Why Automation Beats Willpower for Doctors Building Wealth

Transcription – WCI – 458
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 458 – David Bach on becoming an automatic millionaire.

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QUOTE OF THE DAY

All right, our quote of the day today is from Peter Lynch, who said, “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.” Isn't that the truth?

We've got a promotion going for WCICON. This is for the virtual version of WCICON. The sale goes through March 25th. wcievents.com is where you use it, and the code is WCICON100. You can see $100 off the virtual version of WCICON. I think you can still come in person if you like. That code doesn't work for in person, but if you'd like to come on the virtual version of the Physician Wellness and Financial Literacy Conference, we would love to have you.

We've got a great interview today. We've got David Bach on here. He wrote all kinds of books you've heard of. The Latte Factor, Smart Women Finish Rich, but he just put out a 20th anniversary edition of The Automatic Millionaire, which I think is his most famous book. Let's chat with him about some of the ideas in that as well as what he's doing with his life now. We'll be back afterward to talk some more.

INTERVIEW WITH DAVID BACH AND WHY “THE AUTOMATIC MILLIONAIRE” STILL MATTERS

My guest today on the White Coat Investor Podcast is David Bach, author of The Automatic Millionaire. He has been famous for a long time in the personal finance space. David, welcome to the podcast.

David Bach:
Jim, it's great to be with you. Congratulations on all the good work you've done, and you have been doing it a long time. It is an honor to be on your show finally after all this time, because you've been kind enough to review multiple times The Automatic Millionaire, which I appreciate.

Dr. Jim Dahle:
Yeah, I love the ideas in it. The fun part about this interview is we are speaking intercontinentally. David is currently living in Italy. We're going to get more into that a little bit later in the show today. First, I want to spend some time talking about The Automatic Millionaire and the ideas in it. This is fun. This is the second edition, right?

David Bach:
It's hard to believe. This is the fourth time we've updated this book. I should know what edition this is.

Dr. Jim Dahle:
It's the 20th anniversary edition is what it is.

David Bach:
It's a 20th anniversary edition. It's out now in hardcover. I just spent the last year and a half completely updating it. It was a complete revision, and it's now timeless. It's a timeless book, but now it's been updated for the world we're living in today.

Dr. Jim Dahle:
I've written books. I've updated books. It's a pain to update a book. You've got to feel passionately about what you're doing. Why do you feel so passionately about the message in The Automatic Millionaire that you wanted to do a 20th anniversary edition?

David Bach:
Jim, it's a minor understatement. It's a pain in the ass to complete that out later. It's so much work. I think I forgot how much work it is, but I wanted to do it another time because of all the work I've done, I've got 13 books out. I've got 10 New York time best sellers. This has been the book that's helped the most amount of people. And this is the book that over 20 years ago, I launched on Oprah. It's helped so many people. The letters I get, success stories I get every day, ordinary people who have built financial freedom. Sometimes these letters come in and they literally bring me almost to tears. They're almost not believable, but so much has happened in 20 years.

I've got kids, and I've got a 22 year old and I have a 15 year old, and I wanted a book for them and for their friends and basically the next generation. So I thought, I'm getting ready to wrap up my career here. I've spent 33 years in personal finance, and I wanted a book to give my friends kids, and the next generation.

PAY YOURSELF FIRST AND AUTOMATING YOUR FINANCIAL LIFE

Dr. Jim Dahle:
Very cool. The main idea behind this is that it's hard for people to remember to keep doing the right thing over and over and over again, that you're basically telling them, automate things, make it automatic. And then, there's no guarantees in life, but you're essentially guaranteed to be financially successful if you put the right habits in place in the beginning. And many of those, you don't even have to do yourself. You can just set up a system. Tell us what you mean by making it automatic to become a millionaire.

David Bach:
When it comes to money, money is the only thing you can automate. Your listeners are doctors in the medical industry. You can't automatically make me eat well. It's not possible. I know I should eat well, but no one's bringing me food automatically. Money is the only thing that you can automate.

When it comes to saving and investing for the future, and really everything, your emergency money, your retirement, your dreams, there are a couple of ways you can do it. You can write checks, or you can transfer money yourself. But that doesn't usually work because we're busy. And even if we start off doing it, we fall off track.

When you automate your financial life, when you move money every time you get paid, so you get paid, money moves right when you're paid, or before you're actually paid taxes, you pay yourself first. When you pay yourself first, ideally, one hour a day of your income, I teach you to save a minimum of 10%, ideally 15%, right off the top, and you move that money without touching it to a retirement account, to an emergency account, to paying down your debt, it actually gets done.

What I say on the back of this book is that wealth isn't a secret, it's a system. And when you make your money automatic, the system works for you while you sleep. And that sounds like an infomercial, but that's the truth. And what we now know, because we have 40 years of experience with this, we've had retirement accounts for 40 years, 401(k) plans, IRA accounts, SEP IRA accounts, we know that people who save money automatically do really, really well, and become millionaires. We now have 24 million millionaires in America. When I wrote The Automatic Millionaire 20 years ago, we only had 8 million millionaires.

The book is about an ordinary couple that came into my office with an ordinary income. That year they came into my office, they made less than $55,000 that year. And they had saved automatically, by the time they got into their early 50s, they were able to retire. And when I met them, I was a young, successful financial advisor making six figures, and spending everything I made. And they were my wake up call. Because of meeting them, I realized that if I didn't change, nothing was going to change.

The couple's name is Jim and Sue McIntyre in the book. And they were the ones that inspired me to realize it's one thing to teach people to make automatic, it's another thing to do it yourself.

And fortunately, after I met this couple, I realized I've got to change myself. I was making more and more money and spending more and more money. And this is typical for anybody who's in a high income profession. You have a lifestyle creep. And when you make your savings automatic, you take the money off the top, you can keep increasing your lifestyle. But you have to pay yourself first, before you increase your lifestyle.

That's really the premise of the automatic millionaire. Make it automatic so it moves while you sleep. It doesn't take discipline. It doesn't require a habit. The habit is automation.

Dr. Jim Dahle:
It's a behavioral thing, really. You're trying to set this behavior in place so that you don't have to have amazing amounts of willpower to keep doing this over and over and over again. Because you just set up the system in the first place. I think that part of it's absolutely brilliant.

WHAT TO AUTOMATE (RETIREMENT, EMERGENCY FUND, GOALS, DEBT) PLUS SIMPLE INVESTING AND ASSET ALLOCATION

But let's talk about what this means, practically speaking. I love the pay yourself first approach. A lot of people don't like budgeting. Budgeting is their least favorite thing in the world. And so, they call it anti-budgeting. They just take whatever they're going to put toward retirement or whatever their savings goals are first, and then they spend the rest. And they figure if it's in the bank account after I've already paid myself, I can spend it.

Other ways that you can automate things. You can set up your 401(k), so it'll be maxed out over the course of the year. You can make automatic payments into your taxable brokerage account. What are other ways people ought to be thinking about automating their finances?

David Bach:
I love what you just said. It's the anti-budget approach. And then I'll answer the question. When I was young and I first got married, my wife and I talk about this in my second book, Smart Couples Finish Rich. My wife and I fought about the budget.

Before I was automating everything, I wanted to figure out where all the money was going because I wanted to make sure we could save something. And finally, I said to her, look, here's what I really want to do. In my case, I want to take 20% off the top. Before you and I can spend the money, I want to move 20%. I want to move at least 10% into the 401(k) plan automatically. I want to move 5% into an emergency account. And I want to move another 5% into a buy a house account, call it a dream account.

I said, then after that, you can spend the next 80% and I won't fight with you about where we're spending the money. That approach works really well when you're married. It works really well even if you're not married, but it really works well if you're married. Because if you're somebody who likes to track where all the money goes and anybody who's listening to you and who's a White Coat Investor, they're super into this, that's why they're here. There's a good chance they married somebody who's not super into this. That's how it works. We always marry our financial opposite.

When you automate your financial life, it reduces all the friction in your marriage. So, that's number one. Now to answer your question, what can you automate? What are the key things you can automate in your life? I've got a hand up with five fingers here. One is your 401(k) plan or whatever your retirement account is. It's automating your retirement account.

