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.
One House
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.
One Spouse
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.
One Job
Rent the house by the lake every year. Just don't buy it.
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!
This seems like a corollary to “nothing that flies, floats, or flirts.”
I think he didn’t want to use this, given that he’s buying (or has just bought) a new boat 🙂
This is a great rule. It makes much more sense to keep things simple and make the most of what you have. The adage, “less is more” seems to apply here, doesn’t it?
I’m only two years in to practice, and the one job line has already cost me ~30K. However, leaving that first job and walking away from that money also was the best thing I could’ve done for the one spouse rule (though I would’ve left there for her even if there wasn’t a rule)!
Good article. The “serial” house purchases is a good reminder.
[Joke deleted. Yes, it was funny. No, it’s not appropriate for the comments section.]
IMO the “one-spouse” rule is only valuable in hindsight or in a situation where someone is contemplating marriage to a questionable partner. I think it probably applies well to getting married for the second time, but in that event a properly executed pre-marital agreement should do the trick.
If someone is in a terrible relationship and made a huge mistake, while it may or may not be financially “cheaper to keep her,” it might be emotionally, spiritually and physically devastating to stay married. Sure the retirement account might stay more or less intact, and you might not have to sell the family home, but you will be stuck in that home with a person that you hate or that hates you, or likely both, for the rest of your life. I do not want to advocate divorce, but for many people who do choose divorce it ends up leaving both happier.
Plus it’s not always cheaper to keep her (or him). Almost all spouses pending divorce fight over money. There are many, many spouses who can plow through the money as fast as the other spouse brings it in, or even send the couple into debt. Those alimony payments probably would have been blown by the other spouse during the marriage just as well (and that’s when it belongs to both of you). It’s certainly not cheaper for the physician to stay married to a loser husband who also has a gambling addiction. If you consider that half of it might already belong to him or her anyway, the property settlement just makes it official, and can effectively cut off a spendy spouse from further spending both parties into the ground. Plenty of physicians live paycheck to paycheck, more or less, so splitting the home, IRA and all of the debt might be a big wash.
Although it would sound less catchy, I think a “no spouse” or “spendthrift spouse” rule would be much more pertinent.
Excellent counterpoints. You’re right, of course. While it’s usually cheaper to keep her, there are exceptions, and in many ways, in a failed marriage, the money is already gone. I guess I mean it as an encouragement to make sure your marriage is good before and during, rather than a suggestion that you stay in a miserable marriage to a spendthrift.
Definitely.
Also thanks for keeping this place classy! 😉
Reminds me of a classic joke:
Why are divorces so expensive? Because they are worth it
Definitely agree. If you’re willing, you can always make more money, but if you’re not with the right person it won’t matter how many millions you have, you’ll be miserable.
A followup question to this is: say you have a better opportunity elsewhere. By how much your salary/income should be higher at the new place to make such move worthwhile? (suppose, the expenses would be similar at both new and old place?) In business terms, what is the “hurdle rate” for such moves?
I would think it’s 30%. Thoughts?
I strongly disagree with the third point. Strongly. We were afraid to leave that first job out of residency but when we looked around we saw that were much better opportunities out there.
I would say that a better job is almost assured after getting a couple years of experience. In our case, it meant moving thousands of miles but increasing pay x4.
Very similar situation here. Changing jobs was BY FAR the best personal financial decision I’ve ever made.
I am also considerably better off financially and psychologically after changing jobs. The message should probably be to try to choose that first job wisely as opposed to hesitating at changing jobs.
Absolutely. Or at least when you change make sure that one is right so you’re not doing it 3 or 4 times.
Finding “the best job” vs “a job” is such a huge deal. When I tell people I had at least a phone interview with nearly 100 jobs out of fellowship, they are uniformly shocked. However, it was time extremely well-spent as not only did I get to figure out what’s “normal” and not, but I landed a job I’m still at nearly 10 years later.
I’m shocked. But the same process worked for me when buying a home (I looked at 30+) and finding a residency (21 interviews) that I tend to agree with you that too many of us don’t look at enough jobs. I was lucky that when I went to look for my first real job I already had four years of experience in a community hospital, an academic hospital, a trauma center, and on three other continents. I knew exactly what I was looking for so I just had to find it.
