By Dr. James M. Dahle, WCI Founder
This column is all about the big picture. We spend way too much time discussing minor details of mutual funds, retirement accounts, and insurance policies and probably too little time discussing what really matters in personal finance. That can be summed up in the phrase One House, One Spouse, One Job.
Avoiding the True Pitfalls in Personal Finance
Personal finance writers often spend far too much time on the little things in personal finance and far too little time on the things that really matter. Consider how many articles you have read discussing the Latte’ Factor, choosing the correct cash-back credit cards, avoiding restaurant meals, buying used cars, and using coupons. The truth is that, for most physicians, most of what you need to know to avoid the real pitfalls in personal finance is encapsulated in a single phrase: One House, One Spouse, One Job.
Physicians fall into the Multiple House Trap in two different ways. One is to have serial houses, and the other is to have parallel houses.
#1 The Serial House Issue
This is when you change houses every few years. Buying and selling a home involves some serious transaction costs. A good general rule of thumb is 5% to buy and 10% to sell. Don’t believe it’s that high? Go back and look at your closing statements for your last home, and then look at your credit card statement for the three months before and after.
Unless the real estate market at the time is heavily tilted toward one side of the transaction, sellers tend to pay for upgrades, repairs found on the inspection, closing costs for the buyer, and realtor fees. Purchasers pay for loan costs; upgrades; and maintenance items such as snow blowers, lawnmowers, and power tools.
For a $500,000 house, the 15% round trip cost of purchasing and selling a home is $75,000—or more than many physicians save toward retirement in a single year. Do that a few times and you will find yourself way behind the eight ball compared to your “one house peers” when it comes to retirement savings.
#2 Parallel Houses
The vacation home. It might be a beach house, a mountain house, a lake house, or simply another house. A second home generally doubles all your housing-related expenses: mortgage, taxes, maintenance, upgrades, furnishings, utilities, etc.,—plus, you have those same transaction costs and the cost of traveling between your two homes.
To make matters worse, many physicians mistakenly think this expensive consumption item is an investment. They envision selling it after it appreciates a great deal to pay for their retirement. Or perhaps they expect to rent it out a few weeks a year. The truth is an investment property is very different from a vacation home. If you actually run the numbers on your vacation home as an investor would, you will quickly see the return on your investment is likely to be terrible.
If you wish to purchase a second home, view it as a pure consumption item. That means you should have retired your student loans and paid off your first home while still saving 20% of your gross income toward retirement and having the ability to pay cash for the vacation home. If you cannot afford to do all that, you probably cannot truly afford to buy the vacation home.
A thread about vacation homes on Sermo, a physician-only forum, contained advice from many doctors who have owned a vacation home in the past. See if you can see the common theme:
- First Doc: At first it was great when everything was new but it later became a real money pit and expense. We started using it less and eventually sold it.
- Second Doc: Every doc I know who purchased a vacation home eventually regretted the decision. They became financial drains, and more importantly, became one more chore and obligation that needed tending, and a time suck.
- Third Doc: You can take a lot of vacations all over the world for less money and aggravation than owning your own vacation home will be.
Like most things in medicine and personal finance, it is better to learn from the experiences of others rather than making all the mistakes yourself.
Divorce is personally and financially devastating. Whatever expense may be required to maintain your marriage should be considered as pennies compared to the cost of divorce. The truism, “It’s cheaper to keep him/her,” really applies here. In a bitterly contested divorce, the lawyers for both sides walk away with tens of thousands of dollars and your assets are also split in half. Then, you may find yourself paying alimony and even child support. You are basically buying yourself a second house, except you don’t even get to vacation in this second home.
To make matters worse, many physicians find themselves in serial marriages and divorces. Some of the least happy physicians I have ever met are working way too many shifts and taking far too many calls late in their careers as a result of alimony payments and devastated nest eggs.
Changing jobs is often financially devastating, too. The new job may require a move, which brings in the multiple house issue. More significantly, if you are in private practice, it will take time and money to build your practice back up in the new location. You may also need to purchase malpractice tail insurance or suffer a financial penalty as a result of breaking a contract. Your new job may exclude you from making 401(k) contributions for a year or two after starting. If you are leaving one partnership for another, you may have to pass through a 1-5 year partnership track before your earnings recover to prior levels. If the jobs are lower-paying employee jobs, there may be no significant cost to changing jobs, but the lower income from not being an owner at either job will take its toll over time nonetheless.
Or, if you do decide to change jobs, make sure that it's for a big raise and make sure that the new job is right so you’re not doing it three or four times.
One House, One Spouse, One Job. You can mess up a lot of things in your personal financial life and still recover, but you are likely to lose a great deal of money every time you disobey this rule. Serial disobeyers rarely build much wealth.
What do you think of the “one house, one spouse, one job” rule? Divorced? How much did it cost you? How many times have you moved and what did that cost? Did you change jobs after a year or two like many physicians? Was it avoidable? Comment below!