I get a lot of comments and emails from docs, and spend a fair amount of time on both physician-specific and financial forums. I'm often surprised to see doctors carrying debt that I see as completely unnecessary.
Unnecessary Debt
A Car Loan
The classic example is a car loan. It might be an attending physician several years out of residency going through their financials and they list a $5K car loan. Assuming no working spouse, this person grosses $15-30K a month. How long should it take to pay off a $5K car loan? Well, when does your next paycheck arrive? That's when it should be paid off. I'd be embarrassed to say I'm in debt for a car. Broke people have car loans. People with an income of $200-400K shouldn't be broke unless they have terrible money management skills. Therefore, if you are a doctor with a car loan, you probably have terrible money management skills. The status symbol isn't driving a fancy car; it's driving a paid-for car.
Credit Card Debt
The other silly debt I occasionally see doctors list is credit card debt. Now, take pretty much anything that came in the mail from a credit card company. Turn it over and look for a big box on the back. Read that box. Somewhere in that box it will tell you that borrowing money from that credit card will cost you somewhere between 15% and 30%. Now, if I could find an investment that paid 15-30%, I would buy as much of it as I could, take out a home equity loan and send my kids out to shovel driveways (it's December as I write this) to get extra cash to invest. If you are carrying credit card debt, you are somebody's awesome investment. As my 6 year old will tell you, interest is something you should get, not give.
An Emergency Fund and Debt?
Another interesting combination is people who say they have an emergency fund and yet still owe money. As physicians, we generally have access to all kinds of credit. I think I could probably run up $150K in credit card debt in the next hour if I wanted to. Emergency credit isn't usually difficult to get. So for us, the point of an emergency fund is to avoid going into debt if you have an emergency. If you are already in debt, YOU'RE ALREADY HAVING AN EMERGENCY. Your emergency began several thousand dollars ago. Use the emergency fund to take care of the emergency and pay off that credit card.
Debt Management?
There seems to be this popular concept out there that encourages people to “manage” their debt so they can use it to get wealthy. The arguments look good. The idea is basically to borrow at 4% and earn at 8%. Mathematically, there is great truth there. But behaviorally, people don't really seem to work that way. Once your mindset changes from debt elimination to debt management, people seem to get comfortable, savings rates go down, spending goes up, and 20 years later they wake up and find they are still in debt and really didn't take advantage of some huge arbitrage.
The other issue is that people don't really calculate out just how much this arbitrage is earning them. For example, let's say you are offered a 2% loan for a car. You have the $10K the car will cost, but think you'll do better than 2% investing. So you invest. Things go pretty well, and over the next couple of years while you carry this debt you make 6%. So you've made 4% a year for two years. What's 4% of $10K? $400. $800 for two years. And after tax? Maybe $500. How long does it take you to earn $500? What else could you cut out of your budget to get $500? Exactly. Obviously, if you're making $200K a year you can afford to service a $10K 2% debt. It's not going to break you. But it's kind of silly.
I also find it very unusual for wealthy people to have a significant amount of debt. As mentioned, there are good arguments to be made to carry debt throughout your career and even into your retirement. But in practice, I know precious few wealthy folks doing that. The same mindset that makes people wealthy also makes them pay off debt earlier than required and not take out any more. Dave Ramsey does “Millionaire Segments” occasionally. These are generally Millionaire Next Door types who made $60-150K throughout their careers and are now millionaires. Granted, these are a very self-selected bunch, but few of them ever still have debt (maybe a mortgage) and all deny that debt had any significant role in their wealth accumulation. Same thing with the millionaire retirees over on the Bogleheads forum.
Can you do some of it? Sure. I'm doing a little debt arbitrage with a taxable investing account instead of paying off my mortgage. My justification is that my effective after-tax rate (2.75%*56%=1.54%) is less than the rate of inflation. But guess what? At the time of this writing, I would have been better off sending the checks to the mortgage lender. I think that'll probably come around over the next few years, but there is certainly no guarantee. [Update 6/2015- I am now actually ahead, especially after tax loss harvesting benefits.] My wealth has not come from arbitraging debt. In fact, most of my financial success comes from the fact that I lived well below my means, eliminating much need for debt. The recipe is (almost) always the same- make a lot of money, save a big chunk of it, and invest it in some reasonable manner.
