in dental school or is just coming out of dental school or residency that wants to get back to broke like you have and start building wealth? What advice do you have for those people?

Annie:
I would say to definitely don't ignore the finances. I definitely had colleagues in dental school who were like, “Oh, just borrow, they're giving you this much, you borrow up to that much. It's just money.” And I was just, “Well no, you have to pay that money back.” I definitely would not ignore the debt. I definitely got to a point where it was a little bit easier to not think about it, but I'm really glad that my personality would not allow me to not think about it.

I was really grateful to be plugged in with a loan advisor that the school provided in the last year before you graduated. And I learned lots of different tricks like filing your taxes last year of dental school and then you have zero income just so that when you're applying for a repayment program that you have a tax record as opposed to any job that you have afterwards. And we take that tax return where you probably made zero dollars in dental school. Little things like that is very time sensitive, so just not ignoring that there is this big low cloud that's over you.

Dr. Jim Dahle:
Awesome. Good tips. Well, Annie, congratulations on your success. You should be very proud of what you've done. I know your mom is proud of you.

Annie:
Oh, thank you.

Dr. Jim Dahle:
And thanks so much for coming on the podcast and inspiring others to do what you've done.

Annie:
Thank you so much. I really think that what you have built has helped me a lot. I know when I graduated dental school and when I was starting residency, I was like, “I'm starting to make some money now, so I want to know where to put that money.” Having found the WCI community has definitely been the number one thing in terms of helping me get my finances in order as well.

Dr. Jim Dahle:
Well, on behalf of the entire WCI community, I want to say to you our pleasure. It is wonderful to have you be part of us.

Annie:
Thank you.

Dr. Jim Dahle:
Okay, that was great. The longer I talk to her, the more I'm like, “Man, I want to bring my kids to see her. She should be my dentist.” Just has such a great demeanor and has done just great with her finances. Two and a half years, that's almost a half million dollar swing in net worth. You keep doing that your whole career, you'll be doing incredibly. Because once you get into the positive and you start getting your money working as hard as you're working, great things happen and things really start to snowball. The first $100,000 really is the hardest $100,000. The first $10,000 is the hardest $10,000. And getting out of that hole is the hardest part. And so, one of my favorite milestones to celebrate is getting back to broke because it really is the one that gets everybody started.

 

FINANCE 101: BOOSTING YOUR INCOME

All right, I promised you we're going to talk about ways to boost your income and there's lots of ways to boost your income. I'm a big fan of ownership. When you own your job, when you own businesses, it tends to increase your income. But let's go over a few other ways that you can increase your income.

The first one is just to see more patients. You work more, you see more patients per hour, work more shifts, whatever. That's a great way to boost your income. It might also induce a little bit more burnout. I just heard a funny quote on the Bogleheads forum. It was a doc who said, “I am still a per click doctor and my wealth only grows as fast as I can work and burn out.” Which is a little tongue in cheek and a little sad of course, but there's a lot of truth to that. That is the primary way for us to increase our income. If we work more, if we see more patients, we make more money.

Okay. Other methods for increasing your income. You can increase administrative work. One of my partners just became the medical director in our group and he gets paid for that. They get paid pretty well. And so, he is doing more work because he is doing all this admin work as the medical director and he is getting paid more for it. And so, that's one way to increase your pay.

Another way is to take on a side gig. This might be medically related, it might not be medically related. It could be consulting, it could be disability evaluations, it could be doing expert testimony. We partner with Gretchen Green for her course on how to become a medical expert witness.

It might be a hobby that becomes monetized like this blog. This blog, the White Coat investor is my side gig. I know we got 18 people working here and it doesn't seem like a side gig, but it still is. I still view what I do for a living as medicine, even though what I probably spend more time on now is the White Coat Investor. But it could be anything. Handyman services, being a rafting guide, whatever. A side gig is a way to make more money.

Here's another one. Changing your specialty. Some specialties tend to make more money than other specialties. This is a big commitment to go back and do a new residency, but there certainly are docs out there who have done it. If you're not in medicine, this can be a lot easier. Nurses change specialties in like two months. And same for APCs. It's relatively easy to go do something else and that something else may pay significantly more.

