Writing this website, responding to comments and emails, and participating in internet forums makes me a bit insulated to what's really going on out there sometimes. That's one reason I really like going out and meeting real docs where they're at financially. I returned yesterday (I wrote this piece in April) from Tucson, where I had the chance to meet a lot of readers and actually speak to my residency program. It was fun to meet new people and renew friendships with those who had given so much to me. The week before I was in Boise, speaking to the Ada County Medical Society, also a great group of docs. But you quickly realize there is a serious selection bias in the docs who arrive at this site. Those who arrive here are not only very interested in financial stuff, but they are also more knowledgeable about it, even without me, than the average doctor. This post, however, is not for you guys. It's for the other guys.
Credit Cards Are Not For Credit!
I've written before, but not for years, about how credit cards are not for credit. You're not supposed to actually carry a balance on them. Well, unless you're somehow taking advantage of a 0% for 18 months kind of deal and could pay it off at any time. Credit cards are for convenience, and maybe also for rewards. And perhaps for a true cheapskate with a massive portfolio, to help him spend a little more money than he would otherwise. But one month of carrying a balance on those suckers pretty much wipes out the rewards for the entire year. If you've carried a balance on a credit card, or paid a credit card fee in the last, say, 3-5 years, credit cards are not for you. Cut em up and throw them away! Heck, even if you are having difficulty saving 20% of your gross income you should get rid of your credit cards.
So what triggered this? Well, I gave a talk to the residents and some of the feedback afterward from one of the attendings was, “The only additional thing I wish you had covered was to tell them not to use credit cards.” I thought to myself, “I have to actually say that? That isn't a given?” I just always took that as a given. Of course, you're not stupid enough to carry a balance on a credit card, are you? Are you? Well, it turns out that lots of people are. QUIT DOING THAT! That's personal finance 101.
A Bit on FMG Immigrant Families
I had a great chat with a resident who was doing some incredible things. She was a refugee from a war-torn country whose family had lived in several different third world countries. Now, half the family had made it to the US, including her parents with advanced degrees working in menial labor jobs. Despite being an FMG (Foreign Medical Graduate), she had matched into a particularly prestigious residency program and had been given awards for her exceptional ability to relate well to patients. And she was truly as nice as she sounds. So nice, in fact, that she was partially supporting her parents and siblings with her residency income and doing all she could to help the other siblings to legally immigrate. However, these efforts caused her to live beyond her means and rack up some serious credit card debt. Now, in the end she'll be fine, because she doesn't have the usual $200K in student loans to go with it. But we had a long chat about the importance of pulling people up to where you are, rather than trying to push them from below. Due to the debt, this resident had a lower net worth than all of her family members, including those living in a third world country! Just like most attendings will make plenty of money to be able to put 20% toward retirement, pay off their loans, and buy a fancy wakeboat (eventually), she will be able to save for retirement, pay off her (relatively minor on an attending salary) debt, and assist her family. But it is important to have your own financial house in order before you try to help someone else. It's the same reason retirement savings is a bigger priority than college savings. You'd rather have your kids work their way through college than have to support you in your golden years.
The Medscape Debt Survey
Medscape just came out this week (again, this was written in April) with their annual physician compensation survey. Part 2 of that survey shows a bunch of interesting stuff. The net worth chart is particularly interesting. Thanks to regular commenter Toshi for helping make the images more readable.
It wasn't so surprising to see that 94% of docs under 28 have a net worth under $500K, nor even that 65% of those 35-39 had less than $500K (although I wish that number were a lot lower). I did find it surprising to find that number never dropped below 10%. At any age, at least 1 out of 10 docs has a net worth under $500K. That's terrible. Heck, it's still 30% at 45-49!
I also found it depressing to see that only 50% of docs over 50 are millionaires. Remember this is net worth- home equity, savings account, checking account, retirement accounts, other investments etc. That's terrible. While I don't expect every doc to be a millionaire at 40, I don't think 50 is a particularly high hurdle. I think $2 Million is a reasonable number for a doc to retire on (that's an income of $80K a year plus Social Security), but when you look at docs at retirement type ages (60+) you see a quarter of doctors still don't have that, and that includes their home equity! Take away the home equity, and that number would be even higher! I was, however, surprised by just how many 70+ docs had more than $5 Million-about 18%. I don't know if that is a reflection of “The Golden Age of Medicine,” or simply due to the fact that they were able to invest throughout the 80s and 90s. But clearly, there are still some docs out there who became very wealthy.
Physician Expenses
Moving beyond the net worth chart, we see one on physician expenses.
2/3 of docs have a mortgage. Okay, no biggie. But 38% have a car loan?!? WTH? Quit buying cars on credit! If you can't afford to buy the car with cash, you can't afford the car. You make $15-50K A MONTH! You should be able to save up for a BRAND NEW CAR in 2-3 months. I could buy a couple of reasonable used ones every month with discretionary cash flow. There's no reason 38% of docs ought to have a car loan. But get this! It gets worse. There's ANOTHER 17% who are LEASING their car. That's a significant majority of doctors who aren't driving a paid-off car. I can barely even write the word “paid-off” because it implies that you had payments at some time.
Who Has Student Loans?
So this was a funny graph.
It turns out emergency docs have more student loans than anyone else. 37% of emergency docs haven't paid off their loans. We're the big losers in the house of medicine. How embarrassing. Only 16% of pulmonologists still have student loans. On average, the numbers seemed to be in the 27% range. I expect that will go up every year for the next few years with the crazy debt burdens young docs now have. 41% still have student debt at 40, and 11% still have it at 50. [Update: Even more embarrassing is that EM's still are the top of the list in 2017! – Ed]
Who's Building Wealth?
One of the questions asked about spending habits. While it was good to see that 61% “live within their means and had little debt” it was a bit depressing to see that only 24% checked the box that they “live below their means, people would be surprised at how much money I have.” I wonder if that percentage would have been higher without the second phrase, since most people, including doctors, don't think they're rich. (That question was asked in 2012- only 11% of doc think they're rich.)
How Do Docs Lose Money?
77% of docs didn't have significant financial losses in 2014. That's good since stocks, bonds, and real estate were all up. 6% of docs still managed to lose a lot of money in the stock market despite the fact that just buying all the stocks would have provided a 12.6% return. However, most losses seemed to be due to divorce and practice issues. Fear your spouse more than your patient!
Investment Mistakes
It turns out that, at least by self-report, endocrinologists are the best investors (least likely to make an investing mistake) and anesthesiologists are the worst.