Long Student Loan Repayment Terms
I have a lot of student loan refinancing companies who advertise here. They laugh at me when I tell them I want my readers out of debt in 5 years and that I don't really care what their 10-20 year rates are. Why do they laugh? Because they know what you guys are actually doing. And you're refinancing into 10 and 15-year student loan terms. I think you ought to be a millionaire 10 years out of residency, not a debtor. But hey, if you want to still be in debt a decade after finishing your training, pretend your student loans are a house and get yourself a fifteen year fixed student loan mortgage. I look at it like this- the longest anyone ought to be in debt for med school is four years after finishing training, because that's how long it would take to pay for medical school via the HPSP “Scholarship.” If you can't get out of debt in four years, you'd be better off in the military.
One issue with a long-term student loan is that you get a crummy rate. Sure, 5.5% beats 6.8%, but if you were going to pay it off in 3 or 4 years, not only could you get a 3.5% fixed, but you would probably be comfortable with a 2% variable rate. And 2% is much better than 5.5%.
But the main issue is that you still have debt after 5, 10, or 15 years. It is a very rare doctor who is just as excited about practicing medicine 10 years out of residency as she was one year out of residency. It's not that she's burnt out (although that is the peak for burnout as well,) it's simply that life happens, other interests develop, part-time work starts looking more attractive etc. If your loans have been gone for years and you have a huge nest egg at that point, then you can cut back and pursue other interests. If you're still in debt slavery, well, sorry. Get back to work.
Forgiveness programs almost make things worse. With the possibility of federal forgiveness programs and employer loan payback programs hanging out there, many doctors start thinking maybe they won't have to pay back their loans at all. So they subconsciously take out more or delay refinancing and paying them back as quickly as they could.
30-Year Mortgage?
Yet another area of silly physician debt is a long mortgage on your primary residence. You might be surprised to learn that nobody used 30-year mortgages prior to World War II. GIs came home and were eligible for a 30-year VA mortgage. Prior to then, shorter mortgages were the norm. Why did they go with the 30-year? Because they figured a typical career was 30 years and wanted the home paid off prior to retirement. Do you really want the VA to decide how long you should be in debt for a residence?
My daughter and her cousins on Angel's Landing. Yes, we roped them up.
Now, if you practice in Boston, or Manhattan, or the Bay Area, you may not be able to afford to buy with a 15-year mortgage. The rest of you have no excuse. Don't buy a house so expensive that you can't pay it off in 15 years. Not only do you get out of debt in 15 years, but you get a lower interest rate too.
The flexibility argument is bunk (“I want a 30-year just in case something happens, I'll still pay it off in 15.”) Your mortgage ought to be such a small percentage of your income anyway that if something happened that kept you from making the payment on a 15-year, you probably won't be able to make it on a 30-year either. Plus, you have an extra decade and a half of exposure to “something happening.” Do yourself a favor and get the 15. If you want to be skinny, do what skinny people do. If you want to be rich, do what rich people do. Rich people use 15-year mortgages (and pay them off in less than 15.)
Personal Loans
I have had a lot of advertisers come to me and want to advertise their personal loan and personal loan consolidation services. I uniformly turn them down. (I took one, which also does business/practice loans. But I demanded they remove any reference to personal loans from their banner ad.) They thought I was strangely demanding, but I don't want you getting the idea that it's okay to have consumer debt. Paternalistic? Perhaps. I'd certainly be wealthier if I took their money. But nobody borrows their way out of debt, and nobody borrows their way to wealth.
Rich people don't “manage” debt. They eliminate it. Not stupidly, but reasonably and consistently. It's a behavioral thing, not a math thing. There's a reason debt makes you uncomfortable.
