Podcast #166 Show Notes: Is Vanguard Losing Its Status?

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I love Vanguard. I think it is great to have a real mutual fund/brokerage company that is owned by the investors and run at cost. Their low costs and passive investing has done wonders for the investment industry. However, things are maybe not the same as they were years ago, as far as Vanguard and its competitors. Fidelity and Schwab are now competing with Vanguard on price by offering their index funds at a lower expense ratio. But is that a reason to move your assets away from Vanguard? I don’t think so and I talk about why in this episode. But Vanguard has its issues, and I discuss those in this episode, too. I think if they’re not a little bit more careful, they may see that they really have serious competition for gathering assets.

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Quote of the Day

Our quote of the day comes from an unknown physician who said,

“I married a gold mine. My spouse is thrifty.”

That is so true as we will talk about a little bit later with one of the questions from a White Coat Investor Facebook group member. Getting on the same page with your spouse is really key to being financially successful.

Announcement

Our WCI online courses are on SALE this week, July 6-13!  Save 10% when you buy our Fire Your Financial Advisor: A Step By Step Guide to Creating Your Own Financial Plan OR  2020 Continuing Financial Education course. Plus, purchase either course and you’ll also receive our CFE Park City course for FREE! 13 hours of content from investing giants like William Bernstein, Jonathan Clements, and Mike Piper for FREE.  The sale ends on Monday, July 13th at midnight MST.

I also want to just give you a save the date announcement. We have signed a contract with a hotel in Phoenix for White Coat Investor Conference 2021. I just want to give you the dates on that for those of you who would like to clear your clinical schedule and attend. It will be March 3-6th, 2021. It will probably be October before we do signups, though we will be taking speaker applications soon. Obviously this is very pandemic-dependent right now. We won’t make a final decision about whether to hold the conference until later this year.

Is Vanguard Losing Its Status?

I love Vanguard. I am grateful for what they have done focusing on mutual ownership, as the investors in the funds own the company. In addition, the low costs and passive investing have done wonders for the investment industry. Jack Bogle truly is a Saint. He could have easily been as rich as the owners of Fidelity. He could have easily gone down that route, but he didn’t. Instead, he tried to give a fair shake to investors, and I will be eternally grateful for that.

However, things are maybe not the same as they were years ago, as far as Vanguard and its competitors. That was kind of illustrated by an email question I received this morning. A reader has become financially literate through books, blogs, and podcasts and is now putting his financial life in order. In doing so, he found zero expense ratio funds with Fidelity. He wanted to know what my take was on the zero expense ratio index funds; did I think that no fees must be better than low fees or was there a catch?

I wrote about Fidelity’s zero expense ratio funds in 2018. They basically introduced this total stock market fund that was tracking their own made-up index. Really, it was the logical progression of a marketing strategy that they, along with Charles Schwab, have used over the last few years with some limited success in order to compete with Vanguard. Vanguard made its name becoming the world’s biggest mutual fund company based on low-cost index funds.

Fidelity and Schwab are now competing with Vanguard on price by offering their index funds at a lower expense ratio. Now it’s not significantly lower. When you have your expense ratios down to 0.05% a year, it really doesn’t matter if it’s 0.05 or 0.04 or 0.03 or 0. But they’re able to say “We charge less than Vanguard does on these funds.”  Vanguard’s total stock market index fund is at 0.04%. Fidelity’s total market index premium fund had an expense ratio of 0.015%. Schwab’s total stock market index fund had an expense ratio of 0.03%. So, all of a sudden, investors who have been told that expenses matter assume that differences of one to three basis points matter. Well, I guess they matter, but they just don’t matter very much. In fact, once you’ve gotten down to the differences of less than 10 to 20 basis points, it matters a whole lot less than some other things.

That principle still applies with the natural continuation of the strategy to a 0% ER that has happened at Fidelity over the last couple of years. Fidelity has a zero total market index fund. The ticker is FZROX and a zero international index fund with the ticker FZILX. Based on the number of people who are actually thinking about changing their investing holdings, I would say that this marketing strategy is working very well. Notice that I said this is a marketing strategy and not an investing strategy. If I was more cynical, I’d just call it a publicity stunt. There is no actual new investing strategy going on here. It’s the same old investing strategy. You buy all the stocks, you hold them, you keep your costs and taxes down. In the long run, your money grows at the same rate as the market. If you save enough, you eventually become financially independent. Nothing’s really different about the fact that the expense ratios went to 0%.

