Tax Payments and Savings

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor Podcast number 377.

Today's episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents. Check out all that SoFi offers at whitecoatinvestor.com/sofi.

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Welcome back to the podcast. I’m glad to have you here. I'm recording this at the mid-June, but it's not going to run until about a month later. So, lots of stuff is going to happen between when I record this and when you hear it.

I've got a pretty exciting month that's been going on. We're leaving tomorrow for the Salmon River and do the Middle Fork of the Salmon, back for three days, a week at Lake Powell, back for one day, going to Raft Hells Canyon in the Lower Salmon, and then back overnight. And then Katie and I have got a two-day 25th anniversary celebration plan.

So, it's pretty exciting. It's going to be fun. I've rented a McLaren supercar, so we'll get some fun out of that. It should be fun. And we're going to go do some downhill mountain biking and go to some great restaurants and go see a concert and all kinds of fun stuff. I guess it won't be until I record an episode after that that you get to actually get to hear all the details, but we've got a pretty fun celebration plan. We don't have a 25th anniversary every year, obviously. And who knows? You never know what life's going to bring at you. There may not be a 50th. We'll be quite a bit older than we are now when we get to our 50th wedding anniversary, so we better make the most out of this one.

Same thing for you. If you're out there, remember to celebrate stuff. Part of the reason we're going crazy on this one is we're celebrating the financial milestone we hit recently. Celebrate your financial milestones. We failed to celebrate way too many of them as we went along, so make sure you do that.

All right, let's get into your questions. Oh, I got to tell you about something first. Our scholarship. If you're a med student, dental student, some sort of professional student, summer is the time to apply for these scholarships. You have until the last day of August to apply. There's no benefit to applying early, but if you forget and apply in September, you're definitely not going to be considered.

Go to whiteconeinvestor.com/scholarship. You've got to be enrolled full-time in a legitimate school. It can't just be purely online. It's got to be a brick-and-mortar school. And you can't be on a full ride already. We want these scholarships to go to people who actually need the money. If you're already on some sort of a full tuition plus scholarship, you can't apply either. But otherwise, if you're in good standing, you're going to be a student for the 2024/2025 year, professional graduate student, medical, dental, etc., then you can apply.

We need judges, though. We got 1,000 applications last year. We need a fair number of judges so that each of them doesn't have to read too many of these 1,000-word essays. Please, please, please, volunteer to be a judge. Send an email to scholarship at whiteconeinvestor.com. Put “Volunteer Judge” in the title. We'll get you some essays to read in September, and you can help pick the winner.

Nobody at WCI picks these winners. We just provide the cash. The 10 winners basically get a check sent to them. It's very helpful when you don't have much money when you're a student. So, we're trying to keep this going and help as many people as we can.

All right, let's take a question. This one from Andy. He wants to talk about the safe harbor.

QUARTERLY ESTIMATED PAYMENTS AND SAFE HARBOR

Andy:
Hi, Dr. Dahle. This is Andy from the Midwest. I want to elicit your thoughts on quarterly estimated payments in safe harbor, specifically how one calculates the 110% of last year's federal taxes paid.

This year, we were hit by a big tax bill and a penalty. My wife works part-time as a W-2 employee, and I have my own practice with 1099 income. I incorrectly assumed that her federal and FICA taxes withheld by her employer would count toward the 110% of last year's federal taxes owed.

However, my understanding now, after falling short on quarterly payments and paying the penalty, is that last year's taxes include our federal taxes along with the employer and employee portions of the FICA taxes from the small business, but not her employee FICA taxes.

If this is a correct explanation, can you explain why the 1099 FICA taxes are part of the amount of last year's previous federal taxes paid, but not the FICA taxes from W-2 income? Thank you.

Dr. Jim Dahle:
All right. Great question. And the answer is, I don't know, and I don't think anybody else does either. That's just the way it is. Self-employment tax counts, FICA taxes don't. So although we all know they're the same thing, really, the way they're collected just makes the IRS treat them a little bit differently.

But having been dealing with quarterly estimated payments now for at least 12 or 13 years of my life, let me tell you the honest truth about them. People worry about this way too much. It's a guess. Some people have the same income year to year, but most of us, our income is significantly different every year. It's up, it's down, whatever. It's really hard to nail it.

The most important thing, first of all, you got to understand what's going on. A lot of people don't, but paying taxes and withholding money to be paid toward taxes are two totally different things. That's the first thing to understand. People are like, “Oh, my bonus got taxed so much.” No, it didn't get taxed any more than your regular income. Just the withholding rules are a little bit different on your bonus.

A certain amount of money is withheld or is paid in quarterly estimated taxes. And then come April, you settle up with the IRS. That's all you're doing is settling up. Maybe you paid too much. Maybe you paid too little. You pay a little more in April, or they send you a check if you paid too much. That's all that's going on.

The most important thing, once you understand that, is to make sure you have the money to pay your taxes. Everything else is small potatoes after that. Making sure you have the money, because what you don't want to do is get to April and realize, “Oh, I was supposed to be paying quarterly estimated taxes. Not only did I not pay those, but I don't have the money. I spent it on a McLaren, or whatever.” You might have spent the money on a Tesla, more likely if you're a doctor.

But this is the way it works. You've got to pay your taxes. It's a pay-as-you-go system. You're supposed to pay it as you go along. If you don't, there's a little bit of penalty associated with it.

But let's talk about that penalty. What is that penalty? The penalty is basically just the interest you should have been earning on the money that you didn't pay to the IRS when you're supposed to pay it. It's not like they throw you in jail. It's not like there's this huge onerous penalty, like if you don't file your 5,500 EZ every year, for those of you with solo 401(k)s with more than $250,000 in them. It's not a penalty like that. It's just a little bit of interest. It's the interest you should have made on the backside anyway, or on the front side anyway. You've got to give that interest to Uncle Sam. That's all. It's not the end of the world.

