Podcast #33 Show Notes: Questions from Medical Students
I'm answering questions from medical students on the show today. We are recording this for the first time on YouTube. It is still available via the traditional podcast outlets, ITunes, Overcast, Stitcher, or Google Play. You can choose how you like to watch or listen to it but the YouTube version will be less polished.
Podcast # 33 Sponsor
[00:00:19] This episode is sponsored by ProAssurance, professional liability insurance for doctors. They understand the risks involved in the practice of medicine. Your reputation is at stake, and even the best doctors face malpractice allegations. Count on ProAssurance for superior defense against claims—it’s part of their commitment to treat you fairly. ProAssurance is rated A+ Superior by A.M. Best. Learn what it means to be treated fairly at ProAssurance.com.
Quote of the Day
[00:00:49]”If you began your investing journey after 2009 or haven't yet started, then you're an investment virgin. It's safest to assume that your true [risk tolerance] is low, and you should start with a conservative stock/bond allocation, say in the range of 50/50. If…you find that you have a lower risk tolerance than you thought, at least you'll discover it relatively early and with a relatively small portfolio.” -William Bernstein
[00:01:13] This is exciting. Today we're recording this for the first time on YouTube. Enjoy!
[00:01:34] I want to encourage you to talk to your colleagues about money. I had an interesting chat last night with a doctor that I've been admitting patients to for the last year and a half and realized how much I could have helped if I had talked to him about money a year and half ago.
[00:03:20] In today's episode we're mostly just answering questions that people have sent in to me over the last couple of weeks and the majority of these actually come from medical students.
[00:03:29] He said , “I'm 24 and married. I work in research and my wife is a nurse. I will start medical school in July and I've been trying desperately to pay off my student loans before I have to take out more. I have 24000$ remaining in my loans to pay off. I tried to put 100% of my paycheck to my loans. We live off of my wife's paycheck, constantly stressing about money and the ability to pay these loans is making both of us truly miserable. I get aggravated every time she goes shopping because I feel like we need to just buckle down and pay our debt. She's 100% in on wanting to get my debt down before I start med school but it's beginning to wear on our marriage. I feel like we cannot enjoy ourselves at all. We spend very little money outside of rent and bills and the constant stress of finances is starting to drive me crazy. I know I need to tone it down at being so strict with our finances. But how can I? How can I find some sort of balance so that we can actually enjoy our lives as well?”
[00:08:34] From a fourth year medical student. He says, “I'm planning to go into a five year general surgery residency program. I'm in a stable place in my life, I'm not married, have no kids. I have about 80,000$, 5.8% interest, in student loans and I've already started to pay back the loan amount as I did not use or need all the loan money that I received. I have a large sum of gift money coming my way. And I'd like to invest that in a home purchase. I know that you recommend residents don't buy a home during residency. What are your thoughts on investing in real estate versus paying back the remainder of my loans with the incoming gift money? Also if I pursue a home purchase would I qualify for a conventional 20% down mortgage with the resident salary if I'm able to put down the 20% with a gift money or would I be restricted to the physician loaned?”
[00:11:41] Another medical student writing in. He says, “I'm a fourth year medical student and I've been introduced to a few of what I would consider alternative investment strategies that I do not believe I've heard a mention of yet and want to hear your thoughts. I'm not sure if they're just newer and less popular or if there are innate concerns about these strategies to be worry about. The first is socially responsible investing or SRI. My knowledge is that there is little difference between this and other forms of investing, except these companies have gone through some sort of vetting process and are more environmentally conscious. Are there SRI funds out there? Are there any concerns with this type of investment philosophy?”
[00:15:56] From a doc who just started working at a multi specialty practice says, “I do very rare surveys for which I get about 20 to 50$. At my job they wouldn't let me start contributing to a 401k until January 2019. I wondered if I could use my survey income as a reason to start my own personal 401K or any other means of saving in addition to my backdoor Roth IRA? Also if I'm able to do this now how will it affect me starting my company sponsored 401K next January?
[00:17:53] From a third year EM resident graduating in June. He says, “I've contributed fifty five hundred/year to my Roth IRA for 2015 through 2017 and I'm trying to figure out if I will be able to in 2018 as well. I make about 70,000$ this year as a resident New York City. I will start working as an attending in Pennsylvania on August 1st, I'm assuming that will be over the 118,000$ limit for 2018. Since I'm guessing I won't be able to contribute unless you know a loophole. Where would you recommend I start contributing during the last six months of my residency? (See the Back Door Roth IRA tutorial for the loophole)
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[00:00:00] 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. Here's your host Dr. Jim Dahle.