55% of docs claim to have never made an investing mistake. Hard to put that together with the net worth numbers though, since it seems most docs are at least making the mistake of not investing enough! Given the people who email me, I find it highly unlikely that 55% of docs haven't made any mistakes. Chances are, they simply don't know about their mistakes! At any rate, 28% acknowledge making a mistake investing in the stock market, 14% in real estate, and 14% in another investment. You can count me into at least the first two categories! No surprise, since emergency docs are the 6th worst investors.
If you don't know much about personal finance and investing, know that the first goal for most doctors is to get back to a net worth of zero. It will be far easier to do that if you don't have any credit card debt and if you “go nuts” on your student loans for your first year or two out of residency.
What do you think? Are you surprised how many doctors carry a balance on their credit cards? Are you an immigrant supporting multiple family members? What is that like? Are you surprised by the physician net worth numbers? Why or why not? Comment below!
It might just be because it’s late, but I think the section “Who is building wealth?” has the wrong picture/graph. Very interesting info though.
I’ll try to get it fixed ASAP.
You definitely have a skewed population on this blog! I’ve tried to help some close physician friends with their personal finances. I even bought them your book and highlighted particularly important sections. It goes in one ear and out the other. They just don’t know (or want to know) about making intelligent personal financial decisions. One of my best friends does a lot of night calls and can’t wait to give it up. I showed him how to do it with minimal impact on his lifestyle. Yet, he won’t do it. (This despite the fact that his wife is also a physician and combined they make close to $600K! WTH!!) You are basically telling overweight people why and how to lose weight. (Yes, some will be surprised that daily ice cream and donuts are not on the plan!) Ultimately, you will only reach a few but for them you will make a great impact. Thanks for not giving up on these people.
I’ve had the same problem. They mustn’t be able to process and see it the way I do, the whole omission/comission perspective. They see an amorphous “risk”, where I see them choosing to basically push money away/burn it.
The data prove doctors in general are financially illiterate, as are most americans. Sad to see such low net worth and the majority never making a financial mistake. Docs like leasing fancy autos to boost their esteem; how silly!!
nothing wrong with BUYING a car with financing, especially in this low int rate environment. A lot better than Renting, also known as leasing.
BEST TO buy A CAR OFF A THREE YR LEASE, THAN NEW
can you expound on that statement (buying out a lease)?
The one and only time we leased a car, at the end of the 3 year term it was worth more by Kelly Blue Book than the lump sum buyout price set in the original contract. We bought it and our daughter still drives it today.
i’m with you on this, i think Jim is way too stringent on this issue of car buying. i bought a very reasonably priced hybrid at 2.6% 5 year loan. i probably have saved 2K in gas expenses by spending a little more on a nice hybrid. plus for those of us who commute to work, we spend a great deal of time in our cars and many of us like a bit of comfort here that i wouldn’t have in 97 Accord. new, luxury vehicles are a total waste of money, but having a small car payment each month just isn’t that bad.
Each car is different, but when I priced it out, if gas mileage was the only difference between a hybrid and non-hybrid, then the break even point was about 8 years out at $4 a gallon. Quicker break even if gas is higher, slower if gas is less. Especially with cars getting 40+ mpg now, I think paying the hybrid premium is not as compelling. And there is always more possibility of problems with more complex systems.
But, my father in law loves filling up once a month and is sure the extra money he spent up front was worth it, even though his break even point will be after he is dead because he drives so little….
I bought my Prius C with 0% over 5 year loan. $5k down.
Cool. Sometimes you have to pass a rebate up to get the 0% interest though. So if you would have had the same purchase price with or without the loan, then 0% is a no brainer. Passing on a $2000 rebate to get the 0% would take some more math to know which is better.
You want a real waste of money buy a wakeboat. I can’t believe how much gasoline I burned last week making a 4 foot wave behind the boat to surf on. It was pretty fun though.
Seriously though, if you could buy everything in your life at 2% a year, would you do it? Your groceries? Your electric bill? Your health insurance bill? If not, why not? How is your daily transportation any different? If so, what is your ratio of debt to net worth and do you believe there should be an upper limit to that number?
Try wake skating. Uses less gas.
If the goal was to use less gas, I’d have kept the old boat!
I didn’t read all of the 91 comments on this topic, but there are significant tax advantages to leasing a car through the business for physicians who are business owners and have more than 1 office location. This may contribute to the number and I also agree its tough to justify not taking 0% or 0.5% on a 20 grand (it ends up being like 250 bucks of interest over a 3 year loan)…Just a thought.
Funny how many people feel threatened by my rant on car/lease payments. If you want to buy your cars on credit, lease cars, buy whole life insurance, pick your own stocks, or buy a gas guzzling wake boat, knock yourself out. But pretending it is some kind of good financial decision seems odd to me. Leasing a car only looks good financially if you compare it to an equally stupid method of paying for your transportation. Sure, there are tax advantages, just like there are tax advantages to having a $2 Million mortgage.
Your argument doesn’t hold water. You don’t spend $500 a month in a lump sum on your groceries, your electric bill, and unless you are self employeed you insurance.
I’m not saying buying cars is a good investment but owning a slightly nicer car that has a warranty and doesn’t eat oil and gas isn’t a bad thing. Buying used is nice if it works out buy I know plenty of people that think they are getting a sweet deal on $5000 dollar car but sink $2-3000 in repairs in it over a year time period. Thats 7-8K or $2500 a year. Still not bad but not great either and at the end you might recoop 4K.
Likewise I could buy a 30K car (from selling my clunker) and finance 26k over 5 years for about 500 a month and in the end I can sell it for at least 15K. Very few cars have major repairs in the first 5 years and anything in 3 years is under warranty. In the end it cost about the same per year.
The difference is if you want to pay monthly or in lump sums. If your used car is a good one you come out ahead. If its a clunker you don’t. You never known.
I agree that cars are not a good investment.
What helped us get back to zero and beyond was simply plotting our net worth once a year every year. I saw how our debt repayment matters, how our cars depreciate, and the importance of investing for our future. Start with seeing the big picture of your forest, then learn each of your trees.
Leasing luxury cars seems to be a bad habit that I see people doing all the time.
Regarding renting vs. Leasing a car….my hubs and I (both ED docs) have been told by 3 different accountants (had a hard time finding a good one) that leasing a car is “better” because we can deduct the payments from our taxes (a portion or all including gas maintenance etc)…so from a tax perspective does this really help? Or should we really just buy? After reading your site we are both starting to think we have gotten bad advice…
Your accountant is correct in that it will lower your taxes, but a 10% mortgage will do that also, so it depends on what your end goal is. Sometimes you can come out ahead with a lease, mostly if you like to upgrade every couple years, and have expensive cars. If you hold onto a car for a longer time, you can still deduct all your car expenses, either way you have to keep very good records.