Secondly, this idea of calculating it. Trust me, I've tried to calculate what my quarterly estimated payments should be and have missed dramatically by four, five, six figures before. You can really blow this. It's hard to do. A lot of it is guesswork.

You do the best you can, and if you paid a little too much to the IRS, well, you gave the government a tax-free loan or an interest-free loan. If you didn't pay enough, no big deal because you've got the money. You've been setting it aside. Remember, you've got the money, and you got to pay a little bit in penalty, a.k.a. interest, to the IRS because you should have paid it a little bit earlier in the year.

Not the end of the world, but if you want to try to calculate it, it's good to get close. It's good to guess. The closer you are, the more likely you are in the safe harbor, and you don't have to pay any penalties. But if you overpay, you lose the use of that money. It's pretty hard to get it exactly right.

If you're getting within a few thousand dollars as a physician, I would say you won. You nailed it. If you're in a five-figure range as a typical physician, you probably need to look at this a little more closely. If you're off by more than five figures come tax time, if you're getting a tax refund of more than $10,000 or if you're finding you're having to pay taxes of more than $10,000, then it's probably worth looking a little more closely and trying to guess a little bit better.

But if it's just a few thousand dollars, man, that's just the way this game's played. So don't sweat it. Don't try to calculate it exactly. Do the best you can and don't sweat it. They're not thinking about auditing you more, putting you in jail because you had to pay a little bit of penalty/interest.

Okay, the next question is about W-9s.

TAX IMPLICATIONS FOR HAVING A W9 FOR TRAVEL REIMBURSEMENT

Speaker:
Hi, Dr. Dahle. Thank you for all you do. I have a question which is hopefully pretty straightforward. I'm traveling for interviews and I have been asked to fill out a W-9 for reimbursement for travel expenses that the practice interviewing me would reimburse me for. I've never had to fill out a W-9 for interview related expenses for reimbursement before. Just wondering if I would have any tax implications because of this. Thank you.

Dr. Jim Dahle:
Well, that's an interesting approach. I don't know how many companies interviewing send out a W-9, but if you're filling out a W-9, you're probably getting a taxable check. So, expect that. I guess it's nice for them to pay it. You only have to pay the taxes on those expenses. It's better than nothing because lots of companies don't pay for your interviewing expenses. So, better something than nothing.

But it sounds like this is probably going to be a taxable event for you. They're looking at it as a deduction they feel like they need to pass on to you. Maybe it's only some of the expenses they're going to pass on to you, but they wouldn't be having you fill out a W-9 unless they're going to pass some of the expenses on to you. So, expect that.

Interesting way to do the travel expenses, though. It feels a little bit cheap to try to pass that on to the interviewee, but maybe that's the way they have to do it for some of those expenses. Or at least the way their accountant has decided they have to do that. I'm not sure exactly why.

That's a good question. Maybe some of you accountants can write in and let us know why they would be doing that. I don't think it's very common practice. I would think they would be able to write off those expenses as a legitimate business expense to bring you to town and put you up and feed you and interview you. But maybe there's some aspect of that that they're required to pass on to you that I'm not aware of.

Okay. Let's take a question from Frances about tax loss harvesting.

WHEN TO TAX LOSS HARVEST AND WHEN A SOLO 401(K) IS NOT WORTH OPENING

Frances:
Hi, Dr. Dahle. Thank you so much for everything that you do for a community in the healthcare. And I am a dentist and actually specialist, but I wanted to ask you two questions today about, as far as tax loss harvesting goes, if you would recommend doing this sort of towards the end of the year, like in November, December timeline, with a 30-day wash sale rule and having enough time to be able to accomplish that rule without any issues.

And also the second question is, I just started a second sort of a side gig thing on my own for just consulting. And for the income in this part of my second job, it's not going to be too much, maybe a couple of thousands for starting out this year. But if you would recommend doing something like a solo 401(k) of some sort for this, or is it too much hassle for just dealing with this paperwork when the income is not as significant?

And any other thoughts you would have regarding these two questions or suggestions or thoughts, ideas? I’d really appreciate it. Thank you so much for everything. Have a great rest of your week. Bye-bye.

Dr. Jim Dahle:
Good questions. Let's take the first one first. Would I wait for the end of the year to tax loss harvest? No. I tax loss harvest when the market drops. If the market goes down 20% in April, that's when I tax loss harvest. I don't wait until November to tax loss harvest. So no, there's no reason to wait to the end of the year. And some people are like, “Oh, I do my tax plan at the end of the year.” Well, what happens if the market drops 20% in April and comes back up 20% in August? You missed the opportunity to tax loss harvest. So, I don't think that's a great plan.

Secondly, I'm not sure what you're planning to do with tax loss harvesting that you care a lot about the 30-day wash rule. If you're doing this where I view as the right way, this is not an issue. So, what I do when I tax loss harvest is everything in my taxable account, I've identified two securities that I'm happy to hold either one of them for the rest of my life.

For example, for the US stock market, I hold the ETF VTI, which is the Vanguard Total Stock Market ETF. And I hold the iShares ITOT. This is the iShares Total Stock Market ETF. So, when I'm tax loss harvesting, I sell VTI with a loss and buy ITOT or vice versa. That's it.

The 30-day wash rule doesn't apply because I'm not waiting 30 days to buy VTI back. And I'm not going to look at tax loss harvesting again for two or three or four or six months. And so, it's one swap. That's it. There's no issue with the wash sale. And there's no issue with turning qualified dividends into unqualified dividends by not holding onto the security for at least 60 days around the ex-dividend date.

If you don't try to frenetically tax loss harvest where you're swapping every day for a week, then you don't have this issue. So, just do big tax loss harvest when the market drops a lot and then don't sweat it beyond there. But no, there's no reason to wait to the end of the year to do that.