I hereby formally recommend that if you can move and quadruple your pay, it is financially worthwhile to do so. 🙂
I’m two years out of fellowship, and I’m still scared to leave my first job. Doesn’t pay great, but lifestyle is not bad. Some of the downsides of job switching in an outpatient specialty as mentioned, is the time it takes to rebuild a practice, get accustomed to the practice patterns, and being confident that you can actually achieve a higher salary especially if your income is based production.
Is it worth working 30% harder to get a 30% pretax increase in salary? Better be sure you want to make the leap if that entails the mental and monetary costs of moving the family.
Thanks for the article
Particularly helpful for a young physician. I’m only one year out but already have to shift positions (fortunately it’s an intracompany move to another clinic site and I followed the advice to rent first). Even with those changes, I can see how much of a financial drain serial job and housing changes can pose.
I think they are good ideas in theory, but real life is often messy. They way thing are going in medicine I think the days of having one job and one house are gone for most people.
Life is messy. Sometimes things happen that we cannot control. But that doesn’t change the fact that the fewer serial spouses, houses, and jobs you have the better off you will be financially. Control what you can, deal with the rest.
“..doesn’t change the fact that the fewer …jobs you have the better off you will be financially.”
That is not a fact. I am not sure why you holding to this tenet. It is not a one-size-fits-all truth.
As a general rule. Obviously if you are moving from one job to a MUCH BETTER job each time, then you’ll do just fine. However, there are transaction costs involved in changing jobs for many doctors. Those are the ones who will be hurt by serial jobs.
Most doctors switch jobs within the first 2 years of residency. Usually for something better as they understand themselves and the world outside of residency much better. I switched jobs after 1 year and it was the best deision I could have ever made. Not only for more pay, but to a better location and a better life.
I could only imagine switching jobs after being somewhere for 7 years, having to relocate, having to rebuild relationships and a practice could be very draining financially and psychologically.
I gotta say, the vacation home is by far the worst waste of money ever. To lock yourself into 1 type of vacation while at the same time doubling your expenses uterly a waste of money and precious vacation time.
as for a second home I couldn’t agree more with added expense, over two decades ago we made the decision to live where people vacation but yet some
Docs still bought vacation homes and I don’t mean a small camp , many now sit empty and unused but still with bills as the kids have grown up.
I agree with WCI. Thankfully my one wife is still with me but I have changed houses and jobs several times. I have no regrets about those decisions but from a pure financial perspective I would have been better off with only one of each. Housing transaction costs are huge. Moving practice disrupts flow, referral relationships, ancillary income streams, reputation, and accounts receivable.
Good points about the practice disruption issues.
I must be the exception. One wife, one job, and built a lakehome (we both grew up with family lake places). Paid cash for it, and the lifetime memories for my wife and I and our 3 boys have been priceless
If you can pay cash, and view it as a consumption item (i.e. you can afford it) then buy whatever you like. Obviously spending on consumption items doesn’t improve your financial position but hearses don’t have trailer hitches.
WCI,
Great article. Obviously life is messy and even under ideal circumstances not everyone can follow these rules, but too often people ignore the financial consequences of their actions. At the end of the day it comes down to this: Do the math and determine if the cost is worth it. I like the idea of evaluating a second property as an investment, in other words only buy one if you would buy it as an investor. Ive known a handful…well ok just 1 doc who did this and made a modest amount of money as an investor. I’ve known dozens who have lost a great deal of money on various vacation properties. Every time I’ve run the numbers on any potential second property for myself I have been horrified at the economic cost. Maybe the best of both worlds is to rent all your partners vacation homes while they are not using them!
I would add the condition that staying with any job or partner that makes you miserable should be changed. If it can’t be salvaged the sooner one gets out the better. That being said often times the relationship can be salvaged, and a job can be renegotiated or modified so that it makes sense.
How would you guys handle a spouse who wants multiple homes for the purpose of using one as an investment property?