What do you think? Do you have “little debts?” Why or why not? Do most of the wealthy people you know carry a lot of debt? Are you “managing your debt” or “eliminating your debt?” Why? Comment below!
I have 1.2 million saved net (still have a small mortgage on a rental, and no primary residence as I rent). All I want to know is…when can I quit medicine?
Can you live on 4% on 1.2 million per year? If so…. Then good news … You can go in tomorrow and hand in your resignation (in theory) 😉
Depends on how much you spend. The less you spend the less you need to quit medicine. There are also alternative careers to consider.
A post on alternative careers would be FANTASTIC. Burnout in clinical is real, no matter how great the job or group, and many of us who are less talented in blogging would like to have some sort of income.
Lots and lots of options, but none of them are automatic like the clinical track is after med school and residency. I’ll think about that and see what I can come up with though.
The problem is docs tend to want an alternative career that is easier than medicine but pays the same or better. That’s a much tougher thing to find. There is a reason medicine pays so well.
I know. And I can. It just seems…silly to do so, and it doesn’t leave a huge margin of error. I like my life. I hate my job.
I don’t know anything about your situation. I don’t know your age, how much you make, how much you spend, whether you are OK living on a small amount (48k), how flexible you are, whether your tied to your area (I don’t count the house), how specialized you are, whether you hate your employer, your line of work or medicine as a whole, are there multiple employers in your area etc. but you probably have a lot of options… New employer. different training for new specialties, demand current employer give you less hours, different location, locums,etc. you can make changes and be happy while still making money… You have the flexibility of a nice nest egg which is a very good advantage
One more thing… I have known a lot of people who have left their jobs and it’s the same thing…. They start the “check out”, they don’t do a good job, they get frustrated, they become standoffish then when they actually hand in their resume or resolved it without quitting they are ecstatic. If your good at your job, and your actually willing to quit you would be surprised what your employer would be willing to do to keep you but you have to be willing to actually quit if you threaten it
If you really want to retire but are unsure if you can live off 48k and you can hold out another year, you could open a new account, put $48,000 in there. Pay for all living expenses from that account and don’t add anything else to it and pay all of your work expenses and taxes from whatever account you currently have (where your paycheck is deposited). After a year if you still have money left in the 48k account then retire
All true and fantastic advice! Thank you very, very much. And to have saved that much I basically lived on 48-60 k a year.
There are VERY few jobs in my area, which I enjoy living in IMMENSELY, and it’s definitely an employer’s market (one of the few in the country for what I do), but my field is extremely locums-friendly, although, like all locums the jobs can be iffy and/or low paid.
You make a good point about resigning (I assume you meant hand in a letter of resignation, not my resume). It’s a good thing to think about. The job has given me a ton (I saved all that money, plus investment returns, in five years) and has allowed me to stay in an area I love. But, like all else, it probably has an expiration date. It’s emotionally hard to cut the cord, but your counsel is wise and I will think long and hard about how to approach the situation. I think my coworkers and boss really, really need their jobs and need them in this location, so it may be an interesting surprise to them if I discuss leaving.
$1.2 Million in 5 years? You should send me a guest post too.
OK, I rechecked…maybe it was about a million in five years as I had a tiny Roth and SEP in 2010. Not to mention I’m vested in some sort of pension.
Oooh, guest post, I am flattered. I feel like I’ve entered the inner sanctum of physician fiscal responsibility.
Here’s the guidelines, but I rarely turn one down written by a regular reader:
https://www.whitecoatinvestor.com/contact/guest-post-policy/
I help some people a lot with the editing, so no big deal if it’s not super polished.
Another option is that if you can live on $60K per year, then you can probably cut to half time and let your assets grow without any further contributions.
Over the next 10-15 years it will very likely double to $2.5 million giving you an even more luxurious lifestyle.
I cut my how many days I work recently and my job is so much better. I enjoy coming into work because I am not burned out and like what I do.