But let’s talk about what’s really going on here. Vanguard has the largest index funds. They benefit the most from economies of scale. They’re a mutually owned company, so they operate at cost. They have to charge the investors, the owners of the company, enough to cover the costs.

An index fund that’s charging less than Vanguard is, therefore, operating at less than cost. It’s a money loser. And no, I don’t buy the “Fidelity runs a more efficient operation” with a fund that’s 1/14th the size of the Vanguard fund. A for-profit business is willing to lose money on a product line for one of two reasons. Either it’s going to soon make money on it, or it hopes to make it up elsewhere.

If your strategy is to attract the nonsticky money using a very slightly lower ER, and then you raise prices, the same nonsticky money will then leave you. The only possible reason for Fidelity and Schwab to charge less than it costs to run a mutual fund is so they can make money on their other products.

What you need to ask yourself is, number one, “Do I really want to support a business that is doing that with my investment dollars in order to save one to four basis points?” And number two, “Would Fidelity, Schwab, etc. be doing this if it wasn’t for Vanguard giving investors a fair shake on Wall Street by decreasing the cost of their funds as much as possible?”

But perhaps the most important discussion we should have about these very low-cost index funds is what matters with index funds. When it comes to index funds, three things matter. The first is “What index does it follow?” Second is, “How well does the fund track the index?” And third is, “Do I get other benefits like tax efficiencies, simplicity, status, etc?”

Notice that the expense ratio really isn’t on the list. That’s because it’s baked into number two. The higher the cost, the less well the fund is going to track its index. Also, keep in mind that if you’re investing in a taxable account, the return you care about is the after-tax return.

Back when I wrote the post in 2018, I actually looked to see what the annualized fund returns were for these total stock market funds at Fidelity and Schwab.  I saw that Vanguard’s, with a higher expense ratio of 0.04, compared to 0.03, had a 15-year annualized fund return of 9.77%, whereas the Fidelity and Schwab ones were slightly lower at 9.71 and 9.74.

My point with that isn’t to illustrate the Vanguard fund as somehow markedly better, because it’s obviously not. It’s trivially better. But it’s not trivially worse. And what that demonstrates is that once you get to these very low expense ratios, the expense ratio doesn’t matter. What matters more is what index are they tracking and how well are they tracking it? I think that’s an important thing to understand.

Realize that the Fidelity and Schwab total stock market index funds don’t track the exact same index as the Vanguard index fund. Honestly, the index probably matters more than the expense ratio. You can read more in that post from August of 2018 about how well a fund tracks these indexes and what some of the data there suggests on the Vanguard, Fidelity, and Schwab funds, as well as some additional factors like tax efficiency.

The bottom line of the post ended up being that if your money is at Fidelity or Schwab, and you have a simple portfolio because, remember, Schwab and Fidelity only have limited numbers of index funds, if you have a more complex portfolio, they’re not going to be able to have index funds for all of the asset classes you want, but if you’re there already and you have a simple portfolio, go ahead and use their index funds guilt-free. I have used Fidelity funds.  These low-cost index funds that Fidelity offers are fine. Same with Schwab. Especially if you’re in a tax protected account where the slightly better tax efficiency that Vanguard offers does not matter as much.

But if your money is at Vanguard like mine is already, there is no reason to switch based on the trivial differences and these expense ratios. You certainly don’t want to pay any capital gains taxes to switch from one to the other. The reason that Vanguard is the biggest mutual fund company in the world is that they earned the trust of millions of investors by doing the right thing over and over and over and over again for decades.

Are they perfect? Not even close.  But ownership matters. And, at Vanguard, you’re the owner. So, I encourage you to show a little loyalty to the company and not bail on it just because Schwab or Fidelity comes out with a fund that’s a couple of basis points lower.

Issues at Vanguard

Now there are some issues with Vanguard. One of the big issues, I think, is their customer service. I don’t think they’ve done a great job keeping up with the growth that they’ve had over the last few years. It has been the fastest growing mutual fund company on the planet. It really has grown very quickly as people have realized, “Oh yeah, index funds are good idea. Keeping costs low are a good idea”.

