The Politics of Student Debt Forgiveness

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 383.

All right, welcome back to the podcast. Thanks for all of you out there in WCI land for what you're doing. Your jobs are hard. That's why you get paid well. That's why you're a high income professional and listening to this, or why you soon will be a high income professional. It's not supposed to be easy. You're supposed to have a hard job. You're supposed to get calls after hours and feel like you're working for free sometimes and be taken advantage of.

But if nobody's said thank you lately, let me at least tell you that. I know a lot of you are people pleaser kind of personalities. That's the type of person that medicine in particular tends to attract and it's nice to hear it sometimes. So, if no one's told you that let me be the first.
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BEING AT PEACE ONCE YOU HAVE ENOUGH

I want to start out today talking about a series of blog posts, a thread on the Bogleheads forum. And I think there's some important lessons to learn from this. Let me just read from this person's post.

The title is Possibly Financially Independent and Feeling Miserable. “I think that my wife and I, ages 38 and 40 respectively, may have become financially independent today.” Now this was posted in March of 2017. “Run our net worth numbers at the end of every month. And the first time we crossed the $3 million mark yesterday.” This is at not even 40 years old. Getting to 38 and 40, $3 million already. Blah, blah, blah, blah, blah, blah, blah. Talks about how it's probably enough money for them to live the rest of their life because they don't spend that much money.

“I mentioned all of this because I can't figure out why I'm not happy about achieving this level. In fact, I think that I'm rather miserable about the whole affair. I simply cannot stop thinking about money, about our savings rate, about whether we have enough, about what else I could be doing better, and so on. I can't tell you how many times I spend each day, whether at work or at home, on a calculator, constantly dividing arbitrary numbers into our net worth number and subsets of our net worth number, all in an effort to divine some sort of clarity in regards to knowing that we will be okay.

The calculations have consumed me and I do not like it, but I also do not know how to stop. I am seemingly addicted to saving, to calculating, to worrying that we don't have enough. I've heard it said that you will know when you have enough or that you will know when it's time to move on, but I don't feel like I do. I don't know how to change that.

And so, my questions are this, how can I or anyone in a similar situation become at peace with what we've got and accept it? How can I stop making money and saving money, consuming it? How do you know when you truly have enough or have we not yet reached financial independence? And accordingly, we should continue to press on.”

This is 2017. I apparently missed this thread the first time around, saw it pop up again recently, and the poster is still on the forum. And somebody says, reading this after eight years, I wonder if the OP is now a billionaire. So, he comes back and responds and says, “I am not. I retired in 2020 as a result of getting laid off.” Remember this person was 40 in 2017. So, retired in 2020 at age 43.

“Since my original post, our net worth has increased by about $2.5 million, not including a house that we bought. And our annual spending has decreased by about $10,000. Our withdrawal rate is in the sub 1% range, but I'd be lying if I didn't admit that I often think that even is too high. And I am constantly trying to make sure that we aren't spending too much, that we have enough money and that we are okay financially. Suffice it to say that I still think and worry about money way too much. And I will likely never be fully happy and that's okay because that's just who I am.”

Makes you kind of sad to hear that story. 43 years old, consumed almost by this need to make money, to have money, to not run out of money. And I think it's an important lesson to learn. I think everybody needs to learn this. You've heard this before. Surely someone has told you that money is not going to make you happy. Most of us don't believe that though. And the reason why is our personal experience.

When we don't have very much money, getting a little bit more money does make us happier. It makes us more secure. It gives us more options in life. It allows us to buy things that help us be happier. It allows us to have experiences we couldn't otherwise have. It allows us to take care of people we care about. It allows us to donate to causes we support. It makes us happy.

At a certain point, that stops though. And it's a gradual process and it's difficult to recognize. And in the end, money is just a tool. It does not make you any happier. But it's hard for most of us to believe that until we have money. So, you almost have to get the money thinking it's going to make you happier before you realize it's not.

So, what does make people happy? Well, it's very strange. Trying to be happy doesn't make you happy. It's interesting that way. You become happier when you become other-centered, centered in the lives of others. If you look for purpose, you'll find happiness accidentally. If you look for happiness, you'll be miserable. Going to a therapist every week for an hour or two and dwelling on why you're not happy is not a recipe to becoming happy.

Now, if you need therapy to teach you cognitive behavioral therapy so you're thinking in a positive and appropriate way about the challenges in your life, that's great. And maybe this poster might even benefit from some of that. But going there just because you're not feeling happy may not be the solution. Perhaps what you need to do is seek for purpose.

And when you're 40 years old or 43 years old or 47 years old, maybe it's not time to check out of life and just retire early. Don't assume that FIRE, Financially Independent Retire Early is somehow going to bring happiness to your life if it's not already happened. You've got to have a purpose in your life, something to do, something that gets you up in the morning that you're excited about. It need not change the world. Maybe it's just keeping the grass green at the golf course. I don't know what it is, whatever your purpose is, but that purpose and being centered on the happiness of others is where you're going to find that happiness.

The other thing that I think is helpful for a lot of people, especially the type A, high achieving kind of people that listen to this podcast, is it is natural as humans, we just naturally set our expectations at unachievably high levels. Lowering those expectations to something more reasonable is likely to make you dramatically happier.

So, those are the two keys to happiness. Be centered in others, lower your expectations a little bit. I'm not saying go for mediocrity, but lower your expectations a little bit. And you're likely to find that happiness that seems so elusive. You will not find it by constantly saving more money and lowering your withdrawal rates and spending all day thinking about money and doing calculations.

Can you become addicted to this stuff? Absolutely you can. And those of you who are hobbyists, who are do-it-yourselfers, there is some risk of this. And if you recognize this in yourself, see if you can change. If you need help, get a little bit of help. But you don't want this to be your story, where you're worried about money despite being a financially independent multimillionaire.

RECENT JOBS REPORT – STICK TO YOUR PLAN

Okay. Something else I wanted to talk about today. I want to talk a little bit about the news this morning. We're recording this on August 2nd. By the time you hear this, it's going to be a month. The world will probably be different. But all the news today is about the dramatic slowdown in US hiring. The jobs report came in yesterday as lower than people expected. And people think this is the onset of the feared recession we've been waiting for.

Stocks are way down, bonds are way up. I just want to remind people out there, this is not something you need to do anything about. Over the next 30 years or 20 years or 10 years or 50 years that you're accumulating money, and even once you start spending that money, because you don't spend it all at once, these sorts of articles are going to come out. They're going to come out most days, certainly most months and years.

And it's not a reason to change your plan. This is why you have a long-term investing plan. And it's way easier to make a long-term plan than a short-term plan. Because in the long run, we kind of know what's going to happen. Not exactly. And it could be some terrible World War III thing that happens. And all the glaciers in the world could melt and flood San Diego. There's all kinds of things that could happen. But for the most part, you know what's going to happen in the long-term.

If you're invested in the sensible stock and bond and real estate investments, over the long-term, they're going to go up in value. You're going to make money. Maybe you don't know the exact rate at which you're going to make money over the years, but this stuff works. You just sit back, set your percentages, rebalance back to them every year.

This plan works. There's no guarantees in life, but this is awfully close to a guarantee. If you're funding this plan adequately, you invest it in some reasonable way with a reasonable amount of risk, it's going to get you to a multimillionairehood and financial independence over the course of a typical career. It's just not that complicated.