My strategy thus far (I’m a 1st year attending) is to rent until I’m confident I will stay at my current position and to save up enough of a down payment for our dream house (aiming for 200k down, total cost a tad under $1million in keeping with the mortgage-no-more-than-2x-gross-salary rule)
My spouse comes from a family that has used real estate as an investment tool and instead of paying rent, she’s pushing for the purchase of a cheaper starter home (~300k) with the intent of using it as an investment property even if we decide to vacate the area for job purposes or move onto our dream home.
We would not be able to purchase the starter home outright but could probably put down 33% and have the property paid off in 1-2 years.
Sounds like a lot of risk to me but she insists not any foolhardier than making rent payments that would be higher than a mortgage payment.
Any recommendations? Thanks!
I don’t have a bit of a problem with buying investment property. But you have to run the numbers as an investment and make sure they make sense. Far too many people buy a second house as an investment where the investment makes no sense whatsoever. For example, they might buy a $500K house they will use for a week in the summer and 5 other weekends a year. Then, when they sell it in 20 years, it will hopefully be worth more. That’s hardly an investment. Even if they rent it out for 5 or 10 weeks a year, they’re probably not going to be making much money on it.
However, what you’re talking about with a “starter home” is completely different. Until you move out, it will be a consumption item like any other home. No big deal. Once you do move out, you’ll rent it out and presumably it will provide a reasonable investment return. There’s nothing wrong with that at all. It’s basically what we did. However, since you’re only going to be in it a few years, you need to evaluate the purchase primarily on investment criteria rather than what you want to consume. I.e. What can you rent it for? What will the cap rate be? What will the cash on cash return be? What will the overall rate of return be? Etc. If the numbers look good, then I see no issue at all with this approach.
However, you need to be sophisticated in your analysis. “The rent is higher than the mortgage would be” is not sophisticated. Of course the rent should be higher than the mortgage! The renter doesn’t have opportunity cost for the downpayment, insurance costs, maintenance, upgrades, transaction costs, taxes etc.
Awesome, thanks for the quick reply!
When referencing “the rent is higher an the mortgage would be”, my spouse meant that to rent a property for the next 1-2 years would cost $2500/month
She argues, “why not purchase a starter home, with 33% down, our mortgage would cost <$2000/month. We would then have the flexibility of paying off the property early in 1-2 years if desired and would have a tangible asset to show for it as opposed to paying someone else $2500/month in rent for the next 2 years and having nothing (I'd argue flexibility but she's not seeing my point of view 🙂 )
Right, but it’s the same thing either way. Renting a place with a $2000 mortgage for $2500 is probably a pretty good deal. Assume that 45% of rent goes toward non-mortgage expenses. So $2500*55%= $1375. I’d argue if you can buy a place with a $1375 mortgage that would cost you $2500 to rent, that’s probably a good deal. But a $2000 mortgage? I don’t think you’re stealing anything there. You’ve got to run the numbers for yourself and make some projections, of course. The NYT buy vs rent calculator is pretty handy that way.
I think you also have to look at how much of your net worth you want in homes. Paying down a mortgage is a great idea, but if your net worth is 350k, and $300 of it is your house, 25k in savings/emergency fund and 25k in retirement after a couple years it seems a little risky to me. Besides, when you move, you have to take out another mortgage and put another downpayment on your next home. If you are making 1M a year, then this isn’t that big a deal, but with average salaries 300k in one rental home is a lot.
We rented the first year out, so I am biased, but it allowed us to search the market, visit lots of areas and wait for a screaming deal to come our way. Yes I missed out on a little bit of equity, but my liquidity was huge to be able to get the house we have. And, how much will $500 a month really be in savings? that could get eaten up with a major repair, or small remodel. (I think WCI knows about replacing a roof on a rental if I remember correctly..)
And windows, and appliances, and paint, and flooring, and countertops…..
I wish more physicians understood these 3 things and saving appropriately will pretty much make every physician financially secure. Not necessarily “happy” as that is a much more difficult thing to achieve, but any physician following these simple rules and with appropriate disability in case of disaster will find financial independence.