I don’t think their customer service has kept pace, quite frankly. They try to run it at cost, but they’ve probably been too skimpy on their customer service. They should have charged a little more to the investors, to the owners, and spent a little bit more money on making sure that there are plenty of well-trained people behind the phone lines.

Because Schwab and Fidelity are offering these low-cost funds, just like Vanguard is, and they tend to offer better customer service, you can hardly blame someone for going to Fidelity or Schwab and housing their assets there. You can buy the low-cost funds at Schwab or Fidelity, or you can just buy the Vanguard ETFs for very low commissions of $5 or $6. Both Schwab and Fidelity have a commission when you buy and sell the ETFs. That is a totally reasonable approach, if you want to have a little bit better customer service experience.

A couple of other things people complain about at Vanguard is their individual 401(k) still doesn’t allow IRA rollovers into the 401(k). That is annoying. A lot of people looking to open an individual 401(k) have to go elsewhere.

Another problem people have is when they go to do their backdoor Roth IRA every year. I mean, you should be able to do the conversion step the day after you do the contribution step. A lot of times Vanguard is making you wait two or three or seven days until everything settles in between the contribution and the conversion step. It is annoying to check back there every day for a week to see if you can finally do it. You should be able to do it 10 minutes later. If you go to Fidelity, you can do that.

These little customer service things are starting to drive Vanguard investors nuts. I think if they’re not a little bit more careful, they may see that they really have serious competition for gathering assets.

Some people have wondered “Is Vanguard going to become like iShares?” Look at what iShares does. They don’t have this big brokerage. They don’t run these 401(k)s and all this other stuff. All they do is run the funds and ETFs. They do a great job running these index ETFs at very low costs. Then they’re purchased at other brokerages like Vanguard, Fidelity, Schwab, and TD Ameritrade. Maybe Vanguard’s pathway is eventually to get there.

But I think that is a real travesty. I think it is great to have a real mutual fund/brokerage company that is owned by the investors and run at cost. I just think they need to put a little more focus into handling their growth better and getting their customer service on par with Fidelity and Charles Schwab.  I’m hopeful they’ll do that. I’m obviously thankful for what Vanguard has done. I’m thankful for what Jack Bogle did, but more and more people are going to be asking Vanguard, “What have you done for me lately?”

Reader and Listener Q&A

Unpaid Invoices as Business Deductions

A reader who has done some medical legal consulting work for a large law firm has an outstanding invoice and wondered if he could use the unpaid invoice as a business deduction.

Let’s first answer the question he asked, “Can I take this unpaid invoice as a business deduction?” This is really the equivalent of a question I get a lot, which is, “Can I use any charity care I do as a physician or a dentist as a business deduction?” The answer is no in both cases. You cannot take it as a deduction because you never had the income from it. You basically already had the deduction by not getting the income.

But there is a broader point here. First, if you’re going to do any sort of medical legal work, whether it’s consulting, chart review, expert witness testimony, whatever, get paid in advance. These guys are notorious for not paying doctors. So, you need to basically have a retainer. And when the retainer is used up, you stop working until you get more money. It’s not like your clinical care where you are used to patients with insurance, where you get paid 6 to 12 weeks later. This is not the case. If they’re not paying you up front, they’re probably not going to pay you.

So, what would I do at this point? Well, if it’s enough money and it’s worth your time, I’d try to collect personally. If this law firm is in town, I’d go down there and knock on the door and demand to talk with a lawyer and ask him why he’s not paying you. If that didn’t work, I’d send it to collections. I wouldn’t have any qualms whatsoever. If you send them to collections, they’re not going to send you any more business. Why would you want business from somebody who hasn’t paid you anyway? You don’t want to be in business with people that treat you like that.

In business you say what you’re going to do, and you do what you say you are going to do. That is how you create trust and how you have ongoing business. A lot of people think that millionaires, billionaires, and business owners are crooks, but, in general, you can’t build a big business being a crook because people stop doing business with you. No one wants to do business with you if you’re continually taking advantage of them or ripping them off.

So, treat people well. That is how you build a business. In this case, this law firm hasn’t treated you well. Why would you keep doing business with them? If you want to do medical legal, I assure you there are plenty of other firms out there that have medical legal work for you to do.

