Our main topic today is budgeting. Budgeting is simply a plan of what your money needs to do. It helps align your spending with what you value so you can achieve your financial goals. Despite what it might feel like, budgeting actually is not restrictive but gives you freedom to spend the way you want without stress and without guilt. We talk about different types of budgets and who those budgets might work for. Disha provides insight on different budgeting apps and products, and we talk about why budgeting is important and how it is not just for beginners in the financial world. We also dive into some questions from our listeners about taxes, spending, and investing.

 

Budgeting Gives You Freedom  

Budgeting is so important for a vast number of physicians that want to be financially successful. This is like step 1 for so many people. The truth about budgeting is that the hardest part is getting started. It's hard to start a budget. Keeping it going's not that hard, but starting it is hard. We're going to talk about a lot of different ways to budget today, but the truth is that any budget is better than no budget. “Do something” is the takeaway message from this podcast. Let's talk about some of the “somethings” that they can do. Do you want to talk a little bit about that?

“I feel like budgeting gets a really bad rap in the financial field. Everyone wants to tell you that you can get ahead without budgeting, but the truth of the matter is that 93% of millionaires have a budget. It doesn't have to look like everyone else's budget. There are different ways to budget. But the big thing is that when you look at the number in your bank account, for example, if you just log in and look at the number today, that tells you what you have today. But it doesn't tell you what your money needs to do. A budget is simply a plan of what your money needs to do. It helps align your spending with what you value and helps you achieve your goals. It's a very practical way of achieving your goals. It's a tool in your closet of how to get the most out of your money and achieve all of your financial goals. So why would you not use it?

I love budgeting, because it gives me freedom. It gives me freedom to spend without guilt, because I am so cheap. I would not spend otherwise. Giving me a budget helps me say, “I got this. There's enough money there to meet our financial goals. And here's how much you can spend on yourself to have fun and enjoy life.” It gives me that freedom to spend without guilt. It actually makes me feel wealthy and takes me out of this scarcity mindset that I tend to get into because I'm an immigrant. It helps me get out of that, gives me a raise by decreasing my unintentional spending, and then gives me a plan going forward. The goal of a budget should be to pay for all your needs, pay for most of your wants. Then, of course, meet your savings goals and your investing goals. Jim, I'm on my high horse. Do you mind if I just go into the types of budgets that I love?”

More information here:

Doctors Need to Budget Too! 

Frugal Living with The Frugal Physician

 

Different Types of Budgets

Let's talk about the different types of budgets. You tell them what kind you use, as well.

“When people think about budgeting, they generally think about a line item or a zero-based budget. That's the most commonly known type of budget. That's what I do, where I list out all of our spending in an Excel file, and my husband and I go through line item by line item, each single spending category, and we put all our spending in there manually. That's a line-item budget. A zero-based budget is a kind of similar thing where you're giving each dollar a job. You make sure you account for every dollar that's coming into your household. You account for what it's going to have to do for you that entire month. There's also an older way of budgeting called the envelope budget, where you put the cash that you have into the different spending categories manually in an envelope and carry it around with you. That's somewhat hard to do these days because nobody carries cash anymore. Plus, you don't get any credit card points, which I'm a big fan of.

Another way to budget when you want to track what you're doing, but you don't want to be tracking it every single month or day is to do a proportional budget. That's where you basically sit down every once in a while, every quarter or so, and make sure that your spending is aligning with a proportion that you have determined. Most of the time it's 50%. Fifty percent of your money goes toward your needs like your utilities, your mortgage, your car payment, your student loan payment, the stuff that you have to pay for. Thirty percent goes toward your wants like shopping, restaurants, massages, all the good stuff. Then, 20% goes toward savings—50/30/20 is the proportion that you want your spending to end up in. Every once in a while, you can do a kind of alignment check and make sure that you are spending that way.

The least hands-on way to budget and a more automatic way for people that have plenty of income that just need to make sure that they meet their goals is pay yourself first or a backward budget. Basically, all you do here is you schedule your payments. You schedule your savings goals. Go ahead and schedule those withdrawals straight out of your checking account into your brokerage account and into your savings account at the beginning of the month so all of that is automated. You've saved and paid yourself first, and then you spend the rest.

When choosing which one is the right one for me, I think of it from an internal medicine perspective, if you would humor me for a second. Think of it like a heart failure patient. When their situation is super-critical, they're super overloaded, they're on events in the ICU, you need the most amount of information then in order to turn their state around. You need really strict eyes and nose. This is where you need the most amount of information to turn their critical state around. In that case, a line item or a zero-based budget is for someone whose money situation is really critical and could help them turn it around. You need the most amount of information. Where am I spending? Where do I need to cut back? Then, as your money situation gets more and more stable, you graduate to the floor, you graduate to going out to the bars again on a slight fluid restriction. You can become less and less strict about how much you're actually tracking what you're spending. You go toward a proportional budget or pay yourself first budget. Your budget can grow with you.”

I think that's good advice. In a lot of ways, it's the whole training wheels analogy. In a lot of ways, a budget is training wheels. The whole point of a budget is to spend less than you earn. You can carve out this portion of your earnings, a certain portion of your earnings, and use that to build wealth. Once you figure out how to not spend everything you earn, you can really free up the rules around your budget and make it a little bit less work for yourself while still having it fulfill its purpose of you spending less than you're earning. Once you get to a point where you are not anywhere close to spending everything you're earning—you're well on track to meeting your goals—you might need the opposite of a budget. Something that forces you to spend, almost a spending budget that says you have to spend this much every month. I need to put my parents on that budget. They're going to end up leaving us way too much of an inheritance just because I can't get them to spend their money.

A lot of us simply get to the point where we need to keep track of what we're spending so we add it up once a month. We make sure we're not the victims of fraud. We go through all the lines on our credit card statement or our bank account or whatever. But the truth is we're not anywhere close to spending what we're earning. I call that the tracking spending budget and it literally has one category: spending. Everything goes in that category and then we have the big categories like taxes and charity and how much we're investing, those sorts of things. That's basically what our budget looks like now. But it was not that many years ago when we had a zero-based budget, and that included allowances for each of us, which I think is a great addition to a budget. That prevents a lot of budget-related fights is if there's some certain amount of money that you can spend without having to be accountable to your partner for it. What do you think are the best ways to deal with the fact that budgeting is often not a single-player game?

“In my household we make sure we sit down and budget together. My husband and I have a meeting at the end of the month where we sit down on our opposite computers and just go through the same Google doc together. Then we talk it through. If it's a fun fund category, I don't get to have any say in it. That's his fun fund. If he wants to save that for the next month, that's fine, too. Most of the time we end up not spending our fun funds, but it's really nice knowing that it's there because it just gives you that little bit of like, ‘OK, please enjoy yourself. You have permission because you have met your goals.' And doing it together really helps us do that.”

More information here: 

The Romantic Side of Budgeting

 

Budgeting Apps and Software

Take us through some of the apps. What's some of the software that's out there that can help us be better at budgeting?

“Josh and I do the Excel sheet, because he's a project manager and that's what he speaks. That works for him. So that's great. But there are actually lots of apps out there that will help you do this in a more automated fashion. Several of them are paid. The more sophisticated ones are paid like YNAB, Simplifi by Quicken, EveryDollar. YNAB is my favorite. It stands for You Need a Budget. It helps you craft a zero-based budget, where it brings in your income. You can link your credit cards into it. The thing that complicates this in the beginning is you need to go in and actually qualify all of your spending and put it into a category. The app learns after a while, but just like any other type of budget, this isn't going to be something that's going to be super quick. There's a learning curve to it. It takes about three months to get really good at any type of budget. YNAB is one where you're going to have to invest some time upfront and watch the videos and learn how to work the software. Another good option is Mint. It actually brings in everything automatically as long as you link it. While this is free, they do bundle your data and may sell a bundled version of your data. There's a lot of pitching going on in any free product. Same thing with Personal Capital, which is also free.

With Personal Capital, once you reach a certain net worth of I believe $200,000, they start calling you to try to sell you their advising services. We were aiming for that net worth when we were starting out so we felt accomplished when we got that Personal Capital call. Personal Capital will pull in your data and it does help you budget and it does help you balance out your portfolios and look at your asset allocations and gives you automated advice through that, as well.

Another option is EveryDollar. That is the Dave Ramsey version of the app to budget. Again, it's a zero-based budget. It's a little bit less sophisticated when it comes to credit cards since Dave kind of tends to preach against credit cards in general. The credit card payments in it get lost in that app. YNAB, I think, tracks that a little bit better. EveryDollar is a little bit more intuitive to deal with, interface-wise. So, it might work for some. They also have some free videos that you can watch about budgeting and a trial period so you can always try it out. Simplifi is a little bit cheaper. I think it's $4 vs. around $10-$11 for YNAB and EveryDollar per month.

You can try an app called Emma. It is a smaller app that I think is good. It goes through your spending and it looks at all your subscriptions and it brings it up for you to see and decide whether this is something you want to continue to subscribe to or not. In this day and age, that's a very easy way to start losing money out of your account. Then, finally, Excel. Excel's not an app, but it will definitely help you devise a budget. Those are the ones that I know of, Jim.”