[00:00:19] Welcome to Podcast number 33 that we're calling questions from medical students. This episode is sponsored by ProAssurance, professional liability insurance for doctors. They understand the risks involved in the practice of medicine. Your reputation is at stake and even the best doctors face malpractice allegations. Count on ProAssurance for superior defense against claims as part of their commitment to treat you fairly. ProAssurance is rated A plus superior by A.M. Best. Learn what it means to be treated fairly at ProAssurance.com.
[00:00:49] Our quote of the day today comes from William Bernstein. If you began your investing journey after 2009 or haven't yet started then you're an investment virgin. It is safest to assume that your true risk tolerance is low and you should start with the conservative stock bond allocation say in the range of 50-50. If you find that you have a lower risk tolerance than you thought at least you'll discover it relatively early and with a relatively small portfolio.
[00:01:13] So this is exciting. Today we're recording this for the first time on YouTube. And so this is going to be available either on YouTube or via the traditional podcast outlets and in the show notes we'll include both. So you can choose how you like to watch it but the Youtube version is going to be less polished because we're not going to edit it so you actually get to see the making of episode number 33.
[00:01:34] Before we get started I want to encourage you to talk to your colleagues about money. I had an interesting chat last night with a doctor that I've been admitted patients to for the last year and a half and he said hey I'm reading your book which I thought was great. He hasn't gotten through it yet but it is pretty interesting to realize that maybe I could've helped him a lot more if I talked to him a year and a half ago about money. You see he's got high student loans he owes about four hundred thousand dollars and he hasn't refinanced them at all. Most six point eight percent. But he's got a third of them at seven point nine percent. Meanwhile he's got somebody trying to sell him a whole life insurance policy as a Lerp, a life insurance retirement plan.
[00:02:17] He has no idea what a backdoor Roth IRA is and really is still trying to sort his way through retirement accounts while carrying 400 thousand dollars in debt. And he was wondering if maybe he should carry that debt for a while so that he can make more investing but in reality at six point eight percent or seven point nine or he was talking about refinancing him to 5 percent that's a pretty risky proposition to try to beat that with your investments.
[00:02:42] When I really got talking to and he thought he could pay his loans off within three years which means you could refinance them into a five year variable loan with very little risk and you probably get that at 3 percent or maybe even less. So I just want to emphasize how important it is to talk to your colleagues about money and let them know that there are resources out there. There are people that aren't trying to rip you off. And really it's pretty impressive too. And I really dug into it with this guy. The person trying to sell him the whole life policy was another doctor trying to move into financial services. Please don't do that to your colleagues. They don't need to be hosed over anymore than they already are.
[00:03:20] In today's episode we're going to talk mostly just answering questions that people have sent in to me over the last couple of weeks and the majority of these actually come from medical students.
[00:03:29] And so they're great questions and there are people with all kinds of different financial situations but I thought that was kind of a good theme to put all these together for today's episode. So the first question I got actually came in on the forum there at white coat investor dot com slash forums. He said I'm 24 and married I work in research and my wife is a nurse. I will start medical school that's come in July and I've been trying desperately to pay off my student loans before I have to take out more. I've talked to 24000 dollars remaining in my loans to pay off. Remember this is a premed student. I tried to put 100 percent of my paycheck to my loans. We live off of my wife's paycheck, constantly stressing about money and the ability to pay these loans is making both of us truly miserable. I get aggravated every time she goes shopping because I feel like we need to just buckle down and pay our debt. She's 100 percent in on wanting to get my debt down before I start med school but it's beginning to wear on her marriage. I feel like we cannot enjoy ourselves at all.
[00:04:23] We spend very little money outside of rent and bills and the constant stress of finances is starting to drive me crazy. I know I need to tone it down and being so strict with our finances. But how can I? How can I find some sort of balance so that we can actually enjoy our lives as well?