Roth Conversions from Income in Different States

“I’m a physician and I work for a company in California and Nevada and make income in both states. I live in Nevada. My question is regarding Roth conversions. The company I work for in California has the ability to convert in my 401(k) through that company that’s based out of California to do a Roth conversion. My question is, if I do a Roth conversion with my 401(k) money, am I subject to state income tax in California, or just the federal income tax on the conversion? My income significantly decreased this year, which is why I’m going to do the conversion. And I was just wondering if I am subject to California state income tax on this Roth conversion, even though I live in Nevada. The money that’s in the 401(k) was made in California, if that is a contributor.”

You’re earning money in California and in Nevada. You live in Nevada. You want to do a Roth conversion. Do you have to pay California state taxes on it? No, you don’t. You’re not a California resident. A Roth conversion is not about where the money was originally earned. It’s not about where the company that has the 401(k) is physically located. At this point, all that matters is your state of residence. So, I would do that conversion. I would not pay state income taxes on it. It would not be reported on my California non-resident return. I don’t think any CPA is going to have a problem with that. But there are plenty of you listening to the show. So, if you think there is a problem with that, call in on the Speak Pipe and I’ll play your answer, but I’m pretty sure that you do not have to pay California state taxes on a Roth conversion, just because the money was originally made there.

Buying and Selling a Home at the Same Time

“We are considering selling the home we bought during residency and purchasing a new home. We have never sold a house before. However, when I mentioned that we were looking at houses, it seems like everyone has an opinion on whether or not this is a good time to sell and/or buy a house. As someone who will be both selling and buying a house, won’t whatever benefits come to me as a seller, cancel out the benefits to me as a buyer?”

A lot of people are worried about buying a house in these times, when perhaps housing values are going to go down. I don’t know. Maybe they go up. Maybe they go down. My crystal ball is always cloudy. What I wouldn’t be worried about, though, is swapping one equivalent house for another. Anytime you do this, what you lose on one end, you’re gaining on the other end. Now, obviously, you could lose here. There’s an element of timing that could work out well for you. If you’re going from a less expensive house to a more expensive house, obviously you hope the market’s going to go up afterward. If you’re going from a more expensive house to a less expensive house, obviously it will work out better for you if the market goes down after that move. But if these houses are equivalent, it’s really not going to matter.

One thing I would be very careful about, however, is that you don’t get stuck with two houses at once. I think that is the big problem with buying and selling in a downturn. So how do you avoid that? Well, you don’t sign a contract that says you’re going to buy the house, the new one, until you’re under contract on the sell side, and it looks like that is going to go through. You can make the buy contract contingent on the sale, but that does make your offer a little bit less attractive in a hot market. But in a hot market, this usually isn’t a problem because everything sells fast. In a down market, maybe that doesn’t make your offers so much less attractive that they won’t take it. But mostly you just kind of want to wait until that sell contract has gone through inspection and has gone through appraisal. Once you’re at that point in the contract, you’re pretty sure it’s going through, and I think it’s okay to get that buy contract going.

It usually takes less time to find and buy a new house in my experience than it does to sell the old house. So, I’d start with selling and when it looks like that’s going well, then move on to buying. But no, I wouldn’t worry about swapping houses in a hot market or in a down market. What you lose on one side, you’re going to gain on the other.

Claiming Losses on Your Small Business for Multiple Years

A reader’s spouse has a small business that she has claimed a tax loss every year for the past three years as her earnings have been small and her startup expenses have been significant. This year, however, things have started to pick up, and her earnings have become much more significant. They have reinvested those earnings into the business to allow it to grow. She is currently right on the cusp of breaking even, albeit with substantially more earnings this year than the prior three combined. The IRS allows you to claim losses for three out of five years before they make you classify your business as a hobby. He wants to know, if they end up with a net profit this year, would they still be able to deduct all of this year’s expenses from her business earnings? If her business ends the year slightly in the negative, is it correct that they will still have to claim all of her earnings as hobby income, but not be able to claim any of her expenses? Could they claim only enough expenses to negate her earnings, but not have so much that she ends the year with a loss again?