Keep it simple. Don't panic when you see things like this in the news. If the markets go down over the next four or five months or the next four or five years, great. You're going to be able to have an opportunity with your new contributions from your job, assuming you stay employed, which most of you as high-income professionals will, you will be able to buy things at lower prices. You'll get good deals on real estate and stocks and bonds and those sorts of things. And so, this is not necessarily a bad thing. And certainly you don't want to panic sell.

So, be careful. Don't be changing your portfolio all the time. As Carl Richards has said “One mistake a decade is enough to just tank your portfolio.” And what does he talk about one mistake? We're talking about selling low, panic selling. Don't do that. Very bad thing to do. It's maybe the only thing worse than not saving enough money in the first place. Stick with your plan even when markets are going crazy. Very important.

STUDENT LOAN ACCOUNTABILITY ACT

Okay. Let's talk for a minute about something else in the news here. And I'm in Utah. And so, what our political leaders do here shows up in our local news more often as you would expect. But the news today, a piece of news is that our Senator, Senator Romney says “Biden's morally questionable efforts to cancel student debt need to stop.” And I thought it was an interesting article, not because this is Romney's position, it's kind of been his position for a long time, as it is most Senate Republicans.

But he reintroduced what's called the Student Loan Accountability Act, prevent the administration from continuing its efforts. Bill Cassidy and Tom Tillis from North Carolina, South Carolina are sponsors on the bill. And it's kind of a bill that says, hey, this is Congress's role, not the executive branch of the government. They've got the authority to cancel debt. And so, quit trying to take it from us, is basically what the bill is saying.

Now, I don't know how he's planning to get this signed by President Biden, much less through the Senate. I imagine it's not going to. But the point is right. This is Congress's role. What has Congress done with regard to forgiveness? Well, they passed public service loan forgiveness.

And whether you think it's good policy or not, it's passed by Congress. That's very different from something coming out of the executive branch. Because what happens when they just set policy over the Department of Education? Well, the next president comes in and the policy changes. And so, some of these other forgiveness things that have come out to like the SAVE program. That's all basically executive branch fiat subject to change as soon as there's another election.

So, definitely, I think the moral of the story here is to rely more on what Congress has done and what the executive branch has done. You cannot expect things like that to last the 10 or 15 years it's going to take you from the time you start school until you're actually done with your student loans. It's probably not going to make it through that whole time period. Where something that goes through Congress has a far better chance.

PSLF was passed in 2007. I first told you about it the first month this blog was open in 2011. People started getting forgiveness in 2018, 2019. And it's really picked up quite a bit in the last couple of years. But this program has now been around for 13 years. That's what happens when you go through Congress, whereas SAVE got put in by the executive branch. And like two months later, or three months later a judge has basically said it's not constitutional.

And so, you got to keep in mind when things happen. Yes, it happens a lot faster when it comes to executive fiat. But it's much more stable and much more long term and much easier for you to plan around when it comes through Congress. So, pay attention to where the new rules come from when the student loan game changes.

I also think this article is good in that it demonstrates some of the problems with the policy of forgiving student loan debt. We're all for this because we're all high income professionals, and we all went to school forever, and it cost a ton. And most of us paid for it with student loans.

I think about 73% of medical students these days are graduating with student debt. The average for MDs is like $205,000 or $200,000. The average for DOs is like $250,000. It's like $280,000 or $300,000 for dentists. It's a lot of debt. And so, we're all kind of pro-forgiveness. If we have that debt, no surprise. But there are some issues with it.

Reading from the article, aside from the constitutionality issues, they say, “Despite the Supreme Court's ruling last summer that President Biden's student loan forgiveness proposal was unconstitutional, the White House continues to cancel student loans and publicly entertain additional cancellation policies”, said Romney. “Not only are the Biden administration's student loan cancellation schemes morally questionable, forcing hardworking Americans who have already repaid their loans or decided to pursue alternative education paths to foot others' bills. These policies are wildly inflationary, fiscally reckless, and do nothing to actually address the real problem of increasing higher education costs.”

Others say, “There's no reality where hardworking taxpayers should foot the bill for someone else's degree and be slapped with loans they didn't sign up for. Unfortunately, the Biden-Harris administration's political pandering continues to rear its ugly head and continues to harm the exact people they are claiming to help.” Cassidy said, “These schemes are nothing more than an attempt to spike votes before an election at the expense of taxpayers.” And Tillis said, “[I'm] proud to hold Biden accountable and lawmakers must address the root cause of surging costs around higher education.”

A lot of times we live in a bit of a bubble because we're only around other high-income professionals or only around doctors or medical students and everybody's got these loans and they all think forgiveness is awesome. You got to realize, there's a very significant part of the country here who does not think these programs are awesome. They're like, “I didn't go to school because I didn't have the money, or I paid off my debt and I don't want to see other people getting it for free while my taxes are paying for it.”

There are a lot of people out there who feel that way, and they have politicians they voted for who support that view. So, however you feel about it, it's important that you recognize there's a lot of people in the country that might feel very differently about it.

The other thing that I thought was interesting was the article says, “Some research shows wealthier families are more likely to benefit from student loan forgiveness. A 2022 paper from the left-leaning Brookings Institute found almost one third of all student debt is owed by the wealthiest 20% of households in the country. By contrast, the bottom 20% owe around 8% of student loan debt. Universal debt forgiveness, the expectation of future debt forgiveness or a universal free college would transfer huge amounts of wealth to high-income families, increasing wealth gaps rather than reducing them”, Adam Looney wrote in the Brookings report, adding that student loan forgiveness programs would not reduce inequities in higher education.

My point of sharing that is there's a lot of criticisms of forgiveness programs, and most of them are pretty valid. So, don't be surprised if these policies change down the road. Now, what is likely to happen if they do change? Well, what's most likely to happen given historically how these things have happened is those who already have loans are going to be grandfathered in, on the loans that you already have.

If PSLF goes away, it's probably going away for new borrowers. If you're already in med school, if you're already in residency, especially if you're already in a payment plan, you're probably still good with it. But it would not surprise me if at some point in the next decade, it became a little bit less generous. I think one of the ways that would probably be not terribly unreasonable would be limiting how much you can get forgiven. Maybe limit it to $100,000 or something.

It's still a great benefit for docs who are willing to go do public service kind of stuff. You get $100,000 forgiven, that helps with the fact that you're probably paid less or maybe don't have as many resources at your job as you'd like to have without being this. I feel like a giveaway of $400,000 or $500,000 to some of the people that are really not even making any less money in their public service job.

I wouldn't be surprised to see changes. I think you're going to see them coming a long way down the road as far as public service loan forgiveness. Some of the other programs, they can change very rapidly, like we saw with the recent changes to SAVE. Basically, when a judge just said, nope, that whole program's unconstitutional. They didn't say what we're going back to. They just said that one's unconstitutional.

So, pay attention to your student loans, have a plan to take care of them. If you're relying on a plan that is maybe a little bit iffy, have a backup. Have a PSLF side fund or whatever you want to call it or Biden forgiveness side fund. So if something changes, you have the money to take care of your student loans on your own.