Two, it's automating an emergency account. Now, what is an emergency account? Emergency account is you're putting money aside, ideally in a money market account that doesn't have checking attached to it. So, you're taking, and again, in my case, I used 5%. You're taking a certain percentage of every time you get paid, you're putting it in an emergency account specifically for an emergency. Not to redo the kitchen, not to get a new car or a boat, it's for an emergency. It's times like COVID. It's having that money set aside for when things go wrong.

Other things people automate money for, and I use my example of a house. I wanted to buy a house, so I set aside money for a house. Maybe somebody wants to buy a second home, a ski home, or a lake house. Whatever it is you want, you can put money away automatically in a separate account for that. Now, it can all be in the same brokerage account. It's just designated for those things.

College savings plans, 529 plans. I'm sure a lot of your listeners and viewers have kids. The sooner you start a 529 plan for college or an HSA account, these health savings accounts, those are great accounts to automate.

Then the last thing is debt. If you have a mortgage, you should automate paying your mortgage every month, and you should automate paying it down early. The way you can best do that is take a bi-weekly mortgage. You take a mortgage and split it in half and pay automatically half every two weeks, and you'll take a 30-year mortgage down to typically 25 years.

I recommend if you don't do that, you make one extra mortgage payment a year, and you'll pay your mortgage off seven years early. You can run all these calculations online today. It's super easy, and credit cards should be paid automatically. At a bare minimum, you should make minimum payments on your credit cards. I don't want you to make minimum payments, but you should make those automatically too.

Dr. Jim Dahle:
A lot of that automation is in the savings. It's in the contributing, making the contributions into these accounts. One of the ways in which I think automation has most helped me in my life is we've taken an approach to our investing where we basically use a static asset allocation. We use a fixed asset allocation, same percentages.

Basically, 20-plus years ago, I took all of those decisions about what to invest in off the table. I wrote down a plan, and all I have to do is follow the plan. What investments make sense for somebody who wants to become an automatic millionaire?

David Bach:
I really recommend for the average investor, if you've got a 401(k) plan, you use a target-date mutual fund because a target-date mutual fund does that asset allocation you just described automatically for you in one fund. It might give among 10 asset classes, and it's based on a timeframe. If you're going to retire 20 years from now, you choose a target-dated fund 20 years from now.

That's how I think it's great for people to start. There's now trillions of dollars in target-dated funds. As you start to have more and more money, and if you do manage yourself or you hire a financial advisor, they will build you an asset allocation model. What you just described is exactly what you should do. You should have a targeted asset allocation.

In my case, I'm very conservative. My asset allocation is basically 50-50. I'm 50% equities and 50% fixed income. When I sit down with my financial advisor and I go over my account, as the markets go up, my accounts go up, I have to rebalance it. Every year, this is the time of the year where I sit down with my financial advisor and I have that discussion. It's been a great year. The stock portion of my portfolio was up 19% for the year. My asset allocation of stocks has gone up quite a bit, actually.

Now, I have to decide, and this is what everybody who's listening is, it's easy for me to rebalance it in my IRA account. There's no taxes. That's where I'll rebalance first. In my taxable account, it becomes harder to rebalance because I don't want to pay capital gains if I don't need to.

But my asset allocation hasn't basically changed in six, seven years. The individual investments inside it might change slightly. In my case, I moved money to global two years ago. I'm giving you behind the scenes stuff, my own personal life. I've never had global investments in my portfolio, specific global investments, because I traditionally didn't feel they were necessary. If you're in a broad-based US index fund, you're getting global exposure.

Global investing has underperformed for 20 years. Two years ago, the global investment markets were so cheap compared to the US markets that it just seemed to me like it was obvious it was time to start putting money into global investments. Now, global investments have been up way more than the US markets, but I'm not switching everything global. I'm just switching a percentage. I happen to be one-third global and two-thirds US.

Dr. Jim Dahle:
That's actually precisely what I've been for the last 20 years. You're right. The last 15 years up until 2025, that didn't pay off that well, but 2025 sure did. That's for sure.

David Bach:
This year is amazing. You're up over 30% on your global investments.

LIMITS OF AUTOMATION AND HOW ADVISORS/SYSTEMS HELP

Dr. Jim Dahle:
Yeah. If you're invested in something like international small value, it's closer to 50%. They've just knocked it out of the park in 2025. Let's talk a little bit about the downside of automation, some of the things that you can't make automatic. Basically, if you've chosen to have an automatic life, you've chosen not to do these things.

The first one might be tax loss harvesting, which is significant for those who have a significant taxable account, especially if you're automatically reinvesting dividends so you can maximize the benefit of that. You've always got these small tax slots coming in, causing you to have wash sales if you then want to go tax loss harvest. But tax loss harvesting by its very nature is pretty manual. It's a pretty manual process.

Another thing that tends to be difficult if you're automating is doing your backdoor Roth IRA process every year. This is kind of a manual thing. You don't want to trickle in money every month all year into your traditional IRA and invest it and then try to convert it at the end of the year. It just makes for a big paperwork mess on your form 8606. Sometimes doing asset location things where you've got different asset allocations in your taxable account versus your 401(k), et cetera, et cetera, to try to maximize the tax benefits of each account. That's difficult to make automatic as well.

What do you see as the way to balance those issues with the behavioral benefit of making everything as automatic as possible?

David Bach:
It's interesting because I actually don't know. Let's assume your clients have hired a financial advisor. That's the job of the financial advisors to do tax loss harvesting. Now, most financial advisors do tax loss harvesting without calling you. If you've got a fiduciary who's a registered investment advisor, that's their job. They have a system in place. It's all automated. It's not the individual advisor that's going in there and going, “Oh, I think I should sell this, and I should buy that.” Usually, it's a computerized system that's automated.

I was the co-founder of a registered investment advisor. You heard me speak at FinCon. I was just launching this firm with two partners. That firm today has over $40 billion under management. I've sat on the investment committee for eight years. I've gone through every quarter 90 pages of investment reports where we have our board meetings with our CIOs.

Most of that money is automated. Most big, large model portfolios, including institutional money, is automated. In terms of tax loss harvesting, if you're doing it yourself, you can't automate it. You've got to go in and look at it yourself. If you're working with an advisor, then you should at least be agreeing on when you're going to do this.

Most tax loss harvesting takes place at the end of the year, or it takes place if there's a major drop in the market. If the market drops 5% and you have a good advisor, chances are they're harvesting those losses. That's one thing.

The second thing is on the Roth question, which is a good question. Some people actually choose to do Roth conversions automatically so that they don't have to think about it. They actually sit down with their advisor and say, “You know what? I'm going to take $100,000 out of their IRA account. As an example, I'm going to convert that. But I don't want to make the decision at once because I don't know what the market's going to do. So, I want to just take whatever it is. I'm going to take $100,000 by 12 months and divide it. And I'm going to dollar cost average out of the IRA account. Just like a dollar cost averaged into the IRA account, I'm going to dollar cost average into my Roth conversion.” That's what some people do.

THE LATTE FACTOR, DOCTORS AND WEALTH BUILDING, AND BIG-PICTURE RETIREMENT TOPICS

Dr. Jim Dahle:
Let's talk about another idea that I think you've made. Maybe it might be your most popular idea, your biggest contribution to the personal finance space over the years, which is the latte factor. The idea that a little bit of money every day adds up to a massive sum, especially when compound interest is applied to it, over the long term. If you skip a latte every day for the next 30 years, you could be a gazillionaire. That's basically the idea.

The pushback I hear about this idea is that it requires a great deal of behavioral willpower to focus on the small decisions. That instead, you should focus on getting the big rocks right. Get your housing costs right. Get your transportation costs right. Get your schooling costs right. And then you can treat yourself to the lattes because you're doing the big things well. What do you think about that pushback and how would you respond to that?

David Bach:
Well, first of all, you're right. The latte factor has probably become one of the most famous things I've ever taught. Besides pay yourself first, the latte factor is what everybody knows me for.

The latte factor was always this metaphor around how we spend small amounts of money on little things without thinking about it. And it started with me telling a story about a young woman named Kim who said she couldn't use her 401(k) plan. She couldn't pay herself first automatically because she didn't have any money.

And as she was telling me that, she was drinking a Starbucks latte. And I asked her how much it cost. And she told me. And then I went up to a chalkboard back in the day and ran the math for her and showed her, “Well, Kim, if you didn't have the coffee and you didn't go to Jamba Juice and you brought yourself an apple and you had the coffee for free, she worked at the Gap, and you save $10 a day and the Gap matches your 401(k) plan, you'd have over a million dollars by the time you reached retirement.”