It’s fun to have a side business, but if you’re going to put a lot of time into it, it’s also nice to make money. She has lost money the first three years of this sole proprietorship. That doesn’t sound like a great business, that you’re in year four and almost breaking even. If your business never makes money, the IRS calls it a hobby and they don’t let you deduct losses forever for something that is a hobby.

His question is, should you deduct all the expenses? Well, in year four, when you have losses in years one through three, I probably would not deduct all my expenses if it meant I was going to have another loss. I would deduct enough of them to ensure I still had a profit. So at least it looks like, in your fourth year, you finally turned a profit on this business.

There is no requirement that you report every single expense that the business has and claim it on your taxes. That is not a requirement. I would definitely leave some expenses off and make sure you turn a profit this year.

But if you actually ask the IRS how they define if a business is a hobby or a real business, they basically look at nine factors.

  1. Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records. Do you have a separate bank account? Do you have a separate credit card? Are you running this thing like a business?
  2. Whether the time and effort you put into the activity indicates you intend to make it profitable. If this is something you do three hours a year, it might be hard to convince the IRS you’re really doing it as a business.
  3. Whether you depend on income from the activity for your livelihood. Now for many side gigs, for physicians and their spouses, you’re not going to meet this factor because you have that physician income that is really providing your livelihood.
  4. Whether your losses are due to circumstances beyond your control or whether they’re normal in the startup phase of your type of business. So, if most businesses of this type lose money for a couple of years, they’re not going to be thinking about it very hard, but if most businesses become profitable very quickly and you’re still turning in losses, it looks bad.
  5. Whether you’ve changed the business. Whether you’re making changes in your methods of operation to try to improve profitability, or you are just doing the same thing every year and reporting this loss and taking it as a deduction on your taxes.
  6. Whether you or your advisors have the knowledge needed to carry on the activity as a business. Maybe you know nothing about being a general contractor and you’re trying to convince the IRS that you have a business as a general contractor. That might not go over very well.
  7. Whether you have been successful in making a profit in similar activities in the past. Did you work in this industry before, whether as an employer or as an owner of another business?
  8. Whether the activity makes a profit in some years and how much profit it makes. So maybe if you make gobs of profit in years one through three, and then you have four years of losses, maybe the IRS will be a little more lenient about it because you obviously were profitable at some point.
  9. The last factor is whether you can expect to make a future profit from the appreciation of the assets used in the activity. Sometimes you’re losing money.  I think real estate is a classic example. You’re losing money at least on paper for years until you sell the property. And then that is when you lock in all the profit. If it looks like that, maybe it’s a little easier to convince the IRS it’s a business and not a hobby.

But they have kind of implemented a practical standard for classifying whether it’s a business or a hobby. The IRS Safe Harbor rule is that if you’ve turned a profit in at least three of five consecutive years, the IRS would presume that you were engaged in it for profit.

This may be extended to a profit in two of the prior seven years in the specific case of horse training, breeding or racing; I guess because that’s a particularly risky business. But in your case, you’ve already had three years of losses. So, I wouldn’t push this anymore. I think you really need a profitable year. The IRS is going to start looking at this a little more closely and may audit that business’s return.

If the IRS classifies your business as a hobby, it won’t allow you to deduct any expenses or take any loss for it on your tax return. You may be able to claim it as a loss somewhere else. It used to be that, on our miscellaneous deductions on Schedule A, maybe you could take some of these deductions, but starting in 2018, even that’s harder to take.

So, if your business is legitimate, keep accurate and extensive records, demonstrate your professional approach to the business, have a written business plan. That is often the difference in whether the IRS calls it a hobby or a business. Show that you really do intend to make a profit eventually.

Issues with Dual Citizenship

A reader asked about having a second home in Italy and living part of the year there. He wanted to know if I knew of any financial reasons why they should be careful applying for Italian citizenship.

“We would, of course, not be renouncing our U.S. citizenship by doing this. I am an employed physician and my wife and I both have sole proprietor side gigs. Would there be any issues with our life or disability insurance policies? Any implications on my ability to come back to the U.S. to practice medicine for part of the year? Any implications on drawing down investment accounts after retirement, while overseas? Anything else that we should think about before going through with this?”