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And what's interesting is a lot of people choose to go to the wellness stuff preferentially. I've been amazed over the years how much more interest there has been in that than I expected in the beginning. I thought it was just a way originally that we could use CME money to pay for it, but it's a real need out there. And I guess I shouldn't be surprised given the burnout rate is over 50%. So, sign up today. You got five days from the time this podcast drops until early bird pricing goes away. Go to wcievents.com and hope to see you down there.

Okay. Let's get into some of your questions here. And we've got some great ones, including, oh awesome, we got one here from Tim from Salt Lake City. We got all the favorites in here today. You guys are going to love today's episode. Let's start taking your questions.

WHAT KIND OF LOAN SHOULD YOU USE IF YOU DON’T HAVE 20% DOWN?

Speaker:
I am a surgeon relocating to a different state for a new job when I separate from the military. We are planning to purchase a home and sell our current home. There will be a period of time between selling our current home and buying a new home in the new location. And I'm anticipating that we may have less than 20% in cash for a down payment on our new home.

Our current home should sell quickly, and we would hopefully have additional funds within six months after to put into the new mortgage. Would it be best to seek a physician loan or VA loan to avoid PMI and then put the money from the sale of our current home into the new mortgage once it sells? Or could this mean a higher interest rate, and we might be better off seeking a conventional mortgage and looking to take out some other type of short-term loan to assist with the down payment? Thank you, Dr. Dahle.

Dr. Jim Dahle:
Okay. Good question. Thanks for your service. Here's one thing you need to know about interest rates. They change twice a day. They're always changing. They are constantly changing. And so I cannot even give you an answer today as I record this will be accurate by the time you hear it. The relationship between the rates you can get on a physician loan and on a VA loan and on a conventional loan are changing twice a day. So you just have to go see what you can get at the time you're ready to have the loan.

But as a general rule, the best deal is going to be a conventional loan. And the reason why it's the best deal is because you have the most options. You have all kinds of people offering this, but it requires you to put 20% down. You end up having to pay PMI. Private mortgage insurance. That's the stuff you pay to protect your lender from you defaulting on the loan. It provides no benefit whatsoever to you. One way that a lot of doctors and other high-income professionals get out of PMI, despite not putting 20% down, is to use what's called a physician loan. And we've got a whole list of people that offer these as well as a list of people that offer regular conventional loans on our website.

And as a general rule, you'll get a slightly worse interest rate or slightly more fees taking a physician loan. But that is not always the case. Many, many times over the years, I've been told, hey, the best deal out there for me turned out to be a physician loan. I actually did better putting 10% down on a physician loan or 5% down on a physician loan than I would have done if I had gotten a conventional. So that does happen.

As a general rule, the VA deal is not as good as you would think it would be. I think we could take care of our veterans a lot better than we do with the VA loan. It's okay to look at it, but I'll bet it doesn't end up being the best deal for you. I'll bet you end up either doing a conventional if you can get the money or a physician loan. That's probably what's going to work out best for you. But you can check into it. If you qualify for it, why not look? I just think most of the time it's not competitive.

Now, if you don't have the money and you're thinking about getting the money from some other source, some other loan, usually they want to see where that money came from. So they go back and look at three months of bank statements. If you're planning to hide the fact that you're just borrowing this money from somewhere else, you better borrow it at least three months before. Same thing if your parents or somebody's going to give you money to use. You want it in the bank account for a while so that look back period doesn't go back and say, “Oh, this isn't really your money.”

The purpose of a down payment is to protect the lender. They want you to put more money down so that you're not underwater if the house drops and so that it shows that you're financially stable. Whereas when you circumvent that with another loan or getting the money from somebody else, it doesn't look like you're so financially stable as you otherwise would be. I hope that's helpful. Good luck with the new home. And hopefully this all works out great as you transition into your new life.

All right. Let's take another question. This one's on real estate from Chris.

EVALUATING REAL ESTATE AND LEVERAGE RISK

Chris:
Hi, Jim. This is Chris from Oregon. I have a question about evaluating real estate. The amount of leverage is one of the biggest risks to evaluate. I noticed that leverage can be assessed by loan to value of the property or LTV, but I've also seen some syndication deals that describe the loan to cost or LTC. Can you speak about the difference between the two? Is one of these a more accurate representation of the leverage risk? I appreciate your clarity. Thanks for what you do.

Dr. Jim Dahle:
All right. Good question. Loan to cost is just the maximum loan amount based on the total cost of the project. Loan to value allows you to work out the maximum loan amount based on the value of the property. And the value of the property obviously changes. The property becomes more valuable or you do something to improve it, then the loan to value changes because you've changed value. The loan to value would drop if you increase the value of the property. The loan to cost isn't going to change because that's what it costs you to do it. That includes the buying cost, includes any improvements that you put in there.

I think it's just important to understand these are two different numbers so you can compare apples to apples, but they're both used to work out the maximum loan amount that can be given to a borrower. They're just a different metric.

As a general rule, loan to cost is going to be a higher number than the loan to value, but there's obviously some variation there. These are mostly numbers that lenders think about, but it's also important to think about when you're in real estate investing. But as a general rule, loan to value is probably a little bit more standard.

And as a general rule, you're wanting to see that a syndicator is not using too much leverage. This is where they get into trouble. It ends up costing more to improve the property than they think, or they're not able to raise rents as much as they think or raise tenancy rates as much as they think. And that down payment, that lower loan to value ratio is what protects them, and you as an investor in those sorts of situations. It keeps them from being cash flow negative.

There's syndications all the time that stop making distributions. That's a bad sign. You're expecting this thing to distribute 2% or 3% or 4% or 5% to you each year, and the distributions go to 3% and 2% and 1%, and then they stop together. This is bad. You don't like that. And the reason why oftentimes is just that the cost of the debt is too high. And so, they don't have enough income to service the cost of the debt and still make distributions to you. If things continue in a bad direction, it gets even worse. All of a sudden, they're doing capital calls. Or worse, you're starting to lose principal. Your equity is being wiped out. That's a bad thing.

As a general rule, you're looking for syndicators to be having a loan to value of no more than 75%, 65%. A real conservative one might be only 60%. 60% leverage, 40% equity. And so, it's just important to understand what the terms mean and what they're talking about there and comparing apples to apples when you're comparing one deal to another.

Okay, let's have another question. This one's on mortgages from Andrew.

PAY OFF REMAINING BALANCE ON MORTGAGE OR INVEST THE CASH

Andrew:
My question is regarding the remaining balance on a mortgage. I have about $270,000 left on an adjustable rate physician mortgage that I took several years ago in training. Of course, the crystal ball should have told me to lock this in with a fixed mortgage back several years ago when interest rates were at an all-time low. But of course, life happens, and we just missed that opportunity.

I do have the cash to cover the full $270,000 balance. So, my debate here is what to do. Do I, number one, pay off the $270,000 with the cash that I have and own the home outright? Or do I invest that cash and hope for compound interest over a number of years while getting a new 15-year fixed mortgage at around 6.25%?
Andrew:
I'm hoping someone out there has a spreadsheet that shows the trade-off or the number of years that we could visualize the amortization schedule on one end versus the expected compound interest return on the other end. Thank you for all that you do. Your blog and wisdom have certainly changed my financial life.