Excel's what we've been using for years and years and years. You can do this with paper and pencil if you want. It's not complicated. It's only third-grade math at most. It's not like you need a super powerful thing. You need what you're going to use. Whatever you're going to use is what's going to work for you. If you want to learn more about YNAB, on podcast 167 we had Jesse Mecham on. He's the CEO of YNAB. I've known him for many years. The company's located here, not far from WCI headquarters. If you want to hear more about where that app came from and how they run their business, you can go listen to that.

Let's wrap this up and go into the first question, which I think is actually related to budgeting.

More information here:

You Need a Budget – Podcast #167

 

How to Prepare for Income Changes That Are Out of Your Control

“Hi Jim, this is David from the Midwest. I'm calling on the topic of how an early-career physician should think about their income over the course of their career, especially as I'm trying to determine what I can reliably spend over the course of my earning time. I'm in a high-paying specialty and above the median for that specialty, as well. I'm just wondering how you think that an early-career physician should expect their income to be over the course of their career. Do you think we should expect to go up, down, relatively stay the same, keep up with inflation? Have you become aware of certain specialties that are vulnerable to significant income decline over the course of their career? For me specifically, I'm an oncologist. A lot of my reimbursement comes through high reimbursing chemotherapies, for example. What happens if, all of a sudden, the government decides that chemotherapy is only going to reimburse half? How do you protect yourself, or how do you plan for the potentials in income variability over your career? Thanks.”

Do you want to take a shot at this one, Disha?

“Cost of living adjustments are generally not built into a physician contract. But having noticed what my salary has done for the last few years, every time I get a new contract, it's certainly higher. The median pay for doctors is generally trending up. However, I wouldn't count on it. I'm a firm believer in living below your means, and I would definitely learn how to live within the means that you have now at this attending salary, the first attending salary that you have, and then use the rest as just extra gravy to help you fuel and meet your goals.”

I think this is highly variable. It varies a lot by type of job. It varies a lot by specialty. For example, in emergency medicine, if you're a partner, you start out relatively low pay on a pre-partnership track, and then you make partner after two or three years. Once you make partner, you are basically at peak earnings. That's it. That's as much as you're ever going to make. Because chances are you're never going to work more shifts and you're never going to work more undesirable shifts (i.e. night shifts that pay the most) than you are right then in your career. For most emergency docs, at least on an inflation-adjusted basis, you should probably plan on earning less and less throughout your career vs. what you're making within a couple of years of getting out of training.

Now, that's not necessarily the case for somebody else that's building a practice. If you're building a practice—you're building a rheumatology practice, for instance—and you just go out into private practice, it may be really slow going in the beginning. As you build up your panel of patients, your income goes up. If you're on a Doctors for Patient Care, like some sort of concierge practice, as you build that practice, your income is going to get higher. You have to adjust this to how you're doing it. If you're just an employee, like roughly 70% of docs now, then you can kind of expect to be able to negotiate raises that at least keep up with inflation as you go along.

But there are lots of risks in every field. It wasn't that long ago that radiologists, as well as cardiologists, both took significant cuts. What was it from? It was just from the reimbursement for something they did a lot in their specialty being cut. It got cut by Medicare and then ended up being cut by the private insurance companies. All of a sudden, there was just less money there to pay them. If they were in any sort of private practice at all, it meant they were being paid less. Even if they were an employee, it meant they were generating less and viewed as less valuable to the organization. Something like that can certainly happen to your specialty.

Now, you bring up oncology specifically where a lot of the income is from the drugs. There's serious risk there for you to end up making less money down the road. It's no guarantee, of course. What can you do about it? Well, not much. You make as much as you can, as is reasonable. You negotiate as best you can. You try to run your practice as efficiently as you can, but some of those forces are out of your control. There's not really any point to worrying about them. As far as your personal budget goes, you try to make hay while the sun is shining and get your financial ducks in a row. In case something does happen to it, you can adjust. Disha, what is it like in internal medicine, do you think? In general, should people expect to be paid more each year throughout their career? Or do you think it decreases because people work less or take less call? What do you think the usual flow is?

“It's difficult to get a raise where you are currently working unless you go from something like pre-partner track to partner track, or your RVU earnings go up just because you're working more and seeing more patients. Generally, I have found it's easiest to get a raise when you change jobs. Every time I change jobs, I definitely get a higher offer. But it's very difficult to negotiate that from an employee perspective when you're not changing positions.”

I know this is a tough question, but you do the best you can.

More information here:

How Much Money Do Doctors Make a Year? Doctor Salary by Specialty

 

Taxes on Taxable Accounts

“Hi, Dr. Dahle. I have a question that's probably kind of dumb, but if you'll indulge me regarding taxable accounts: how often and when are we actually taxed? For example, if you have 500 shares of VTI in a Vanguard account, are you taxed capital gains only when you withdraw it? Are you taxed annually? Are you taxed on shares that are sold and bought within the ETF? So, quarterly? I'm trying to understand, but it seems to me that you'll probably have to pay some capital gains periodically, even if you don't sell the shares. Do I understand that correctly? Or can I buy a bunch of shares of an ETF, leave it there for years and years and I only pay when I sell it? I'm sort of confused about that. If you could dumb it down for me, I would really appreciate it. Thanks so much.”

I like this question a lot. It's important to start, however, from the perspective that this is not a bank account. It's not about withdrawing money from the account. Within this account, you own stuff. When that stuff does something or when you do something to that stuff in that account, taxes generally result. Disha, do you want to run us through the various taxes that people pay on investments?

“We're talking about a brokerage account. In a brokerage account, you pay taxes in several different ways. First time, you might trigger taxes as capital gains. So that's a difference between the sale price and the cost basis or what you paid for it. If you sell your share or your stock or your bond within a year of buying it, that's subject to short-term capital gains. That is taxed at your ordinary income rate, all the way up to 37%. We try to avoid that as much as possible.

Long-term capital gains taxes are a lot more favorable to you. If you sell it after a year from buying the equity, then your taxes are more favorable, 15% usually at most. There's an exception if you earn less than $80,000 married, then you would be at 0% capital gains tax. Or if you earn more than about $500,000 married, then you would pay 20%. Again, that's usually much less than your ordinary income tax. Long-term capital gains tax is kind of what we aim for if we have to take the equity out or sell it at some point.

Another point you might get taxes is when your stock pays out dividends. Dividends are when there are payments made from the business to its shareholders, shareholders that have invested in it. This happens periodically. Generally, in most index funds you have qualified dividends. These are dividends that have gotten permission from the IRS to be taxed at long-term rates—the more favorable rates. Qualified dividends are preferable. Ordinary dividends are taxed at short term or your ordinary income tax rate. Another time you might get taxes is when your money earns interest. Interest in any account—savings or money market income—is taxed at your ordinary income. Finally, if you own mutual funds that are actively managed, then whenever those active managers do trades and sell something, those capital gains from that, the sale of the equity in that fund, are passed on to the investors. So, that's something that you need to know if you own mutual funds.”

You have to be careful about that. In a lot of ways, mutual funds can burn you. You can actually lose money in a mutual fund and have them send you capital gains that you have to pay taxes on. The more actively managed the mutual fund, the more you do not want it in a taxable account. The other thing to keep in mind, if you're a relatively high earner—more than $200,000 single, more than $250,000 married—you also have to pay Obamacare taxes on your investments. That's an additional tax that you have to pay off at around 3.8%. You have to pay on every capital gain and every qualified dividend, etc.

Here's another pearl. If you are into tax loss harvesting, which is trying to get tax losses to use to offset your capital gains, be advised that if you do not hold an investment for at least 60 days around the time a dividend is paid, that dividend becomes non-qualified and you pay ordinary income tax rates on it rather than the lower qualified dividend rate on it. I've gotten burned on that before. You have to be a little bit careful with that when you're doing tax-loss harvesting, especially. One other thing. She asked when do you actually pay these taxes? Now, our tax system, our federal tax system anyway, and many state tax systems are pay as you go. You're supposed to pay as you go along. If you realize a big, huge capital gain in February, you're supposed to pay that in the first quarter of the year.

Now, a lot of people are not having big, huge capital gains, and they can just cover all the taxes they owe by having money withheld from their paychecks. But if you are having to make quarterly estimated tax payments and you make a lot more money early in the year, you're supposed to pay taxes on that money when it comes in. So, you have to be careful about that. You may end up getting some tax penalties if you don't do that. But for most people for relatively small capital gains, that's not a big deal. You can just settle it up basically the next April, when your tax return goes in.

More information here:

How Are Investments Taxed

 

Vanguard Retirement Funds Debacle 

“Hey, Dr. Dahle. Long-time follower, and thank you for all that you do. I just had a question about the recent situation that happened with Vanguard and the target date retirement funds. Apparently, they lowered the minimum requirement from $100 million down to $5 million in their institutional share class of this target date retirement fund. This eventually triggered a bunch of capital gains distributions unknowingly to a lot of retail investors in this same fund in their taxable brokerage account.

My question is what would make Vanguard not do something like this in, say, just a regular total US stock market fund? Could they lower their minimum requirements for the institutional share of a total US market fund, causing the same type of capital gain for their retail fund? And would this make more sense now for everyone to use ETFs in their taxable brokerage account? Thank you for your answer, and I look forward to hearing from you.”