And she's like, “Are you trying to tell me my lattes are costing me the number of times are $1.2 million?” I didn't say it. People in the audience were turned around, like, that's exactly what he's telling you.

And so, everybody, when I left that class, that's what they were talking about. They weren't talking about, “Should I stop going to Starbucks and having coffee?” They were talking about what was their latte factor. Because everyone's got a different thing. And is it going out and having cocktails today? Is it taking Uber everywhere? Is it having Uber Eats every day? Is it paying for subscriptions that you don't use?

Today, it's not $5 a day. Today, we're wasting $10, $20, $30 a day on little things. And I don't know if we sent you my famous latte factor mug, but in the Automatic Millionaire now, I talk about…

Dr. Jim Dahle:
I got one. I got one of those. It's beautiful.

David Bach:
There's only a hundred of these, Jim. This thing, you got to hold on to this.

Dr. Jim Dahle:
Now it's a collector's item.

David Bach:
A collector's item. This mug, what we talked about in the update of the book was, “What does it take to blow $10,000 a year?” And that was the most viral post I ever put out, was “What does it take to blow $10,000 a year?” How much money is it per day? The answer is $27.40 a day at the end of a year is $10,000.

$10,000 is so much more money than the average American has. Like six out of 10 Americans cannot get their hands on $10,000. They can't even get their hands on $1,000, six out of 10 Americans.

I've been using, on the latte factor mug, I showed you $27.40 a day invested in the stock market. If it only earns 10% annually, the stock market has earned in the last 10 years, over 13%. If it only earns 10%, you'd have $1,644,000. In 40 years, you'd have over $4,424,000.

Now, what do people say today when they hear about this? They say the same stupid things that they said 20 years ago. They literally say, “Well, in 40 years, $4,442,000 isn't going to be worth that much.” It's going to be worth a whole lot more than zero. They say, “I don't waste $27.40 a day.” Oh my God, tons of people do. You live in any major city and you go out for a drink and that's how much you spent on a cocktail or two.

I was just in New York City and I stayed in a beautiful hotel and the drinks were $31 without a tip. And the bar was full. The bar was absolutely full, like standing room only to get a drink for $31. I said to my wife, there's no way everybody in here is saving $10,000 a year. They might be making $150,000 a year, but they're probably still broke and they're spending at least $50 to $100 tonight just having a cocktail. They haven't even had dinner yet.

I'm not trying to take away people, have your coffee, smoke your cigarettes, have your cocktail. But if you don't believe you can save $5 a day, $10 a day, $20 a day, you're never going to fix the big things. And what I found with the latte factor is it was the emotional light switch that made a whole lot of people who didn't believe that they could start saving realize, “You know what? Maybe I'm richer than I think. Maybe I could start saving.”

And also made people realize that you don't have to be rich to become an investor. If my legacy has been any, well, hopefully been anything, I will have helped a whole lot of people realize you're richer than you think. You don't need to make a lot of money to become an investor. Small amounts of money can change your whole life. And if you make it all automatic, everything's easier. You'll turn around in 20, 30 years and you'll be financially really well off.

This is not a get rich quick approach. This is a build wealth over your lifetime approach. And not everybody wants that. A lot of people want to try to get rich quick. The problem is I don't know anybody who has successfully gotten rich quick. And I've been doing this a long time.

Dr. Jim Dahle:
I've met a few over the years, but the way they did it is never reproducible. That's for sure. They basically got lucky.

David Bach:
Sometimes they get lucky. But a lot of times if someone gets rich quick, they don't keep it.

Dr. Jim Dahle:
Right. Right. They don't have the habits. It's the classic problem. And this is a good time to segue into the financial life of doctors. When you're a small business person, by the time you've built wealth, you know how to manage money. That's not necessarily the case when you spend the first 15 years of your adult life in school and training, and you come out and someone hands you a $400,000 income, you don't actually have any training in managing money and business and personal finance and investing.

And so, just like somebody that becomes rich quick, you don't necessarily know how to stay rich. Just like doctors don't know how to build wealth, despite the fact that they make $200,000, $300,000, $400,000, sometimes much more, they struggle to build wealth. What's your experience been interacting with doctors over the years as far as their wealth building habits go?

David Bach:
Well, my experience in the real world, number one is that doctors come out of school with a lot of debt. Often the debt in the beginning days is suffocating. It can be hundreds of thousands of dollars in student loans. But then in the very beginning, they'll make a lot of money, then their income starts to grow.

I've seen doctors that as their income grows, they get a nice house, they get a nice car, they get a country club membership, their jobs are hard, but they're not actually building any wealth. That's one type of doctor. It's a very tough place to be in your early 40s.

I've seen other doctors that follow you. They become a part of an organization like White Coat. They've heard horror stories from older doctors. And they realized in medical school, or right out of medical school, I need to get my finances right early. Those doctors tend to do a really good job.

They have a defined benefit plan. They're putting a lot of money away in their retirement accounts. They're thinking early about “How do I crank the savings in the first 10 to 15 years?” Because they also see all the writing on the wall that it's very hard to maybe be a doctor as you get older. Can't handle the hours. Stress can kill you. There's a lot of difficulties to being a doctor. The medical industry is a tough place to be right now.

I see doctors who are serious about it, maybe earlier than they were 20 years ago, younger doctors today are way more sophisticated, I think, when it comes to investing. And then the sophisticated doctors, if they're a part of a practice, or if they're an entrepreneurial doctor, they have learned, and if you haven't learned, you want to learn this, they have learned that one of the greatest ways to build wealth as a doctor is to own the building that your medical practice is in.

When I look at my doctors that I know who have built substantial wealth, in many cases, they either own the building where their medical practice was, or they owned a part of a building where their medical practice was. And if they didn't, they took money and they also invested in real estate.

And it's interesting because I started my career in commercial real estate. I'm from California. I worked in the area of Pleasanton, California. And the first building that I had a listing on was this beautiful building in downtown Pleasant, still there, it's a gorgeous brick building.

The owner was a doctor. His name was Dr. Bob Bindi, a remarkable man. He was an individual, he was a doctor, he had a medical practice, and he had taken his money and he had bought real estate. And I was like, “How did you afford to buy this beautiful building in Pleasanton?” He's like, “Well, I started off small, I had one and then I had a house and then I had a duplex and then I got a little bit bigger and I ultimately rolled everything into this building.” And then later, he was in one of my books, later he rolled that into another property.

To answer your question, there's different levels of doctors. As a doctor, when you're making good money, you have to appreciate your money almost like an athlete. Athletes careers are very short, doctors careers are not necessarily short, but you should look at the 15 year time horizon and say to yourself, “I got 15 years here to make a bunch of money, I need to make sure I'm cramming that money into investments that make me money so I have the option to not work if I don't want to work.”

Dr. Jim Dahle:
It's interesting, they do surveys periodically, and like any survey, the data is not perfect, but after talking to thousands and thousands of doctors, I think it's close enough that we can use this information, but they do surveys where they ask doctors, “What's your net worth?” And no surprise when you ask a doctor in their 30s, what's your net worth is negative, usually. They've got a bunch of student loans still.

But the concerning part to me is when you talk to doctors in their 60s. And what you discover if you do that is that about a quarter of doctors are not millionaires, 11 to 12% of them do not have a net worth of even half a million dollars and about half of them are not multi-millionaires, which I know there's some doctors doing just fine and I'm not really writing for them, I'm not really working for them. I'm trying to work for the ones on the other end of the spectrum and try to avoid this issue because I think it's a super shame to make $200,000, $300,000, $400,000 a year for 30 years and not even be a millionaire yet.

I wrote a post a couple of weeks ago where I basically said doctors should retire as multi-millionaires. That should be the basic standard. It's not that hard for somebody making $200,000, $300,000, $400,000 a year to end up with at least a couple of million dollars in net worth by the time they're in their mid-60s.

And you wouldn't believe the pushback that came on that post, that basic idea that doctors shouldn't focus on that, shouldn't be multi-millionaires. And so, I hear all kinds of sob stories. “Well, I had a divorce. I had to put my kids in private school. I focused more on my patients than on my money.” The pushback that came from that.