Dr. Jim Dahle:
All right. Great question. First of all, let's go back to this decision you made a few years ago. You had to decide between running the interest rate risk yourself or paying the bank to do that. Paying the bank to do that is when you get a fixed-rate mortgage. If you can afford to run that risk yourself, you can afford an adjustable-rate mortgage.

And I would tell you that you were correct, that you can afford this risk by virtue of the fact that you can pay off this mortgage anytime. You've got the cash. So, it is not the end of the world that this mortgage went, and I don't know what it was, went from 4% to 8% now. This is not the end of the world because you can afford not only to make these payments, but you can afford to just wipe out this mortgage.

So, don't beat yourself up that you made a bad decision. I think you made the right decision. You can't judge your decision based on what happens afterward. You have to judge it based on the information you had at the time. There's lots of people out there that are super excited about having 2.5% and 3.5% mortgages right now. But in some ways, that was lucky. And you can't always expect to have luck.

All you can do now, that's all water under the bridge. What are you going to do now? Well, I don't know what your mortgage is at. Presumably, it's over whatever you said it was, 6.25% or 6.5% that you're going to get on a fixed rate now. If it wasn't over that, you wouldn't be talking about refinancing. You'd just be dealing with what you have.

Can you out-invest that? It's possible. It's possible you could beat 6% or 8% investing. I'm not sure I'd bet that way though. I think the better comparison is what can you earn without taking any risk? Because paying off this mortgage is risk-free. You pay off a 6.25% mortgage, you earn 6.25%. And right now, if you go to Vanguard in a money market fund, you'll find that it's paying 5.3%. Might not be in a month from now with the changes in the markets, but 5.3% today.

Now you can get 5.3% risk-free by putting the money in a money market fund, or you can get 6.25% risk-free by paying off your mortgage. Well, it sounds like paying off the mortgage is a pretty good idea. On the other hand, if that mortgage was 2.5%, well, maybe you leave your money in the money market fund for a while and see what happens.

But in this case, I would not feel bad whatsoever. I think it's perfectly fine for you to take that $270,000 and pay off the mortgage. I'll bet you don't regret it. But you know what? If you do, you can go back and get another mortgage. Let's say interest rates fall to 3% again. Well, you can go out and get a 3% mortgage. There's nothing keeping you from doing that. But I think it's really rare.

I think most people that pay off their mortgage are really happy to have it paid off. We paid ours off in 2017, no regrets whatsoever. There's no way we're going back out to get another mortgage, no way. Unless you need to run that sort of leverage risk to reach your financial goals, which I highly doubt, given that you've managed to save up $270,000, I don't see any reason why you shouldn't take a big chunk of that money and pay off a big chunk of the mortgage, if not all of it.

Now, if you want to refinance and get 6.25% on the rest, I wouldn't say you're crazy, but I can tell you what I'd do. If I had $270,000 in cash, I still maxed out my retirement accounts and HSAs and stuff, I'd take it over there and drop it on the mortgage and be mortgage-free. That's what I'd do. But you can do whatever you want. It's your money. You got to live with the decision. But that's the way the math works on it.

As far as your desire to have a spreadsheet, well, it's easy to make an amortization schedule. You can do this using payment function in Excel or Google Sheets and principal payment function in Excel or Google Sheets. Those are easy to learn how to do.

Alternatively, one of my favorite ones is just going to the Mortgage Professor site. They have a calculator there for making extra mortgage payments. And you can basically just put in your mortgage rate and your mortgage amount and the number of years left. And you don't have to put in any extra payments if you don't want to, and the calculator will spit out an amortization schedule. So you can see what that amortization schedule looks like.

Now, on the other hand, you want to compare that to what you're going to make in your investments. And the problem with that is, yes, it's easy to make that schedule in a spreadsheet, but it relies on the huge assumption of what you're going to make in the future. And that's a totally unknown. It's garbage in, garbage out process. You don't know what you're going to make in the future, but obviously if you can borrow at 6% and earn at 10%, you're going to come out ahead.

I just think it's a mistake not to consider risk in there. You got to adjust the calculation for risk. And when you do that, paying off a mortgage is risk-free. What else is risk-free out there? We're talking about CDs and treasuries and money market funds, that sort of a thing. And you're not going to make 6.25%, much less 8% on that. And so, I think that's the time you turn around and pay off your mortgage.

FILING A GIFT TAX RETURN

Okay, let's take another question. This one from email. Lots of real estate related stuff today.

“I have a question regarding tax implications on an addition to my primary residence. I bought a house one year ago. I'm in the process of planning a mother-in-law suite addition for my parents later this year.”

Well, that's nice of you.

“It will cost roughly $300,000 to $400,000. My parents will be funding the addition.”

Well, that's nice of them.

“My questions are related to the tax implications. My parents pay for the addition. Would this affect my ability to use the cost of construction to offset the gains of the house if I sell it in the future?”

The answer is no.

“My parents will not have an estate tax problem. Would it make more sense to have them gift the money for the addition?”

Well, that's what they're doing anyway. So yeah, that would make more sense because that's what's happening.

“Would this require a gift tax filing regardless because the house is only in my name?”

Yes, it is going to require a gift tax filing. You're only allowed to give $18,000 a year without filing a gift tax filing. Now, you can stretch this out. Your mom can pay you $18,000 a year and can pay your spouse $18,000 a year and your dad can pay you $18,000 a year and can pay your spouse $18,000 a year. $72,000 a year total.

But you're talking about $300,000 or $400,000. So, it's going to take you like five or six years to do it that way. And you can set up a loan such that that amount is forgiven every year and that would be the gift and that would keep you from having to file a gift tax return.

But the easiest thing to do here is just to file a gift tax return. As soon as you figure out how much went into this and they paid for it all, it's $410,000 or whatever. They file a gift tax return, $410,000. They've got that much less in their estate tax exemption but they're not going to have an estate tax problem anyway. No one actually has to pay tax on this. Just a return has to be filed. I think that's probably the route I would go with this.

Okay, next question. Here's the one from Tim from Salt Lake City. And sounds like he's got an estate planning question.

LEAVING MONEY TO THE GOVERNMENT WHEN YOU DIE

Tim:
Hi, Jim. This is Tim in Salt Lake City. I was thinking about to whom to leave any extra money left over when I die. And I was wondering what you think about just giving the money to the government. Seems like they need money. Maybe you could help pay down the national debt a little bit. And you never know how good charities really are, how far your money will go. What do you think?

Dr. Jim Dahle:
Well, this is certainly an option. You can give the money to the government. If you have an estate tax problem, you're almost surely going to be giving some of the money to the government. The problem with giving money to the government is you probably don't agree with everything the government is doing. If you did, that would be extremely unusual. If you lean a little bit left, maybe you're against giving money to Israel. If you lean a little bit to the right, maybe you're against giving money to Ukraine or maybe you're against spending more on defense or you're against giving more to social programs.

There's probably something you don't agree with. And when you just give money to the government, well, you're funding some of that stuff you don't agree with. Whereas when you choose a charity, there's thousands and thousands of charities. Surely there's one whose mission you agree with. And the likelihood that the charity is even less efficient using the money than government is, seems low to me.