Yes, there's some protection here when you are in a fund that provides an ETF share class of the fund. Because what they can do is they can take those appreciated shares and they can distribute them to these ETF creators out there, and they can pass on these appreciated shares to them rather than basically dumping that sort of a thing on the small investors. There is some risk of that happening with any fund. If they changed and allowed those of us that have, let's say, $500,000 in the fund to now access the institutional level fund and save two basis points a year, many of us who owned that share in a retirement account would sell our shares and go buy the now lower expense ratio version of the fund.

Now, nobody's going to do that in their taxable account, because they're going to realize those gains themselves. But if you're working in a retirement account, that would certainly be something that would be tempting to do, and those who are left behind in the fund, who are in a taxable account, could get hosed by it. That absolutely is a risk. I think it's lower with the typical Vanguard index funds that we all tend to use, especially if they have an ETF share class, than it was with the target retirement funds, which I think are pretty much designed to be put into 401(k)s. They're designed to be inside retirement accounts. I think the risk there was a lot higher, and that's why people have been saying don't own these things in a taxable account for many, many years. Now you see yet another reason why that's maybe not such a great idea.

By the way, as an update on that, there is a class-action lawsuit going. If you were affected by this, there's an attorney out there. If you go to the blog post I had on this, I think it was the first week of February. There are links there if you're interested in getting involved in that. I have no idea if they're going to win. I've heard from a lot of lawyers that say there really is no case here, and that may be the case. But whether there is or isn't, those of us who are owners of Vanguard by owning their funds are going to be paying to defend against that lawsuit, which is kind of a bummer for all of us. But if they would just not do things like that, that they really didn't have to do, they wouldn't have this problem.

Jason gave a good explanation of what happened, but basically, Vanguard said those of you who want into these lower-cost funds can get in there now with a lower minimum investment. A bunch of 401(k)s and pensions basically said, “Sure, we'll take the lower expense ratio.” When they did that, they sold their shares. Then, what did Vanguard have to do? They had to sell a bunch of shares of stock that are in that fund. What happens with the capital gains from those shares? They've got to be passed on to the remaining investors. The remaining investors, which in this case turned out to be the small investors, were left holding the bag, which was a dirty trick, I thought, from Vanguard.

More information here: 

Vanguard Capital Gains Distributions 2021 – Lessons Learned 

 

Move Bond Funds into Money Market Funds? 

“Jim, this is David, a retired ER doc from California. Two questions. No. 1, what are your thoughts about the QQQ or the Invesco 100, which invests in the Nasdaq 100 as a way to get a piece of the exponential technology sector?

No. 2, with the Fed likely to increase interest rates several times this year, what are your thoughts about switching your bond funds into money market funds and then harvesting the tax losses, at least in your personal accounts? Thank you very much.”

Disha, why don't you answer this.

“The QQQ tracks the Nasdaq 100 index. Basically, this is a large-cap tech company index fund. You have Apple, Amazon, Meta, so you get a lot of high sector risk because you're basically in one sector and no small-cap. You don't have that much growth potential. Expense ratio is 0.2%. The fact that these are all large tech companies, you have a really high bear market risk because these 10 companies tend to have a lot of swing and variation depending on the market. Would I go for it now? Probably not. I try not to forecast the market, but it's looking pretty bearish recently. I don't know. What do you think, Jim?”

I don't like this investment for several reasons. One, it's a sector fund. It's a sector fund masquerading as a broad index fund. This is not a broad index fund. The stuff that trades on the Nasdaq tends to be very, very tech-heavy. This is a tech fund. If your written investing plan calls for you to own a tech fund, maybe have 5% of your portfolio in a tech fund or something, then sure, this is something maybe you ought to consider to fill that allocation. It wouldn't be my first choice even for a tech fund though. I think Vanguard's got a tech fund that I like better than QQQ. You shouldn't compare this to a total stock market index fund, or even an S&P 500 index fund. These are not the same things. The 500 index fund invests all across the broad market. The Nasdaq 100 does not.

The other thing to keep in mind is you already own an awful lot of techs these days. Have you looked at the top 10 holdings of a broad index fund, like a total stock market index fund? Guess what it is? It's Apple, Amazon, and Meta. This is what it is. You are kind of doubling down your bets on these big, large-growth tech companies. I’m not a huge fan. I don't tilt my portfolio toward tech. If you want to, maybe consider this fund for a small percentage of your portfolio, but this isn't a favorite fund of mine; just because people have heard of the Nasdaq is why they end up investing in it. There are lots of ads for QQQ out there. But this is not something I invest in or ever plan to invest in. I think it's a little bit more of an investment designed to be sold, really.

The other question I find more interesting and, unfortunately, it requires a crystal ball to answer. Should you sell your bonds and go to cash? Well, do you know how bonds are going to perform compared to cash over the next year? Now, the assumption is, because the Fed has said they're cutting interest rates, that cash must outperform bonds. The market already knows the Fed has said it's going to cut interest rates. So, there is no guarantee that money market funds are going to outperform bonds. They may, or they may not. What I do in these situations is I try to set up my investing plan so I don't have to have a clear crystal ball in order to be successful. We have 60% stocks, 20% bonds, 20% real estate. That's our investing plan. If I think bonds are going to do poorly, I don't switch all the bonds to cash. And when I think bonds are going to do great, I don't switch all my stocks to bonds. I think that's a recipe for chasing your tail, incurring a lot more capital gains taxes that we talked about earlier. I just don't think it's a great idea. Now, if I had to sit here and predict which one of those is going to win this year, I'd probably flip a coin because I'm really not sure if bonds will outperform money market funds or not. Rates are supposed to go up and they probably will go up, but really the market ought to be pricing an awful lot of that information into the price of its investments already.

 

TSP Money When You Leave the Military 

“This is Aaron. I am a military orthopedic surgeon who will be separating from the military this summer. I took advantage of the blended retirement system and have been investing in a Roth IRA, and I was hoping to get your opinion on what to do with those funds after I separate from the military. Should I keep them with TSP? Should I roll them over? Any guidance would be greatly appreciated. Thanks for your time.”

Your real question here is what do you do with your TSP money when you leave the military. Obviously, with the new BRS system, you get to leave with something you didn't used to get. When I was in, you didn't get a match on your 401(k), your military 401(k), aka the thrift savings plan or TSP. You just got the money you put in there. That's all I left the military with was the money I put in my TSP. You had to stay 20 years to get anything else, to actually get a pension from the military. Now, you get that match. You have to take it with you if you leave early, but it's basically just like the money you put in the TSP. The question is, do you keep the TSP or not? When I left the military, I kept the TSP for a couple of reasons. One, at the time, it was the low-cost leader. It was the lowest expense ratio 401(k) out there. You have all these mutual funds at one or two basis points.

The other thing you have was you got the special G fund. The G fund gives you basically bond returns at money market risk. It is kind of a cool fund, and I've used it as a significant hold in my portfolio ever since. The downside is I've had to manage another retirement account throughout my career. So, it makes my portfolio a little more complex. You can leave it there for now. If you decide after a while, it's not worth it to you to have the G fund and you look around and you're like, “Man, Schwab and Fidelity and Vanguard, they all have stuff that's just as cheap as the TSP these days. Maybe I'll just roll this into my Roth IRA or I'll roll into my current 401(k)” or whatever, then I think that's fine to do. But there's no rush to get it out of the TSP. I left the military in 2010; my money's still in the TSP. I've actually done several rollovers into the TSP. I wouldn't feel like you need to get the money out of there.

One reason you might definitely want to take it out is if you have a bunch of after-tax money in there that you put in while you're deployed. It makes it a lot easier to roll that into a Roth IRA and no longer have after-tax money earning taxable income on it. When you take that after-tax money out, all the earnings come out as tax-deferred money, and you have to pay taxes on them. But if you get that into a true Roth account, you don't have that problem. That might be one reason to roll it over into a Roth IRA, but I wouldn't feel like there's some huge rush when you get out of the military to do something with your TSP. You can take your time and decide in a few months what you want to do.

More information here: 

What You Need to Know About the Thrift Savings Plan (TSP)

 

457s

“Hi, Dr. Dahle, this is Nick from North Carolina. I appreciate everything that you do. My wife and I are both physicians from the same hospital system and we both max out our 403 and 457 retirement accounts. Recently with the spike of Omicron, they have requested that we delay spending our CME money and it was extended, which didn't make sense because they're starting up elective procedures.

At what point would you jump ship on the 457? Or is there anybody you would talk to or any certain things you would look for where you would not think that the hospital is stable? They've all said in the emails that we're financially stable, but they just ended a merger, too, which didn't make financial sense if they were stable. So, I appreciate your help on this. Thank you.”

Disha, what do you think?

“That's all sounding pretty shady. First of all, I'm assuming this is not a governmental 457, that this is a private 457. If it was governmental, you might be able to roll it over to the next employer, but since it is not, which is what I'm assuming, I would definitely start looking into the withdrawal options that you actually have with this 457. Since you are both working at the hospital, you're taking more than the usual risk. I would start asking some questions and just knowing what my options are at this point.”