And it's appalling because I could demonstrate financially that if you just save 20-ish percent of your income, even if you cut it in half once, even if you're one of the lowest paid doctors, even if you got a late start, you still ought to get to a couple of million dollars. But people don't necessarily like hearing that. And they don't want to be told they're a financial failure because they didn't build any wealth at all despite making tons of money during their career.

David Bach:
If you went out and surveyed your community and you asked the question, “Knowing what you know today, what is your single biggest regret when it comes to money?” You should do this actually, if you haven't already done it. What you're going to find is they're going to come back and they're all going to say, “I wish I had started saving and investing right out of medical school or even in medical school younger. And I wish I had taken it more seriously and saved more. I wish I had started younger, wish I had saved automatically and I wish I had saved more.”

We're talking about doctors, but it doesn't matter what the audience is. I just did an event in Arizona and I asked this room of super successful entrepreneurs. People who are paying $35,000 to $100,000 a year to be in the room. This was a Joe Polish Genius Network event. You probably know Joe. I asked the room, “How many of you wish you'd started when you were younger?” And every hand went up.

And then there's a room of young people and I'm like, look at all the hands that are going up. One of the things you wish when you get your 50s or 60s is usually you wish you had started doing more earlier. And when you're young, you have so much energy and you're so unstoppable. And you think you're actually going to always be like that. And people in their 50s and 60s tell you it's going to go by really quickly. “You're going to go like this. You're going to blink your eyes and you're going to be in your 50s and then you're in your 60s and you're not going to want to work as hard.”

Dr. Jim Dahle:
Boy, I know how that feels. I turned 50 this year. I just got done turning 50. And if ever there's a sobering moment becoming half a century old, that's got to be one of them.

David Bach:
Yeah, when I just turned 59. And I got to tell you, by the way, if you want to know the difference between 50 and 59, I'm sending out an email next week telling everybody, I've been doing emails since 1997, I'm about to just totally wrap up. And you're one of my last podcasts, too. There comes a point where you're like, you just want to go have fun.

And so, as a doctor, for many of the doctors listening, there's going to be a point that you're like, “I don't want to do this anymore.” Even if you love your patients 10 years from now, you might not want to do this anymore. You need to take care of your future self. Wherever you are today, try to take yourself out 10 years from now, just like you would tell your patients, you have to take care of your health so that in 10, 20 years, you can do all these things. You need to take care of your wealth.

Health is the most important. You're 50. When clients in their 50s would come into my office and they want to talk about their finances and their net worth and how much to save, I'd say, “Jim, let me ask you a question. When was the last time you went in for an annual physical?” Wife's like, “I've been telling them to go in for an annual physical.” And I'm like, “I know. Why are you asking me about that?” Because there's no point in getting to the age of retirement and then not being healthy enough to enjoy it. You're a fit guy.

But a lot of doctors also don't take care of themselves. It's funny, because I live in Italy. People smoke. I just went to an appointment at the hospital, and I'm like, I'm walking through the hospital and I can smell smoke everywhere. I'm pretty sure you probably aren't supposed to be smoking if you're a doctor.

Dr. Jim Dahle:
Yeah, that's a good segue. I wanted to spend a little bit of time talking about this. A few years ago, you made a decision to go spend a little bit of time in Europe, and I think this is a common thing for people. They want to try living outside the United States. They want to try geographic arbitrage. Sometimes they realize their money will go a lot further if they retired to Guatemala or whatever. Tell us a little bit about your experience living outside the US. Both financially and non-financially, what that's meant for you and your family.

David Bach:
Sure. Well, first of all, we did it for the adventure.

And really, what I wanted for my family was a transformational experience as a family. I had two kids, I still have two kids, and they were young, and I wanted to move abroad for one year before they went to college. I intentionally moved the family abroad when my older son was going to be a sophomore. He was going to be 15.

We moved abroad because we felt that was the one year in high school we could move abroad and then come back to New York so he could finish high school. That was kind of how we structured when we went. And then I had a younger son who was younger than him. We chose Florence, Italy, because we came from New York City. I wanted a smaller city, I loved Italy. And there was a good international school, and we didn't know anybody who lived in Florence, we just thought it would be fun, it's nine months. How fun would that be to live in Italy for nine months? And we came here and it was fun. It was so much fun.

And 90 days later, my son, who we really thought would be hard to get him to even move to Italy, he came to me and said, “Dad, is there any way you would consider staying so I could finish high school? Could you work from here?” And my wife was like, “God, I would love that. Could we stay? I'd rather not go back to New York now.” So we did, we stayed. And now we've been here six years. My older son graduated, went to college. He's in Northwestern Chicago. He's about to move to New York City for his career. And my younger son is in 11th grade and has one year and a half left. And so, that's how it started.

Now the things that we found out living abroad is that our whole lifestyle changed. Our life became about experiences, completely about friendship, food, fun, travel, all the things you dream that retirement would be like, we just moved it up a decade. And I've slowed down how much I work because I live abroad. I don't work as much, I slowed down. I'm retired basically, kind of sort of started to retire two or three years ago.

The arbitrage thing turned out, we didn't move abroad because it would be less expensive, but coming from New York City, the arbitrage was unbelievable. Money goes further abroad, but the quality of life is so… I don't want to depress people in the States, but quality of life…

Dr. Jim Dahle:
Especially in New York.

David Bach:
Yeah, quality of life is just really phenomenal. And I love visiting New York City. I loved living there for 18 years. And I'm really happy in Europe now. When I get done with you and I've got another week of stuff here, and then I go to Switzerland and I ski for a month, and then I'll go to France and I'll ski. It's just fun.

I have inspired a lot of friends to move abroad because they saw me do it first. It's like, you put your foot in the water and then it's like, oh, he's okay. And so, quite a few of my friends from New York City have moved abroad. They haven't all come to Florence. They've gone to Madrid. They've gone to Barcelona. They've gone to Lisbon.

In the beginning, it seems like it's a huge challenge. And once you actually do it, it's not that hard. And I think what happens is when you change your location, you really change your life. We had a great life. And I think we've just gotten to go on a whole new adventure. It's been really, really fun.

I highly encourage people to take breaks. And if they have any part of them that's thinking, “I'd like to do that”, I know it's harder to do that as a doctor. Nurses do it all the time. But I think not working until you're 60 to retire, but instead taking an intentional month or two months, maybe in the next year or two off, and doing like a mini sabbatical, I call it in the book, in the Automatic Millionaire, I call it a mini retirement. Don't wait, take a mini retirement. In Europe, they just call that summer.

Dr. Jim Dahle:
They do it every August.

David Bach:
They do it every August, I know, totally. And those are the ordinary people. These are people who aren't ordinary. They take the whole summer off, but everybody takes off.

Dr. Jim Dahle:
All right. Well, let's talk about your Olympic plans. I was here in medical school in Salt Lake when the Winter Olympics came to Salt Lake. It's going to come back here in a few more years. The Olympics is not very far from your home. Do you have any Olympic plans coming up?

David Bach:
Okay, it's really funny. You're the second person to ask me this. The previous podcast asked me this question. I'm going to Verbier in another week. I'm probably going to stay in Verbier. The thing is, I love skiing the Dolomites. And the Dolomites, I don't think I want to be there during a crowded time. Because if you've actually been to the Dolomites and you've been to Cortina and you've been to all these places, getting there is enough when there's not crowds.

Dr. Jim Dahle:
Right, for sure.

David Bach:
I think I'll avoid those two weeks and then I'll go back up the Dolomites after. But Lindsey Vonn, go. I'm rooting for Lindsey and I love the Olympics. But I don't know that I'm going to actually go watch any. I think I'm going to be skiing in Switzerland.

Dr. Jim Dahle:
Yeah, I drove through Cortina about three months ago. Three, four months ago.

David Bach:
Oh, in the summer.

Dr. Jim Dahle:
They didn't look like they were quite ready when I came through. So, hopefully they pull it off.

David Bach:
I've heard that in the last month or two, too. I'm like, somehow in these Olympics they always pull everything off. There's an issue of snow. Snow's late this season. But snow's been late everywhere.

Dr. Jim Dahle:
Yeah, it's terrible here in Salt Lake. We've had maybe the worst winter that I can remember in a couple of decades of living in this state. So, hopefully it resolves itself.

David Bach:
You happen to live in my second favorite place. I live in Florence. Now, what my original plan had been when I moved to Florence was to move to Park City after Florence. Which is, talk about booming. Everywhere around you has boomed.