But at least you can evaluate the charity and see what they're using the money for and find one where most of the money is not going to administrative costs or anything you don't agree with. Most of it is going to whatever you're trying to support. And so, I think that's probably a better route if you're trying to do some good in the world than just in general leaving it to the government. But that is an option. The government will take the money. You can write the U.S. Treasury a check and they'll accept it. I just don't think very many people actually want to do that.

Another option of course, is just to find people out there that you think could benefit from it. And whether they are family or friends or coworkers or neighbors, you can change a lot of lives just giving somebody a check, not even a very large check. A $10,000 check when you die can be life-changing for lots of people. I would encourage you to put more effort into your giving.

There's five money activities out there. Earning, saving, investing, spending, and giving. And they all require effort and you can get better at all of them. I would encourage you to put more effort in on giving and I'll bet you can find a cause or a person probably better than the government to give the money to. But if you don't, you can always leave it to them.

Dr. Jim Dahle:
Okay, let's take another question. This one from Ruth.

LONG-TERM CARE INSURANCE

Ruth:
Hi, my name is Ruth and I'm a 40 year old nurse whose income fluctuates from year to year based on pandemics, overtime, nursing shortages, etc. My question is in reference to nursing home insurance. Is it a good idea to have this in my back pocket to pay for those expenses? Or is there a better way to plan for care for myself?

I'm single and have no dependents. My financial life truly only depends on me. I would say I average about $90,000 to $150,000 per year. I really started to get into personal finance and aggressively maxing out my retirement accounts in my early thirties. Currently my net worth is about $840,000. Is that enough? I really don't want to end up as most of the patients I see come through the ER that reside in nursing homes. Thank you for everything you do.

Dr. Jim Dahle:
Well, Ruth, thanks for what you're doing. Let's talk about this. It's totally reasonable to think about this, especially when you work in an ER. You see people drug in from nursing homes all the time and you wonder who is taking care of these people. You talk to the people on the phone who are taking care of them and you go, “I don't want that.”

The technical term for nursing home insurance is long-term care insurance. That's what you'll be Googling if you're interested in buying this or you're interested in evaluating this or pricing it out. And it's designed to pay for long-term care, whether you're in a nursing home or whether you're getting care at home or whatever. That's what it's designed to do.

The product has a lot of problems with it. It's probably not yet a very mature industry. A lot of the policies that first came out with it a number of years ago, they just didn't charge enough premiums. And so, people got older and started actually using the insurance and the company went broke. And it's not like you still have insurance when the company doesn't exist. You could have paid for it for 15 years and now you don't have a policy. And if you want to go get another one, maybe they won't give you another one or it costs dramatically more than what you were paying and you can't afford it anymore. The industry just has issues.

In general, I want people to not buy insurance they don't need to start with. And then when you look at the insurance product having issues when you do buy it, it gives you that much more motivation to not actually need this insurance.

There's really three groups of people when it comes to long-term care insurance. There are the average Americans. They don't have very much money. And frankly, I don't know if they can even afford long-term care insurance, but if they do go into a nursing home and it's really expensive, they're going to quickly spend down to a level of assets where they qualify for Medicaid. And that's how they will pay for any long-term care they may need.

On the other end of the spectrum are the multimillionaires. And at 40 with $840,000, there's a good chance you're going to be in this category. I hope the vast majority of White Coat Investors are going to be in this category. This is when you have enough money that you can just pay for this. You don't have to use insurance to pay for long-term care. You can write a check. It works just fine.

Now go look around at the nicest nursing homes in your area and see what they cost. In my area, they cost between $70,000 and $110,000 a year. So, let's say you go into a nursing home and you're there a long time. Let's say you're in there five years. $100,000 a year times five years is half a million. Well, that's not a big deal if you have $4 million. $500,000 is a very reasonable expense that you can afford to pay for and you're not going to run out of money. That's the other end of the spectrum.

Then there's the group in the middle, the people who have some assets, but maybe not enough assets to totally pay for this. Well, then the question is, is there anybody else depending on this chunk of money, this nest egg of yours. If you're married and one of you goes into the nursing home and it's super expensive and you're there a long term and you wipe out all the assets this couple has and now you've left your spouse penniless, that's bad. Imagine somebody that's they're retiring on a nest egg of $600,000 and they're married and one person goes in and wipes out the nest egg. This is a bad thing. This is the person that needs to buy the long-term care insurance.

But if you're single and you sound like you're pretty sure you're going to remain single, what's the big deal if you go through all your money? Typically, most of these nursing homes, even if you have to transition to Medicaid after four or five or six years or whatever, they still keep you in the same nursing home, they don't kick you out.

And so, you can just go that route and still self-insure this risk. I just think people who can't self-insure it, that are married, that have a level of assets between, I don't know, a couple hundred thousand dollars and a million and a half maybe, these are the people that need to be buying long-term care insurance.

I'm sorry you have to buy it, it's not an awesome product, but it's probably worth buying. But you're $840,000 already, you're single, you're probably going to retire with twice that much at least, maybe four times that much, I think you can probably self-insure this risk. I'm not sure if I were in your situation that I would buy it. So hopefully that's helpful for you.

QUOTE OF THE DAY

Our quote of the day today comes from Tony Robbins who said, “You either master money or on some level money masters you.” It's got a lot of potential to improve your life, but mostly it's really good at keeping you from being miserable.

All right, let's take another question, this one's on disability insurance.

PAY DISABILITY INSURANCE PREMIUM OR LET IT LAPSE

Speaker 2:
Hi, Dr. Dahle, I'm trying to decide whether I should pay my annual disability insurance premium, which is due by the end of August, or if I should let the policy lapse. It's an individually owned own occupation product with a $6,800 annual premium and an up to $15,000 monthly payout for partial or total disability.

The issue is that I am changing career fields entirely. I haven't actually practiced medicine for the last five years while I've been in hospital administration. And the insurer did reassure me that the policy would pay out for disability incurred in this position.

However, I'm about to leave this position and take a three to 12 month hiatus before making a likely complete career pivot out of both the practice and the business of medicine. And for that reason, I doubt that the policy would still be valid one year from now.

However, I don't know that I would be insurable or at what price if I were to try to obtain a new policy in another year when I would be 52, about 17 years older than I was when I got this first policy.

My net worth is about $8 million, which would not be sufficient to pay for all of my needs and those of the multiple family members who depend on me if I were to become completely disabled in this year long transition period. Any advice that you might have would be greatly appreciated. Thank you.

Dr. Jim Dahle:
Okay, we got to talk about this. There's a lot to talk about here. First of all, own occupation disability insurance. That sounds like that's what you own. Will pay out if you are disabled and cannot do your occupation. That's the occupation you're doing at the time you're disabled. Not the occupation you were doing at the time you bought the policy.

Now you're charged for the policy based on the occupation you're doing at the time you bought the policy. If you're an orthopedic surgeon and you buy a policy, you're charged like an orthopedic surgeon. Even if later on you decide you're going to be, I don't know, a communications professional or whatever else or what other field of medicine you're going to go into or you're going to go be an attorney or whatever. You keep paying these premiums. And if you're disabled, you can no longer be an attorney now because that's what you were doing at the time you were disabled. It's going to pay you.

Now it might limit how much it pays. If you take a job as a rafting guide and you bought a policy for $50,000 a month as an orthopedic surgeon, maybe it doesn't pay that. It only replaces your income. I don't know. You'd have to read the fine print of the policy.