Your second question is, is it worth the hassle to open a solo 401(k) for a side gig that's only making a couple grand? Probably not. The contributions most people make in their solo 401(k), although you can set them up to do what are called make a backdoor Roth IRA contributions, but most people do, if they've got a main gig with a 401(k) or whatever, what they're doing is just making employer contributions, which are basically 20% of your profit.

So, if you're making $2,000 in this side gig, 20% of that is only $400. And the tax savings on having $400 invested in a solo 401(k) versus a taxable account are probably not enough to justify the hassle of the 401(k). And so, if you expect to make a lot more next year, maybe open it now. If you got some other reason to have it open, like you need somewhere to roll a traditional IRA into, so you can do backdoor Roth IRAs, great, open it. But for something you're only making a few thousand dollars, it's probably not worth the hassle.

QUOTE OF THE DAY

Our quote of the day today comes from Maya Angelou, who said, “Success is liking yourself, liking what you do and liking how you do it.” I love that one.

Okay. Let's take a question about the tax tail and the investment dog.

SHOULD YOU EVER MODIFY YOUR WRITTEN INVESTING PLAN FOR TAX REASONS?

Speaker 2:
Hi, Dr. Dahle. Thanks a lot for all that you do. I have a question about trying not to let the tax tail wag the investment dog. My situation is that my investment plan includes some tax and efficient holdings, which are small cap value, some real estate. I use the Vanguard refund and some TIPS. I recently arrived at the point where I don't have enough room in tax protected accounts to hold all these anymore and I had to start moving some to taxable. I started with small cap value so far. Everything else in my investment plan are very tax efficient holdings.

I knew this would happen someday. And it's a good problem to have. But I'll admit that I had a harder time pulling the trigger on this than I thought I would. And I even briefly thought about just reverting to the Boglehead three fund portfolio, which is the core of my plan anyway, in order to simplify everything and avoid issues like this.

Thankfully, though, I was able to get through the moment of doubt and stay the course. This made me think, though, is there any investment that is so tax inefficient, that it would be worth modifying an investment plan rather than letting it be in taxable?

A refund, for example, could this be too tax inefficient for taxable? I know I could satisfy the real estate portion of my investment plan by doing active real estate investing or syndications, etc, which I would actually want to hold in taxable for the tax benefits. But I may never want to be more of an active real estate investor than the Vanguard refund. Thanks in advance for your input.

Dr. Jim Dahle:
Congratulations. What a great problem to have. You're able to save so much money that it overflows all of your retirement account opportunities into your taxable account. This is a wonderful thing. Don't beat yourself up about this happening. This is great. I've got the same problem. It sounds like your portfolio is pretty similar to mine. I've got TIPS and I've got small value and I've got some VNQ along with a lot of other stuff in my portfolio. And my portfolio is now, I don't know, 80% taxable or something.

I've been dealing with the same thing you're dealing with and it's exactly what you're doing. As the taxable to tax protected ratio grows, you're slowly moving assets out of the tax protected accounts into your taxable account. And so, you move the most tax efficient ones first. You probably already got all your US stocks in there. You probably got all your international stocks in there. Maybe you have some muni bonds in there or something. Well, now you got to move some other stuff.

I think you made a good decision moving small value there before the TIPS or the REITs. I think that's probably smart, but they're still pretty tax efficient. But at a certain point, you may have to move some of that other stuff in there as well. I've got some of my TIPS now in taxable. The nice thing about it, you can console yourself with the fact that they're state tax free. So that's nice, I guess.

But would I change my asset allocation for tax considerations? I think the general rule is no. You try to make it as tax efficient as you can, but as you said in your first line, don't let the tax tail wag the investment dog. If you think it is worth having these asset classes in your portfolio, then I would have them in there, even if they're being taxed.

That said, if you'll go back and look at one of Bill Bernstein's books, The Four Pillars of Investing, he gives example portfolios at the end. And you'll notice that the portfolio for Sheltered Sam, the fellow with all of his stuff in tax protected accounts, is a different portfolio than it is for Taxable Ted, who’s got all of his money from a windfall or whatever in a taxable account.

And so, clearly, there is some room for different opinions on this subject. Some people might simplify their portfolio rather than having less tax efficient assets in their taxable account. How's that for a non-answer for you? Lots to think about, but mostly this just means you're being successful. So, congratulations.

Okay. The next question comes from Zach.

REDUCING ADJUSTED GROSS INCOME

Zach:
Hi, Dr. Dahle. I'm a current KGY4 resident. I had a couple of questions regarding reducing my adjusted gross income. I currently have around $120,000 in student loans with around a $600 monthly payment for the SAVE program. I know if I reduce my AGI, I can reduce my student loan payments through the SAVE program. And additionally, I make a little over $100K gross. So currently, I do not qualify for the $2,500 tax deduction for student loan interest.

I just had a question. Is it worth maxing out my 403(b), 457(b), as well as my HSA to reduce my adjusted gross income? It sounds like I'd save around $4,000 per year if I max out all three of those, but I'd be making pre-tax contributions instead of post-tax retirement contributions. Additionally, how hard is it to later move money from a 457(b) account to other retirement accounts? Thank you so much for your help.

Dr. Jim Dahle:
Wow. You packed a lot into that question, but you failed to give me the most important piece of data to answer your question, which is what your plan is with your student loans. Are you trying to get these forgiven or not? Because if you are not trying to get them forgiven, all we're talking about here is cashflow for the most part. If you are trying to get them forgiven, we're talking about actually paying less money overall. And so, without that information, it's really hard to give you advice.

First of all, you said vested gross income. I think you mean adjusted gross income for anybody out there confused by that term. I don't think there is such a thing as vested gross income.

But you're right. The lower your income, the lower your SAVE payments are, and you can use that money for something else. And so, making tax deferred contributions, making HSA contributions, lowers that gross income, lowers your payments, potentially allows more money to be forgiven down the road if you're going for that.