And unless you use your car 100% for business, and it’s hard for most docs to use a car just for business, the lease isn’t 100% expensed. Have your accountant run your numbers both ways and see which leaves you with the most money, not necessarily the least taxes.
Here’s the deal with leasing- If you’re going to buy a new car every 3 years, then leasing may be a reasonable option.
But the cheapest transportation is buying a used car and driving it until it dies. For example, my first car as an attending cost me $1850. I drove it for four years, put a new battery, two used tires, and new windshield wipers on it, and then sold it for $1500. My second car as an attending (outside the hospital as I write this) cost me $4000. I have had to put a transmission in it, so it isn’t nearly the deal the first one was, but I’ve also gotten nearly five years out of it and may get five more. Ask your accountant whether leasing a car will cost you less than what I’ve done the last 9 years.
Re: leasing costs as an income tax deduction.
My husband and I are ER doc and surgeon. The 3 accountants we’ve had over the last 25 years NEVER have sanctioned auto costs as a deductible expense.
Accountant #1 advised that my husband could deduct only the portion of driving he does from one hospital to another _IF_ he kept a daily log, which he would never do.
Our accountant felt the whole lease vs. buy through the office was a wash. My husband wanted to try leasing once anyway. He picked a car that he knew would be worth more at the 3 year buyout than then what the buyout was. To this day he can’t tell you if after all the math it was a good deal or not for us. We didn’t do it again. The accountant felt at least it was an easy bone to the IRS if we were ever audited.
You do not have to lease in order to write off car expenses, but I understand that people prefer this way. However, you have to be careful of falling in the trap of spending more money to save more money on your tax bill. It should all be viewed through the lens of what you truly need/use and how to maximize that.
Its not really savings if you are spending 500/month to save 75/month. Makes no sense. Make sure everything goes towards the overall financial goal (more money in your pocket), dont get hung up on one detail.
Wow didn’t realize it was so unpopular financially to lease cars. Why is this? What is the recommendation for someone looking at a luxury vehicle but doesn’t want the hassle of owning the thing after the warranty expires?
I can definitely see the appeal of buying the car outright if it’s cheap and reliable but hard to see the appeal in actually owning something like a BMW outside of the warranty
The solution to just simply drive a cheap and reliable car certainly works but I figured I’d reward myself for getting free of my student loans and since I can list the lease as a business expense, figured all the more reason to do so. Not good?
If you don’t want to own the car, not much to do besides lease it.
The solution could also be to drive something expensive and reliable, and drive it for a long time. If you are doing all the other things WCI recommends then leasing a car isn’t going to destroy your financial plan. Many times you can deduct even more by buying, especially if it’s a very heavy vehicle, but check the numbers with the car you use and how much you use it for business.
One last thing, buying a BMW out of warranty can save a ton of money. A 2015 5 series is 62K, and the 2012 version of the same car is 39K if you get it certified pre-owned. I can make a lot of repairs for 23k!
I always wondered who bought new cars every time they went off warranty. Now I know. 🙂
At any rate, spend your money on what you like. As long as you’re saving “enough” if you want to blow the rest on a fancy new car every 3 years who am I to criticize?
Leases nowadays go for less than 200/month – much cheaper to lease a reasonable car than buy – saw 170/month for a Altima yesterday, much cheaper than buying, having car trouble even one day, and missing work
Yep, a cheap car means a cheaper lease, but it doesn’t change the math, just makes all the numbers smaller. I could lease an expensive car for $170 a month with a really large amount due at signing, or I put nothing down and have a larger payment. Monthly payments are not as important as the total price paid.
I don’t know. I bought a car and it’s $0 a month. That seems pretty cheap to me. 🙂
Even if you average out the cost over the months of ownership, it’s still pretty cheap. Consider my last car:
Bought $1850
Sold $1500
Owned for 4 years.
Price per month = ($1850-1500)/48= $7.29 a month
Or my current one
Bought $4000
Current Blue Book $4000
Owned 5 years
Price per month = $0 per month
Or do you mean that the lease payments you could personally get for a Nissan Altima are lower than the purchasing payments you could personally get for a Nissan Altima. I don’t dispute that. However, I think it’s important to look at the whole picture. Let’s say you buy a $25K Nissan Altima. You presumably can lease it for $170 a month. After 3 years, you give it back. Or you can buy it. After 3 years, you can sell it for say $16K (totally making this up, of course.) Cost of ownership- $9K, or $3K a year. If you could lease it for $170 a month, well that’s only $2040 a year as a cost of ownership. So that’s better I guess if the way you use cars is to get a new one every 3 years. But you don’t have to mess around too much with the assumptions before you come to a different conclusion. For example, suppose you can sell the 3 year old car for $19K and the lease is $200 a month (the best I saw online for an Altima). Now you’re behind leasing.
If you’re really into making monthly payments, you could just finance the car over some ridiculously long term and get your payment lower than the lease payment I’m sure. At any rate, I think cycling out your car every 3 years is a dumb way to use your cars, but if that’s your thing, knock yourself out.
Obviously we are only talking leases with no money down. My perspective comes from driving a 2007 sentra (which I still drive and will until its done) – If a car needs a new transmission, thats 2500 bucks and at least one day of work (the day the transmission goes) – if so I could have leased a car for 2-3 for that price.
2-3 years
It’s unclear to me why you’d miss a day of work. Are you installing the tranny yourself? If not, why not just have it towed to your favorite repair shop and take a taxi to work, then to the rental car place afterward? And that’s the most expensive, time-consuming alternative. If your spouse can come get you and you can use that car, it’s that much easier. I’ve had a tranny go out. It cost me an hour waiting for the tow truck and a friend to pick us up. We were on our way out of town to Las Vegas in the other car an hour later with our car headed to the shop.
And brand new car transmissions are covered under warranty. If you’re talking about an older car, then the price of transmissions is generally MUCH less than the depreciation on a new car.
But again, if you just always want to be driving a car that is no more than 3 years old, then leasing probably isn’t significantly different from repeatedly buying and selling.
Man you are fast today! I start writing my response, see a patient, come back and post it and you already hit all the points much more succinctly.
ED is slow today. I currently only have one patient de-mething (i.e. metabolizing to freedom.) So other than researching a viatical fund, not too much else to do than check for new comments!
That’s all true, but not taking the risk of having an “older” car break down will cost money. Car dealerships are not in the bussiness of giving something for nothing, or financing your new car desires. The dealer likes a lease because he makes more money than from a sale. Plus, you pay higher premiums on insurance, plus gap insurance to cover the depreciation, it all adds up.
If you want to lease, go ahead. You can even run your numbers to make it look good for you, but WCI’s examples that he has given multiple times on this site show the other side, and it’s hard to argue with those numbers, just others ones that you put out.