These are good rules of thumb. On the other hand, you’re dead a long time. We’ve had a “Summer” place on the St. Lawrence for 7 years now, and aren’t regretting it yet. That being said, we move there June 25th and move off Labor day (plus weekends through Thanksgiving). During this time, my commute involves a 15 minute bike ride, a 15 minute boat ride, and a 25 minute car ride through farm country in that order, which really is fantastic. I do worry that my kids will grow up thinking it is “normal” to chase snakes & frogs and ride bikes to the beach every day- I think they won’t be too scarred. The feasibility of this arrangement is helped by a relatively low cost market (both houses), low interest rates, and the fact that I have no problem driving a modest car. Despite this, we still manage to put away roughly 85K/ year in tax advantaged accounts. Save some, spend some, you could be gone tomorrow (but I must admit, the WCI site has motivated me to bump up our savings via the BD IRA). Thanks!
Moderation in all things. Nothing wrong with consuming when you can afford it.
Out of residency almost three years now. Have yet to buy the house. Got married in med school and just got divorced, turns out people do in fact change and often not together. Fortunately was amicable and only cost me half of the savings account and $2K for the attorney. Now on second job. First job ended when group dissolved due to a narcisstic, greedy A-hole who decided he didn’t want to take call anymore and turns out was skimming off the top from the group for the last decade. I was stupid enough to get involved in shareholder purchase agreement to buy into practice 1 year out of residency and trusted the narcisstic A-hole that everything was on up and up. Lesson learned, trust but verify! This little lesson has cost me ~$110K between tail coverage, attorney fees to get out of it, moving expenses and lost income from not working for 3 months between old job and new.
I had a thought while reading your post. Perhaps it is better to pay off student loans instead of invest those first few years out of school. If you get divorced, the investments get split, but the loans are all yours.
[Unnecessarily harsh comment edited.]
Hey, that’s me! One spouse forty years this May, one house 39 years and one job 38 years until I slightly early retired 3 years ago. Not a doc but made similar wages. Enjoyable lucrative part time side gigs, non-monetized blogging and volunteer work now. That formula served me well.
What advice do you have for those doing the military route looking at a minimum of three moves between training, payback, and eventually settling down as far as housing goes?
You mean other than waiting until you get out before buying a house and maxing out your Roth TSP?
A lot of my fellow HPSP classmates are in the housing market and plan to own houses throughout their military service. Do you just recommend not owning for the four years or is there a time that it would be worth it? Yes, blended retirement with TSP and still use the civilian options as well.
It’s worth it if the housing market appreciates 100% over the next 4 years. But since that’s impossible to predict, I see little reason to own while in the military unless you are somehow guaranteed to stay someplace for 5+ years, which is pretty rare in the military.
Thanks for the insight and great book. I am a HPSP medical student with a long ADSO (active duty service obligation) of 9 yrs (service academy for undergrad). I am a little hesitant to accept that I should only rent for the 14+ years during my time in the military (assuming a training period of at least 5 years + ADSO).
Should I shift my focus away from home ownership during the military to growing assets, such as maxing the ROTH TSP like you mentioned earlier? Are there any other methods you would recommend for active duty military in addition to ROTH TSP? Perhaps additionally saving during my active duty service for a downpayment on my “forever home” once I leave the military?
Yes, I’d do both of those things.
If there is some way that you can nearly guarantee you’ll be in one spot for 5+ years, then sure, buy. But moving every 2-4 like most in the military? I don’t think that’s a great idea.
@SaltyCadet – I second WCI on this one! I owned 2 houses during a 34 year career (if I count the 4 HPSP years) – one during my 6 year residency and one at the later part of the career when I was basically assured of no moves as there were no empty slots for my subspecialty. 9 PCS moves total – rented in the other 7 and absolutely no regrets. Neither house was a terrific investment (but both were great consumption items!)
1) The house you (& your spouse) wants to live in RARELY makes a great rental property.
2) Consider adapting WCI advice a little and “Live Like An Officer”. Just save all your doctor bonuses, medical pay, etc and instead of comparing your situation to other docs, make friends with and hang out with other military people. It slows down your hedonic treadmill and you will accumulate assets to max TSP+IRA+save for house down payment for later easily. Also you will make great friends and enjoy your time in the service more.