Dr. Jim Dahle:
Yeah, for sure. The secret is out for sure about Utah. Okay, I want to spend a little bit of time talking about another idea. You've actually been advocating for a very interesting government policy change, a tax policy change. Tell us about it and why you think it's such a good idea.

David Bach:
All right, the idea is called, you can go to my website, it's iraflattax.com. Here's the idea. For anyone over the age of 60, I'm proposing that the government do a policy that would take ordinary income on withdrawals from IRA accounts to a flat tax.

Just like people do Roth conversions and they pay ordinary income tax and they move into a Roth, what I'm suggesting is they have an eight-year tax policy and they drop the taxes down to, and we ran a whole white paper on this, 10%, 12% or 15%. I think 12% is the sweet spot. And I'm suggesting that the government look at doing this because what it would do is it would start to unlock retirement money.

What's happening on the good side is a lot of people have saved a whole bunch of money. There's $44 trillion, it's actually now $45 trillion in retirement accounts. That's the good news.

Dr. Jim Dahle:
Most of which is tax-deferred.

David Bach:
Tax-deferred. The bad news is the money is not leaving these accounts. 83% of retirees who are over the age of 60, eight out of 10, will not take money out of their IRA account until they hit RMD age. For anyone who doesn't know what that means, RMD age is the required minimum distribution. The government requires you to take at least about 4% out of your IRA account at age now 73, or for the young guys like you and I, it'll be 75.

When people hit RMD age, they're only taking the minimum. And 25% of people aren't even taking the minimum out. They don't realize that they need to do it. And there's a 25% penalty if you don't do it. Again, why don't they take the money out? They don't want to pay taxes. I said people would rather die than pay taxes. Kind of a joke, but like some cases it's true.

Dr. Jim Dahle:
It's totally true. It's unbelievable what people will do to avoid paying taxes. They'll make less money. They'll have lower investment returns. They'll manage their money in some cockeyed way just to pay lower taxes. It's amazing.

David Bach:
Yes, they'll risk all their net worth to pay lower taxes and lose their money. My idea is, look, if Trump were to come out, because they're trying to look at things they can do to stimulate the economy. If Trump were to come out and announce an eight-year tax policy on it with a flat tax on IRA distributions over the age of 60, I think you'd see trillions of dollars coming out of these retirement accounts sooner.

Now, where would the money go? Lots of places. It could just go right into a taxable account and leave it in the same investments. It could go into buying homes. It could go into second homes. It could go into RVs. It could go into vacation travel. It goes into the community, goes into the economy. It also pulls tax dollars forward for the government because the government's not getting these RMD taxes, but they're budgeted to get RMD tax money, but it would pull forward revenue.

That's my idea. And then if I were to supersize the idea, if I were sitting here with Trump, I haven't got a chance to talk to Trump yet, I suggest to Trump that he do a Trump IRA account. Instead of a Roth IRA, I do a Trump IRA. And what I do is I create an eight-year window, take the money out, instead of doing a Roth conversion, I do a Trump conversion. And I convert the money into a Trump IRA. And then I'd give them like 10 years. You can put it in a Trump IRA for 10 years. It's got to come out. Come out tax-free, but it's got to come out.

I think you would just see a lot of money come out of these IRA accounts, go into a Trump IRA. It'd be like a mini powerful version of a Roth IRA, but it'd have Trump's name on it. And you'd probably see $5 trillion at least come out of these accounts.

Dr. Jim Dahle:
Okay, so let's say the policy changes. What you've advocated for has just now been implemented. I'm coming in, I've got Roth accounts, I've got tax deferred accounts, I've got taxable accounts. Now I'm asking for advice on what to do with this policy in place. What would you recommend people do?

David Bach:
Here's what'll happen in the real world. And you're asking a really good question. What will happen? Financial advisors will sit down with the client and they'll go through your options. And they'll say, “Look, you've got eight years. One option will be, wait for eight more years. You've got eight years in tax deferred growth. You're eight, take it out, pay the flat tax. We'll see what tax brackets you're in. Take it out, because it's got to come out before the RMD age. And then we'll see what do you want to do with the money? Do you want to put it in a taxable account? Do you want to put it in an annuity? Do you want to put it in an insurance policy? Do you want to give it to your kids? We'll just see.” That's one option.

Another option is, and this is how conversations go. “I know it's an eight-year tax policy, but tax policies are funny. They usually stick, but what if they change? Maybe you want to take it out immediately. Maybe you want to take the day it's available, take it out.” Some people will take it out the day it's available. Other people will say, “You know what? Why don't we take it out over all eight years? Why don't we dollar cost average out?” So, people will do it all differently.

Now, if you ask me, what would I do? If this really got done, I'd probably move it all out immediately. And why? Because I don't trust the government. I want the money in my account. It's the same reason I have a retirement account. I'd rather have my money in a deductible retirement account than pay the government upfront.

So, why are there $45 trillion in retirement accounts? Because everybody didn't want to pay taxes and they wanted to control the money. What's happening with these IRA accounts is a lot of people do have actually very large accounts. If you have a million dollar account right now, then in 10 years, it's $2 million. Literally in 10 years, it's probably a $2 million account. In 20 years, it's 4 million.

Now, if you look at the last 10 years of the stock market, because that means money's doubled every six years, it's actually not a million to 4 million. It's more like a million to 6 million.

What's really happening is we're going to end up in another 20 years with, believe it or not, a lot of eight figure retirement accounts. And I was on calls with senators last week discussing this idea and they were very honest with me. They're like, you know what? All the energy has been put into putting money into these accounts. We've created everything to put money into these accounts for retirement. We wanted people to save for retirement.

I don't really spend a lot of time thinking about how this money is going to get out of these accounts. You spend a little time on it, that's why the Roth IRA came around. The Roth IRA came around because on a bipartisan group of people, they sat down together and realized if we get people to pay taxes money upfront, we could use this tax money. What's the carrot we give them? We give them tax freedom forever. Huge carrot, by the way, the Roth IRA is a huge carrot.

The truth is the Roth IRA, that wasn't thought through either. Because you start to put money away in these accounts forever, the government can't run without income. We have a $38 trillion deficit that's just growing. The interest on our debt now is greater than our GDP.

So, none of these tax policies are ever actually permanent. If we take it for granted it's always going to look like this. 401(k) plans didn't even exist 50 years ago. So, some of this has got to be looked at I think with fresh eyes.

Dr. Jim Dahle:
Yeah. The bigger issue for these people with large accounts, and there are plenty, and there are plenty of people in this audience that either already have this problem or soon will have the problem. There's not so much whether the money's in a tax deferred account, or Roth IRA, or their taxable account, or a Trump IRA. The issue is people don't spend.

There's really two problems in personal finance. And once you solve the first one, which is that you don't save enough money, you pretty much almost instantly end up having to fight the second one, which is how to spend your money. And so, what advice do you have for somebody that's done a great job saving for retirement? Now they're 50, 55, 65, whatever. They've got millions of dollars. How do you help them become a better spender?

David Bach:
You hit the nail on the head. It's so interesting. Jim, there's two sides to this story. Save and invest, that's the accumulation side, and then spend and enjoy. And all the work that's been done, including my own work, has been on the save and invest side. I've spent more time in the last 10 years on the spend and enjoy side.

What I would tell anyone who's listening is this, and you've probably talked about this. They say in the financial service industry that there's three stages to retirement. The first stage is what they call the go-go years. It's the first decade. And then the second stage is the slower go years. It's the second decade of retirement. And the third decade is the won't-go years, and that's the years that the husband usually won't go anywhere, because he doesn't have the health.

What I would say to anyone is, you really want to maximize your first decade. I just moved it up a decade. I decided to just maximize my 50s. And everybody who's listening, they're doctors. If anyone should know the importance of this, it should be doctors. Because I talk about this in the Automatic Millionaire, health expectancy in America today, not life expectancy, health expectancy is age 63. That's the age that we know in the US, typically someone gets sick and it permanently affects their quality of life. Well, you have people retiring at 65.

I would have a financial plan, I would have a financial planner, and I would maximize that first 10 years. People don't run out of money typically. People who have saved and invested, their issue, just like you said, is not running out of money. The issue is they run out of health time and they miss out on fun time. So, don't wait, don't wait till your 70s. And if you're in your 70s, then start spending money now and enjoying it. And start giving money to people that you love.