Here's another one. You can learn new procedures. We are not getting away from the fee for service system anytime soon. And the truth is procedures pay more than thinking. And so, adding a few new procedures to your clinical practice can increase your pay.

Here's another one. Specializing in a niche. If you find a niche that's not very well served in your area, especially one that pays really well, that can really ramp up your income. You think about some of the orthopods out there who only do hips and knees or only do whatever. And that can really increase your income when you can become very good at one thing and become very efficient at it, both in the OR and in your clinic.

Here's another method. Expand your team. If you're a dentist, get a bunch of hygienists that work underneath you or dental assistants. The lawyers and paralegals can do this. Physicians and APCs can do this. Physicians can even have other docs work underneath them. When I talk to the wealthiest doctors I've met, they tend to own practices that have multiple providers working for them. Expanding your team can increase your income.

Here's another one for you employees out there. Renegotiate your contract. Way too many docs are working for less than average pay. Half of you are working for less than average pay. Go get average pay, it'll increase your income. Yes, you'll have to work at least average work to get that, but negotiating your contract may ensure you're getting paid fairly. It goes a long way.

Here's another one. You can invest, getting some passive income. Whether that is in rental properties, whether that's in private syndications or funds, whether that's in index funds, whether that's just in bonds or these days you can make 5% plus just in a money market fund. Investing money is a way to increase your income. You don't have to reinvest the income from your investments. You can actually spend it if you want. And that increases your income that allows you to pay off debt or invest more money or spend more money or whatever.

Here's another one. You can move to a larger practice. If you go to a practice that's just run more efficiently, a lot of times you can make more money. This is the reason why a lot of primary care docs have sold their practices off to a hospital. It turns out that when they banded together with a bunch of other docs, when they banded together with a bigger organization, they actually made more. It wasn't about the buyout price, it was about increasing their income.

Okay, here's another one. Academics are still in general paid less than private practice.
If you want to boost your income, you can leave academic medicine. That is an option. Here's another one. You're pretty good at learning, you're pretty good at test taking. Sometimes getting another degree can increase your income. Be careful with this. There's plenty of degrees that cost a lot of money and time and won't increase your income. But maybe getting an MBA or something that allows you to move into more leadership positions that might pay more would be an example of a degree that could increase your income.

Another method is to go cash only. Imagine if you didn't have to deal with insurance. A concierge practice or some sort of doctor's patient care or cash only practice where you cut the insurance person out. You might be able to give your patients a better deal and make more money yourself. That's kind of a win-win situation. Win-win-lose. Lose for the insurance companies I guess, but I don't feel too badly about that.

Here's another one. Geographic arbitrage. Move from a low income high cost of living high tax area to a high income, low cost of living low tax area. Yes, it means you might not be able to live in the Bay Area anymore, but you're going to increase your income almost surely by leaving.

How about increasing ancillary services? Offering labs or X-rays or meds or whatever is legally allowed in your practice and ethical. It is a great way to increase your income. It's a little bit like owning the surgical center that you operate in. You're not only being paid to do the surgery, you're being paid the facility fee as well.

One last one is taking surveys. Super low commitment. We've got a link. Go to whitecoatinvestor.com/mdsurveys. We've got a number of companies that we've partnered with that want your opinion and they'll pay you for it. And you can do this while you're sitting on the train going into work or while you're sitting there vegging and watching little TV at night or whatever. You can actually get paid for that time. One of our columnists made as much as $30,000 a year just taking these surveys. It's a good option to consider.

All right. Lots of ways you can boost your income. I hope that's helpful to you. It's just easier to save more money and it's easier to pay off debt and it's easier to build wealth when your income is higher. You got to be careful, you don't want to burn out. Life isn't all about making more money. Life isn't all about your finances, but there are a lot of seasons of our lives where having additional income can be very helpful.

 

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We'll see you next time on the Milestones to Millionaire podcast.

 

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.