Also, I don’t know a single doc that would miss work because a car broke down. If I get a flat, I fix it, if the car won’t start, I’d get a ride from a friend or taxi and take care of it after work. Only thing I can think of being late for would be an accident, which happens with leased, financed and owned vehicles.
Yeah 55% of people haven’t made an investment mistake? 99.9% of people make investing mistakes. Sometimes that mistake is NOT investing properly. Just because you’ve never picked an individual stock/piece of RE and lost money doesn’t mean you haven’t made a mistake.
Heck, I’m making an investing mistake right now because I’ve been too lazy to re balance lately.. and I know better.
As for the people not generating any net worth.. what I’d like to know.. what the real question is for me.. is: Is that even a goal for them? Maybe it isn’t.
I think there are a lot of people that really don’t care about their older self and even if given the information of how to generate a great retirement portfolio… they really don’t want to if it involves any sacrifice now.
Now, sure they’re going to complain about still working when they are 65/67… and they are going to complain that they have to cut back in retirement… just like many Americans will.
They may even be willing to admit they dug their own hole of a problem. But what I’d really want to know is if they could do it again would they do it any differently?
I wonder someday if I’ll regret being financially responsible and taking some fun away from myself in my 20’s and 30’s if my health isn’t adequate enough to enjoy my money the way i’d like to in my 50’s
You’re right z, the 55% response is preposterous!! Like most surveys, the responses to some questions need to be considered with some skepticism. People don’t know what they don’t know. I just saw a survey in which it asked participants in 401k plans if they could identify their plans. 25% said they could. Based upon my experience in this area, I would say it is more like 5% or so, if that.
I meant to say that 25% could identify the “fees” in their plan. An important omission.
To me the question of FMG’s assisting their family is not so clear cut and should be a separate discussion from the main topic of this post. FMG’s that assist their family and help them to come to the US are making decisions and accumulating debt based on anticipated future earnings. In this situation there is some degree of urgency since the family is growing older. If the FMG delays assistance then educational opportunities for younger family members may be lost, and as older family members age they may become older, sicker and less able to travel. Not to mention the ethical considerations in waiting to help your family escape a “war-torn” country. This isn’t like buying a big house or a wake boat.
I am not a FMG and can’t offer any personal experience, and agree you can’t bankrupt yourself while trying to help your family, but in my view helping your family escape a bad situation could merit a good amount of financial risk.
Excellent points.
Agreed, this may be a different issue from personal finance. Oskar Schindler spent his entire fortune (went bankrupt) bribing SS officials and purchasing black market supplies for his 1200 Jewish workers, who he saved from the gas chamber. If the urgency is great enough, you have to do what you have to do. Although WCI says she is from a war-torn country, the way he writes about her I get the impression her family is probably not still in eminent danger, but rather relatively impoverished, in which case I totally get his point.
Details were changed enough to obscure the identity of the doc, but the current issue is poverty/lack of opportunity, not physical danger.
The “net worth” question may be skewed by misconceptions. I would venture to guess that most people don’t even know how to properly calculate net worth, create a balance sheet, etc., and even among physicians there are many who don’t understand. Many with home loans and car loans don’t consider that they own the underlying asset, deducting from their net worth the associated loan but not adding the value of the home or car in their mental arithmetic. Additionally some may not add the value of their retirement account, thinking only about what is in their checking and savings. That said, there are certainly many older doctors with no real net worth.
I understand not carrying a credit card balance… but why would you suggest only buying cars with cash? Also leases make sense for many that own their own practice as it makes for a cleaner tax writeoff (and tax bracket arbitrage). The idea of “don’t buy a car unless you can afford to pay with cash” makes sense, but actually paying with cash, when rates are 0%, 1.9%, etc. is silly. And if you buy that Mercedes for $90,000, you didn’t save any money over the $900/mo lease when you trade it in 2 years later for $65,000 to get a new one. Avoiding lease and finance on cars only makes sense when rates are high.
But it is shocking to see so many people who should know better carrying credit card balances. Worth repeating again and again!
Mint.com does a pretty good job of tracking it. But you have to give it reading access to all your info.
Yeah, I’ve been playing with Mint. I like the instant net-worth tally – very fun. But I have trouble with it’s estimate of home value and it can’t access some of my accounts (state based 457).
“as it makes for a cleaner tax writeoff (and tax bracket artitrage)”
what does that mean? what’s a “clean” writeoff? By “writeoff” do you mean income tax deduction? What a non-clean writeoff?
Our accountant told us if audited the IRS likes to find/will find something you did wrong. There are some areas they apparently flag for ease of making errors. Leasing and buying a car through the office is apparently one of them. Hence not a “clean” deduction. Doesn’t mean we don’t do it or wouldn’t fight it.
Yes I thought it was striking too that 55% of people felt that they had not made a ‘particular’ investing mistake. Perhaps it was the use of the word ‘particular’ and then singling out stocks and real estate as the areas of error rather than the more common: didn’t save, didn’t invest, didn’t invest soon enough, didn’t rebalance, paid fees that were too high, didn’t pay enough attention, didn’t educate myself, etc, etc. Looking at the breakdown on this answer by specialty, it looked like the more income you had (plastics, orthopedics, radiology, ophthamology) the more likely acknowledged a mistake in these areas. Is it simply that these folks had more to invest?
I also found it striking how low the net worths were from the 50s on. Where is all of the money going? I would never have felt that 2 million was a reasonable retirement nest egg for an MD and the chart says that many MDs are retiring with less than a million. Perhaps if one wants to work until medical coverages kick in but who wants to (or in some cases can) do that?
Please keep plugging away Jim.
FWIW-Here is basic template we use to calculate net worth annually. I have the template as a Word Document. I print it annually in January and hand write in the balances. Each year you want to see your Total Worth increase. I couldn’t figure out how to import the document. Cut, paste and adjust as you see fit…
Dr. Mom’s Net Worth Template: Updated 6/2015
General: Bank: Checking
Money Market (Emergency Fund)
Brokerage: Money Market
Funds/ETFs/Stocks
House: Worth:
Mortgage:
HELOC:
Net:
Vehicle: #1 Worth:
Loan:
Net:
Student Loans:
Retirement: 401K:
Roth IRA:
Kids College Savings:
TOTAL NET WORTH: (Add and subtract it all up)
_____________________________________________________________
Insurance Portfolio:
Life Insurance:
Disability Insurance:
OK, this is embarrassing to admit as I like to think of myself as being at least somewhat financially literate . . . but you just made me so happy I don’t care! I never took into account the value of my house when calculating my net worth. I’m a year out of residency, I’ve paid off my student loans, I don’t have a car payment, I have a retirement account, and my only debt is the mortgage, which I pay extra on every month. And yet, I was calculating that it would be another 10 years or something before I had a net worth of zero. So I was trying to figure out how so many young docs could have such a high net worth, while I didn’t. But now my net worth went from like -300K to +170K, just by doing the math correctly. THANK YOU!!!!!