But I'm skeptical that you are. You only have $120,000 in student loans. You're already making $100,000 as a resident, and pretty soon, presumably, you're going to be making $200,000, $300,000, $400,000, $500,000. You can probably knock out that $120,000 in student loans before October, the year you come out of residency.

I'm guessing you're probably not going for public service loan forgiveness or something, in which case I'd be pretty hesitant to do something that just lowered my student loan payments. If you're going to be paying them off anyway, maybe take advantage of the Roth accounts.

And as a general rule, Roth is better when you're in residency or fellowship anyway, because you're in a relatively low tax bracket. I don't know that I'd be trying to minimize my student loan payments unless you have a real cash flow problem or are having trouble living on that $100,000. Or if you're thinking about then you'll need to run the numbers.

If you need help running the numbers, by the way, studentloanadvice.com are the folks we recommend. So go check them out, book an appointment. They can help you run all the numbers and make that decision. For an hour of your time and a few hundred dollars, you can know you're doing the right thing for your plan. But you didn't give me quite enough information to really give you any more advice than that.

As far as the 457(b), you asked about whether that can be rolled over to other accounts. It can if it's a governmental 457(b). And that's the usual thing. You leave an employer with a governmental 457(b) and you roll it into your 401(k) or 403(b) or something so you can still do your backdoor Roth IRAs.

If you're at the end of your career and you don't care about backdoor Roth IRAs, you can just roll it into a traditional IRA. If it's a non-governmental 457(b) though, you can only roll it into other non-governmental 457(b)s, which chances are good your new employer is not going to have one of those. And so, it's kind of stuck where it is. One downside to those accounts. You can use it for those early years of retirement, but basically it's probably going to sit in that same account until you retire. So, I hope that's helpful and answered both of your questions.

The next one comes from Benjamin.

WHAT TO DO WHEN YOU DON’T COUPLES MATCH FOR RESIDENCY AND WHEN IS TOO EARLY TO SIGN AN EMPLOYMENT CONTRACT

Benjamin:
Hey, Dr. Dahle on the White Coat Investor podcast. My name is Benjamin Nelson, incoming MedPeds resident at UT Houston. Background on myself, wife and I are both graduating medical students from the University of Mississippi. We both received a service scholarship requiring four years post-residency practice in rural Mississippi.

We unsuccessfully couples matched. And so, that being said, we are feeling a little pressure moving to a new city with a one-year-old, a new big city with a one-year-old and a one resident salary.

The idea has been brought up to focus on or explore the idea of signing on early since we know we will be returning to rural Mississippi to fulfill our service scholarships. And this sign on I feel could be advantageous to help with residency costs, the baby, big city, all those things.

But I wanted to know where I should balance the signing on early to get extended benefit, meaning more time with the stipend versus waiting a little bit longer to figure out what exactly I want in my practice because I don't want to lock into anything too soon. I was wondering if you have any advice on that. Thank you.

Dr. Jim Dahle:
I'll be honest, Benjamin. I'm a little confused. I'm not sure exactly what's going on in your situation. It sounds like you guys already each have a service commitment in rural Mississippi. So, when you say you unsuccessfully couples matched and are going to be living on a one resident salary, it sounds to me like one of you didn't match. And I'm very curious how this commitment works if you're not a practicing physician. I'm guessing they still have an expectation that whichever one of you didn't match is going to try to match again and still pay off that commitment.

That part is a little bit confusing to me. I'm not sure exactly what's going on there, but obviously if you don't match, the thing you typically do is apply again the next year. And it may be that you can't couples match. Couples match is obviously much harder to do. You're going to have a much easier time matching whichever one of you didn't without going through the couples match. Hopefully you can still be in the same geographic area, but that doesn't always work, which gets really hard when there's kids.

I wish you the best of luck navigating residency in that sort of a situation. It sounds kind of terrible actually, but I'll tell you what, if I was the one who didn't match, I would be in there getting to know everybody at every program that's in the same geographic area so that I can stay close to my family while going through my training.

Otherwise, I don't know what you do. You put off your training for a few years and then try to match and go to residency sequentially. But I don't think that's a great idea. It seems a lot harder to match in that sort of a situation when you haven't been doing anything for the last three or four years.

I guess that would be my number one financial priority right now is getting both of you into residency programs where you can get that training. The rest of this is superfluous compared to that.

I'm not sure exactly what's going on, whether you haven't yet taken that commitment or whether you already have the commitment or whether you can take on more commitment by getting more of a signing bonus from the program or whether this is a signing bonus coming from the employer that's totally separate from your commitment and your program.

But the general rule with signing bonuses is they're trying to lock you down early. And what you have to be careful about is what seems like a lot of money to you as a resident is not going to seem like a lot of money to you as an attending. So if they can lock up your options for a few tens of thousands of dollars, that's a great deal for them and not a great deal for you. But if they're giving you enough money, it may be worth limiting your options.

Just keep in mind, when you come out of training in a few years, you're probably a lot more valuable than you are right now. Inflation will have gone up, physician salaries will have gone up, and you need to be careful not to sign a contract at today's rates. The contract needs to emphasize that you will be paid at that point according to current going rates.

You need to get this contract reviewed by a formal contract review service. They're on our recommended page. You go to whitecoatinvestor.com/recommended, and you can get with one of these. One we had on the podcast recently was Resolve, go to whitecoatinvestor.com/resolve, and they can help you evaluate that contract, make sure you're being treated fairly. Otherwise, I think you got to send me an email with more details because I wasn't quite clear on what's exactly going on in your situation.

Thanks, everybody out there for what you're doing. Those of you willing to serve in rural areas, it's hard going through this field, having a couples match. All of a sudden, now you're limiting your career because you're trying to hold your family together. There's a lot of sacrifice involved in this. So thanks everybody, for the sacrifices you're making every day and every year.