This is the option I was going to recommend. If you only have to do something a couple times a week it doesn’t seems as arduous, but if it does, then the other comments above are correct about quitting completely.
WCI: I enjoyed reading this post and all of the comments that have gone along with it. One of your answers resonated with me:
“…Now if you live in the Bay Area, perhaps you’ll have to do something a little different. Perhaps you’ll have to get a 30 year. Perhaps you’ll have to eat out less, go on fewer vacations, drive a crappier car, and work five years longer…”
I’m curious though, what you would actually do. Not just in a quick few-sentences sort of way, but realistically using HCOL numbers after average graduate medical school debt, etc.
I grew up in NYC and have now moved to another HCOL area for residency. One could argue that at least the latter point was partially under my control. That’s true, but the question with much bigger financial implications is where I’ll live afterwards. Certainly whenever I read your blog and hear you talk about savings rates, the % of your income represented by your mortgage, etc., part of me feels like it’s financial suicide to move back to NYC given that medicine allows us the flexibility to practice anywhere. I’ve heard Dave Ramsey’s line about places like NYC – that you “don’t get a free pass on math” just because you live there. But his and even your advice seem a bit like blowing off a very extreme and somewhat rare situation. Certainly when you live there, though, it doesn’t seem extreme or rare.
I imagine I’m not the only reader you have from NYC/LA/SF who reads these posts and thinks, “sure, but what would you do if you faced THESE costs?”. Would you just move, even if that’s where you had family ties? I’m curious to hear what you think.
I’m going to throw another question on top of that… Do all HCOL area pay doctors less than other areas?
Right, and that’s the double whammy that makes me feel like an even bigger sucker for wanting to go back to NYC after training. At least in many other fields you take a pay raise that compensates for the higher COL in NYC. In medicine, we’re told it’s reasonable to instead expect lower pay because it’s a desirable area. A difficult setup and obviously not isolated to NYC.
I doubt it, but it’s so individual you have to look at your state, specialty, jobs etc to know for sure. California sure seems to though, and I haven’t been impressed by what I’ve heard about Boston and NYC.
May I try and answer this as best I can.
I think you have a couple of options.
1) For a few years work in a LCOL area, pay off debt and move back to the high cost of living area. My wife and I did this. We are from NY and moved south for work. The plan was to live in the south for 2-4 years, live like residents, pay off debt, save money for our HCOL mortgage home and then move back to NY. Instead we realized life is better here down South and we fly back to NY regularly with the tons of extra money we now have.
2) Being from NYC, I know plenty of people who don’t have a physician salary and able to have a life there. They don’t live in fancy apartments with a doorman and a pool/gym in the building. The answer is to live like them and save 25-30% of your income.
3) Work till you are 65
Lots of people actually like living in the South and other LCOL areas. I wonder why people are willing to pay such high property taxes.
SH! Don’t recruit or the reasons I love it might change.
Dr Mom should we reveal to the others that we are actually boring uncultured hicks because of where we choose to live?
Honestly? What would I do? I would move. No doubt in my mind. If I were in the Bay Area practicing medicine I would move. When we moved to Salt Lake neither of us had any of our siblings or parents here. Since then two of mine have moved here, but neither of us are from here. One of my best friends was in Sacramento making crap money, paying tons in taxes, living in a tiny house, and not getting ahead. He moved and joined my partnership. He is now in a house twice as big with a 100 mile view for about the same price (and Sacramento isn’t the Bay Area) makes twice as much, pays state taxes at half the rate, has a better payor mix, better partners, and more job satisfaction. Plus, he can go climbing, skiing, canyoneering, and mountain biking with me at the drop of a hat.
But if moving wasn’t an option for whatever reason, then I’d do the best I could. I wouldn’t have a boat. We wouldn’t drive two SUVs. We’d cut back on vacations. We would spend a higher percentage of our income on housing and thus less on retirement (but I’d still plan to have the house paid off before retirement.) We’d muddle through. Remember that just because I’m only spending 5% or whatever on housing, doesn’t mean that YOU have to spend 5% on housing. 20% is reasonable. 40% is not. Will someone spending 5% be FI earlier than someone spending 20%? Almost surely. But FI isn’t everything in life, right?