But assuming you're making similar income to what you're making before, well more than $15,000 a month, this thing will pay whatever this career you transition to. Now, obviously you're going to have to pay the $6,800 for that year when you're not working at all. Now it might not pay you for that year if you get disabled during that year because now your occupation is doing nothing. It might not pay you anything if you get disabled then, but once you're working again, that policy still works.

If you still want the policy, still need the policy, keep paying for the policy, enjoy your sabbatical and come back with whatever you're doing with your new life and you'll have a policy. Maybe you can decide then whether to drop it or not. Okay, that's issue number one. That's just the way these policies work.

Here's the other issue though. You said that $8 million is not enough to support you and yours, but somehow you think $15,000 a month is. And I think that's a little bit problematic. $15,000 a month is what? $180,000 a year. In order to support that sort of income, you need a little less than $5 million. Well, you've got $8 million. Either the disability policy is not adequate for your needs or the $8 million is too much for your needs. It's one or the other, but it can't be both. You might need more disability insurance, not less disability insurance, if this is truly the case.

But I would bet that you could do something with your spending where $8 million might be enough for you and yours. If you work real hard at it and get all the other people involved in this process and look at their assets and ability to earn and those sorts of things.

Most White Coat Investors, by the time they have $8 million, they have enough that they're canceling their disability insurance policy, especially as they start approaching the age at which the disability insurance policy would stop paying anyway. I think you mentioned you're 52.

Now these things generally pay until you're 65 or 67. When you get to be 58, 59, 61, 62, you got to start asking yourself, “Is this even worth it anymore? Is it worth paying this much when this thing's only going to pay me for two or three years anyway?” Obviously your likelihood of disability is going up, but the financial cost of your disability is going down as you get older. And hopefully your nest egg's growing along with it.

I don't know, I guess I'm surprised when you said you had $8 million. I thought I was going to be able to just tell you, “Hey, it's time to drop the policy”, but then you said that's not quite enough. So you've got to take a long, hard look at your finances and see if you can figure out a way to make $8 million work, or maybe you ought to be in the market for buying more disability insurance at this point, if it's really going to be a dramatic life change for you guys to cut back to being able to live on $8 million. But that's something you're going to have to run the numbers yourself on and figure out what you need. I hope that's helpful in some way.

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All right, we come to the end of another great podcast. I hope this has been helpful to you. Keep your head up, shoulders back. You've got this and we can help. 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 186 – Emergency docs get back to broke.

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All right, we've got an event for the FEW, the Financially Empowered Women. Christine Benz is coming on. She's going to be on September 11th, 05:30 PM. She's going to be talking about investing one-on-one. And this is a treat. Christine is the head of the Bogelheads board. She is the head guru of personal finance at Morningstar. She's been in this space for a long time. She knows what she's talking about. She gives great presentations. This is really a treat to have her on one of these events for the FEW.

Sign up for that at whitecoatinvestor.com/few, the Financially Empowered Women, and join the community. And you'll get that event as well as other events. It's totally free. And these events have been wonderful. They're well attended, and we get great feedback on them. But I think this may be the very best one yet. So, don't miss it.

All right, we got a great interview today. Stick around afterward. We're going to talk for a little bit about paying off mortgages and a few reasons why maybe the more well-to-do you are, the less beneficial it may be to drag that mortgage out, and the better off you might be paying it off. So, stick around afterward.

INTERVIEW

Our guests today on the Milestones podcast are Ellen and Tom. Welcome to the podcast, guys.

Ellen:
Thanks so much.

Tom:
Thanks for having us.
Dr. Jim Dahle:
All right, tell us what you guys do for a living and how far you are out of training and what part of the country you live in.

Ellen:
I’m still in my clinical fellowship. I'm an emergency medicine fellow in Sacramento, and so just started the fellowship. So, I'll be done with training by the end of the year.

Tom:
And your fellowship's in health policy. I finished training last year, so I'm one year out, and we're in Sacramento, California. I work in two different sites. One's a little bit more rural up in Auburn, and another in Roseville, which is a little bit more higher resourced.

Dr. Jim Dahle:
Very cool. So, one of you, you're out. One of you is still in training. It's not San Francisco, but Sacramento is not a cheap place to live either.

Ellen:
Yeah, it's true. The whole of Northern California move in that direction.

Dr. Jim Dahle:
Yeah. So, how do you feel about your tax bill the first time you paid as an attending? Did you like that?

Tom:
Oh, it's such a delight. There's Christmas, and then there's getting your taxes. I don't know which one is better.

Ellen:
Yeah. Actually, putting aside 30 percent at least from his paycheck every month has been huge. That was a very strange realization, but yeah, that's what needs to be done.

Dr. Jim Dahle:
Very cool. Well, you guys recently hit what I consider my favorite net worth milestone. You just got back to broke, so congratulations to both of you on that. Let's talk about your net worth. Tell us about your debts and your assets and how it all stacks up.

Ellen:
Okay. Our approximate net worth as of today is $30,000. Our liabilities include about $350,000 in student loans. $150,000 for me and then about $200,000 for Tom. He ended up going to a private medical school, so it was a little bit more pricey.

We also have $120,000 in a zero percent down payment loan from Tom's parents because we actually were planning on staying in the area, and we ended up buying a duplex when we first got married, and we weren't anticipating the 20 percent down payment that that required from Wiltec Family Home. We had the 10 percent, but then when it required the 10 percent, it was a little bit off-putting. They are very generous. It was a huge blessing that they were able to do that for us, and so we're still paying that down.

Then we have $470,000 in our primary residence mortgage. For our assets, we have around $108,000 in high-yield checking and savings accounts plus a little bit of cash, about $150,000 in retirement savings at the building, and about $40,000 of that is in Roth IRAs.

Then the house worth is around upwards of $700,000 right now for a recent appraisal, and then we have about $30,000 in scattered in the worth of our cars, some silver that Tom got from his grandfather growing up, and then some iPhones as well.

Dr. Jim Dahle:
Very cool. A hodgepodge of assets, a hodgepodge of debts. It sounds like a pretty typical physician story. Doctors, they tend to start their journey with significant debts, but high income and hopefully are able to rapidly start getting rid of debt and building assets. It sounds like you guys are in the middle of this. A very real physician story we're hearing here.

Here you are on the Milestones podcast. At some point, the two of you have made a decision that finances are important to you, that you want to be financially successful. Tell me about that conversation, when you had it, and what it was like.

Ellen:
Our first conversation about finances was on our second date.

Tom:
Second date, two stand-up paddleboards.

Ellen:
Yeah, we were stand-up paddleboarding, and we were like, “What do you think about finances?”

Tom:
Let's get real for a second.

Ellen:
Yeah, we had that conversation early on. We both grew up in really spiky households, and we knew that not having a lot of material things around, but being able to facilitate spontaneity in our lives and not spending our whole lives at the hospital was really important for us. That's why we both chose emergency medicine specialty in the first place, one of the many reasons. Yeah, it's been kind of a natural progression since then. I'm definitely a lot more interested in finances than Thomas is.

Tom:
Yeah, I have to confess, I might only be here so we can talk about ice hockey for a little bit.