Congratulations on increasing your net worth by $470K in a single day! 🙂
Most importantly, nice work paying off the loans a year out of residency, avoiding car payments, and having a retirement account. I think $170K is pretty darn good for a year out of residency.
So proud of you! And happy for you! Would love to hear more of your story.
Thanks! Yesterday was like Christmas for me! I have a question I’ve been meaning to ask-my husband and I both work for a university and our retirement account is a 403b. Right now we are just putting in the 14% the university automatically puts in there for us, and our money is growing at 4.7% (mine) and 4.9% (his). I’m not sure why the numbers are different-it looks like they are in the same plan, but he’s had his 5 years and mine just started this year, so that may be why. My question is if this is a decent rate? In the about 3 years we will have another 50k in addition to invest each year and we could put it all in the 403b account, but is that a good idea? Or should we put it in a 401k at vanguard or betterment or something? I know people keep talking about all the fees that people pay when they have someone else managing their money, but I have no idea how to find out what fees we are paying for the 403b account and from what I can tell, there is no way to put that money somewhere else, but I honestly just don’t know enough and could be totally wrong here. Does anyone know more about these types of accounts? I’d be grateful for any pointers!
Remember the investments inside the accounts determine the return, not the accounts themselves. A 403B is like a piece of luggage, the investments are like pieces of clothing. Any piece of clothing can go into any piece of luggage. Past performance does not necessarily indicate what future performance is likely to be. As a general rule, a 5% per year return over the last 5 years is fairly low for a diversified portfolio, but perhaps your holdings are very conservative, so hard to say much about whether you’re doing anything wrong just from the numbers you’ve provided.
So it sounds like you are saying that I should be able to choose my portfolio within the 403b and that I don’t have to stick with whatever standard plan they chose for me. Guess I have some research to do . . .
Yes you do! You’ll be amazed at what you learn!
You are on the right track! Here are some basic guidelines:
1. Determine 15% of your Gross Annual Pay. This amount is what you want to be saving for retirement ASAP. If you are there, great. If not make a plan to get there. Ultimately aim for 20%. And, no, I don’t count matching funds.
2. How much of that can you get into your 403b? There are limits set by the government. For 2015 it is up to 18K. Once you elect to defer into your 403b, the real research starts. What are your investment choices? You may even have Vanguard funds as an option. Sounds like you just let yourself fall into their default option which is very conservative. Fix it. You can change it around over time as you see fit. It’s your money. If you are mid 30’s, shoot for between 60-80% stock/40-20% bond mix for now. Look for choices with “Index” in the fund name. Look for lowest expense ratios. Then start reading up. It is a rare 403b where investments are so bad or so expensive that you wouldn’t want to take advantage of contributing enough to get the whole match.
3. If you fill 403b and haven’t gotten your full 15% invested, then you move on to other options: IRA’s, HSA’s, good old taxable investing, etc.
4. Take your time. Enjoy learning. None of this needs to be done in a rush.
5. Best words of wisdom I can leave you with…At some point in your investing lifetime, the market will tank again. May drop 10%, 20%, 50%, idk. If you are young, this drop is your sale! Watch for it and take advantage.
Best wishes!
These are really helpful pointers. I went to the TIAA-CREF website to see what I could do online, but there’s no way to make changes that way. I’ve contacted some people so hopefully I can get going soon! I just wish I’d paid more attention sooner. We’re lucky in that our employer just puts 14% on top of our salary into the account, there is no match. So that’s a good chunk of money that we don’t even have to think about and it gets invested. I was looking into it and it looks like you can put up to 52K in the account each year total, but there is a limit to how much we can contribute on our own (the 18k you mentioned). So in the next few years we will have more money to invest, but depending on how the account is performing (and how flexible the investing options are), we may put our money elsewhere. Thanks again for the ideas!
I had TIAA-CREF with my old 403b from a previous employer that I have long ago rolled into my IRA. The funds were very good and not overly expensive. They were a little confusing because back then the funds came in different classes of shares. Basically, the same fund came in different flavors of fees. Some with front loads and a lower expense ratio. Some with back loads. Some with just the expense ratio. Makes the process a little confusing but the math is simple. The best choice depends on your longevity with the job. I knew mine was just a few years so I went with higher expense ratio and no load. Good luck!
Also, if you are not saving 15% of gross pay yet and feel like it is a stretch to get there you can do what my daughter is doing. She started with 10% then elected to automatically increase it by 1% per year. Viola. She’ll be at 15% in 5 years without having to think about it again. Most employer plans have options like hers.
Right now we’re investing 14.2%, but using another chunk of money to pay off student loans (which we did in April!) and then get a 6 month emergency fund in place. So we’re basically saving or investing about 36% of our income. Hopefully in the next year we’ll have another kid and I’ll cut back significantly on my hours for a year or two and we’ll just invest 15% during that time. But then after that we’ll be able to invest the whole 36% each year, which should set us up nicely for . . . whatever!
That “higher expense ratio” is a “C Share” or “C Class.” The load is baked into the ER. It’s important to realize that isn’t a true “no-load” fund although your choice to pay it rather than buy A Shares was probably a good move.
Wow. Is TIAA-CREF still offering funds with all those share classes? It was so annoying but not too hard to figure out. It was one of the first times I caught how the financial industry obfuscates math to their benefit.
I don’t know if they are or not. I usually think of TIAA-CREF as one of the good guys but loaded funds are loaded funds. Maybe TIAA-CREF is running the 401(k) and includes some loaded funds from other companies.
What if I have zero plans to leave the job? Then what would you choose? Can I roll over the funds from the 403b while staying at the job, or is it only after you leave?
Usually you can’t rollover unless you leave the job. But, that is a quick HR question to be sure about your plan.
As far as which to choose, you can set up a pretty simple algebraic equation to see the break even point between each option. They may even provide you that in the prospectus. But, I prefer to do the math a little differently. Life happens good or bad that can change your plans. Whatever you think your longevity is with the job divide it in half. (So if this is your job for the next 20 years, use 10.) Then just look at the math difference between your options over the period of time you chose as meaningful to you. You may see the difference in cost really doesn’t matter so much, or it may be obvious which to pick. When in doubt, don’t pay a load. Hope that helps!
wideopenspaces,
I work at a state university and have a 403b. But I also have access to a 457 (a Deferred Compensation plan), and I really like it: low fees, many options, no 10% penalty for early withdrawals, allows another $18,000 pre-tax to be invested. Do you have the option to use a 457? If so, I’d strongly recommend looking at the details of your plan and seeing if it would be a good fit for you.