The only negative of Salt Lake being…death by inversion and air pollution!!
Not the only negative, but certainly a big one. Luckily, escaping from the inversion only requires a 2 mile drive from my house.
It’s funny how all us discussing financial and other things here come from such diverse backgrounds. I grew up in LA, a “city boy” by all means. Both my wife and I are MDs and we traveled all over this beautiful country for training. We spent some time on the east coast- hated every minute of it. I think the absolute lowest point of my training was waking up at 5:30 am to make it to rounds to a completely frozen icicle of a car and having to pour boiling water on the door locks and windshield in freezing cold. Granted we were not in the best region of the East Coast, we couldn’t wait to get out. We moved to Sacramento for my wife’s training; actually liked it a lot. Outdoors-man paradise, Tahoe, Bay Area, lower COL as compared to So Cal, etc. I don’t agree that doc in Sacramento make “crap money”. Sutter and Kaiser are big employers there; if you are in the right specialty, you can make bank. A neurosurgeon friend of mine is pulling in 1.6M working 4 days/week, but taking lots of call. Sacramento is up and coming and is growing like crazy. Very diverse community. Lots of opportunities in and around medicine. We almost stayed there. Almost. If not for both sides of the family living in Los Angeles. On the other hand, one of my relatives did his IM residency at University of Utah. We visited him once or twice. Yeah, I wouldn’t so well living in Utah. Not well at all. No matter how much I am paid.
You poured boiling water on a frozen windshield? How’d that work out for you? Nobody ever does that twice.
I was talking about a specific doc who increased his pay by at least 50% moving here from Sacramento. I’m sure it’s different for other docs.
OK, lol, it wasn’t boiling, it was warm. Give me a break, I am typing and seeing patients at the same time.
Is private school worth it? If you put 2 kids through private school that’s about the cost of a house. Wouldn’t it be cheaper to just spend a little more and be in a decent neighborhood? I believe millionaire next door was against it. (This is a debate my wife and I have, as my background is from an excellent public school and hers is from an excellent private school)
I agree with you, but there are plenty who do not. As long as it is an expense the person can afford, I don’t have a problem with it.
Enjoying “Blink.” Thanks. As for private school, since you said you don’t have kids yet, defer to your wife for now. We’ve done both over the years despite our strong preference for public schools. At the time, it was pretty clear to both of us what the best choice was for the kids. No sense worrying about it so far ahead. Choose other topics to debate.
I’ve had blink on hold since 4/23 am there are still 13 people ahead of me. Btw the intelligent investor is pretty good but I couldn’t get an audiobook and it takes me forever to read with my eyes since I have to actually stop and focus on something instead of just listen and wander around the area or go to the gym or run errands etc. yes we don’t have kids and won’t start for a year or so and then they need to grow a bit before they are off to school but it does affect long term budgeting, where we will live how much to save up for a house or save up for school, will we get a mid house or dr house next etc. but you are correct I have a long time before it’s a real issue. We will stay in our med school house that is less than 1x our salary for a few more years min.
Sometimes I let my husband win debates as I am biding my time. For now save the money as it is needed either way. Remember neighborhoods and schools change over time for better or for worse. The big variable will be the individual needs of the child which you can’t know yet. Some kids do better in one environment over the other. I’m sure you will both make the right decision.
Good point. Also I haven’t given any thought as to the individual needs of the kids. I just figured schools were either good or bad based on rankings, graduation rates etc. I didn’t know they could be good at some things and not others.
I’ve heard the debt arbitrage excuse many times. Some people even do it when they have student loans at 6% interest! They figure the market can get them 8% and student loan interest is tax deductible. These type of people will be in debt for a very long time.
Student loan refinancing is the best thing I could have done. It cut my interest rate in half with the 5 year term and forced me to get motivated in paying off my debt. Great post doc.