I’m not an expert on Italian law, but there are a few things you need to be aware of when you go for dual citizenship. Dual citizens enjoy a lot of benefits. You have the ability to live and work freely in two countries. You can own property in both countries. You can travel through them with relative ease. But there are some drawbacks. It can be long and expensive to get that dual citizenship. You are now bound by the laws of two nations, and that can be tricky. The most significant one is the potential for double taxation. You don’t want to have to pay taxes on all your income in the U.S. and pay taxes on all your income in Italy. Now, the U.S. has tax treaties with a lot of countries, and I don’t pretend to be an expert in these, but, in general, the United States imposes taxes on its citizens for income earned anywhere in the world. So, you don’t want to end up having to pay taxes in both places. So, you want to know about these treaties.

Now the U.S. – Italy tax treaties are from 1984 and 1999. You can find them on irs.gov with a simple Google search. But they’re about 300 pages long, and they’re all totally written in legalese. You probably ought to at a minimum skim through these before taking up dual citizenship, especially if you’re planning on having any income in Italy.

But, honestly, if you’re in this situation, I think it is worth paying for formal advice on this before purchasing something as substantial as another home. Especially before doing any paid work in Italy. I think you really need to understand how those tax laws are going to apply to you. And I think you probably need an attorney that specializes not just in foreign tax law, but frankly U.S.-Italy tax law. I don’t know where you find one. I suspect if you Google it, you can probably find one. Might be based out of New York City, I would guess, but that’s where I would start. I would get formal advice before I even became a dual citizen to know how that is going to affect your particular assets and your plans going forward.

Negotiation for One-Year Hospitalist Job

A reader wants to do a hospitalist year while his spouse is finishing fellowship. What contract issues should you be thinking about? It is still the usual contract issues. You want to make sure you’re being fairly paid. You want to know what happens if you choose to leave. You want to know what happens if you’re fired. You want to know what the benefits are going to be. You may focus more on total salary because you might not be eligible for the 401(k) that first year, for instance.

And, of course, if your plan is to go for public service loan forgiveness, you have to make sure that hospitalist position directly employs you as the employee of a 501(c)(3), not that you’re the employee of a physician partnership or the employee of a physician group that’s for-profit and contracts with a not-for-profit hospital. You want to make sure you’re actually an employee of a nonprofit or government entity.

The big ethical question: should you tell them you’re only going to be there for a year? Well, in general, I don’t like lying to people. So, if they ask me how long I’m going to be there, I’d probably tell them what my plans are. I’m not sure that is the first information I would volunteer in the interview, however. Obviously, it’s a pain in the butt to hire doctors. The longer someone stays the better, because it costs money and time and hassle to hire a new doc. I probably would not reveal that information any sooner than I was required by law to do so.

However, you also don’t want to leave people hanging. Treat people right. If they ask you what your plans are, I would probably tell them my plans, but I wouldn’t necessarily start out saying “I’m looking for a one-year position” as that may keep you from getting the position you want. Certainly, it will give you a weaker negotiating position than you would otherwise have.

Lowering your 2020 Taxes

A reader asks about lowering his tax bill for 2020.

In general, for doctors, there are two big tax deductions. The first on is your tax deferred retirement accounts. The second one is the 199A deduction for self-employed people. He has a 403(b) available. I’d max that out. That will help keep taxes lower. If you have some 1099 income, you can have an individual 401(k) or a SEP-IRA. Individual 401(k) is usually better. It depends on how much you make. You may be able to contribute a fair amount to that, and that’ll lower your taxes somewhat.

But mostly you just have to get used to paying taxes. This is the way it works. When you make a lot of money, you pay a lot of taxes and you just have to realize that and be grateful that at least some portion of those taxes probably goes to a cause that you agree with and that you’re supporting. That is part of what makes living in this wonderful country possible.

Buying Your Practice Real Estate

“I followed your valuable advice and decided to buy in and joined my senior partner in private practice. Our main practice is in a leased building, and the landlord wants to sell the building. We’re doing due diligence at this time, but the cash flow appears quite favorable. Plus, we’d be getting favorable loan terms because we are owner users. My question is, because of my recent, large ticket practice buy, I’m now practice rich and cash poor. What would be the best option for me?”

He lists off six options.

“Liquidating my solo 401(k). It’s got $165,000 in there. Get a hard money loan, ask a family or friend for money. Walk away from the deal. Ask for a regular loan or use the $50,000 to $60,000 I’ve got in cash right now. It’s a $2 million building. They’re planning to finance 80%, putting 20% down. There are two other providers in the deal. So, there are four members putting in $100,000 each. I’d like to participate in this opportunity. Any input would be greatly appreciated.”