I’ll have to look into that. Thanks for the head’s up! Lots of ideas here . . . I’ve got some homework to do!
I work at a university and DH is community hospital ER physician. For my employment I put the obligatory 12% retirement contribution in but then we also tap out the voluntary investment plan (a 403b) with another 18k which is a great way to save more for retirement. And I max out my HSA. My paycheck is rather depressing (there’s not much left – I am a PhD researcher) but it does wonders for our overall portfolio and tax bill so I’d definitely check this out.
We found this wonderful site and bought the book in early 2015 and reallocated our portfolio after a learning spree as describe earlier in this post (BIG THANKS TO WCI!). We reduced our investment fees considerably and were able to get our funds allocated in a way we are happy with. So I also say enjoy the journey. It’s enlightening.
DrMom, THANK YOU for the spreadsheet template! I adapted it and for the 2nd time in my life calculated our net worth. The first was immediately after DH finished residency. We had credit card debts from multiple moves, no savings, and virtually no retirement with 250k in student loans. I am completely shocked to find out that we are, 6 years later, worth a high six-digit figure! And this is even after accounting for the fact that we still have some student loans and a relatively hefty mortgage due to living in a high cost area. I just thought we were still in the hole. I wouldn’t say we are particularly frugal. We spend a lot on vacations, eat and drink well, and have nice cars (paid in full), but we put ~28% away for retirement and typically have funds left over each month.
Funny how quickly your net worth builds with a 28% savings rate.
So true! And it was great to tap into the backdoor roth idea. We both have them now. Our net worth is especially satisfying since we both started grad school late and finished in our late 30s with -300k net worth.
Glad to be of service! It’s fun to pull out our papers and look at how far we’ve come. Plotting net worth annually helps you make better financial choices. Mental math games can trick you. Best wishes!
Now that we are no longer -300k in the hole it’ll be a lot more fun to do too! I think we’ll need to celebrate when we hit 7 digits. Thanks again.
I don’t count the cars (or the boats.) But there’s no right or wrong way to do it. The most important thing is to be consistent.
I count cars, boats, jet skis etc. to keep them in perspective as we have many of them. They have always been a drag on net worth. It serves as an annual reminder. Although the used Honda S2000 (or as I tease my husband-his midlife crisis) actually appreciated this year.
I only count 1/2 my home equity and don’t count cars and personal possessions. Sure you can sell your house and get some of the equity out, but you still need to live somewhere. Unless you live in a big city with good public transportation, most of us need a car just to function in this society. I could sell my clothes, jewelry and furniture, but again you’ll usually only get a fraction of what you paid for it.
I ended up selling my old boat for more than I paid for it too. Maybe I’m doing it wrong.
Yeah. We got tired of trying to sell the sailboat. Just donated it to a Girl Scout Camp. Wrote off on taxes almost what we paid for it.
You can use Evernote’s webclipper to take simple screenshots instead of photographing the computer screen.
https://www.youtube.com/watch?v=QyuAn1Z_7uM
https://evernote.com/webclipper/
Those screenshots are hard to read. Assuming Dr. Dahle has access to the original material, it’d be much better to use Snipping Tool (or Print Screen + Paint + format conversion) to save them natively as PNG images, rather than taking a photo of a screen…
(For Mac OS X users then substitute command-shift-4 and then drawing a box around the content that one wishes to capture.)
Google brings up the site,that one can see the survey without subscribing
https://www.google.com/search?q=Medscape+Debt+Survey&ie=utf-8&oe=utf-8
Thank you!
I am on the tail end of my 60 day retirement notice. Multiple docs (Surgeons, Anesthesiologists, GI and OB/GYN) have expressed amazement of my ability to retire at 56 y/o. I give them a brief pep talk, provide your website link/book and William J Bernstein’s “If You Can” pdf. On followup, most docs have made little to no attempt to educate themselves. Interestingly, the extended care providers (PAs, CRNAs, 1st assists) seem to be far more receptive to expanding their understanding. Like you …. I will continue the effort to assist.
Congrats on your successful journey.
I’ll comment on favorable timing for retirement. My husband and I are ages 58. We plan to retire in 2-4 years. I scold myself for not keeping our eyes on the ball and being prepared earlier.
However, 4 years ago, during 2011, the real economy and the equities markets were still shaky. I suspect few physicians retired early during the 2008-2012 interval.
The launching pad for early retirement requires a combo of professional satisfaction and alignment of the equities markets. Four years ago, my husband and I would have felt we still had some professional proficiency to scale. I sense we’ve both peaked in clinical skills and are now ready to retire before we dwindle.
I’m out this year at 55. Will have practiced 26 years and 2 months.
You are correct, a little education of yourself early on in your career and saving early on in your career is the KEY. Nothing like compounding to create a large nest egg.
Congratulations, Sam!
Would you mind sharing some detail on how you achieved this? Did you set a target “number” for yourself? Fixed savings per cent through your career? Investment advice?
In my experience the likelihood that a physician is “Still Paying Off School Loans” (chart) has more to do with their parents’ income bracket than their own savings rate. I think the chart shows this too, as the rate of paying of school debt does not correlate at all to physician’s income. Jim, the way you’ve written this assumes that if a physician is school debt free it’s because the physician paid it off, not because their parents paid for med school. All of my friends under 40 with little or no school debt got that way because of their parents, not their own spending habits.
I wish that was the case for me…. I’ve found the opposite, so I think it just depends on who you are sampling. My parents paid for 1 semester of freshman undergrad books, I paid for everything else. My other friends that had parents pay for school ended up with debt anyways and have little motivation to do much about it. It was a monkey on my back, but to them, just a pet parrot they feed each month. Polly wanna cracker?
I do agree that it wouldn’t correlate with income though, as the more some docs make, the more some have to spend to keep up and the less they worry about the loans as there is always money to make the monthly payments. Less income, and the loans seem to be a bigger problem that needs a fix sooner, rather than later.
I was blessed to have my folks help me with my (inexpensive) undergrad. But like many here, I paid off my own med school loans. It helped that I went to school before the tuition bubble (and beater car, vacation at motel 6, inexpensive/free hobbies, cheap city for residency, etc)…but my loans–and new car (Jim: it was 1.9% APR for crying out loud!) and first house–were paid off by 10 yrs after residency. I have a different idea of “good living” than my peers who are still making monthly loan payments.