Exactly, no one ever takes that 2% and puts it all in the market and you don’t always get 8%, last year was pretty terrible, refi the student loans and pay them off as fast as possible you get a good return every time. As for the tax deduction, if you’re a doctor and you qualify for the student loan tax deduction you’re doing it wrong.
WCI, just finished all the posts and can’t even really remember what the blog post was about, but the comments were priceless. Especially loved the last ones by Elizabeth, SnowCanyon and Dr. Mom (always wise as stated before). So much wisdom on this site!
What affect do you think the brexit will have on the Libor rate?
(Stupid doctors debt could be student loans so it’s debatably related but please don’t debate that point)
I would assume it would go down, but interest rate movements are tough to predict.
My wife and I took to extremes of living like a resident, rented a 700 sq ft 2bd apartment for me and 2 kids in a super high cost of living are for 1150 a month that even people on section 8 would not rent. They get a much higher allowance in my area like 1700, gives you an idea how bad the place I lived in was. Lived there for 5 years untile networth grew to 7 figures. My goal always to have net worth equal to or greater than what you have grossed working in the past. We have always been savers was saving over 10k to my 403b in residency a year and maxing out roth iras. We accumulated six figure savings in residency. Never changed our lifestyle. Fast forward about a dozen years and we have been fortunate to accumulate about 8 figure net worth. It’s amazing how fast net worth grows when you have your money working for you. However I still have debt, granted I could pay it all off no problem, but I don’t bother to. most of my debt is on real estate investments that allowed me to leverage and buy with 25% down. They were cash flow positive at the start and now with appreciation (which I never count on when I buy), based on what comparables have sold for I my most leveraged investment has 60% equity. Many have 75%. I don’t really care about the value of the rentals now b/c I dont “suck the equity out” to invest in more properties. I save more money put in index funds and when I see a deal withdraw funds and buy if they market is down then don’t buy the real estate. If you keep looking at real estate as an atm you will get burned at some point. My biggest concern now is estate tax. Feel very fortunate have been able to accomplish all this before the age of 42. WCI, would be interested in a post that projects out to death. Looking at the way this community saves, we should look at investments and discuss beneficial ways to minimize estate tax. For example, leaving a ton of money in 401k would be bad if you have let’s say 15 million b/c you have to pay estate tax on the 10 million, then your heirs have to pay tax on withdrawals of your 401k funds. Roth would seem to be better in this case. How do you plan on converting your 401k fund later for your children. At the rate you are accumulating net worth you will have estate tax issues also. Also I max 529 for my kids, not b/c I think they will use it but I plan to help my grand kids with their education.
I agree. Someone like you should be going nuts on backdoor Roth IRAs, Roth 401(k)s, and Roth conversions.
I doubt I’ll have estate tax issues that I can’t deal with by giving money away. It would require a change in current law for me to have that issue I think. But you’re right that some will.
Do you plan to take a sabbatical or anything to decrease earned income so you can convert? You will most definitely have some issues as you stated unless theres a lot of people you’ll be donating to.
Interested in your rental plans, do you plan to scale up to larger multifamilies (taking advantage of 1031s, etc..) or just hold the many properties you now have?
A minor point, but there’s no double taxation on inherited 401k/IRAs. There’s a specific tax deduction that eliminates that double taxation, known as the IRD deduction.
https://www.kitces.com/blog/understanding-the-irc-section-691c-income-in-respect-of-a-decedent-ird-deduction-for-the-beneficiary-of-an-inherited-ira/
https://www.kitces.com/blog/how-the-691c-ird-deduction-can-eliminate-the-need-for-deathbed-roth-conversions-to-avoid-federal-estate-taxes/
Thanks for sharing that.