[00:04:37] Well this is kind of a tough situation. I mean they really both need to just step back and look at the big picture. Let me see if this helps your marriage matters more than this debt or even what you do with your finances this year. I mean we're talking about 24000 dollars worth of debt. But my general rule is one house one spouse. Those guys are at the beginning of a very long tunnel. There is a light at the end of it and that light is what I call the good life where you don't think about finances at all. And you can live your life exactly how you want but that light at this point is this year this last premed year plus four years of med school plus three to seven years of residency or fellowship training plus two to five years of living like a resident away. And so it's over a decade away and they need to look at it from the long haul both of them need to be in it for the long haul and on the same page. Habits matter more than dollar figures she can help you not be cheap. You can help her maybe be a little less spending and find a careful balance.
[00:05:37] I mean no couple has the exact same spending balance. Everybody's a little bit different. And most of the time you will help each other to moderate your positions. And the truth is for this couple what they do with their spending now really doesn't matter that much. What really matters in a physician's financial life is that first year out of residency. So even as a premed and a medical student and a resident, your planning should be all focused on those first 12 paychecks as an attending physician because that is the key to building wealth as a physician. You want to be able to hit the ground running when you come out of your training. So congratulations to this premed student on getting into medical school that's not an easy accomplishment. But there's not a lot you can do about finances in medical school. If your wife works that's going to help a ton because it will mean you can take out less loans. If she works at the hospital that gives you a tuition discount. That's awesome. A lot of my classmates had that benefit. If you can minimize how much new debt you take out that will help.
[00:06:35] You want to choose a specialty mostly with longevity considerations. You want to do something you're interested in that you will be interested in for another 30 years. And that matters more than how much especially pays or anything else because if you're burned out in five years at a high paying specialty that's not going to help you much, compared to being able to make less money over 30 years. But for heaven's sake if you like orthopedics and pediatrics equally do Ortho.
[00:07:05] There's really nothing magic about paying off your current debt before starting school which is this couple's goal. And it's great but you know don't go donating plasma to do it. The truth is 15 years from now you can make more in an hour than you spend on groceries in a month now. You'll be able to pay off the debt if you combine attending income with the resident lifestyle for a few years after residency. I look back sometimes at some of the cheapskate things I did in college and medical school and even afterward and wonder why I was so friggin cheap. It seems so silly now. I mean habits are good. They are important. But keep moderation all things.
[00:07:38] So those guys are doing great. But you know the old adage of happy wife happy life and I haven't found one that rhymes with husband yet so don't write it and say I'm sexist but a happy wife happy life is a pretty good motto because if you preserve that relationship it's going to allow you to concentrate on your career and your finances and you're going to do better financially by following that. But I think this is probably pushing a little too hard. The key to making progress toward your financial goals is to avoid feeling deprived. You want to spend as little as possible but as little as possible without feeling deprived because as soon as you start feeling deprived you start fighting about money. You start feeling terrible, you feel like there's no light at the end of the tunnel.
[00:08:19] So sometimes you get a bump up spending a little bit to avoid having the whole plan collapse and just the fact that this premed is already on the white coat investor forum. I mean they're going to do fine. Right. He's probably going to be a millionaire three years out of residency.
[00:08:34] All right our next question is from a fourth year medical student. He says I'm planning to go into a five year general surgery residency program. I'm in a stable place in my life, that's interesting going into a residency program and feels like he's in a stable place. But anyway says I'm not married have no kids.
[00:08:51] I have about 80 thousand dollars. Five point eight interest in student loans and I've already started to pay back the loan amount as I did not use or need all the loan money that I received. Well that's pretty impressive only 80000 and already paying it back. I have a large sum of gift money coming my way. That's great too. And I'd like to invest that in a home purchase. I'm not sure invest is the right word to use there but OK.
[00:09:12] I know that you recommend residents don't buy a home during residency. What are your thoughts on investing in real estate versus paying back the remainder of my loans with the incoming gift money. Also if I pursue a home purchase would I qualify for a conventional 20 percent down mortgage with the resident salary if I'm able to put down the 20 percent with a gift money or would I be restricted to the physician loaned.
[00:09:33] You know it's interesting, this burning desire to buy a home among medical students and residents. You know usually I think it's just the spouse that wants to buy that home. But you know it's the students too.
[00:09:43] I mean he's got some gift money. He's got all this student loan debt. He could wipe it out. And yet what are you thinking about doing with it? Buying a home. You know my general rule is don't buy a home as a resident. That's because you know the breakeven period on buying a home is really three to five years. You have to come up with enough appreciation of the home to account for the transaction costs and the round trip transaction costs for buying a home are about 15 percent. And so a five year residency is probably going to work out better than a three year residency.
[00:10:14] So if you choose to buy I hope that works out well for him but I think my general rule of renting as a resident should be the default position.