My usual answer on these is that I've never met a doc who lost 457 money. If there is somebody out there and you've lost 457 money because the hospital went under, shoot me an email [email protected]. I'd like to hear about it. I have yet to hear about any doctor ever losing their 457 money, but I agree. This sounds really bad. When they're telling you not to spend your CME money—that's part of your salary, really—that's very sketchy. Maybe they're not doing very well. I might dial back what's going in the 457, because remember, there are three things that matter with the 457. This is non-governmental, of course. One is the investments and fees. If they're reasonable, great. Two is your distribution options. You don't want to have to take it all out in the year you leave the employer, that's a bad distribution option. If you can take it over 10 years or delay it until you're 65, that's fine. The last one is the hospital stability. Remember, it's not your money. This is deferred compensation. It's still the hospital's money, and it's subject to their creditors. If they go bankrupt, you could theoretically lose your 457 money. And boy, in what you're describing, I guess I would worry about that. That doesn't sound very good at all.

 

TurboTax 

“My question concerns Form 1116 Schedule B for tax carryover reconciliations schedule, and TurboTax's lack of support for e-filing returns with this form. I'm a long-time user of TurboTax and e-filing returns. I completed my 2021 tax returns, and I'm ready to file. However, TurboTax says it is not supporting e-filing of Form 1116 Schedule B foreign tax carryover schedule. My taxes are rather simple. Yet as part of my asset allocation, I own funds that generate four dividends in income. Foreign taxes are collected at the mutual fund/ETF level. Thus, I need to file Form 1116 and Form 1116 Schedule B. I suspect that many of your listeners who follow an asset allocation strategy that includes international funds may also run into this situation.

Question. Since TurboTax has taken the position that it's not supporting e-filing of 2021 tax returns that include Form 1116 Schedule B, I'm in need of a tax software package that will allow me to e-file. Please recommend an alternative to TurboTax.”

Disha did some research on this. I don't think either one of us knew the answer to this question going into it. But share what you found, Disha.

“I went into the TurboTax Q&A, and it seems that the problem has been fixed. It seemed to be a software update issue, but I'm looking at a thread back and forth between the TurboTax people and someone else asking the same question. It seems that as of yesterday, the IRS accepted this person's return and the Form 1116 Schedule B did go through. So, that should be fixed for you now. I don't work for TurboTax, but I'm just looking online.”

There's a little delay when people leave stuff on the Speak Pipe and we get it on the podcast. So hopefully, this has been resolved at this point. But boy, that was one of the more challenging questions I think we've gotten over the years, for sure.

More information here: 

Best Tax Software

 

The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there is always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth-building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses.

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

 

Financial Educator Award

It is time to nominate your favorite financial educator. In order to qualify, they have to be practicing docs or dentists. They can't be bloggers or financial advisors. We're talking practicing docs or dentists who are doing this for their colleagues, for their trainees, for students. We want to recognize what they're doing to help others be financially literate. You can submit your nominations until May 2, 2022, at whitecoatinvestor.com/educator.

 

Quote of the Day 

These quotes come from Jesse Mecham, the founder of You Need a Budget. He said

“Budgeting is not dieting, it's planning.”

You have to realize this is not something that is hurting your ability to spend. It's improving your ability to spend. The second quote is,

“Budgeting is not spending less, it's spending guiltless.”

 

Milestones to Millionaire Podcast

#61 – Anesthesiologist Gets PSLF and Becomes a Millionaire

This anesthesiologist shares his experience finally getting PSLF after getting rejected multiple times and having to file a complaint with the Consumer Financial Protection Bureau.


Sponsor: WCI Monthly Newsletter

 

Full Transcript

Transcription – WCI – 258
Intro:
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 258 – How to set up a budget, investing, spending, and tax Q&As.

Dr. Jim Dahle:
Today's episode is hosted by me, Jim Dahle. I'm an emergency physician and the founder of the White Coat Investor, as well as my co-host, Disha Spath. An internist who is also one of our WCI ambassadors. Welcome back to the podcast, Disha.

Dr. Disha Spath:
Thanks so much for having me.

Dr. Jim Dahle:

The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there is always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth-building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses.

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

Dr. Jim Dahle:
Here's the deal. If you like this podcast, this podcast is totally driven by what you are interested in. The blog is much more so what I'm interested in writing about, but this is what you're interested in hearing about.

Dr. Jim Dahle:
A lot of this podcast is driven by your questions. And if you don't know where to leave your questions, go to speakpipe.com/whitecoatinvestor, and you can leave your questions. You can record up to a minute and a half. Don't feel like you got to fill the whole minute and a half. Sometimes we even cut them down if you get too blabby, but you can leave a question up to a minute and a half and we will answer them on this podcast. That's a great way for you to participate. And the truth is if you have a question almost surely, dozens of other White Coat Investors also have the question.

Dr. Jim Dahle:
All right. Disha, how have you been? I haven't talked to you in several weeks. We've been out gallivanting around on this side, but what have you been up to on the right side of the country?

Dr. Disha Spath:
Yeah, I went over to Grand Cayman Island and spoke at a women physician conference there. That was amazing. Then I virtually spoke at a women in toxicology conference. And then in the middle there, I did the doctoring thing full-time, primary care hospitalist and everywhere in between. How about you?

Dr. Jim Dahle:
Awesome. Well, lots of fun travelling, actually. I wedged a bunch of my shifts for this month into the very first week of the month. And then went to Canada. I had a fun ski trip to Canada. We've got snow in Utah and nearly as much as Canada. And so that's always a fun trip.

Dr. Jim Dahle:
People out there say they want to hear more about our trips and vacations, and I'm like, okay, if you want to, but this was a three-day helli skiing trip. This would fall in the spending category of how to spend your money. And it was good fun. The weather got consistently worse throughout the trip, which meant we couldn't fly as high and go as high in the mountains. But the snow got consistently better throughout the trip. And so that was a good time.

Dr. Jim Dahle:
But most recently, I just came back from San Francisco. It's Monday, the 21st now. I just came in late Saturday night from San Francisco, took my son out there this time to the CSRO conference. This is the Coalition for State Rheumatology Organizations. They've had me come out and speak, I don't know, six or seven years in a row to their fellows.

Dr. Jim Dahle:
But the interesting thing about this trip is afterward, a lot of the fellows came up and said, “Oh yeah, I've been listening to you for years. Oh yeah, I've been following the White Coat Investor for years. I read your book when I was a medical student.” And I'm like, “Why am I coming to this conference? You guys already all know about this stuff.” But it was fun to hear that they'd already heard about the White Coat Investor.

Dr. Disha Spath:
That's amazing.

Dr. Jim Dahle:
Yeah. All right. Let's talk about budgeting, it’s our main subject today. Budgeting, a subject that's near and dear to your heart.

Dr. Disha Spath:
Yes.

Dr. Jim Dahle:
But important for a vast number of physicians that want to be financially successful. This is like step one for so many people. The truth about budgeting is that the hardest part is getting started. It's hard to start a budget, keeping it going's not that hard, but starting it is hard. And we're going to talk about a lot of different ways to budget today, but the truth is that any budget is better than no budget. So do something is the takeaway message I want you to take from this. But let's talk about some of the “somethings” that they can do. Do you want to talk a little bit about that?

Dr. Disha Spath:
Yeah, Jim. I feel like budgeting gets a really bad rap in the financial field. Everyone wants to tell you that you can get ahead without budgeting, but the truth of the matter is that 93% of millionaires have a budget, and it doesn't have to look like everyone else's budget. There are different ways to budget.

Dr. Disha Spath:
But the big thing is that when you look at the number in your bank account, for example, if you just log in and look at the number today, that tells you what you have today, but it doesn't tell you what your money needs to do.

Dr. Disha Spath:
A budget is simply a plan of what your money needs to do. It helps align your spending with what you value and helps you achieve your goals. It's a very practical way of achieving your goals. It's a tool in your closet of how to get the most out of your money and achieve all of your financial goals. So why would you not use it?

Dr. Jim Dahle:
Exactly. I think that's a totally good point.

Dr. Disha Spath:
Yeah. My thing is, I love budgeting because it gives me freedom. It gives me freedom to spend without guilt because I am so cheap, I would not spend otherwise. Giving me a budget, it's like, okay, I got this. There's enough money there to meet our financial goals. And here's how much you can do to spend on yourself a little bit, have fun, enjoy life.

Dr. Disha Spath:
And so, it gives me that freedom to spend without guilt. It actually makes me feel wealthy and takes me out of this scarcity mindset that I tend to get into because I'm an immigrant. It helps me get out of that, gives me a raise by decreasing my unintentional spending, and then gives me a plan going forward.

Dr. Disha Spath:
The goal of a budget should be to pay for all your needs, pay for most of your wants. And then of course meet your savings goals, and your investing goals. So, Jim, I'm on my high horse. Do you mind if I just go into the types of budgets that I love?

Dr. Jim Dahle:
Yeah. Let's talk about the different types of budgets.

Dr. Disha Spath:
Okay.

Dr. Jim Dahle:
You got to tell them what kind you use as well.

Dr. Disha Spath:
Yeah, absolutely. The different types of budgets. When people think about budgeting, they generally think about a line item or a zero-based budget. That's the most commonly known type of budget. That's what I do, where I list out all of our spending in an Excel file, and my husband and I go through line item by line item, each single spending category and we put all our spending in there manually. That's a line-item budget.

Dr. Disha Spath:
A zero-based budget is a kind of similar thing where you're giving each dollar a job. You make sure you account for every dollar that's coming into your household, your account for what it's going to have to do for you that entire month.