Great post and tenants that should be the foundation of our lives before getting into the “small stuff.”
So important along with one spouse is being on the same page financially with your significant other. Read the blogs and books together. Budget together. I hate to say it but it can even become a fun thing to share!
Tenants are nice too, but I think you meant tenets!
Not that many would do this but how about no fixed home, no spouse, and jobs wherever you want. Live in a trailer, have friends, and change jobs as you desire. Otherwise great advice.
Certainly better than multiple houses and spouses! But bear in mind buying one house and having one spouse does generally lead to a higher net worth than remaining single.
Changing jobs can be costly too if there are significant start up costs.
I get the house rule. But the other two? No way.
Agonized over getting divorced. Was a shell of my former self by the time I did it. Hadn’t smiled in years. Made a point of educating myself about divorce law in my state, I ran the divorce, it cost me next to nothing and now the ex and I are great co parents. I’m remarried to someone far more compatible (with a strong pre nup) and I can’t believe I tortured myself for so long in a bad marriage.
Stayed in job #1 far too long because of the money. Commuted 3 hours round trip for 12-13 years. Being partner really wasn’t all that great!!! Finally took the job offer closer to home, making almost the same working less hours. Should have done that a lot sooner as well.
Money is important. But it shouldn’t be #1. People before money. I when I put myself first I got out of a bad marriage that would never bring me anything but loneliness. When I put my children first. I got out of a crazy commute and contentious group.
I think you missed the part of the One House, One Spouse, One Job rule that says get the right house, spouse, and job the first time! Obviously staying in a terrible marriage or job is a bad idea.
Financially,, zero spouse makes more sense for most high earners.
Nonsense. The data is quite clear on this. High earners typically marry other high earners and married folks generally have higher net worth than single folks.
https://www.moneycrashers.com/financial-benefits-marriage-single/#:~:text=A%202005%20study%20at%20Ohio,people%20who%20had%20stayed%20single.
But divorced is worse than single and married!
Strictly from a financial perspective:
One house – completely agree. Not many scenarios where you actually gain financially by upgrading to a larger home.
One spouse – won’t argue with this one either.
One job – this one is definitely situation dependent. Especially first job out of residency/fellowship. Many docs are very naive when it comes to negotiating their first employment contract and end up accepting terms that are not in their best financial interest. Once locked in, few employers are willing to re-negotiate terms when you realize in a year or two that there are better opportunities out there. With regards to tail coverage, this may be specialty dependent but in my experience I’ve always been able to negotiate tail as part of the sign-on. Also never had an employer exclude/delay 401(k) contributions so I’m guessing this isn’t the norm but maybe I’ve just been lucky.
Having been in employer-based agreements and private practice, I can also say that although salary is generally higher in private practice, there are a lot of financial (and lifestyle) benefits to take into account in an employed position. I think comparing all the benefits/lifestyle considerations involved, there really isn’t an enormous financial advantage to one vs the other (in most scenarios – building a multi-specialty practice from the ground up and selling for millions excluded). Also, having a slightly lower salary for most usually means fewer consumption items and not necessarily a lower total savings rate.
Overall, I think you have many factors to consider when it comes to deciding whether to stick to one job or explore something new. As long as you’re not caught up in a “grass is greener” mentality and job hopping every 2-3 years, switching jobs can often bring higher pay and a better lifestyle. And I think if you’re considering switching jobs, there’s usually a pretty good reason for it – whether it be financial, career advancement, new experiences, etc.
I’m getting a waterfront vacation house that is 1 hour from me. Screw it. Life is too short, and with COVID19 raging on, we cannot really travel anywhere internationally (or even domestically) like we typically do. I want to enjoy myself and have amazing memories with my kids. I’ve always been a saver, but sometimes, you have to live it up! We don’t live forever!
As long as you’ve taken care of your finances and can afford it, I say go for it. But don’t expect it to make you wealthier. It probably won’t.
Haha, yes I definitely have no expectations that it will make me wealthier. I’m doing fine financially, but poor with recent life experiences because I just work and save.