Ellen:
Yeah.

Dr. Jim Dahle:
All right.

Ellen:
But it's been a good mix. He is fine to go along with whatever I kind of want to do. I'm excited to work out different plans. I'm not a die-hard hobbyist, but I definitely like to do a good amount of it DIY. So yeah, it's been a fun journey.

Dr. Jim Dahle:
Very cool. Well, it sounds like you promised Tom we could talk about hockey. So Tom, are you playing on an adult league team or what?

Tom:
Yeah, I played last night. We're in the playoffs. We've got the championship game in a couple of weeks we're hoping to make. Yeah, it's just such a good community. It's really fun. I'm excited to see what goes on in Salt Lake City for you guys. It's going to be the Yetis or the Blizzards, whatever you guys decide to name your team.

Dr. Jim Dahle:
Yeah, we're pretty excited to have hockey here, except they stole the ice time for my league to practice. So, one of my leagues is actually shutting down because they lost the ice. There are side effects of bringing an NHL team to your city, but that's okay. I'm playing on three different teams right now. So I still have some other places to play.

Tom:
Nice. Yeah. Ellen was gracious and said I could put two nights towards hockey in this next season. So I'm happy.

Dr. Jim Dahle:
Very cool. Well, here's the tough part though. As an emergency doc, as you know, more people come to the emergency department in the evenings than any other time of day. And so, just by its nature, you tend to work more evenings. How has that limited your ability to do things like playing on teams, coaching, going to kids activities? These are all the things that docs get limited on when they're emergency docs. They don't work that many hours, but the ones they work tend to be in the evenings. So, how are you dealing with that?

Tom:
Yeah, that's a great question. I think sometimes joyfully, sometimes painfully, depending on what night of the week. We have a one-year-old and another on the way. That has complicated our lives a little bit more. My group is fantastic regarding schedule requests. Whether it was a weekend night or a weekday night, usually I can get one or two nights off a week that I'm requesting for date night or for hockey.

And so, that's actually worked out well. You just can't have, I think, too high of expectations that you're saying, have to expect the swing shifts frequently. But we did get an au pair about six months into our first kid and that has changed things significantly. So yeah, I think just having flexible childcare actually opened things up.

The constraints of the ER job we were kind of used to, but it's still better than residency. I think that's kind of what I've had to remind myself of. I still get more requests off residency and I'm slowly starting to adapt and realize this is probably the rest of my career. And so, I've actually started to think a little bit more about either a fellowship or a transition to family practice, just depends if I decide that evenings and having so much more stable schedule is important for family. Yeah, it's challenged. It's always kind of a conversation.

Dr. Jim Dahle:
Very cool. Now, Ellen, you guys are in California. California is a tough place for doctors to do well financially. It's easy to tell when I talk to somebody from Indiana or wherever, Oklahoma, they've got low cost of living, relatively low taxes. Sometimes they get paid more than the average because they're in a medium size or small town or whatever.

You guys have decided to stay in California where the tax bill is a little high, where cost of living are definitely high. Sometimes pay's not awesome there for doctors, just depends. Tell us about that decision and what sacrifices you feel like you had to make to do that and how you've managed to live both where you want to live and still be financially successful.

Ellen:
Yeah, I think that for us geographically just wasn't an option because both of our families are in California and we love our families and we want to spend a lot of time with them. Our communities are here, so it just wouldn't make any sense to live anywhere else.

I think that it's also wonderful to keep in perspective how we grew up and the amount of money that we're making now is just bonkers compared to the amount of money that either of our parents made growing up combined. Even as residents, when we were pulling in, both of us were making about 70,000 each, we were making more than either of my parents had ever made combined growing up. To keep that in perspective and say, “Okay, we are incredibly blessed to have these huge shovels already during residency. Yes, we have a large amount of debt, but there are plans for us to figure out how to make that work.”

It was never really a big source of anxiety because we just have these huge shovels and the magnitude of the shovels compared to our parents, it's just keeping that in perspective was huge.

Dr. Jim Dahle:
Yeah, very cool. Now, you mentioned your house was about $700,000. Now, a $700,000 house in Sacramento is not a mansion. How many square feet is your house?

Ellen:
It's 2,000. On the bottom where we live is a 1,000-square-foot home, so it's two-bed, one-bath. I don't know how many kids we're going to have, but I think that will probably be the limiting factor in how long we can stay, but we're planning to stay for at least seven years. And then we have the two-bed, one-bath on top as well that we rent out. Well, right now, we have the au pair living there, but then we're going to rent out to a local researcher.

Dr. Jim Dahle:
Yeah. Okay. Now, your net worth is just a little more than positive now. What was the nadir? What's the lowest your net worth ever was?

Ellen:
The nadir was right when we graduated from med school, it was negative $350,000 when we came out.

Dr. Jim Dahle:
Negative $350,000. Wow.

Ellen:
Yeah.

Dr. Jim Dahle:
Okay. Tell us how you've been so successful. You've gone from minus $350,000 to now a positive net worth, and only one of you is even out of training yet. So, tell us your secrets to success.

Ellen:
I think one of the big things is having hobbies that really don't cost that much money is an important thing. Starting out with that, we like to go whitewater rafting and backpacking, and we like to play hockey, which the dues are a little bit more expensive now, but they're nothing like, I don't know, getting into really fancy cars or getting into really fancy restaurants.

I think having cheaper hobbies and then also really valuing time with family and friends. Instead of going on really luxurious vacations, we usually end up driving down to Santa Barbara, which is one of the most beautiful places in the world, and visiting our brother and sister-in-law and aunts and uncles. We'll go up to Reading to visit our family as well, and occasionally I have to call and visit his sister-in-law. So there are local things that we're doing and really valuing that time with family and friends, I think, has been huge.

Tom:
Yeah. Yeah. And then another standard tip that is important is just making a budget that you both agree with, that is reasonable and sticking to it. For us, we had a lot of conversations early on in our marriage about where we can be more flexible or less flexible in the budget. And just being really honest about that and saying “Well, our grocery bill, it's not reasonable for both of us to eat on $200 a month, but to increase it. It's not reasonable to eat on $300.”

So, just having that conversation fluidly about all of your budget, that's been helpful. And then having the same values. We both know that, yeah, I'm not worried about Ellen going and splurging at Nordstrom, $1,000 dress or something. She's not that kind of woman, and I love her for it. But yeah, having the same mind regarding what your values are and what's worth money and what's not worth money.

Ellen:
And I think going forward, two of the things that I think have really set up well are not only meeting with somebody from a student loan repayment advisor. We met with Andrew, and we figured out that we saved about $50,000 by consolidating my LDS, so the Loans for Disadvantaged Students. We consolidated those with federal loans and put me in a different IDR program. I was going to save us $50,000 in the long term.

And it's definitely nice to have him on board, and also where we're at this financial, and so having both of those folks on board just as sounding boards, and then also places to ask questions when weird times come about, like right now when Save is on hold. It's good to have those experts and a little bit of a board of directors to go and ask questions to.

Dr. Jim Dahle:
Yeah, it's nice to get a little bit of help, and the beautiful thing about it is it's not all or none, right? You don't have to turn everything over to an advisor or do it all yourself. There is a middle pathway there, which is pretty cool you guys have discovered.