All right, our next question is from Dave on group health insurance.

GROUP HEALTH INSURANCE

Dave:
Hi, Jim. Thanks for all you do. Just wanted to ask a quick question about group health insurance. I joined a small practice here in the Midwest, and traditionally, all the partners have bought their own policies on the open market.

We recently brought in some new partners who had a child with special needs, and due to the complexities of health insurance marketplace in order to qualify for coverage for some of their son's therapies, they need a group policy. We've begun to explore these group policies and consulted with our accountants.

We have a pretty good idea of what we're getting into, but I was hoping maybe you could speak to any pearls or pitfalls that you have in regards to getting a group health insurance policy, what that transition looks like. Any advice or recommendations would be greatly appreciated. Thanks so much.

Dr. Jim Dahle:
What a great group of partners. They're willing to change what they've been doing just to help out one of the partners that needs a change. It's wonderful that you're doing that. I think there's quite a few groups out there that would tell them, “Forget it, we're not making that sort of a change.” Good on you for doing that.

This isn't as big a deal as you might think it is. We have done health insurance on the open market for many years. When we had WCI employees, we needed to go to a group plan. When I was just using my partnership plan, every year I would look at the partnership plan, and I would look what I can buy on the open market, and I could deduct the premiums either way.

So, it didn't matter. I just took whichever plan was better. In some years, I used what my partnership was offering. Other years, I bought it from a health insurance broker. It's no big deal either way. It sounds like you're partners anyway, at least most of the docs there, and can deduct that. So, no big deal. Just because there is a group policy in place doesn't mean you have to use it. You don't have to use it, but it'll at least give you that option. A lot of times, it works out to be a better deal.

But the way you do this, you just go to a health insurance broker, and they shop you around the various insurance companies available in the area, and you choose the plan you want with the premiums, the deductibles, the co-pays, and the panels that you want. And that's all there is to it. It's just not that complicated. People make health insurance out to be this terrible thing that can't be figured out.

And yes, the stuff is expensive, but it's not that complicated. The complicated part is how it interacts with the medical care system, not buying it. Buying it's actually pretty straightforward. I'd encourage you to just get a health insurance broker, let them walk you through the process. They're going to get paid either way, they get a commission obviously when they sell it but they are going to help you get the right policy for you.

SPONSOR

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Don't forget about the White Coat Investor Scholarship. You can apply through the end of August, whitecoatinvestor.com/scholarship. And please, please, please volunteer to be a judge. No students or residents can be judges, but if you're an attending or the equivalent in another field or retiree, you can be a judge. You'll probably have to read like 10-ish, maybe 15-ish thousand word essays and just choose the ones you like. That's all there is to it. You can apply by emailing [email protected] and putting “Volunteer Judge” in the title.

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Well, keep your head up and shoulders back. You've got this and we can. I hope you're going to have as great of a summer as I am. And I hope that you have success in your practice and your finances and your family and whatever endeavors that you are working on this week. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 180 – Pathologists reaches multiple milestones.

This podcast is sponsored by Bob Bhayani at Protuity, formerly DrDisabilityQuotes.com. He's an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor. He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies.

If you need to review your disability insurance coverage or to get this critical insurance in place, contact Bob at whitecoatinvestor.com/drdisabilityquotes today. You can also email [email protected] or you can call (973) 771-9100.

We got a pretty interesting interview today, but stick around afterward. We're going to talk a little bit about rules for evaluating investment property.

INTERVIEW

My guest today on the Milestones to Millionaire podcast is Stelle. Stelle, welcome to the podcast.

Stelle:
Thank you. Thank you for having me, Jim.

Dr. Jim Dahle:
Tell us what you do for a living, how far you are out of training, and what part of the country you're in.

Stelle:
I am five years out of training and I am a pathologist and I practice in the state of Texas.

Dr. Jim Dahle:
Okay. Well, the exciting thing about this podcast is you have reached not one, not two, but three significant milestones. Tell us what milestones we'll be celebrating today.

Stelle:
Today, we are going to celebrate me actually completing a PSLF program and also paying out $120,000 in credit card debt. And then I believe the third one is actually saving about $30,000 in travel hacking with my family of four. Those are the three milestones that I would like to celebrate today.

Dr. Jim Dahle:
Okay. Somehow I got in here. There was a net worth milestone as well.

Stelle:
Yes, there is.

Dr. Jim Dahle:
You reached a significant net worth milestone?

Stelle:
Yes. We finally are not broke anymore and we are now pretty much half a millionaire.

Dr. Jim Dahle:
That's a long way from being not broke. Awesome. You say we, who's we? Is there a family here?

Stelle:
My husband and I.

Dr. Jim Dahle:
Any kids?

Stelle:
Yes, we have two boys.

Dr. Jim Dahle:
Two boys. How old are they?

Stelle:
Yes. They are 10 and eight.

Dr. Jim Dahle:
Significant. They've been around for a significant part of this journey.

Stelle:
They have been around. They are residency babies, I call them. Because I used to have them sitting next to me as I previewed cases late in the evening.

Dr. Jim Dahle:
Yeah. Okay. They've been along for the ride. And your husband, for most of your education, it sounds like. Does your husband work? What does he do?

Stelle:
He's an electrical engineer. He works for Flyspace, which is an aerospace company here in Texas. Yeah, that's where he works at. And he's had to do a lot of compromise. I had to find a sweet spot to bring him aboard because wherever you match is where you go. You just drag him along. And this move was pretty much to balance things out to where he wants to be and where his career is taking him. So it's been a fun ride.

Dr. Jim Dahle:
Very cool. Okay. Give me some sense of what your household income has been over the last five years or so.

Stelle:
Right out of residency, we were pretty much in the high $200,000s and we've been in the $500,000s now since I moved jobs. Once I got PSLF, I figured I'll say goodbye to the academic sector.