Yeah, I’m not sure about that, I wold love to see some research on this though. My parents did not contribute anything to my college (thank you, scholarship) or med school (thank you cheap texas med school tuition) education. Being financially independent has always been important to me, that’s why I’m 33, a year out of a psychiatry residency (working in an academic setting, 3/4 time-so I’m not exactly bringing home the big bucks) and I just paid off my student loans. The other people I know that are aggressively paying down their loans are in a similar situation (but have higher debt burdens). Out of all my friends in residency, only 1 had parents that paid for med school.
While there may be some truth to that, I think you need to expand your circle of friends under 40. I’ve been school debt free for 5 years already and I’m still not 40 and my parents didn’t pay for any of my eight years of school. There are plenty of people like me. It’s not that hard to pay your student loans off within 5 years of completion of residency.
I think your replies to my comment are similar to incredulousness that many docs still needed to be reminded not to carry a balance on their credit card. Anyone responding on this website is already a very select audience that is actively thinking about their finances, but we represent a small percentage of the whole physician population. Your anecdotes may not (probably don’t) correlate to the larger population…or at least are balanced by my anecdotes.
Maybe next year Medscape will include the question,”How did you pay for your education?” and we can see if that correlates to who is low-education-debt or education-debt-free.
Via email from “Jared”:
First, I love this blog. I’ve been following for a couple of years now and have sent friends here. You’ve helped me get the courage to “fire” my financial advisor and get a better handle on all my financials. Thanks for that.
Having said that, each time you post about net worth or mention discretionary spending I find myself literally opening up the budget file and desperately looking for ways to skim more from spending and add more to saving because I start to feel like I’m one step away from being the 80 year old doc we all see in the hospital – that guy who you aren’t sure if he’s here because he loves his job or because he drove one too many new cars in his younger days and got burned on that most recent time share purchase he made while in Florida.
Maybe I just need validation, but it seems like I play a different kind of game of Keeping Up With the Jones Family: One of keeping up with the saving. I often feel like I’m being left in the dust when I read this blog, and I get mini panic attacks but nobody will give me any darned ativan!
So, I wanted to subject myself to the WCI (and faithful following) examination, if that’s OK? I’d really like to know if and how someone like me differs vastly from someone reading this who is on a solid road toward where I definitely want to end up…
I’m 33, also an ER doc and also in a state with no state income tax and well above national average income as ER docs go. I’m an IC so I have my own S-corp and my own 401k which I max out. 30% in bonds, 70% in no load mutual funds or commission free index funds. As I mentioned, I’m my financial advisor. My wife is technically employed by my corporation (legal and common here, a whole other topic for another time) and we contribute her salary of $17,500 ($18,000 this year) to her 401k too. I max out an HSA and use other monies for health care expenses. And I plan on doing my first backdoor Roth this year. All told, I put exactly 20% gross into retirement accounts and max out anything tax deferred that I can. Another 5% gross is used to build up my emergency fund and put a (very) little toward college savings (3 young kids). I am paying on about $150k in student loans from a state school and when you add that to my savings rate, 27-30% of gross goes toward saving or paying debt.
I figure on about 22% gross to Uncle Sam (thank goodness no state income tax), which leaves me to live on 48-51% of my gross income.
We bought a house three years ago with 0% down but no PMI. We borrowed a bit less than 1 year salary on a 30 year note. Thanks to good market timing, we have about 20% equity in it now, but that was just lucky.
We both drive new cars and both have a payment. I grew up in a cash for new every 10 years kind of family. My wife grew up in a family where car payments were just what you did. We fought over it for a long time but I finally concluded that I didn’t need to win the battle to win the war, so succomed to the idea of a car payment. I justified it with the thought that a little luxury after saving so well is ok, and that I was either going to pay my bank account or a finance company each month as a car payment, and interest rates are low so what’s the difference really? We are not even close to upside-down and these are 3-4 year loans, not some crazy 72 month, no money down loans. I still hate it though…
We have a house cleaner and a guy who mows the lawn. We go out to eat a lot, travel often and generally have a pretty easy life style. But we don’t use credit cards, I don’t have big toys like a boat or a sports car, and I change my own oil. I keep separate pools of money (in addition to the emergency fund) for auto repair, home upkeep, medical expenses, etc., so we have money in the bank should something bad happen.
What we don’t have is thousands of extra dollars each month sitting around saying “spend me!” I account for literally every penny in our monthly budget. Rarely do we have leftover.
I think about our situation and I get nervous, like it isn’t enough. Is that crazy? My net worth is not near zero yet and I don’t have to cash to walk up and buy a car without robbing from monies set away for other things. I tell myself that having a car payment is not a bad thing so long as you are saving well. It’s a choice to spend frivilously on what you want just like one might say about a pool or boat. Yet I feel guilty for it. I pay 5% of my income to student loans but feel guilty it isn’t more. I know I drive my wife nuts sometimes because she sees what we ARE saving and I see what we COULD be saving. When is it enough? I want to be prepared, but not miss my life while planning for retirement.
So, apologizing for the long post, what do people think? Am I being stupid for worrying or are you and your readers outpacing me? Those reading this are likely to be the people who are where I want to be financially some day, so I would love to know how my situation compares to theirs at my stage in the game. I apologize too for the selfish nature of this post, but maybe others have the same fears or self doubts and have wanted to ask the same question? Are we doing enough? Maybe I’m way behind, or maybe I’ll find out I’m one of many here and am on the right track? Maybe then I won’t need a xanax in order to get some sleep after reading a late night post by the WCI!
First off, congratulations!!! Sounds like you are being proactive with your finances which put you in the top already!
You mentioned that you were not near zero yet, but unless there is something you didn’t mention I think you may be calculating the net worth wrong. The only debt you had that I saw was 150K in student loans and if you are saving/paying debt on 25-30% of a gross salary of say 300K, just a guess as you said it’s way above average, then you should be at zero within 2 years. To me that sounds like success, positive net worth before turning 36! At that point if you cut the saving back a little to 20-25% you still are saving 60-75K a year, at which point you just have to decide when you have enough.
I guess I wouldn’t stress about it much, focus on maybe one big thing to cut back some if you want to do it quicker and let the small stuff go. There will always be someone who saves more and outpaces you, but there are many more that are saving less. You just are dealing with some of the more attuned here on WCI. (But if you want crazy to see some crazy savers go check out the MMM blog, man they put every saver to shame.)
I was going to say the same thing about MMM. It sounds like “Jared” is actually doing fine, but if he’s really wanting to look at ways to save more, MMM is the place to go. Of course, it might just worsen the savings envy/anxiety. I like to read both this blog and that one as I think they balance each other out.
Wow! Only when positioned against MMM do I look like a profligate spender!
Well we all do compared to him! He would NEVER sanction your boat purchase. Or my (reasonable in my mind) J.Crew habit.
Well, I do have one thing (or two) I don’t think he ever had….a job I like.