You have to come up with $100,000. You only have $50,000 to $60,000. So how are you going to make up the difference with the last $40,000 or $50,000? Well, a few things I think you have to think about first. First, you say the cash flow is good. Is the cash flow still good if you’re only putting 20% down? Because a lot of times with real estate investments, you need to put down 25% -30% -33% just to keep a building cash flow positive. So, remember that just because it’s good for that current owner, it might be because he only has a mortgage of $400,000. That might be why the cash flow is so awesome for him. Once you have a huge $1.6 million mortgage, you may have negative cashflow. So really look at the details of the deal.

Second, you need to know what happens when one of these four owners want out? What’s the plan? Are the others required to buy him out? If so, over what time period? Is he required to stay there until the building sold? Have that all worked out in advance. Dave Ramsey is fond of saying “The only ship that doesn’t sail is a partnership”. That is because you’re herding cats, especially with other doctors, trying to get everyone to agree on how this building is going to be managed. So, have those details knocked out in advance.

But since you only need $40,000 to $50,000, there’re probably lots of options here that would work. You might be able to borrow from the practice, for instance, against your future earnings, if the practice has the cash. If you have a few months, perhaps you can just save it up. Doctors make pretty good money. If you’re still living like a resident, you can take that money that would be going into your 401(k) or would be going towards student loans or would be going to the work of the practice buy in and reroute it for a few months to save up this down payment so you can take advantage of this opportunity.

The other thing is, if it’s really going to be a loan that is for a very short time period, then you have other options. For example, you could borrow against that individual 401(k). You could even take out a credit card loan. A lot of those introductory deals are 0% for 12 to 15 months. Maybe there’s a 3% sign up fee, but 3% is a whole lot better than the 10% to 12% plus two points you’d pay for a hard money loan.

Honestly, you probably can’t get a hard money loan anyway, because they want to be in first lien position for the most part. And you already have the bank that is in first lien position. So, I’m not sure a hard money loan is really much of an option.

When I look at your options, some of them are not good. For example, liquidating the 401(k). That’s dumb. You’re going to pay taxes and penalties on that. It’s especially dumb if you only need the money for a little bit of time. So, I wouldn’t do that. I would probably try to avoid a hard money loan in this situation. Family/friend loan? Boy, it might work, but be super careful with that relationship. Thanksgiving dinner does not taste the same when you owe money to someone sitting across the table. If it’s for a few months and it’s your parents and they’re in a wonderful financial position, maybe I wouldn’t worry about it so much. If it’s going to be a long-term loan from your brother-in-law or from a good friend, maybe that’s not something I’d get involved in.

Should you walk away from the deal? Well, if it truly is a good deal after you do the due diligence, I hate to see you walking away from it. There are no called strikes in investing. You can always walk away from it, but this one seems nice since it’s the building that your practice is actually in. So, if the numbers work, I’d certainly try to do it. I don’t know what you mean by regular loan, but most loans, if you go to a bank and say, “I want to borrow money to buy a property”, they want to be in first lien position. So, I’m not sure that’s going to be an option for you. And, of course, you should plan to use cash that you have now.

Working on Finances with Your Significant Other

A listener asks about balancing finances with your significant other when you are at different stages of life. She still has student loans. He doesn’t and has a home partially paid off. He has already spent years paying off his student loans and is not interested in paying off hers.

Here is the deal. I think you have to draw a line. I draw that at marriage. When you are married, combine your income. It is our income and our debt. Until you’re married, I would keep everything separate. But if you’re married, you’re committed to each other for the long-term. I think you’ll have a lot more financial success by combining your finances.

Now, at the same time, I’m not going to be totally unreasonable about this. For example, if there is a discussion of whether she becomes a stay at home mom with this $200,000 in debt that comes from her schooling. Well, maybe the discussion at that point is “we can afford to do that as soon as the student loan is paid off. So, you have to work for two or three years until we can wipe this out and then you can be a stay at home mom.” I think I would have those sorts of discussions together, but mostly you have to be on the same page. If you’re not on the same page, at least be reading from the same book if you want to be financially successful.