Thanks AlexxT, However the IRD does not eliminate double taxation. It reduces it. you are given a tax deduction not credit. so for example if you inherit 1,000 but whoever left you the 1,000 paid estate tax you would be able to deduct 400.00, you would still owe taxes on the 600.00 so about 240 in the top bracket. add that to the 400 paid and 640 of the account value is diminished. leaving 360. if you converted to a roth and are able to get below the limit you can avoid this. Also if person inheriting the money falls under amt the deduction is disallowed. also if the are a high earner their deductions are reduced even without falling into amt. I have been hit with losing all types of deductions in the past, the irs always seems to have rules to make sure they get paid.
Holding properties I have, but I have done a 1031 exchange worked out great, will exchange when depreciation is near tail end of the 27.5 and 39.5 years. Using syndicates for multifamily have expressed the 1031 concern to them when exiting investments, they seem to be able to accomodate incoming money but not outgoing well. Awesome part is even if you don’t dispose of your rentals kids get step up and can depreciate on that increased basis after i’m gone, so the rental income will drop dramatically when they inherit the properties.
We are not waiting to donate when we are gone. Donate a lot now, and will continue to increase as assets grow. In fact made my kids give up their Christmas vacation to create financial aid scholarship. They followed up the next year by cutting my auto expenses to fund the scholarship. My wife and I are trying to donate seven figures to the high school I attended on financial aid because I feel the school helped me in my career path and to develop life long contacts that have been extremely helpful in our success.
With a punishing 8% rate on half of my private student loans (the only debt I’ve had my whole life), I’ve been advised to borrow extra “over” my home loan amount, pay off chunks with a lower mortgage %, plus that has substantial tax benefits vs. current painful student loan payments that don’t. Thoughts? Cautionary advice?
Is there any reason you don’t consolidate/refinance at a lower rate?
According to the loan servicer, because I consolidated once during med school, I’m no longer eligible to do so.
You should double check that…public loans can only be consolidated once (as far as I know) but private ones can be consolidated as many times as you want(as far as I know). Also are you planning / eligible to deduct student loan interest from taxes?
Mortgage debt beats student loan debt. But I agree you should refinance. Even if you have consolidated, you can refinance with a private lender. Be aware you can’t do the IBR, REPAYE, or PSLF programs after that though.
Have a question about practice buy-in options… What would the group recommend for financing $150,000 of a $250,000 buy in (have saved $100,000 to put towards purchase price)? No med school debt, 2 years into a 15 year mortgage on house, 2 doctor household… Thanks for the advice!!
Home equity line of credit would be my first choice, at least for the first $100K. If you can’t get that much, then see your local credit union. I also have an advertiser who does that sort of thing, so try them and let me know how it goes:
https://bhg-inc.com/l/display/whitecoatinvestor/2doctor
But whatever you do, don’t drag out paying it off for decades.
Why is the practice not financing the 250k buy in. I financed buy in at some token interest rate for my partner. He paid 5 equal installments.
Also, when you do a buy in, there are usually 2 components. Stock purchase and income shift percentage of collections. I minimized stock purchase price to book value for most assets and allowed my associate to do an income shift. While I had to pay a higher percentage of taxes, it took much less of a hit from him. Also used inexact method so I took risk for downside but also benefited from upside potential. In the end having a partner is someone you want to work with for 30 years. The financial benefit is often reduced overhead, and you can take time off.
Practice can decide to do that, but many don’t. Sometimes it’s hard to have that borrower/creditor in the practice. Taking the loan to a third party can ease that.
We kept it separate from personal finances. Took out a business loan through a local bank on a 5 year repayment with no pre penalty for early payments. Try to pay off $50K + interest annually for 3 years and be done. Good luck!
Thanks for the advice; have shopped it around at local banks and credit unions and found a 4% personal 5 year loan. Hate more debt but she should recoup buy-in fairly quickly so really a no-brainer. Thanks WCI for your continued insightful articles!
This thread is relevant to us, as my wife and I are thinking of a HELOC or personal loan for a home remodel.