Dr. Jim Dahle:
Okay. How long ago was this transition?

Stelle:
A year ago.

Dr. Jim Dahle:
Year ago. Okay.

Stelle:
Yes.

Dr. Jim Dahle:
All right. We talked a lot about PSLF last week on this podcast. So we're not going to spend too much time on that, but it sounds like you did everything right. You got PSLF five years out of residency. Three and a half of those years were the student loan holiday, right?

Stelle:
Exactly.

Dr. Jim Dahle:
This all worked out great for you. How much money did you get forgiven?

Stelle:
Pretty much $288,000 and I only paid $2,000 of those $288,000.

Dr. Jim Dahle:
$2,000?

Stelle:
Yes.

Dr. Jim Dahle:
That's it, huh? That's got to be some kind of a record.

Stelle:
Yeah, that's how much I paid. Yes.

Dr. Jim Dahle:
Wow. It's wild. Well, a family of four, right? Family of four.

Stelle:
Exactly. A family of four.

Dr. Jim Dahle:
Pathology is still a five-year residency, right?

Stelle:
No, it's a four-year residency, but I did two years of fellowship.

Dr. Jim Dahle:
Okay. So six years of training.

Stelle:
And my husband was in school.

Dr. Jim Dahle:
And then three and a half years of student loan holiday. It all checks out.

Stelle:
Exactly. Exactly.

Dr. Jim Dahle:
What IDR were you in? What payment program were you in?

Stelle:
I was in an income-based repayment program.

Dr. Jim Dahle:
IBR. You were in IBR.

Stelle:
Yes. That's the one I was in.

Dr. Jim Dahle:
Well, congratulations on PSLF.

Stelle:
Thank you.

Dr. Jim Dahle:
The program worked out spectacularly for you. And you just stayed in academics? Did you stay at your program or where'd you stay?

Stelle:
Yes, I stayed in academic, which was actually a very interesting transition because you apply for the program so long ago and you don't really read the fine print. And it wasn't until I had now put in my resignation that I realized that PSLF said, you have to still be active in the public service for 90 days until forgiven. And I had submitted my resignation.

Dr. Jim Dahle:
Yeah. That got a little tight, huh?

Stelle:
It got very tight. But yeah, I literally got forgiven a day before I started working because I was telling them, I was like, “You either pay my loans or I'm going to have to stay here.” But it worked out.

Dr. Jim Dahle:
That's a good warning. I hope people listen to that. You got to stay with the PSLF qualifying job until you get the PSLF.

Stelle:
Yes.

Dr. Jim Dahle:
Okay. Well, did you have a negative net worth when you came out of training?

Stelle:
Oh yeah. I think we were negative $600,000.

Dr. Jim Dahle:
Negative $600,000?

Stelle:
Yes.

Dr. Jim Dahle:
You had your $300,000 plus in student loans, and we're going to talk about some credit card debt. What was the rest of the debt?

Stelle:
We had car loans. My husband also has $65,000 in student loans. We also did take out about $18,000 in residency personal loan for application, interviews, relocation. That was in addition to that.

Dr. Jim Dahle:
And now your net worth is half a million dollars.

Stelle:
Correct.

Dr. Jim Dahle:
Somewhere along the way, you had something happen to you. Was it like a financial awakening or how did you get from minus $600,000 to $500,000 in five years?

Stelle:
It was a crisis. As a new attending, I was burned out. It was a few months before COVID. And I recall this conversation I had with a fellow thoracic surgeon at UPMC where I trained, and he was like, “You should listen to White Coat Investor.” And I was like, “What are you talking about?” So I brushed it off. Six months later, I was so burned out. I just saw this YouTube video by a couple that retired at the age of 40 and moved to Portugal, our rich journey. And I was like, “Why can't that be me?”

Then I went into the rabbit hole of finding WCI, QSFI, and The Mad Scientist. And then I realized I was paying for two insurance, two dental insurance, because I wasn't looking at my paycheck. Who does that? Nobody teaches you to do it. It was just all learning and going through the process. I had a 457(b) that I never knew about, and I was like, whoa.

It was a lot of learning and a lot of application that really got us on track with where we are today. And I've attended your conference three times already. I attended two virtual conferences. I was there in Florida. I've definitely been very active in learning and also walking the walk. So, that's been helpful.

Dr. Jim Dahle:
Because five years ago, your finances were a mess. $120,000 in credit card debt, $18,000 in personal loans.

Stelle:
Correct.

Dr. Jim Dahle:
And what happened to your husband's student loans, by the way? Did you guys just pay those off?

Stelle:
No, we haven't paid those off. That's our next step. That is our next step. And actually, the credit card is actually really interesting, if we could talk about that. I was born and raised in Cameron and moving here in college. I went to college. They gave me a free t-shirt. I signed up for a credit card. In graduating, I had a full scholarship, actually, when I graduated college. And they were giving me stipends every semester for my GPA. But I still graduated with $10,000 in credit card debt because I wanted the shoes. I still have the shoes with my initials on them. It was cool. Then I worked for two years to prepare for medical school. I pay off the $10,000. And then during medical school, I was really good with it. But then we got into residency with the kids, the daycare. We went back to $25,000 in credit card debt.

I think that's when my sister is an investment banker. I think she had an intervention for me. She literally put me on a budget, which it was a humbling experience, I have to say, because she's seven years younger than me, whereby every month, she had to review my finances and make sure I was on budget for her to lend me money to pay some of those 9% interest, personal loans, and this 17% APR credit card debt.

That was a very humbling moment because there were months where I did not qualify for a check. I realized that it was not a joke. She was taking it very seriously. And I had to do the same because this was all about me. That's where she got me through. She's like, “Okay, you have to at least meet the match contribution for your 401(k). Just start with that. I don't care what you do. I don't care if the phone drops off. You have to do that. And then you have to save this amount of money. That's when you could qualify for this.” So we were on that. She put me on that program for two years. Wow.