Dr. Disha Spath:
There's also an older way of budgeting called the envelope budget, where you put the cash that you have into the different spending categories manually in an envelope and carry it around with you. That's somewhat hard to do these days because nobody carries cash anymore. So, that's one way.

Dr. Jim Dahle:
Not to mention the mugger problem.

Dr. Disha Spath:
Right. Exactly. And then you don't get any credit card points, which I'm a big fan of. Another way to do it when you want to track what you're doing, but you don't want to be tracking it every single month or day is to do a proportional budget, where you basically sit down every once in a while, every quarter or so, and make sure that you're spending is aligning with a proportion that you have determined.

Dr. Disha Spath:
Most of the time it's 50%. 50% of your money goes towards your needs. Like your utilities, your mortgage, your car payment, your student loan payment, the stuff that you have to pay for. 30% goes towards your wants. Like shopping, restaurants, massages, all the good stuff. And then 20% goes towards savings.

Dr. Disha Spath:
50/30/20 is the proportion that you want your spending to end up in. And every once in a while, you can do a kind of alignment check and make sure that you are spending that way. That's one way to do it.

Dr. Disha Spath:
Another way to do it, and this is the least hands-on way and a more automatic way for people that have plenty of income and just need to make sure that they meet their goals is pay yourself first or a backwards budget.

Dr. Disha Spath:
Basically, all you do here is you schedule your payments, schedule your savings goals, go ahead and schedule those withdrawals straight out of your checking account into your brokerage account, into your savings account at the beginning of the month so that all of that is automated. You've saved and paid yourself first and then you spend the rest.

Dr. Disha Spath:
As in choosing which one is the right one for me, I think of it from an internal medicine perspective, if you would humor me for a second. Think of it like a heart failure patient. When their situation is super-critical, they're super overloaded, they're on events in the ICU, you need the most amount of information then in order to turn their state around. You need really strict eyes and a nose. You might even need a Swan-Ganz. I need a map right now.

Dr. Disha Spath:
This is where you need the most amount of information to turn their critical state around. In that case, a line item or a zero-based budget is for someone whose money situation is really critical and could help them turn it around. You need the most amount of information. Where am I spending? Where do I need to cut back?

Dr. Disha Spath:
And then as your money situation gets more and more stable, you graduate to the floor, you graduate to going out to the bars again on a slight fluid restriction. You can become less and less strict about how much you're actually tracking what you're spending. You go towards a proportional budget or pay yourself first budget. Your budget can grow with you.

Dr. Jim Dahle:
Yeah, I think that's good advice. In a lot of ways, it's the whole training wheels analogy. In a lot of ways, a budget is training wheels. It teaches you the whole point of a budget of course, is to spend less than you earn. You can carve out this portion of your earnings, a certain portion of your earnings and use that to build wealth.

Dr. Jim Dahle:
And once you figure out how to not spend everything you earn, you can really free up the rules around your budget and make it a little bit less work for yourself. But still have it fulfil its purpose of you spending less than you're earning.

Dr. Jim Dahle:
And once you get to a point where you are not anywhere close to spending everything you're earning, you're well on track to meeting your goals, you might need the opposite of a budget. Something that forces you to spend, almost a spending budget that says you got to spend this much every month. I need to put my parents on that budget. They're going to end up leaving us way too much of an inheritance just because I can't get them to spend their money.

Dr. Jim Dahle:
But that's kind of where you may end up. A lot of us simply get to the point where yeah, we kind of need to keep track of what we're spending so we add it up once a month. We make sure we're not the victims of fraud. We go through all the lines on our credit card statement or our bank account or whatever. But the truth is we're not anywhere close to spending what we're earning. And I call that the tracking spending budget and it literally has one category spending and everything goes in that category and then we got the big categories like taxes and charity and how much we're investing, those sorts of things.

Dr. Jim Dahle:
But that's basically what our budget looks like now. But it was not that many years ago when we had a zero-based budget and that included allowances for each of us, which I think is a great addition to a budget, that prevents a lot of budget-related fights is if there's some certain amount of money that you can spend without having being accountable to your partner for. What do you think are the best ways to deal with the fact that budgeting is often not a single-player game?

Dr. Disha Spath:
Yeah. In my household we make sure we sit down and budget together. My husband and I have a meeting at the end of the month where we sit down on our opposite computers and just go through the same Google doc together. And that way, if there's any kind of spending that is like, okay, this is in my fun fund this month, that's where it goes. And we kind of talk it through. If it's a fun fund category, I don't get to have any say in it. That's his fun fund. If he wants to save that for the next month, that's fine too.

Dr. Disha Spath:
Most of the time we end up not spending our fun funds, but it's really nice knowing that it's there because it just gives you that little bit of like, “Okay, please enjoy yourself. You have permission because you have met your goals.” And doing it together really helps us do that.

Dr. Jim Dahle:
Okay. Well, take us through some of the apps. What's some of the software that's out there that can help us be better at budgeting?

Dr. Disha Spath:
Absolutely. Yeah. Josh and I do the Excel sheet because he's a project manager and that's what he speaks. That works for him. So that's great. But there are actually lots of apps out there that will help you do this in a more automated fashion. Several of them are paid. The more sophisticated ones are paid. Like YNAB, Simplifi by Quicken, EveryDollar.

Dr. Disha Spath:
YNAB is my favorite. It stands for You Need a Budget. And it helps you craft a zero-based budget, where it brings in your income. You can link your credit cards into it. But the thing is you need to go in and actually qualify each spending. Each time you spend, you have to qualify it into a category. It learns after a while, but just like any other type of budget, this isn't going to be something that's going to be super quick. There's a learning curve to it. And it takes about three months to get really good at any type of budget. YNAB is one where you're going to have to kind of invest some time upfront to watch the videos and learn how to work the software.

Dr. Disha Spath:
Mint is another one. It actually brings in everything automatically as long as you link it, but you do need to know it is free, but you do need to know that they bundle your data and may sell a bundled version of your data.

Dr. Jim Dahle:
Not to mention, pitch you a lot of other products.

Dr. Disha Spath:
Yeah. There's a lot of pitching going on in any free product. Same thing with Personal Capital.

Dr. Jim Dahle:
You are the product with Mint for sure. You're the product.

Dr. Disha Spath:
Yeah. And Personal Capital, the call that you get, I think is a $200,000 worth of net worth, where once you link your accounts and you reach a certain net worth, they start calling you to try to sell you their advising services, which is a nice goal to get to, to aim for that. We were aiming for that when we were starting out. Like, hey, we got the Personal Capital call. So that one's free as well. And it will pull in your data. It does help you budget and it does help you balance out your portfolios and look at your asset allocations and gives you automated advice through that as well.

Dr. Disha Spath:
There's EveryDollar. That is the Dave Ramsey version of the app to budget. Again, it's a zero-based budget. It's a little bit less sophisticated when it comes to credit cards since Dave kind of tends to preach against credit cards in general. But the credit card payments in it get lost in that app. Where YNAB I think tracks that a little bit better.

Dr. Disha Spath:
But EveryDollar is a little bit more intuitive to deal with, interface-wise. So, it might work for some. They also have some free videos that you can watch about budgeting, and a trial period so you can always try it out. Simplifi is a little bit cheaper. I think it's $4 versus like $10 to $11 of YNAB and EveryDollar per month. And that's by Quicken that works for some people.

Dr. Disha Spath:
And finally, Emma. There are other smaller apps. Emma, I thought was good. It goes through your spending and it looks at all your subscriptions and it brings it up for you to see and decide whether this is something you want to continue to subscribe to or not. In this day and age, that's a very easy way to start losing money out of your account. So that's a good one for that. And then finally, Excel. Excel's not an app, but it will definitely help you devise a budget. Those are the ones that I know of, Jim.

Dr. Jim Dahle:
Yeah, for sure. Excel's what we've been using for years and years and years. You can do this with paper and pencil if you want. It's not complicated. It's only third-grade math at most. It's not like you need a super-powerful thing. You need what you're going to use. Whatever you're going to use is what's going to work for you.

Dr. Jim Dahle:
If you want to learn more about YNAB, podcast 167, we had Jesse Mecham on. He's the CEO of YNAB. I've known him for many years. The company's located here not far from WCI headquarters. And so, if you want to hear more about where that app came from and how they run their business, you can go listen to that.

Dr. Jim Dahle:
I actually have a neighbor who had me help them apply to work at YNAB not long ago. And so, it's a great company. I have a lot of respect for Jesse and what he's doing there. But it's not free. You got to pay them a monthly fee to use it. So, keep that in mind.

Dr. Jim Dahle:
All right. Let's wrap up that and go into the first question, which I think is actually related to budgeting. Let's listen to this question from David, and see what we can help David with.

David:
Hi Jim, this is David from the Midwest. I'm calling on the topic of how an early career physician should think about their income over their course of their career, especially as I'm trying to determine what I can reliably spend over the course of my earning time.

David:
I'm in a high-paying specialty and above the median for that specialty as well. I'm just wondering how you think that an early career physician should expect their income to be over the course of their career. Do you think we should expect to go up, down, relatively stay the same, keep up with inflation? Have you become aware of certain specialties that are vulnerable to significant income decline over the course of their career?