So many people wait, they're in their 80s and they're not giving money to their kids or their grandchildren. They're going to give them money when they die. But then they're dead, they didn't even get to enjoy giving them money. Or give the experience, take your kids on a cruise, take your kids on a trip. I don't know, whatever your values are, so many people work for decades to build wealth and then they barely enjoy it and that's a mistake.

Dr. Jim Dahle:
Yeah, absolutely, totally agree with you. The big famous book the last few years out on this subject, of course, is Die With Zero. Which is not a perfect book, it's got a few issues. But the main point of it is exactly what you just said. We're not going to live forever. We're not going to have excellent health forever. And your ability to turn money into happiness decreases as your life goes on. So, don't be afraid to turn money into happiness, your own happiness and that of others as soon as you can. It's good advice.

All right, David, our time is now gone. It has been time well spent, I think. Those of you interested in learning more about David's ideas and writings, you can pick up The Automatic Millionaire. It's available at Amazon, just about anywhere books are sold. And make things automatic. There's no reason you can't become a millionaire, even if you're a doctor. I got all this pushback recently that doctors can't become millionaires or multimillionaires. It's just not true. It's easier with high income than it is with a low income, but you do have to manage the money.

David, what else have we not talked about today that you think people need to hear?

David Bach:
Well, first of all, Jim, I've loved our time together. Congratulations again on all the good work that you do. I really appreciate being here. I would say, come over to my website, davidbach.com. And if you're a woman, read Smart Women Finish Rich. It's like a full-blown financial planning book for women and money. It's the first book I ever wrote. If you're a couple, Smart Couples Finish Rich is a phenomenal book. Can teach you how to work together on your dreams.

And then the Latte Factor, which was my last book, is a parable. For your young kids, the kids that probably won't read a financial book, give them the Latte Factor book because it's a story and they can read it in 90 minutes and learn the basic lessons of personal finance that you've been taught in school. And hopefully that work can help them.

Dr. Jim Dahle:
Awesome. Well, thank you for writing them. Thank you for sharing them. Thanks for being willing to come on the podcast.

David Bach:
My pleasure, I'm glad. And thank you for answering your email when I sent it to you to want to do this show. I appreciate you.

Dr. Jim Dahle:
All right, I hope that was helpful to you. It’s interesting. The longer I do this, the longer I try to help people become financially literate and financially disciplined, the more behavior matters. Far more than the math. Personal finance is both personal and finance. It's both behavior and math. But the truth is it's about 90% behavior.

All we're doing, all we're talking about in the WCI forum and the WCI subreddit and the WCI Financially Empowered Women group and the WCI Facebook group, all of that seems to focus more on the math and less on the behavior.

Trust me, get the behavior right. Make things automatic, become a saver. If budgeting is hard for you, do the anti-budget. Just take your 20% off the top and spend the rest. Get the behavior right. And you'll be amazed how successful you can become.

By the way, I got to talk about the WCI Facebook group. I'm not sure exactly what happened with the Facebook group. We started this Facebook group years ago. It grew like crazy, grew, grew, grew, grew, grew. And it gets to like 99,800 people and flattens out. It's been amazing. For two years we've had between 99,500 people and 100,000 people in there without ever actually crossing the 100,000 people mark in the Facebook group.

If you're on Facebook, if you do Facebook groups, join the White Coat Investor Facebook group. It would be awesome to have you in there. It's a great group. There's lots of people there helping each other with their daily personal finances. But for some reason, it's starting to irk me that it can't cross the 100,000 person line. We actually hit 100,000 in the WCI subreddit faster than we did in the WCI Facebook group despite starting it years earlier and getting to 99,000 first. So, it's pretty amazing. If you like Facebook, check out that Facebook group.

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They've actually been advertising with us for a long, long time. And it's one of those easy things to advertise because it works so well for so many people. You can do locums at the beginning of your career, when you're not sure what you want to do exactly. You can do it in the middle of your career as a sabbatical sort of option. You can do it at the end of your career as you're winding down.

There's all these people out there that are like, “Oh, I have to work full-time. I'm a general surgeon, or I'm a thoracic surgeon, or I've got to practice”, or whatever. Well, you don't have to at the end of your career if you don't want to. You can sell the practice, if you have a practice, or leave your full-time employment job and you can do locums.

There are all kinds of general surgeons and thoracic surgeons and whatever who would love to take two, three, four weeks off. Trust me, they're out there, but there's no one to cover them in their small town or medium-sized town or whatever, wherever they are. They would love for you to come in and cover them for two weeks for a month so they can go take some time off.

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I mentioned earlier, WCICON is $100 off the virtual version until March 25th if you use the code WCICON100. wcievents.com is where you sign up for that.

Thanks for leaving us five-star reviews. Thanks for telling your friends about the podcast. A recent five-star review came in from Jagster, who said, “Jump-started my financial education. Love the show, only wish I found sooner. Great primer to stimulate learning about finances for a doc, especially for someone who isn't quite ready to dive into reading a few financial books.” Five stars.

Lovely. If you can listen to podcasts, hopefully we can get you to the same place you'd get if you read a few financial books. But if you prefer books, that's great too. I'm kind of a book and forum kind of guy. I've never been a big podcast listener, so here I am making a podcast aside not being a big podcast guy.

But we're trying to put this information to whatever format you'd like to learn it in. If that's emailed newsletters, if that's books, if that's online courses, blogs, podcasts, video casts, social media, we're trying to get it to you. Let us know how we're doing, ways we can improve. You can always send us feedback, [email protected].

In the meantime, keep your head up and shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER
The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Transcription – MtoM – 261
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 261 – Two doc couple pays cash for a home renovation.

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Stick around after this interview. We're going to do another financial bootcamp. This one is “What is a Stock?” It's the basics about how to understand how the stocks and stock market work.

INTERVIEW

Our guest today on the Milestones to Millionaire podcast is Joseph. Joseph, welcome to the podcast.

Joseph:
Thanks for having me, Jim. Pleasure to be here, and you're about as close as we get to a celebrity in the physician finance phase, so a little awestruck.

Dr. Jim Dahle:
It's very funny to be in that position because it's a very tiny niche, but people do know me in this niche for sure. I've only been recognized in the wild really a couple of times, though, so it's not really celebrity status. I'm far from Matt Damon by any means. But let's introduce you a little bit to the audience. Can you tell people what you do for a living, what part of the country you're in, and how far you are out of training?

Joseph:
Sure, I am a urologist in the frozen upper Midwest, Minnesota specifically. Let's see, I got out of training in 2019, so this is my sixth going on seventh year. Full disclosure, I do have a spouse who's also a physician. She's an OB-GYN as well.

Dr. Jim Dahle:
Both of you working full-time?

Joseph:
I am full-time. We had her cut down to part-time this year.

Dr. Jim Dahle:
That should be a milestone in and of itself, one of you being able to go part-time. But that's not the one you came on to celebrate, so tell us the one we're celebrating today.

Joseph:
Well, we recently did a home renovation project, and we're able to pay for it with cash, not taking on any leverage or debt.

Dr. Jim Dahle:
Very cool. When did you buy the home?

Joseph:
We bought the home in 2022.

Dr. Jim Dahle:
Okay, three years out, you bought the home. And what'd you pay for that home up in Minnesota? You remember?

Joseph:
It was pricey. Like any part of the country, you can find pockets that are expensive, so our home is $1.7 million.

Dr. Jim Dahle:
Yeah, okay, it's a nice home. But there was something about it you didn't like, because you decided to renovate it a few years later.

Joseph:
Yes and no, actually. We built the home, so we had no one to blame but ourselves. But we had built the home in the lower level. We had left unfinished just because budgets were getting crazy and out of hand.

Dr. Jim Dahle:
Got it, that's what the renovation was, was finishing the basement?

Joseph:
Yeah, it was essentially the conclusion of the project.

Dr. Jim Dahle:
All right, what'd you do down there? You put in a bathroom, you put in drywall, you put in carpet, what'd you do?

Joseph:
Full finishing, yes, drywall, carpets, ceilings, paint. Again, we're in the frozen north where our kids are forced to spend nine months inside, so there's a little basketball court down there as well.

Dr. Jim Dahle:
Oh, that's fun, that's fun, very cool. Well, I figure if you buy a seven-figure house in Minnesota, you ought to have a little basketball court in there.