I think you’re doing fine. This post may help:
https://www.whitecoatinvestor.com/enough-is-enough/
But also keep in mind that your “net worth is not near zero yet.” I’ve got an expensive, frivolous toy or two. But I also have a net worth far more than zero. The reason why is that I didn’t have any frivolous toys, nice cars etc for the first few years out of residency. At any rate, sounds like you’re using something like 30% of your gross income to build wealth. That’s almost surely enough. You’ll get where you want to be very soon and then you’ll feel more comfortable relaxing a bit.
I second that, it’s much easier to skimp earlier. I went my first 2 summers after residency without air conditioning. Now that the AC went out in my car I’m dying, but back then I thought it was normal.
Absolutely. The one big downside to that $1850 car I had was the A/C didn’t work. It was fine most of the time, but not when driving to a shift starting at 2 pm.
From what you post everything financially seems on track. Start playing with FIREcalc or other online calculators to see where you can be in 20 years with what you are currently saving. The math helped us be comfortable with loosening up spending a little. But, loosen in baby steps and only on things that matter to you and your wife. Get her involved and discuss these fears you have together. Balance each other. Once your student loans are gone, you can catch up on kids college savings.
P.S. Something else that helped me be comfortable loosening spending… Read Value Averaging by Michael Edleson. But, this is not a first finance book read. We use the idea in the big picture of our portfolio to decide when to save more vs. when to be comfortable loosening up on spending. When we are ahead on our financial path we loosen by spending. If we fall behind we tighten by saving. Another useful reason to plot net worth annually.
Um, you’re doing fine. Putting the money towards longer term investable accounts prior to paying more on your loans will set you up for the future. Give yourself 5 years for your current choices to compound and you’ll be shocked at how well you’re doing (I also have to tell myself this at times). It doesnt change over night.
I think a big part of why Emergency Medicine is #1 in student loan debt is because we are a young specialty, with more residency grads and slots every year. My suspicion is that if you correct for physician age, we would not be #1.
You may be right.
There is a lot one needs to consider when interpreting these survey results. With student loan debt, for example, myself and many of my colleagues have very low interest rates and actually have little plans to pay our student loans off early. I am 38 and still owe $170,000 roughly on my med school loans but, with an interest rate of 1.625%. There are a lot of other ways to use (invest, save) that money wisely, I believe.
Other comments: I have not included cars in my net worth calculations because they are generally rapidly depreciating assets. I know that some do and I agree that you just want to be consistent with it. Also, my accountant strongly encourages me to lease when it is time for a new car (for the legitimate business/tax benefits in my particular situation).
I wonder if inherited money plays a part in the number of 70+ docs having $5M+
I think it has a lot to do with the “golden” period for a lot of things, not just medicine. Schooling was tons cheaper, like crazy cheap. They made a boat load of inflation adjusted wages (100k in 1985 is 220k today), and if they put it into the market at all were investing in a great overall period for valuations.
People today, are a bit on the other, crappier side of that coin. We can still do it obviously, but you absolutely have to be paying attention.
Starting today, if you save $60,000/yr for 30 years and earn 5% real then you’ll have just over $4M in today’s dollars. Those who are 70+ years old did the bulk of their investing during the greatest bull market in history.
still ama zes me how prevalent financial illiteracy is among our brightest
I could teach a 5th grader all he needs to know in a short times
leasing is being on a treadmill forever
buy certified used cars off 3 yr leases
do not care how much you earn but spending on cars is plain silly
This is not quite on topic, but I have searched the site to find some information related to this subject, but was not able to find anything specific. I’m new to this financial world, I started learning and reading your book and website after we had to pay way too much in taxes for my liking. Now that I am getting a handle on investing I am wondering what you and the group think about investing services, mainly robo investing services like Betterment, Vanguard Personal Advisor Services, etc… Do you think these services are helpful? Will my returns be consistent enough to make up the fees they cost? I am not planning on placing all my investments in these services and will be keeping some that I personally manage, but wondered if it was worth investigating as I make my investment decisions. Any thoughts you have would be helpful!
The costs are very low, 0.15-0.30%, so I think they’re fine to use if the service provided is meaningful to you. However, I find it a very small jump from using a roboadvisor to doing it yourself.
Some of those services act as if they are commanding all of your net worth/portfolio instead of the more likely portion of it. They may then allocate a preset amount to cash, which while ok in the grand scheme of planning is probably not what you want them doing with your money. This is pretty much their business model though (not all but read the fine print) as they sell it as proper asset allocation but use it to make interest on your deposits.
Susie, I just started using Wealthfront at age 58. I wish it were available to me 30 years ago. I am not a DIY ( do it yourselfer ). Wealthfront management fees are 25 basis points and they use mostly Vanguard ETFs at 12-15 basis points. Very cheap.
Hi jz, i just looked at Wealthfront. Very impressive. Especially this:
Individuals with $100,000 or more to invest in a taxable account: Retirement accounts don’t count because there is no tax-loss harvesting available. For taxable account balances that large, the Tax-Optimized Direct Indexing feature is very impressive. Those individuals in higher tax brackets will see Wealthfront harvest an exceptional amount of losses than can offset income each year, resulting in higher returns and bigger account balances over time.
WCI, what do you think about this service for taxable account? Seems like a great idea given Tax-Optimized Direct Indexing feature.
If the benefit of tax-loss harvesting outweighs the cost for you, then sure. But keep in mind for many people TLHing is primarily a temporary benefit. Unless you can flush the gains out with charitable gifts or the step up in basis at death, all you’re gaining is the time value of the money harvested, since the taxes you saved are recaptured later when you sell. There is, of course, a bit of an arbitrage on $3K a year since that is saved off your marginal tax rate whereas it could be paid later at your capital gains rate. So this is probably a less than $500K a year or so benefit. Nice, but not life-changing.
I’m in almost an identical position to the reader that emailed about savings anxiety. I did however utilize an 18 month 0% interest deal with a furniture store when I moved to a new city so my wife could start a fellowship. I had the money to buy the furniture in cash but thought having extra cash sitting around for 18 months seemed like a no brainer. I didn’t miss any payments and in the end it was 0%, but what I did notice was that my credit score took an impressive hit. I had a score of just over 800 that suddenly was 750. It stayed that way until I just got tired of the debt and wrote a payoff check. Suddenly my score is back to 805. The deals that are offered essentially open up a credit card, give a max of just over what it costs for the purchase and then instantly max the account (which really screws with the credit score). So the word of caution here is that if you are planning to use your credit score for a large purchase (such as a house) make sure you don’t bump yourself into a higher interest rate by using one of these deals.
Also, if you are late on only one payment, they can charge you some outrageous interest not just on your remaining balance but on the total of the original purchase! Be careful.