David:
For me specifically, I'm an oncologist. A lot of my reimbursement comes through high reimbursing chemotherapies, for example. What happens if all of a sudden, the government decides that chemotherapy is only going to reimburse half? How do you protect yourself or how do you plan for the potentials in income variability over your career? Thanks.

Dr. Jim Dahle:
All right. Great question, David. Do you want to take a shot at this one, Disha?

Dr. Disha Spath:
Cost of living adjustments are generally not built into a physician contract, but having noticed what my salary has done for the last few years, every time I get a new contract, it's certainly higher. The median pay for doctors is generally trending up.

Dr. Disha Spath:
However, I wouldn't count on it. I'm a firm believer in living below your means, and I would definitely learn how to live within the means that you have now as this attending salary, the first attending salary that you have, and then use the rest as just extra gravy to help you fuel and meet your goals.

Dr. Jim Dahle:
Yeah, I think this is highly variable. It varies a lot by type of job. It varies a lot by specialty. For example, in emergency medicine if you're a partner, you start out relatively low pay on a pre-partnership track, and then you make partner after two or three years. And once you make partner, you are basically at peak earnings. That's it. That's as much as you're ever going to make. Because chances are you're never going to work more shifts and you're never going to work more undesirable shifts, i.e. night shifts that pay the most than you are right then in your career.

Dr. Jim Dahle:
For most emergency docs, at least on an inflation-adjusted basis, you should probably plan on earning less and less throughout your career versus what you're making within a couple of years of getting out of training.

Dr. Jim Dahle:
Now, that's not necessarily the case for somebody else that's building a practice. If you're building a practice, you're building rheumatology practice for instance, and you just go out into private practice, it may be really slow going in the beginning. Maybe an ophthalmology practice, if you're a sole practitioner. And as you build up your panel of patients your income goes up. If you're on a Doctors for Patient Care, like some sort of concierge practice as you build that practice, your income is going to get higher.

Dr. Jim Dahle:
And so, you got to adjust this to how you're doing it. If you're just an employee, like I don't know what it is now, 70% of docs maybe now are employees. Then you can kind of expect to be able to negotiate raises that at least keep up with inflation as you go along.

Dr. Jim Dahle:
But there's lots of risks in every field. It wasn't that long ago that radiologists, as well as cardiologists, both took significant cuts. And what was it from? It was just from the reimbursement for something they did a lot in their specialty being cut. Got cut by Medicare and then ended up being cut by the private insurance companies. And all of a sudden there was just less money there to pay them. If they were in any sort of private practice at all, it meant they were being paid less. Even if they were an employee, it meant they were generating less and viewed as less valuable to the organization. And so maybe paid less. And so, something like that can certainly happen to your specialty.

Dr. Jim Dahle:
Now, you bring up oncology specifically where a lot of the income is from the drugs. And so, there's serious risk there for you to end up making less money down the road. It's no guarantee of course. What can you do about it? Well, not much. You make as much as you can, as is reasonable, you negotiate as best you can. You try to run your practice as efficiently as you can, but some of those forces are out of your control. There's not really any point to worrying about them.

Dr. Jim Dahle:
As far as your personal budget goes, you try to make hay while the sun is shining and get your financial ducks in a row. In case something does happen to it, you can adjust. What's it like in internal medicine, do you think? In general, should people expect to be paid more each year throughout their career? Or do you think it decreases because people work less or take less calls or what do you think the usual flow is?

Dr. Disha Spath:
Yeah, it's difficult to get a raise where you are currently working unless you go from something like pre-partner track to partner track or your RBU. RBU earnings goes up, but just because you're working more and seeing more patients. Generally, I found it's easiest to get a raise when you change jobs. Every time I change jobs, I definitely get a higher offer. But yeah, it's very difficult to negotiate that from an employee perspective when you're not changing positions.

Dr. Jim Dahle:
All right. Thanks for sharing that. I know this is a tough question, but you do the best you can.

Dr. Jim Dahle:
Let's do our quote of the day today. These quotes actually come from Jesse Mecham, the founder of You Need a Budget. The first one is, “Budgeting is not dieting, it's planning.” And I think that's very true. You got to realize this is not something that is hurting your ability to spend, it's improving your ability to spend.

Dr. Jim Dahle:
And the second is that, “Budgeting is not spending less, it's spending guiltless.” I like that quote a lot.

Dr. Jim Dahle:
Our next question is from Diana who's talking about the taxes on taxable accounts and how they work. Let's take a listen to that.

Diana:
Hi, Dr. Dahle. I have a question that's probably kind of dumb, but if you'll indulge me regarding taxable accounts, how often and when are we actually taxed? For example, if you have 500 shares of BTI in a Vanguard account, are you tax capital gains only when you withdraw it? Are you taxed annually? Are you taxed on shares that are sold and bought within the ETF? So, quarterly.

Diana:
I'm trying to understand, but it seems to me that you'll probably have to pay some capital gains periodically, even if you don't sell the shares. Do I understand that correctly? Or can I buy a bunch of shares of an ETF, leave it there for years and years and I only pay when I sell it? I'm sort of confused about that. If you could dumb it down for me, I would really appreciate it. Thanks so much.

Dr. Jim Dahle:
Great question, Diana. I like this question a lot. It's important to start, however, from the perspective that this is not a bank account. It's not about withdrawing money from the account. Within this account, you own stuff. And when that stuff does something, or when you do something to that stuff in that account, taxes generally result. Disha, do you want to run us through the various taxes that people pay on investments?

Dr. Disha Spath:
Okay. We're talking about a brokerage account. In a brokerage account, you pay taxes in several different ways. First time you might trigger taxes as capital gains. So that's a difference between the sale price and the cost basis or what you paid for it.

Dr. Disha Spath:
If you sell your share, or your stock, or your bond, and within a year of buying it, that's subject to short-term capital gains. And that's taxed at your ordinary income. All the way up to 39.6%. We try to avoid that as much as possible.

Dr. Jim Dahle:
Well, 37% these days.

Dr. Disha Spath:
Yeah. Right. And long-term capital gains taxes are a lot more favorable to you. If you sell in after a year from buying the equity, then your taxes are more favorable, 15% usually at most. There's an exception if you earn less than $80,000 married, then you would be at 0% capital gains tax. Or if you earn more than about $500,000 married, then you would pay 20%. Again, that's usually much less than your ordinary income tax. Long-term capital gains tax is kind of what we aim for if we have to take the equity out or sell it at some point.

Dr. Disha Spath:
Another point you might get taxes is when your stock pays out dividends. Dividends are when there are payments made from the business to its shareholders, shareholders that have invested in it. And this happens periodically.

Dr. Disha Spath:
Generally, in most index funds you have qualified dividends. These are dividends that have gotten permission from the IRS to be taxed at long-term rates. The more favorable rates. Qualified dividends are preferable. Ordinary dividends are taxed at short term, or your ordinary income tax rate. Another time you might get taxes is when your money earns interest. Interest in any account, savings, money market income is taxed at your ordinary income.

Dr. Disha Spath:
And finally, if you own mutual funds that are actively managed, then whenever those active managers do trades and sell something, those capital gains from that, the sale of the equity in that fund are passed on to the investors. So that's something that you need to know if you own mutual funds.

Dr. Jim Dahle:
Yeah. You got to be careful about that. In a lot of ways, mutual funds can burn you. You can actually lose money in a mutual fund and have them send you capital gains that you have to pay taxes on. And so, the more actively managed the mutual fund, the more you do not want it in a taxable account because it can really burn you that way.

Dr. Jim Dahle:
The other thing to keep in mind, if you're a relatively high earner, more than $200,000 single, more than $250,000 married, you also got to pay Obamacare taxes on your investments. And so that's an additional tax that you have to pay of, what is it? 3.8%, I think. 3.6%, 3.8%. One of those two, don't quote me on it. But you got to pay on every capital gain every qualified dividend, etc.

Dr. Jim Dahle:
And also, here's another pearl. If you are into tax loss harvesting, which is trying to get tax losses to use to offset your capital gains, be advised that if you do not hold an investment for at least 60 days around the time a dividend is paid, that dividend becomes non-qualified and you pay ordinary income tax rates on it rather than the lower qualified dividend rate on it. I've gotten burned on that before. You got to be a little bit careful with that when you're doing tax-loss harvesting, especially.

Dr. Jim Dahle:
One other thing. She's asking about, when do you actually pay these taxes? Now, our tax system, our federal tax system anyway, and many state tax systems are pay as you go. You're supposed to pay as you go along. If you realize a big, huge capital gain in February, you're supposed to pay that in the first quarter of the year.

Dr. Jim Dahle:
Now, a lot of people are not having big, huge capital gains, and they can just cover all the taxes they owe by having money withheld from their paychecks. But if you are having to make quarterly estimated tax payments and you make a lot more money early in the year, you're supposed to pay taxes on that money when it comes in. So, you got to be careful about that. You may end up getting some tax penalties if you don't do that. But for most people for relatively small capital gains, that's not a big deal. You can just settle it up basically the next April, when your tax return goes in.

Dr. Jim Dahle:
All right, we got to tell you about something here. We've got a great opportunity. If you are interested in passive real estate, we're talking syndications, we're talking funds, but you do not know how to evaluate them. You do not know the ins and outs of them, you're interested, but you just feel like you can't tread in there because you're not sure who's going to rip you off, who isn't, and what you're doing.