Joseph:
Exactly.

Dr. Jim Dahle:
And maybe you should have put a refrigeration system in, you could put an ice rink down there too while you're at it.

Joseph:
That would have been a wise move.

Dr. Jim Dahle:
Okay, what did your renovation cost you?

Joseph:
I got the total here. In the end, the total was $202,246.40.

Dr. Jim Dahle:
And you paid for that in cash. Tell us how you did that, how you saved up for that and why that was important to you. Give us the deets on this project.

Joseph:
Sure. Well, really the motivation for it is a two physician household, which meant we came out of training with double the debt and we had tackled those student loans. And I didn't really like having the idea of another six-figure thing hanging over my head outside of our mortgage, of course. And so, that was really the motivation, we've gotten out of somewhat of our holes there so we don't want to dig a new one.

Really it was possible because we had all of our ducks in line. We both got rid of our student loans. We automated all of our savings so our annual saving goals had already been met. And so, now it was just free cash flow from work.

Dr. Jim Dahle:
So it was above and beyond all of your other financial goals and you figured we can afford this, we're going to do it.

Joseph:
Exactly.

Dr. Jim Dahle:
Very cool, that's a wonderful place to be in. When you came out of training, I imagine you're like most of us and you had a list of eight or 10 or 12 things, great uses for money and not enough money to do them all.

Joseph:
You can say that again, absolutely.

Dr. Jim Dahle:
And now at this point, seven years out-ish or so, how many of those things are just gone? They're not on the list anymore.

Joseph:
Just about all of them. We've gotten, again, student loan debt's completely gone. We got a nice retirement nest egg. We don't owe any money on any cars or anything else like that. And even the mortgage, it's a pretty darn low percentage rate hit at the right time. I'm not really in a huge rush to pay that off. So yeah, actually we're sitting in a really good position.

Dr. Jim Dahle:
Now, a lot of people doing a renovation would be a little bit tempted, especially if it's something they bought a few years ago that's probably appreciated, to do some sort of a home equity line of credit to borrow against the house. You probably wouldn't get that at the two or three or whatever you got back when you bought it. But did you think about doing that?

Joseph:
Oh, absolutely. I had crunched the numbers and it was looking very, very likely that we could achieve it in cash. But like most things in life, it's good to have some contingency plans. We did open a HELOC, but we never ended up using it.

Dr. Jim Dahle:
Now, how much more, and I assume it's more because it almost always is, how much more did you spend on the renovation than you anticipated when you started it?

Joseph:
Actually, in a true rarity, we spent less.

Dr. Jim Dahle:
Wow.

Joseph:
Yeah. We had gotten a number of quotes and they were used mostly in the $250,000 to $300,000 range, including the company that we ended up going with. And so, they quoted us at $250,000, came in at $202,000.

Dr. Jim Dahle:
Yeah, it doesn't happen very often. Did you do any of the work yourself?

Joseph:
I tried and my wife pretty quickly put a stop to it.

Dr. Jim Dahle:
Because you were doing a crummy job or because you didn't like what it did to the rest of your lives?

Joseph:
A little bit of both. But no, I think my lack of experience was quite evident right out of the gates there. So, best leave it to the professionals.

Dr. Jim Dahle:
Well, give us a sense for what incomes look like for the two of you the last seven years or so.

Joseph:
Well, when we came out, our combined household income was $600,000, $300,000 a piece. She's an employed physician, I'm part of a private practice. Our incomes have kind of diverged from there where hers has gone down. And then of course, dropping down to part-time, dropped it a little further. Whereas mine, I've continued to be able to increase and increase as the years have gone by. And so, our most recent year, actually we just hit the million dollar mark.

Dr. Jim Dahle:
Okay, what does a seven figure house look like in Minnesota? Is this a 5,000 square foot, very nicely finished house? I know this is a shack in the San Francisco area, but what is it in Minnesota?

Joseph:
It affords you some decent amenities here in Minnesota.

Dr. Jim Dahle:
It's got a basketball court. We know that already.

Joseph:
When you include the basketball court, the total square footage is 6,200.

Dr. Jim Dahle:
Okay, it's a big house.

Joseph:
That's a big house, six bedrooms. Yeah, I got a lot of family in the area and kind of was built and designed to host people over all the time.

Dr. Jim Dahle:
Yeah, you guys make a million bucks a year. You can afford this house, there's no doubt about that. My point is there's a whole bunch of people sitting in the Bay Area or Connecticut or Washington DC or Manhattan or whatever, and they don't want to move off the coast because they're afraid and they don't realize how much dramatically better their financial life might be if they moved to Indiana or Minnesota or Texas or whatever.

Was that ever a consideration to you to live in a very high cost of living area? Is this a deliberate decision to go to Minnesota? Is that just where you've been your whole life and that's where your family is, that's where you're going to go? Tell us a little bit about that decision and what you'd recommend to somebody in a higher cost of living area.

Joseph:
We did our med school and training out east in New York. My wife is actually from New York City, so when we started looking for jobs, it really came down to where the two of us were from because we wanted to be by family. And so, her family's primarily throughout the boroughs of New York City and my family's here in Minnesota.

And it really became just looking at, “Well, what is life going to cost us and what are our opportunities?” It just didn't make financial sense to stay out east. We have the kids and my wife's family, no other cousins, so we wanted to get close to where the kids could spend time with their cousins and family.

Dr. Jim Dahle:
Very nice. All right. Well, you've obviously been very financially successful, the two of you are doctors. You've managed money well, you've got a very nice house and you're building wealth and obviously you know how to save money. You paid for your innovation in cash. How much of that comes from your upbringing and how much of it was some sort of later financial awakening?

Joseph:
I would say mostly the latter. My financial upbringing, we grew up, we didn't really talk about money a lot. Money was never an issue. There was never like going to bed hungry with no dinner. But we also weren't really taught frugality in any way and using money intentionally.

My wife's family, her parents, they are first generation immigrants, so she has a very scarcity mindset. Save, save, save, don't spend, don't spend. And so, she came into our relationship with a little bit more of the saver aspect. I never liked spending money or at least not money that I didn't have. I don't think I came in as a complete spendthrift but certainly wasn't at the same level as her.

But really financial awakening happened in fellowship and it was actually the student loans that were the push to it because looking at that big number and realizing I did not have a plan for it. And so, that's when I just started consuming as much as I could consume. Read a bunch of books, listened to a bunch of podcasts, read a bunch of your blog and realized I needed a plan and needed to stick to it.

Dr. Jim Dahle:
Yeah, very cool. Okay, there's somebody out there that's a lot like you. They're five years out of residency or whatever and they're thinking about a home renovation and they're like, “Well, how should I pay for this?” What advice do you have for them?

Joseph:
Randy Moss said it best, “Straight cash, Homie.” I think if you can really get in the mindset of “I'm going to buy things that I can afford and by that mean I can pay in cash.” Obviously this is a large scale project but even on the smaller scale things, I think that's just a good attitude to have towards everything.

Certainly the HELOC was enticing but like you had mentioned, the interest rates weren't all that great. And so, why borrow money at a 7% interest rate when I have it on hand? But really like all things and this was true of our student loans, this was true of all of our other debts, make a plan and stick to it.

Dr. Jim Dahle:
Good advice. Well, Joseph, thank you so much for being willing to come on the podcast and sharing your story and hopefully inspiring others to do the same.

Joseph:
I appreciate that, Jim. Thank you very much.

Dr. Jim Dahle:
Okay, I hope you enjoyed that interview. I love having these new milestones. Everyone's always trying to come up with new milestones for us. I'm pretty sure we haven't done this one yet. We could have done a bunch of milestones with Joseph. They've accomplished so much and it's wonderful obviously when you have a high income, a dual dock couple, you got a lot of power.

It's a big shovel. You can wipe out a lot of debt in a hurry. You can buy a really nice house. You can do a renovation in cash but there are downsides too to being a two dock couple. You've got twice as much student debt probably and you don't have nearly as much time as another couple might have. And so, you end up having to hire a lot of things out. Might be childcare, might be housekeeping, might be lawn care, in Minnesota, might be clearing the driveway.

And so, there are some additional expenses. Usually you still come out ahead in a dual doc couple for sure but it's not necessarily as easy as a lot of people think if they haven't been in that situation.

FINANCIAL BOOT CAMP: WHAT IS A STOCK?