Dr. Jim Dahle:
She must be so proud of you now. Is she proud of you?

Stelle:
Oh, she is. It's amazing now. We actually talk finance together.

Dr. Jim Dahle:
An intervention that worked though. It worked. She did this and it worked. This is while you're in residency or when was this?

Stelle:
This was in residency. Yes. This is in residency when we had two kids. We had two kids, my husband, and we're just dragging these 9% loans because the personal loans we took were $18,000. We ended up paying $29,000.

Dr. Jim Dahle:
Wow. What's your sister's name?

Stelle:
My sister is Leticia.

Dr. Jim Dahle:
Leticia, thank you so much for watching out for your sister. That was incredible what you did. I'm so impressed with you. Thank you so much. There's about a million doctors in the United States that also need your services though. So we got to figure out a way to scale up what you're doing.

Stelle:
Yeah.

Dr. Jim Dahle:
Wow. That's a pretty awesome story. I love that.

Stelle:
That was that first trench of loans. Then I learned about you. We got our ducks in a row. We paid off our cars. We made the mistake… Not a mistake… We had already bought a house as a new attending, which you don't recommend. We were already in that hole.

But then what we did was we were actively paying for that house. We refinanced. We got a 2.1%. So we were active. We had about a principal of like $180,000 at the end of the full year because we were very aggressive paying it down. But then moving, we had to move and that's what we accrued the rest of the debt. The $120,000 was accrued within the last year.

Dr. Jim Dahle:
Wow.

Stelle:
I got into a lot of side hustles, maybe not for the best. I figure I'm a pathologist. I'm in a hospital. There's not really much after work. One of them was Touro. We got another car for Touro and it really wasn't a good deal. It was the worst deal possible. I realized after buying the car that three banks declined our loan because the dealership was asking too much money.

It was a 2015 Mercedes that was not even worth $20,000, but they were charging $40,000 for it. And they tagged on a whole bunch of taxes. And I had flew to New York to pick up this car and drove it back. And I was just like, I have to take a car when I go. I literally was thinking, okay, I'm making the right decision. And the interest on that was 10%. The car turned out to be $34,000 at 10%. When I saw that first payment, I was like, there is no way in hell.

And having a long history of credit card, I think I've used this technique quite a bit, the balance transfer with banks. I have credit cards that have limits of $60,000. I was able to do a balance transfer at 4%, pay off the car immediately instead of paying the 10% in six years, get rid of it, and then put it on my credit card and now start paying it down actively. We not only did that with that one car, we also had another Jeep that we were using that had $15,000 on it that we did the same balance transfer from 6% to 4%. And people could debate whether it was worth it, but to me, it worked for us.

And on top of that, moving to Texas, we had a new home. We had to put our home in the market. That was another $16,000 of repair and making our home beautiful just to put it on the market that we had to shell out. We had to repaint here. And then when we moved here, our HVAC fell the same day that the septic pump fell.

Dr. Jim Dahle:
The cost of home ownership, right?

Stelle:
Exactly. That was another, the HVAC was a $12,000 cost to replace. And then the septic pump was $10,000. It was just in the middle of summer in Texas, 110 degrees, you just have to shell it out. And then we had to do some old cleaning and all of that. That's what brought in one summer, we amassed $120,000 in credit card debt.

Dr. Jim Dahle:
What lesson do you take away from this experience of having six figures in credit card debt? Have you gone done plastic surgery, cutting up these credit cards and have a bigger emergency fund now? Or you still got 12 credit cards in your wallet. What lesson did you take from that?

Stelle:
Well, Jim, actually, between my husband and I, we probably have over 30 credit cards. 800 credit score. Our utilization is 7%. So we had a plan. It's all about having a plan, right? Our emergency fund was pretty much extinguished in one blow. It was gone, but we knew that we're moving out. We sold our house. We got $180,000 in equity from that sell. That pretty much wiped it all out.

And that was always in a plan. We always had a plan that, “You know what? We have these credit cards. Our house is going to go on the market. This is how much we're going to have in equity. If we get within this range of payment, this is how much we're going to be able to pay off. And we already knew we will get rid of them. This is not something that was going to drag on.” But the benefit of that was the millions of points that we amassed in the process.

Dr. Jim Dahle:
Yeah. It sounds like you said $30,000 in travel hacking benefits.

Stelle:
Correct.

Dr. Jim Dahle:
Where'd you go with those?

Stelle:
Oh, let's see. As a family of four, we went to San Francisco for the first time with the boys. We went to New Orleans that year. I went to a conference, so it makes it easy to pay for the husband and the kids to come and join me. We went to L.A. on a two-week trip to Asia, where we stopped in Japan, Singapore, Bali. And then we went to Barcelona and Lisbon. And all of that was paid with points, even hotels and everything. We only spent on food.

I think that really is the moment that my husband didn't think I was crazy anymore ordering money, because he can actually physically see our network grow while we were still living a comfortable life. Because his problem was like, “Well, HSA, that means we don't have insurance anymore.” I was like, “No, we do. We're just investing a lot of it. 401(k), no, we're putting it.” But we are spending.

And it was really important to know what was important to him. Travel and family time was the one thing. I made sure I learned all about travel hacking. So now he's literally flying first class around the world at no cost, which to me, I couldn't have done that, did I not get the education.

Dr. Jim Dahle:
Yeah, that's pretty interesting. Pretty interesting pathway you've had over the last five or 10 years. Really, your whole life. We appreciate you coming on and sharing that with us.

Stelle:
Thank you.

Dr. Jim Dahle:
Congratulations to you on three or four or five of these milestones you've reached. It's pretty exciting. What are you working on next? What's your next milestone?

Stelle:
My husband's student loans is our next milestone. We would love to actually not have a mortgage anymore. We're trying to see if we can pay off our mortgage within the next few years.