Dr. Jim Dahle:
There is a course out there put together by my friend, Peter Kim at Passive Income MD called Passive Real Estate Academy. PREA it’s called. And that's what the URL is, if you're interested in more information about this online course and online community.

Dr. Jim Dahle:
If you go to whitecoatinvestor.com/prea, you can get more details on that. You can get enrolled in that class. Like all the online courses we tend to do here at the White Coat Investor, there's a money-back guarantee that you can take a peak and try it before you buy it and check it out and make sure that this is something you actually want, because like most of these courses, it's not super cheap. It's only something you ought to be buying if you're really interested in doing this, but it will take you by the hand and walk you through what you need to know to invest in passive real estate. Again, whitecoatinvestor.com/prea.

Dr. Jim Dahle:
All right. Let's talk about Vanguard and the retirement funds with this question from Jason.

Jason:
Hey, Dr. Dahle. Long-time follower, and thank you for all that you do. I just had a question about the recent situation that happened with Vanguard and the target-date retirement funds.

Jason:
Apparently, they lowered the minimum requirement from $100 million down to $5 million in their institutional share class of this target-date retirement fund. This eventually triggered a bunch of capital gains distributions unknowingly to a lot of retail investors in this same fund in their taxable brokerage account.

Jason:
My question is what would make Vanguard not do something like this in say, just a regular total US stock market fund? Could they lower their minimum requirements for the institutional share of a total US market fund causing the same type of capital gain for their retail fund? And would this make more sense now for everyone to use ETFs in their taxable brokerage account? Thank you for your answer and I look forward to hearing from you.

Dr. Jim Dahle:
That's a great question, Jason. Yes, there's some protection here when you are in a fund that provides an ETF share class of the fund. Because what they can do is they can take those appreciated shares and they can distribute it to these ETF creators out there, and they can pass on these appreciated shares to them rather than basically dumping that sort of a thing on the small investors.

Dr. Jim Dahle:
There is some risk of that happening with any fund. If they changed and allowed those of us that have let's say $500,000 in the fund to now access the institutional level fund and save two basis points a year. Many of us who owned that share in a retirement account would sell our shares and go buy the now lower expense ratio version of the fund.

Dr. Jim Dahle:
Now, nobody's going to do that in their taxable account, because they're going to realize those gains themselves. But if you're working in a retirement account, that would certainly be something that would be tempting to do, and those who are left behind in the fund, who are in a taxable account, could get hosed by it. That absolutely is a risk.

Dr. Jim Dahle:
I think it's lower with the typical Vanguard index funds that we all tend to use, especially if they have an ETF share class than it was with the target retirement funds, which I think are pretty much designed to be put into 401(k)s. They're designed to be inside retirement accounts. I think the risk there was a lot higher and that's why people have been saying don't own these things in a taxable account for many, many years. And now you see yet another reason why that's maybe not such a great idea.

Dr. Jim Dahle:
By the way, as an update on that, there is a class action lawsuit going. If you were affected by this, there's an attorney out there. If you go to the blog post I had on this, I think it was the first week of February. There are links there if you're interested in getting involved in that.

Dr. Jim Dahle:
I have no idea if they're going to win. I've heard from a lot of lawyers that say there really is no case here, and that may be the case. But whether there is or isn't, those of us who are owners of Vanguard by owning their funds are going to be paying to defend against that lawsuit, which is kind of a bummer for all of us. But if they would just not do things like that, that they really didn't have to do, they wouldn't have this problem.

Dr. Disha Spath:
Oh, I was going to say this just nicely ties into the last question we had about how we are taxed in a taxable brokerage account. And how the taxes from actively managed mutual funds, any activity in there gets passed on to the investors. So, I love that it all ties in together, and just understanding the basics pays off for you in the end.

Dr. Jim Dahle:
Yeah, exactly. Jason gave a good explanation of what happened, but basically, Vanguard said those of you who want into these lower-cost funds can get in there now with a lower minimum investment. A bunch of 401(k)s and pensions basically said, sure, we'll take the lower expense ratio. And when they did that, they sold their shares. And so, what did Vanguard have to do? They had to sell a bunch of shares of stock that are in that fund.

Dr. Jim Dahle:
And so, what happens with the capital gains from those shares? They got to be passed on to the remaining investors. The remaining investors, which in this case turned out to be the small investors, were left holding the bag, which was a dirty trick I thought from Vanguard.

Dr. Jim Dahle:
All right. The next question is from David. Let's take a listen to that.

David:
Jim, this is David, a retired ER doc from California. Two questions. Number one, what are your thoughts about the QQQ or the Invesco 100, which invests in the Nasdaq 100 as a way to get a piece of the exponential technology sector?

David:
And number two, with the Feds likely to increase interest rates several times this year, what are your thoughts about switching your bond funds into money market funds and then harvesting the tax losses, at least in your personal accounts? Thank you very much.

Dr. Disha Spath:
Okay. The QQQ tracks the Nasdaq 100 index. Basically, this is a large-cap tech company index fund. You have Apple, Amazon, Meta, so you get a lot of high sector risk because you're basically in one sector and no small-cap. So, you don't have that much growth potential. Expense ratio is 0.2%.

Dr. Disha Spath:
The fact that these are all large tech companies, you have a really high bear market risk because these 10 companies tend to have a lot of swing and variation depending on the market. Would I go for it now? Probably not because I try not to forecast the market, but it's looking pretty bearish recently. I don't know. What do you think of Jim?

Dr. Jim Dahle:
I don't like this investment for several reasons. One, it's a sector fund. It's a sector fund masquerading as a broad index fund. This is not a broad index fund. The stuff that trades on the Nasdaq tends to be very, very tech-heavy. This is a tech fund. If your written investing plan calls for you to own a tech fund, maybe have 5% of your portfolio in a tech fund or something, then sure, this is something maybe you ought to consider to fill that allocation. It wouldn't be my first choice even for a tech fund though. I think Vanguard's got a tech fund that I like better than QQQ.

Dr. Jim Dahle:
But that's what it is. You shouldn't compare this to a total stock market index fund, or even an S&P 500 index fund. These are not the same things. The 500-index fund invests all across the broad market. The Nasdaq 100 does not.

Dr. Jim Dahle:
The other thing to keep in mind is you already own an awful lot of techs these days. Have you looked at the top 10 holdings of a broad index fund, like a total stock market index fund? Guess what it is? It's Apple, Amazon and Meta. This is what it is. And so, you are kind of doubling down your bets on these big, large growth tech companies.

Dr. Jim Dahle:
So, I’m not a huge fan. I don't tilt my portfolio toward tech. If you want to, maybe consider this fund for a small percentage of your portfolio, but this isn't a favorite fund of mine just because people have heard of the Nasdaq is why they end up investing in it.
And there's lots of ads for QQQ out there. But this is not something I invest in or ever plan to invest in. I think it's a little bit more of an investment designed to be sold, really.

Dr. Jim Dahle:
The other question I find more interesting and unfortunately, it requires a crystal ball to answer. Should you sell your bonds and go to cash? Well, do you know how bonds are going to perform compared to cash over the next year? Now, this assumption that because the Fed has said they're cutting interest rates, that cash must outperform bonds. The market already knows the Fed has said it's going to cut interest rates. So, there is no guarantee that money market funds are going to outperform bonds. They may, or they may not.

Dr. Jim Dahle:
But what I do in these situations is I try to set up my investing plan so I don't have to have a clear crystal ball in order to be successful. And so, I set this up way back in residency. We have 60% stocks, 20% bonds, 20% real estate. That's our investing plan. If I think bonds are going to do poorly, I don't switch all the bonds to cash. And when I think bonds are going to do great, I don't switch all my stocks to bonds. I think that's a recipe for chasing your tail, incurring a lot more capital gains taxes that we talked about earlier. I just don't think it's a great idea.

Dr. Jim Dahle:
Now, if I had to sit here and predict which one of those is going to win this year, I'd probably flip a coin because I'm really not sure if bonds will outperform money market funds or not. Rates are supposed to go up and they probably will go up, but really the market ought to be pricing an awful lot of that information into the price of its investments already.

Dr. Jim Dahle:
All right, let's take our next one. This one is a question for military docs, I think.

Aaron:
This is Aaron. I am a military orthopedic surgeon who will be separating from the military this summer. I took advantage of the blended retirement system and have been investing in a Roth IRA, and I was hoping to get your opinion on what to do with those funds after I separate from the military. Should I keep them with TSP? Should I roll them over? Any guidance would be greatly appreciated. Thanks for your time.

Dr. Jim Dahle:
Great question. Your real question here is what do you do with your TSP money when you leave the military. Obviously with the new BRS system, you get to leave with something you didn't used to get. When I was in, you didn't get a match on your 401(k), your military 401(k), a.k.a. the thrift savings plan or TSP. You just got the money you put in there.

Dr. Jim Dahle:
So that's all I left the military with was the money I put in my TSP. You had to stay 20 years to get anything else, to actually get a pension from the military. Now, you get that match. You got to take it with you if you leave early, but it's basically just like the money you put in the TSP.