[00:10:22] Personally if I had the money to pay off those 80 thousand dollars in loans I'd just pay them off. I mean there's no way anybody's going for public service loan forgiveness on a physician's salary with only 80 thousand dollars in loans. I mean even without the inheritance with only 80 thousand dollars you should be out of debt by Halloween the year you finish residency. So you might as well get started. But if he doesn't pay them off refinancing and put whatever he can toward them during residency is a good idea.
[00:10:47] As far as whether to use a doctor loan or not, I don't think you're required to. I mean if you want to put a 20 percent down payment you could do that. Bear in mind a doctor a loan doesn't allow you to buy a bigger house than you otherwise could. It just allows you to buy a house with less than 20 percent down and not pay private mortgage insurance. That comes at a cost of slightly higher fees and usually a slightly higher interest rate. But you know it's hard to know really how to recommend what you do in this situation without knowing how big the inheritance was and how much the house costs and so on and so forth. So there's really no right or wrong answer to that. But this guy is so far ahead of his peers it doesn't really matter what he does with a house during residency if he wants to buy it he loses 50 grand. He's still way ahead of all those docs that owe four hundred thousand dollars.
[00:11:34] But again here is a medical student paying attention to finances before he even gets out of medical school, he's going to do just fine.
[00:11:41] All right here's another medical student writing in. He says I'm a fourth year medical student that introduce your book a few months ago and I've been following the podcast since and catching up on the earlier episodes. This is my first venture onto the Web site in search of some advice. I've also been introduced to a few of what I would consider alternative investment strategies that I do not believe I've heard a mention of yet and want to hear your thoughts. I'm not sure if they're just newer and less popular or if there are innate concerns about these strategies to be worry about. He's got my interest piqued. Now I'm wondering what alternatives he's talking about.
[00:12:14] The first is socially responsible investing or SRI. My knowledge is this there is little different this and other forms of investing. Except these companies have gone through some sort of vetting process and are more environmentally conscious. Are there Sri funds out there? Are there any concerns with this type of investment philosophy?
[00:12:32] The second question is less about investing and more on the charity side which you do mention in your book and podcasts. Effective Altruism which I was only recently introduced to by randomly checking out the Most Good You Can Do from the library seems to be an ethical and efficient way to donate for those individuals that do this. They point out that some companies like Give Well rate charities by their efficiency as investing is often about being the most efficient with your income. I thought being the most efficient with your donations is also something to take into consideration.
[00:12:58] OK let's hit the first question first. Socially responsible investing, is it a good idea, is a bad idea? Well basically what these companies or mutual funds tend to do is they have screens.
[00:13:10] And if a company sells tobacco or if they sell alcohol or they make firearms or whatever the thing is that they feel is not socially responsible they don't put money in those funds and instead invest in other funds. And that's perfectly reasonable to do. I mean everybody is allowed to invest wherever they want. But the problem is one man's socially responsible is not another man's socially responsible. For example you might not feel like alcohol is really that bad or you might not feel like you know a particular business practices that bad and somebody else does. And so the likelihood of your values lining up perfectly with those of a mutual fund manager seems very low to me. The other problem with these funds is their higher cost that a traditional index fund instead of paying four or five basis points. Maybe you're now paying 60 and so I really don't think it's worth that extra cost. Because of those higher costs you end up getting lower returns and in effect the way I look at this is because you're not having much of an effect with your investments. Now you can donate less to charity and you're doing less good overall in the world. And so I'm not a big fan of socially responsible investing. I think you're far better off just investing to get the highest return and that given to those charities that you most support.
[00:14:31] And the other thing to keep in mind is where your money goes when you invest it right when you buy a share of stock assuming you're not buying it as part of an IPO Or you know when it first goes on the stock market. You are just giving your money to another investor who is selling it. You're not doing anything to the company, the company doesn't get any of that money. So whether you own it or not they don't care it doesn't affect their business practices one bit.
[00:14:59] And in fact if people avoid stocks because they're felt to be socially irresponsible those stocks will actually have a higher return because you'll be able to buy them at a lower price. And so in that sense buying sin stocks you may be able to come out ahead a little bit more and so a lot of people actually do that. There are mutual funds out there that focus on socially irresponsible companies and by those preferentially and the returns actually aren't too bad. And so bear that in mind if you're really willing to give up good returns in order to feel a little bit better about yourself you're probably going to get markedly worse returns doing it. You're far better off either donated to charities that you support or boycotting the products of the company because that will actually affect the earnings of the company and what they do. So rather than boycotting owning it, boycott buying from it that will make a much larger difference.