All right, let's talk a little bit about stocks. Sometimes when people start a company there comes a time in their life when they no longer want to own the company and they try to sell it. Now for a small business, they have to find somebody to buy it. Sometimes they use a broker to help sell it or sell it to an employee or to a competitor or something like that.

But when you start a really successful company and it gets really big, nobody else can buy it by themselves. You have to sell it to the public. And that moment is called an initial public offering or an IPO. Essentially the company is sold from your ownership as the owner to thousands of people out there owning little pieces of the company. Those little pieces of the company, once you do that, are called stock or shares of stock. And that just means they own the company.

When you own stock, when you buy stock on the stock market or in any sort of a private transaction, you're an owner. You really do own the company. When the company becomes more valuable, the value of your shares go up. When the company has earnings, you're entitled to a share of those earnings. Oftentimes that stock will pay out some of those earnings as a dividend and you get your share of those. If you own one one thousandth of a company and the company makes a thousand dollars, you get a dollar. That's the way it works. You truly are an owner.

That's very different from being a bondholder. A bondholder loans money to a company. It doesn't own the company. The beautiful thing about owning something is when it does really well, you make out like a bandit. All of a sudden the company's worth 10 times as much as when you bought it. Well, your shares are worth 10 times as much as you paid for them.

There's no guarantees, of course, when you own something. It could go to zero. Companies go bankrupt all the time. So, there's lots of risk in ownership, but it also has lots of opportunities.

Sometimes stock is called equity. Equity is just another word for being an owner. If somebody's talking about a stock mutual fund or an equity mutual fund, they're just talking about a mutual fund that owns stocks. And that's probably the best way for most people to own stocks, not only just a mutual fund, but a low cost, broadly diversified index mutual fund.

But when you own stock directly, you just own the shares yourself. When a fund owns the stock and you own the fund, you kind of own it indirectly, but you still own it. You're still an owner.

When you buy a total stock market index fund that owns all the stocks that are publicly traded in the United States, you really do own a little piece of those companies. And when they do well, you're going to do well. It's not this paper asset. You actually have a claim on that company and its buildings and its vehicles and its assets and its bank account. You are an owner in whatever tiny percentage of that that you own.

When stocks are publicly traded on the market, that price goes up and down every minute of every day while the markets are open. And how they're priced varies. Sometimes the market gets a little bit crazy and all of a sudden people think that this stock is really worth a lot of money. And other times everybody gets depressed and think the stock's hardly worth anything.

But the truth is all that stock is, the value of that stock is this future earning stream. It's going to make so much money this year. It's going to make so much money next year. And for however many number of years in the future until it goes bankrupt, it's going to make money. And you're buying that earning stream discounted to today. Because obviously you're willing to have less money today instead of more money later. Those are equivalent things due to the time value of money.

And so, trying to price that stream, however, is hard. Because there's a lot of things that go into that. Like, “Well, what are my alternative investments? If I'm really only going to be getting 4% earnings from this company, well, I'd rather get 4% from a bond. I can get that from a bond. So I'm not going to invest in the stock unless it's going to pay me more money than that.”

And of course, people's judgments of how that company is likely to do in the future, of what other investments are going to be available in the future, what interest rates are going to be, all these things go in to how those stocks are priced.

So, how do you make money when you own a stock? Well, the stock makes money. The company makes money, and you're entitled to a share of those earnings. Those earnings come to you in two ways. One, as dividends, if they actually pay the earnings out to you. Well, really three ways. But the second way is if it appreciates in price. So you bought it for $10 a share, now it's worth $11 a share. Your investment is now more valuable. You got some of those earnings in the form of an increased price for your shares.

And the third way that you can make money is if the company buys back other shares. If the company has got some cash, it can go out and buy some of its own shares on the open market. And the effect of that is that there's then fewer shares. And so, your shares are worth more because the company still has the same value, but there's fewer shares in the company. And so, each share is worth a little bit more.

That's how you make money when you own stocks. You get the dividends, you get the appreciation, and there can be stock buybacks. Now, each of those is treated differently from a tax perspective, but they all are ways in which you make money with a stock.

Another way that people look at stocks is with a valuation called a PE ratio or a price to earnings ratio. For example, what a price to earnings ratio is telling you is how much people are willing to pay for a dollar of earnings. So, if a company gives you a dollar of earnings per share and costs $15, well, the price to earnings ratio, 15 to 1 is 15. If it's 20, well, people are willing to pay more for that dollar of earnings, usually because they expect the earnings to grow in the company. That's why they're willing to pay a higher PE ratio for that stock.

Another company where they don't think the fortunes of the company are quite as good, they might only be willing to pay $10 for that dollar of earnings each year, plus the future earnings stream, of course.

And so, these lower priced stocks are often referred to as value companies. They're thought to not be as likely to grow those earnings, but you don't have to pay as much for the earnings that they have now.

On the other end is a growth stock, a stock in which people often pay exorbitant prices for the current earnings because they expect those earnings to grow and grow rapidly. And it wouldn't be that unusual in a tech stock boom for stocks to be selling at a PE ratio of 30, 40, 50 or more, even though the average PE ratio for the stock market might be something like 15 or 17 or something like that.

That's the way that stocks are valued. But knowing more than the market knows about the price of your stock is a little bit tricky. That's why oftentimes you're better off just buying all the stocks via a very low cost, broadly diversified index fund and trying to figure out where the market is making mistakes and trying to take advantage of those mistakes.

A stock is just ownership in a company. It's not a paper asset. It's not gambling. You really are an owner of a company when you own stock, whether you do it directly or whether you do it via mutual funds and you'll be able to take advantage and reap the benefits of ownership while also running the same risk as all the other owners.

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All right, I hope you enjoyed this episode. If you'd like to come on the Milestones podcast, we'd love to have you. We want to celebrate a milestone with you and use it to inspire others to do the same. Sign up at whitecoatinvestor.com/milestones.

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

DISCLAIMER
The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Jim Dahle:

There are a number of different types of health insurance, and it is important for doctors to understand all of them. Not only are physicians paid by these plans, but they are also consumers who must make decisions about their own coverage. A common question I hear is whether someone should choose a PPO plan or a high deductible health plan. To answer that well, it helps to understand how the different types of plans and organizations work.

PPO stands for Preferred Provider Organization, sometimes also called a Participating Provider Organization or Preferred Provider Option. In simple terms, it is a managed care organization made up of doctors, hospitals, and other healthcare providers who have agreed to provide care at reduced rates for members of the plan. PPOs are often compared with EPOs, or Exclusive Provider Organizations. An EPO is very similar to a PPO, but with one key difference. With an EPO, you generally must use providers within the plan’s network. With a PPO, you can go outside the network, but you usually pay more when you do.

PPOs are also commonly contrasted with Health Maintenance Organizations, or HMOs. These became popular in the 1990s as part of broader efforts to control healthcare costs. Unlike PPOs, HMOs typically require members to select a primary care physician who acts as a gatekeeper for most non-emergency care. Patients often need a referral from that primary care physician before seeing a specialist. This structure can help lower overall costs, and HMOs are often cheaper than PPOs, but they can be less convenient because of the referral process and more limited flexibility.

You may notice that I have not yet discussed the High Deductible Health Plan, because technically any of these plan types can qualify as a high deductible health plan. The government determines whether a plan meets the definition. Generally, this means having a deductible of at least about $2,500 for an individual, and often higher for a family. The idea is that when you have more financial responsibility upfront, you may be more thoughtful about how much healthcare you consume.

When people compare a PPO with a high deductible health plan, they are often really asking whether they expect to use a lot of healthcare or very little. If you expect to be a high consumer of healthcare, a traditional PPO with a lower deductible may feel safer. If you expect to use little healthcare, a high deductible health plan often comes with lower premiums and can come out ahead financially most years, unless you experience a catastrophic event and end up hitting your out-of-pocket maximum, which is usually higher under a high deductible plan.

Another important benefit of a high deductible health plan is that it allows you to contribute to a Health Savings Account, or HSA. Money in an HSA grows tax-advantaged and can be withdrawn tax free for qualified healthcare expenses. While you should not choose a high deductible plan solely for the HSA, those tax and investment advantages can help offset the higher deductible over time.

Hopefully, this overview of how the major health insurance plan types work helps you better understand your options and make an informed decision about which plan is best for you in the coming year.