Dr. Jim Dahle:
Very cool. Well, congratulations to you. I know you can do it. And thanks so much for coming on to inspire others to reach their financial goals.

Stelle:
Thank you for having me.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview as much as I did. This was an interesting journey. Lots of us have very similar journeys. This was not similar to what lots of White Coat Investors have. This was a pretty unique journey. And I think it's good to hear what's happened to other people and the different routes they've taken to get to financial success and to reach their financial goals. I think there are some lessons in there. Lots of lessons about debt management and getting in trouble with money and then digging your way out.

And also lessons on the importance of income. Not only income, including things like PSLF, because that counts toward your income, but also the fact that a physician income, especially if you make sure you're getting paid fairly, can really clean up a lot of financial mistakes, a lot of financial messes, and that there is hope.

There is light at the end of the tunnel, no matter how bad of shape you're in, whether you've got six figures in credit card debt and a negative net worth of minus $600,000. You can. If you are a physician and you take care of your income and you take care of your finances, you can have a million dollar swing in your net worth over the next five years. So, I think there's some awesome hope in that.

FINANCE 101: 5 RULES FOR EVALUATING A RENTAL PROPERTY

I told you at the beginning of the podcast, we're going to talk a little bit about investment properties. I just wanted to give you a few kind of basics for evaluating a rental property investment.

The first rule to keep in mind is that you really make your money when you buy. A lot of what determines your investment return is how much you pay for the property. And everyone says location, location, location. But you know what? When it comes to your investment return, price, price, price is probably at least as important as location, location, location.

If you overpay for something, you're just not going to have a very good return. Not only do you have less protection if it goes down in value, but there's less difference between what you sell it for and what you bought it for when you go to sell in a few years.

Always try to get a good price on the property. You're not buying a place that you and your kids are going to live in, you're buying a place by the numbers. It's got to make financial sense or don't buy it in the first place.

Okay, the second rule is what I call the 55% rule. And use this to determine your net operating income, your NOI, probably the most important number for a direct real estate investor. That's basically what's left after paying all your expenses, not including the mortgage.

Basically, you need to think about 55%. And what that is, is what's left after you pay all the expenses of owning. The expenses of owning are 45%. There are things like vacancies, insurance, maintenance, property taxes, snow removal, lawn maintenance, repairs, and management costs. Whether it's your time doing that management or whether you're paying somebody else to do it, it's really the same thing.

If that's 45%, you only get 55% of the rent to cover the mortgage and your profit. If that doesn't cover the mortgage, you're going to have a negative cashflow situation. Now, expenses vary, right? This is just a rule of thumb, but it's something to keep in mind. If 55% of what you're collecting in rent is not more than your mortgage payment, you're probably going to be in a cashflow negative situation. You'd want to be in that. Now, while a doctor income might be able to carry one or two properties that are cashflow negative, you can't carry an infinite number of them. You need cashflow positivity.

All right, the third rule is to use the capitalization rate to compare one property to another. Once you know what the capitalization rate is in your area at that period of time for that type of property, then it's a lot easier to compare one property to another. Think of the cap rate as like the equivalent of a stock dividend.

While the property is likely to increase in value at about the rate of inflation, the net operating income is really what's going to provide most of your investment return, both as cashflow and as amortization on the mortgage that you might have on the property.

So, if you have a 6% cap rate property, the cap rate, the capitalization rate really is what you would get in cashflow on the property if it were paid off. If it's a $100,000 property and you get 6% on it, that's a cap rate six, $6,000 in cashflow from it. But if you get in 6% cap rate property and inflation is 3% and appreciates by that, your return is 9%. If you have a little bit of leverage on it, you might get a little higher than that. Obviously, there's risks that come with leverage.

All right, rule number four, you got to put down a significant down payment if you want positive cashflow. Whether that down payment is in the form of sweat equity, whether that down payment is the form of getting an absolute steal on buying the property, or more likely just cash that you put down when you buy it, that's the key to positive cashflow.

When you've got a debt to value ratio of 90%, you're probably not cashflow positive. It's got to be better than that. Typically, you can have 25% equity in there, 30%, 33% equity. That's the range it takes for most rental properties to have positive cashflow. It's maybe even a little worse these days as interest rates have gone up. But expect to put money down. These no money down deals, yes, they can be done, but they are often negative cashflow properties and you don't want that.

Then the last rule is minimize your transaction costs. One of the most significant downsides of real estate investing is it just costs a lot to get in and out of a house. I tell people that are buying houses to live in that their transaction costs are probably 15% round trip. 5% to get in, 10% to get out. That's pretty true. For $200,000 property, that's going to cost you $30,000 round trip. $500,000 property, that's going to cost you $75,000 round trip.

You want to minimize those as much as you can. Sometimes becoming a realtor, so you don't have to pay a realtor, that can really minimize your transaction costs. Everything you can possibly do to reduce those increases your investment return. I hope that's helpful to you.

SPONSOR

This podcast was sponsored by Bob Bhayani at Protuity, formerly DrDisabilityQuotes.com. One listener sent us this review. “Bob had been absolutely terrific to work with. Bob has always quickly and clearly communicated with me by both email and or telephone, with responses to my inquiries usually coming the same day. I have somewhat of a unique situation and Bob has been able to help explain the implications and underwriting process in a clear and professional manner.”

You can contact Bob at whitecoatinvestor.com/drdisabilityquotes today, by emailing [email protected] or by calling (973) 771-9100 to get disability insurance in place today.

All right, this is the end of another great episode. You can apply to be on this episode, whitecoatinvestor.com/milestones. But whether you apply and come on or just listen to the successes of other people, we thank you for being here. Thanks for spreading the word about this podcast, leaving five-star reviews, and thanks for what you're doing to contribute to the White Coat Investor community. It really does make a difference.

Keep your head up, shoulders back. We'll see you next time on the podcast.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.