Tom, what did she say when she found out hockey sticks cost $300 and they break off the easiest?

Tom:
It's a great question. Some things you just don't talk about. The way we've decided to balance the more expensive hobbies and still give some financial freedoms, we created a monthly fun fund, and it's a no questions asked. You can spend whatever you want, but you can't go over.

And so, I think right now, and that's, again, with flexible conversation, you can front load your fun fund at the three or four months in advance. So, I do get to pay for my hockey duties, and if I break a stick, hopefully it's not two sticks in one month. Facebook marketplace is a great place to find some old cheap sticks, and you just got to learn to play with what you got sometimes.

Dr. Jim Dahle:
Yeah. What I discovered recently is they can repair those carbon fiber sticks. There are places that repair them now. For $75, $80 you can get your stick repaired. It's my new frugal thing. So I got a couple of them repaired recently.

All right. Well, very cool. You guys have done awesome. You should be very proud of yourself. Thank you so much for being willing to come on the podcast and telling your story to inspire others that they can work together with their spouse to be financially successful. They can get back to broke, even if they live in California. And we just know you guys can continue down this pathway and continue to have more and more successes and look forward to hearing about other milestones you'll hit in the future.

Ellen:
Thank you.

Tom:
Thanks very much. We appreciate being hosted on the show. It’s a joy.

Dr. Jim Dahle:
All right. It's always great. I love doing back to broke milestones because it's the first milestone, really, in the pathway of a physician's financial life. They've still got student loans, they're just in the middle of “Where do we put our money? We've got all these great uses for money. We're not sure where to put it.” They've got struggles, young kids, high cost of living area, still figuring out jobs, doing fellowships, but still taking the time to do finances right and become financially successful.

It's interesting. We see people that are five years out and 10 years out and 15, 20 years out that are super successful. What did they look like when they were a year out or when they're about to come out of training? This is what they look like. Because they're paying attention to finances. They're making sure they're saving. They've checked the financial boxes.

This is what it looks like in the beginning. And then a few years later, all of a sudden they're on here talking about having $5 million. You can do this just like they're doing. No, it's not easy in the beginning. There are lots of difficult decisions to make and some sacrifices to make, but it is almost always worth it when you front load, taking care of the finances in your life. And you can still play hockey, and go rafting and do all that kind of fun stuff at the same time. That's the important part.

FINANCE 101: PAYING OFF YOUR MORTGAGE

Okay. I told you we were going to talk about mortgages and most people understand the math behind a mortgage. You figure out your after tax interest rate and you look at the risk-free rate in the market, what you can go get in a CD or in a high yield savings account or money market fund. And you go, “Well, if I can earn more elsewhere, maybe I shouldn't pay off the mortgage and I should carry it out.”

That's the way the math works. If you can make 5.3% in the Vanguard money market fund and you're paying 2.5% on your mortgage, you can make a mathematical case for dragging out your mortgage, at least for a while.

Most mortgages coming out today are 6% and 7%. So you can only make 5% in the money market fund. It doesn't necessarily make as much sense to drag out your mortgage right now if you've just gotten one, but if you picked one up during those low interest years, you can make a mathematical case there.

But there's a few things I want you to think about, particularly if you're relatively well-to-do, some reasons why you might want to consider paying off your mortgage early. The first one is that if you're wealthy, you're probably maxing out your retirement accounts. You are now comparing investing in a taxable account to paying off the mortgage. If you can max out another 401(k) or Roth IRA or something, well, that's often a better use of money than paying off a mortgage, but now you're investing in a taxable account. There's going to be tax drag on that, particularly if you're investing in lower risk stuff. It may not come out ahead of what your mortgage is, and you might be better off just paying off that mortgage.

Another thing that higher earners have to deal with is higher tax rates. We mentioned this on the podcast. They're putting 30% of their money toward taxes, and that's probably what they're actually paying on a two-physician income in California. They're probably paying 30% of their income in taxes, and every additional dollar they make is probably 50%. That's just the way the progressive tax brackets work.

The higher your tax rates, the lower the actual after-tax yield is going to be on your taxable investments. That makes it more likely that paying off your mortgage is going to be the right move in comparison.

Another thing that the wealthy deal with is that there's a lower marginal utility for extra wealth. Now, this is an economic term. Utility is like the benefit from having more money. When you're very poor, a little more money makes your life a lot better. When you're pretty wealthy, a little extra money doesn't make your life dramatically better. The more you have, the less marginal utility of investing at 5% and paying debt at 3% is going to give you. It just doesn't move the needle after a while. And so, you're more likely to simplify your life, pay off your mortgage, etc.

All right. Another reason why it can be beneficial to pay off that mortgage early is it's kind of a little bit of a luxury good. I haven't had a mortgage since 2017. So, what's that? Seven, eight years now. I never have to make a mortgage payment. I don't have to worry about it. I don't have to worry about the bank coming after my home. My house is paid off. I get a brag to you that I have a paid off house. It's a luxury in some ways, but in a lot of ways, it's the ultimate luxury good. It's the ultimate status symbol, paid off mortgage. Now I don't drive a Tesla. I did rent a McLaren, but I don't drive a Tesla. I don't drive a sports car regularly, but I got something that's maybe in some ways a little more of a status symbol. I don't have a mortgage.

Another thing that debt gives you, debt gives you inflation protection. If you have fixed rate debt, especially at a low rate, let's say you got a mortgage at 3% and inflation goes to 9%, like it did a couple of years ago. Well, you're now paying back that debt with deflated dollars. That's some protection.

But you know what? The opposite happens too. If there is deflation, you start earning less, your money's worth less, et cetera, or your money becomes worth more. Well, you still owe the same nominal amount on your mortgage. And so, paying off that mortgage actually gives you some deflation protection. You lose the inflation protection of having the mortgage, but you get deflation protection. Now while deflation is not as common as inflation, it's not like there's no value there.

And finally, one reason why it can make sense to pay off your mortgage is if you are paying advisory fees to a financial advisor. If you're paying an asset under management fee, they're generally not including the value of your home. And so, if you had $500,000 in a taxable account that they're managing, you're paying them 1% a year, that's $5,000, you're paying them for that money.

Whereas if you took that $500,000 and put it toward your mortgage, it comes out of the assets under their management, you're no longer paying fees on it, you just saved $5,000 in fees. And that makes it so the breakeven calculations are a little bit different.

Now, obviously you got to run the numbers. You got to see what your goals are. You got to decide how much leverage risk is worth taking. You got to decide what your goals are, when, if ever, you want to be mortgage debt-free. But keep in mind that there are lots of great reasons to pay off your mortgage, even if it's possible to earn more than your mortgage rate on your investments.

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All right, we've come to the end of another great Milestones to Millionaire episode. I hope you enjoy listening to these as much as we enjoy making them. We are here to serve you. We want to know what you like about it, what you don't like about it. Send emails to [email protected] and we will make changes. If people are like, “Oh, we don't like this.” Well, we get rid of it. The show you're listening to now is the way it is because of feedback we've received over the years. We appreciate those of you who have given us that feedback as well as those of you who have volunteered to be on this podcast. You can sign up at whitecoatinvestor.com/milestones.

All right, we'll see you next time. Keep your head up, shoulders back. You've got this.

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.