[00:15:56] OK. This question comes from a doc who just started working at a multi specialty practice says I do very rare surveys for which I get about 20 to 50 bucks. At my job that wouldn't let me start contributing to a 401k until January 2019.
[00:16:09] I wondered if I could use my survey income has reason to start my own personal 401K or any other means of saving that addition of my backdoor Roth IRA. Also if I'm able to do this now how will it affect me starting my company sponsored 401K next January.
[00:16:24] Well what he's really asking about is an individual 401k and so any time you have self-employed it called you could use another 401k other than the one your employer offers. But in general because you're using the employee contribution at the hospital or your practices 401k you don't get to use that in your individual 401k. You just get to use the employer contribution which is about 20 percent of what you're earning in your self employment income. So if you do that you know and you're not earning much like this person is talking about making 50 bucks doing surveys. So if he makes 250 dollars during the year he's only going be able to put fifty dollars into that Individual 401k. So it's not like if you're not earning much in self-employed income that you're going to be able to stash away all this money. It doesn't work that way. It's variable depending on how much you make as a self-employed person in your business which is what you're doing when you're self-employed.
[00:17:19] However that can be a great way if you're tried to get around the pro-rata rule with your backdoor Roth IRA and you need a 401k to roll so huge traditional IRA or SEP IRA into doing a few surveys and getting an employer identification number from the IRS and open it up an individual 401K, even if you're only contributing 50 bucks to it, allows you to roll that IRA there. So that could be a useful strategy. But if you're not making much as a self-employed person it might not be worth the hassle to open an individual 401k for you.
[00:17:53] All right. Next question comes from a third year EM resident graduating in June. Says I've contributed fifty five hundred year presumably to his Roth IRA for 2015 through 2017 and I'm trying to figure out if I will be able to in 2018 as well. I make about 70 thousand dollars this year as a resident New York City, man I wish I'd done my residency in New York City. I made about half that. I will start working as an attending in Pennsylvania on August 1st I'm assuming that will be over the 18000 dollar limit for 2018. He's talking about the Roth IRA contribution limit. Since I'm guessing I won't be able to contribute unless you know a loophole. Where would you recommend I start contributing during the last six months of my residency. I've six thousand dollars saved up that it was going to put in my Roth IRA before I came to this realization. I also have a mutual funds account for about five thousand dollars that I could contribute more to. But obviously it doesn't have the same tax benefits. Would love to hear your ideas.
[00:18:44] Well I certainly do have an idea. It's called The Backdoor Roth IRA. I'm amazed that there are still people listening to this podcast and reading my blog and out there in Dr. Land that don't know about the backdoor or Roth IRA.
[00:18:56] Just as a refresher, even if your income is above the income limit you can still contribute to a Roth IRA each year but you have to do it through the backdoor. This is totally legal but it is basically an indirect contribution.
[00:19:12] First you put it in a traditional IRA and usually because you have a work plan available to you, you're not allowed to make a deduction for that contribution and then the next day or the next week or whenever you move it from the traditional IRA into the Roth IRA. Perfectly legal as long as you don't have another SEP IRA or traditional IRA or simple IRA or a rollover IRA. You can do this. No matter what 401K, 403B, or 457 you have, those don't impede the process and so you put it in a traditional IRA and you move into a Roth IRA and boom there's your loophole there's your way around that income contribution limit and you can keep doing a Roth IRA for your entire career. You can keep doing one for your spouse as well from your own earnings and so that's a great way to get that tax diversification in retirement by doing backdoor Roth IRAs throughout your career.
[00:20:09] This episode was sponsored by ProAssurance, professional liability insurance for doctors. They understand the risks involved in the practice of medicine. Your reputation is at stake and even the best doctors face malpractice allegations. Count on ProAssurance for superior defense against claims as part of their commitment to treat you fairly. ProAssurance is rated A plus superior by A.M. Best. Learn what it means to be treated fairly at ProAssurance.com.
[00:20:32] Now you can do this. We're here to help. Keep your head up, your shoulders back, this financial stuff is not that hard to figure out and you can do it.
[00:20:40] Check out the resources Whitecoat investor dot com. Make sure you're following us on Twitter and Facebook. See you next time.