Dr. Jim Dahle:
The question is, do you keep the TSP or not? Now, when I left the military, I kept the TSP for a couple of reasons. One, at the time it was the low-cost leader. It was the lowest expense ratio 401(k) out there. You got all these mutual funds at one or two basis points.

Dr. Jim Dahle:
And the other thing you got was you got the special G fund, which the G fund gives you basically bond returns at money market risk. And so that's kind of a cool fund I've used it as a significant hold in my portfolio ever since. The downside is I've had to manage another retirement account throughout my career. So, it makes my portfolio a little more complex.

Dr. Jim Dahle:
You can leave it there for now. If you decide after a while, it's not worth it to you to have the G fund and you look around and you're like, “Man, Schwab and Fidelity and Vanguard, they all have stuff that's just as cheap as the TSP these days. Maybe I'll just roll this into my Roth IRA or I'll roll into my current 401(k)” or whatever, then I think that's fine to do.

Dr. Jim Dahle:
But there's no rush to get it out of the TSP. I left the military in 2010, my money's still in the TSP. I've actually done several rollovers into the TSP. I wouldn't feel like you need to get the money out of there.

Dr. Jim Dahle:
One reason you might definitely want to take it out is if you have a bunch of after-tax money in there that you put in while you're deployed, it makes it a lot easier to roll that into a Roth IRA and no longer have after-tax money earning taxable income on it.

Dr. Jim Dahle:
When you take that after-tax money out, all the earnings come out as tax-deferred money and you have to pay taxes on them. But if you get that into a true Roth account, you don't have that problem.

Dr. Jim Dahle:
That might be one reason to roll it over into a Roth IRA but I wouldn't feel like there's some huge rush when you get out of the military to do something with your TSP. You can take your time and decide in a few months what you want to do.

Dr. Jim Dahle:
All right. So, let's talk about 457s.

Nick:
Hi, Dr. Dahle, this is Nick from North Carolina. I appreciate everything that you do. My wife and I are both physicians from the same hospital system and we both max out our 403 and 457 retirement accounts. Recently with the spike of Omicron, they have requested that we delay spending our CME money and it was extended, which didn't make sense because they're starting up elective procedures.

Nick:
At what point would you jump ship on the 457? Or is there anybody you would talk to or any certain things you would look for where you would not think that the hospital is stable? They've all said in the emails that we're financially stable, but they just ended a merger too, which didn't make financial sense if they were stable. So, I appreciate your help on this. Thank you.

Dr. Disha Spath:
That's all sounding pretty shady. First of all, I'm assuming this is not a governmental 457, that this is a private 457. If it was governmental, you might be able to roll it over to the next employer, but since it is not, which is what I'm assuming, I would definitely start looking into the withdrawal options that you actually have with this 457 since you are both working at the hospital, you're taking more than the usual risk. I would start asking some questions and just knowing what my options are at this point. What do you think, Jim?

Dr. Jim Dahle:
Yeah. My usual answer on these, I've never met a doc who lost 457 money. If there is somebody out there and you've lost 457 money because the hospital went under, shoot me an email [email protected]. I'd like to hear about it. I have yet to hear about any doctor ever losing their 457 money, but I agree. This sounds really bad. When they're telling you not to spend your CME money, that's part of your salary, really.

Dr. Disha Spath:
That's pretty bad.

Dr. Jim Dahle:
That's a sketch. Maybe they're not doing very well. I might dial back what's going on in the 457, because remember, there's three things that matter with the 457. This is non-governmental, of course. One is the investments and fees. If they're reasonable, great. Two, is your distribution options, you don't want to have to take it all out in the year you leave the employer, that's a bad distribution option. If you can take it over 10 years or delay it until you're 65, that's fine.

Dr. Jim Dahle:
And the last one is the hospital stability. Because remember, it's not your money. This is deferred compensation. It's still the hospital's money and it's subject to their creditors. If they go bankrupt, you could theoretically lose your 457 money. And boy, in what you're describing, I guess I would worry about that. That doesn't sound very good at all.

Dr. Jim Dahle:
All right. Let's take a moment to thank our listeners out there. Some of you are on your way home from work, maybe you're on your way into work, and maybe you're coming in on a call. Whatever it might be, thanks for what you're doing. It's not easy work that you do.

Dr. Jim Dahle:
As we heard last week on the podcast, we had a guest that shared a video she'd made. This is last week from the time we're recording this, of course. It's probably six weeks ago by the time you're listening to this.

Dr. Jim Dahle:
There are people out there with PTSD from their jobs, caring for other people. It's not easy work. And so, if nobody said thanks today, let us be the first. Thanks for what you do.

Dr. Disha Spath:
Thank you.

Dr. Jim Dahle:
All right, let's take a question on TurboTax. I don't claim to be a TurboTax expert, but let's see if we can answer this question.

Jake:
My question concerns form 1116 Schedule B for tax carryover reconciliations schedule, and TurboTax's lack of support for e-filing returns with this form. Situation. I'm a long-time user of TurboTax and e-filing return. I completed my 2021 tax returns and I'm ready to file. However, TurboTax says it is not supporting e-filing of form 1116 Schedule B foreign tax carryover schedule.

Jake:
My taxes are rather simple, yet as part of my asset allocation, I own funds that generate four dividends in income. Foreign taxes are collected at the mutual fund/ETF level. Thus, I need to file form 1116 and form 1116 Schedule B. I suspect that many of your listeners who follow an asset allocation strategy that includes international funds may also run into this situation.

Jake:
Question. Since TurboTax has taken the position that it's not supporting e-filing of 2021 tax returns that include form 1116 Schedule B, I'm in need of a tax software package that will allow me to e-file. Please recommend an alternative to TurboTax.

Dr. Jim Dahle:
Thank you, Jake, for that question. I appreciate your desire for anonymity. If you choose to use an electronic voice on this SpeakPipe, maybe at least have it go with regular speed. Because there's a lot of people out there already listening to this podcast at 2X speed. So that question was probably at 4X speed for them. I don't know. But this is a question on TurboTax. Disha did some research on this. I don't think either one of us knew the answer to this question going into it. But share what you found, Disha.

Dr. Disha Spath:
Yeah, I went into the TurboTax Q&A, and it seems that the problem has been fixed. It seemed to be a software update issue, but I'm looking at a thread back and forth between the TurboTax people and someone else asking the same question. It seems that as of yesterday, the IRS accepted this person's return and the form 1116 Schedule B did go through. So that should be fixed for you now. I don't work for TurboTax, but I'm just looking online.

Dr. Jim Dahle:
Awesome. Thanks for looking that up.

Dr. Disha Spath:
Yeah, no problem.

Dr. Jim Dahle:
Yeah. There's a little delay when people leave stuff on the Speak Pipe and we get it on the podcast. So hopefully, this has been resolved at this point. But boy, that was one of the more challenging questions I think we've gotten over the years for sure.

Dr. Jim Dahle:
Hey, it's April, we're trying to give away some money. And the money we're trying to give away is to people who are educating their peers, colleagues, trainees about finances.

Dr. Jim Dahle:
If you are a practicing doctor or dentist or better yet, if you know somebody that's a practicing doctor or dentist and is educating their peers on finances, giving lectures, putting together curriculums, publishing papers, whatever. We want you to nominate them for our Financial Educator Award. You can do that at whitecoatinvestor.com/educator. It's a short, quick, easy nomination form.

Dr. Jim Dahle:
And then at the end of this month, we'll be choosing the winner of that. We'll be publicizing it on the blog. We've done this for the last several years. Some of the biggest names in physician financial education have won this award. You can't be a blogger, a podcaster, or a financial advisor.

Dr. Jim Dahle:
Practicing doc, dentist, physician, I suppose, if you are a veterinarian or something, we'd consider you for the award as well, but you got to be educating your high-income peers about finances and you can't nominate yourself. Someone else has to nominate you, but we give you a nice award and $1000 cash if you win this. So please nominate people if you would. And we'd love to give away some money.

Dr. Jim Dahle:

The White Coat Investor is proud to introduce our No Hype Real Estate Investing course, which will provide the framework for developing further knowledge and experience as you progress in your real estate investing career. We call it an introductory course because there is always more to learn. But this is no short, superficial course. There are over 200 lectures and videos adding up to more than 27 hours of content by over 15 different instructors. We think it just might be the best real estate course on the planet. Continue your wealth-building journey today with the No Hype Real Estate Investing course at whitecoatinvestor.com/courses.

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

Dr. Jim Dahle:
Thanks to those of you leaving us a five-star review and telling your friends about the podcast. Our most recent five-star review mentions Disha. So, I'm going to make you tell them about it.

Dr. Disha Spath:
Well, thank you so much. I really appreciate it. It says, “If you're a high-income earner, there's no better place to start and maintain financial literacy. I started from knowing nothing to feeling quite competent just by listening to the podcast alone. Also, recently they added Dr. Spath as a co-host and she has been a great addition to the team.”

Dr. Disha Spath:
Thank you again, guys. I really appreciate the positive feedback and please keep it coming. If it's negative, send me an email, [email protected]. I'd love to hear from you. Thanks so much, Jim.

Dr. Jim Dahle:
Yeah, we do appreciate negative feedback in private, and positive feedback in public like everybody else out there. It's been fun having you on here again, Disha. And until next time, those of you out there in listener land, keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the 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.