We are a two-physician family in our mid-40s and live modestly. I’ve listened to your podcast and read your blogs for some time now, and although I find your advice sound and informative, I confess I don’t understand the aversion to debt. Mathematically, the opportunity cost of missing investment gains at an average of 8-10%, compounded annually, seems just too high to justify avoiding or paying down low-interest debt. We haven’t been in any hurry to pay off my wife’s med school loans or our mortgage, both at 4%, as we’ve been able to make much more than that investing in index funds in tax-free, tax-deferred, and taxable accounts. In the 10 years since we finished fellowship, we’ve gained much more wealth by investing our extra income than if we’d used it to pay down these loans. Isn’t that the objective, to grow wealth over time?
This brings me to my original question, which has to do with HELOCs and personal loans. It sounds as though these use investment accounts as collateral. We could pay for our home improvement by selling funds from our taxable account, paying the 15% capital gains tax, and losing 10 to 20 years of compounded investment interest on $75-$100 K (up to $700K, potentially). Or, we could secure a loan for 5-6% using the collateral we were going to cash in anyway, possibly realize a tax deduction since the funds would be used for home improvement, and continue to grow our personal wealth.
We’re very disciplined and haven’t changed our spending habits based on debt status. Our cash flow is also fine and can tolerate the addition of a monthly payment.
Just trying to wrap my head around the contraindication to a HELOC or personal loan. Thanks!
Mathematically, the right answer is always to maximally leverage our life at low interest rates.
But empirically, we know that many of the people that do that go bankrupt or otherwise have serious financial stress in their lives.
Clearly, there is an amount of debt above which it is a bad idea to carry it. The book “The Value of Debt” explores this concept and I think you’d enjoy it as it aligns with your philosophy.
As for me and my house, one of our financial goals was to not owe anyone anything and we were pleased to reach that goal last year and don’t plan on going back, even if it costs us some money in the long run. It is a luxury we can afford. It is a risk we can afford not to run.
In the case of most docs, they’re carrying too much debt, they’re too comfortable with debt, they’re debts are moderate or even high interest etc.
I challenge you to actually calculate how much you’ve made by borrowing at 4% and investing at 10% (or whatever.) You might be surprised as how little it is. That was why it seemed silly to my wife and I to be carrying a $138K mortgage with a high 7 figure net worth and a monthly income often higher than that, no matter what we expected from our investments or how low the interest rate was. I suspect you’ll get to that point soon too where it just isn’t moving the needle to try to arbitrage the debt.
HELOCs generally use the house as collateral. Personal loans generally don’t have collateral (and thus are at higher rates.) You can borrow against your investment portfolio though if you like (again, see “The Value of Debt.”)
Thanks very much for the discussion. Actually, I did calculate the 4% loan versus 10% investment arbitrage, and over the long term, it came out significantly differently (Bankrate.com calculators). $100K borrowed at 4% for 20 years will cost $145K, whereas $100K invested at 10% for 20 years will yield $673K, or $391K after taxes. Doesn’t it make sense to pay $45K to gain $291K?
I don’t specifically favor more debt, but if I’m trying to pick the most cost-effective way to pay for a renovation, isn’t the HELOC the most rational choice? We already maximize our retirement (401a, 403b, 457b, back door Roth), 529, and taxable account contributions. I’m struggling to understand the alternative argument, although believe me, the simplicity of not getting another loan is very appealing.
The 4% is guaranteed. The 10% is not. You’ve got to at least adjust your analysis for that at a minimum.
You should also account for the difference between annualized and average.
Plus the cash flow improvement and lowered risk of bankruptcy.
You might still choose to go that route, which is fine, but you’re looking at it way too simplistically.
Personally, I view a renovation as a consumption item. I don’t borrow for consumption items. So I’d save up and pay cash for a renovation. Why not put less in a taxable account this year and use that money for a renovation? If that’s not enough, you could even liquidate some of it.
That’s probably what we’ll do. I’ve been on the fence about the HELOC anyway, and have changed my mind several times. We essentially invested our extra cash in our taxable account, which made a fair amount in 2017, so we still come out ahead even if we liquidate some of these assets and pay the 15% LT capital gains tax.
Thanks again.