Buying a Home Without A Realtor

“I’m looking to buy a starter home in a super competitive market. I found a fixer upper in a good area, but the seller is requesting we not work with agents to avoid the extra fees. I’m a first-time home buyer feeling a little uneasy about his request.”

This is not a crazy request. If you have already found the buyer and the seller, you’ve done 90% of the work that the realtors do. There are a few things to keep in mind here, though. First, the seller should be splitting that commission with you. They shouldn’t get to keep all of it. So, the saved money ought to be split with you as the buyer. Second, you want to make sure you’re not overpaying. This is one function of a realtor. They help you to not overpay for a property. Obviously the more you pay, the more they get paid. They have a little bit of conflict of interest there, but they’re supposed to be working for you and should at least show you comparables so you have some idea of what the property is worth.

Then the final thing they do is they help you with all the paperwork. That part’s easy to hire out. You can just go to a real estate attorney and do that. I bought a house without a realtor before. The attorney helped and got us through the closing and took care of everything. And it only cost a few hundred dollars rather than thousands of dollars that it might cost to have a realtor.

The other thing you can do is you can just go out and hire a realtor and you can pay them yourself. And, in fact, you’ll probably get a pretty good discount if all you’re doing is asking them to help with the paperwork. They don’t have to drag you around to see 30 houses. And so, those are all options that you can do. You shouldn’t necessarily be nervous about not having a realtor. There’re lots of other good options. Just make sure that it works out as well for you as it does for the seller.

Cryptocurrency or Stocks

This last question is from the WCI Facebook group.

“Hello, I’m new to investing. Do you recommend cryptocurrency or stocks through the Robin Hood app? Any advice for investing would be helpful as a starter”.

I don’t know what to say. This stuff happens in the Facebook group all the time. It’s like people have no contact with the White Coat Investor whatsoever except what is in that Facebook group. So, if you’re in the Facebook group, please take that responsibility seriously. These are people who have never read the blog, who have never listened to the podcast, who have never read a book, who haven’t taken an online course. They’re not getting my newsletters. This is all totally new to them. And they’re trying to choose between cryptocurrency or speculating in stocks through an online app.

The answer is you need a financial plan. If you are not capable of drafting that up yourself, you have a couple options. One is our Fire Your Financial Advisor course. This will teach you financial literacy. It’ll help you write out a financial plan. It’s only $499. It takes about eight hours of your time.

The second option costs more money, but requires a little bit less effort. You just go hire a financial planner to help you put together a financial plan. But just saying you should invest in cryptocurrency or you should invest in stocks is not doing you any favors. The answer is you need to educate yourself. You need to get financially literate. You need to get a financial plan in place because the real answer to this question is that you shouldn’t be doing either. You shouldn’t be buying individual stocks and you shouldn’t be buying cryptocurrency. Certainly not as the main aspect of your investing in any way, shape or form. So, I hope that’s helpful.

Ending

Remember our WCI online courses are on sale this week. Save 10% when you buy our Fire Your Financial Advisor: A Step By Step Guide to Creating Your Own Financial Plan OR  2020 Continuing Financial Education course. Plus purchase either course and you’ll also receive our CFE Park City course for free. The sale ends on Monday, July 13th at midnight MST.

Full Transcription


Intro:

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. Here’s your host, Dr. Jim Dahle.
Dr. Jim Dahle:
Welcome back to the White Coat Investor podcast. This is podcast number 166 – Is Vanguard losing its status? We’re recording this on June 23rd. It’s going to run on July 9th. It’s been an interesting summer so far.
Dr. Jim Dahle:
Thanks for what you do. I know that you’re out there trying to sort out your lives, dealing with the stress, the additional stress you’re having at work from trying to keep yourself safe and not bring this virus home to your family, as well as dealing with the economic stress that the entire country is dealing with. It’s affecting both of your investments and assets as well as your income. Thank you for all of that, that you’re dealing with and for doing such a difficult job.
Dr. Jim Dahle:
Personally, it feels like the pandemic has finally arrived in Utah. Our numbers have gone from where they were for a couple of months of 150 to 200 cases a day to now 400 to 650 cases a day. It really feels like some switch has flipped around here now that we’re a few weeks out from coming out of our holes and trying to interact a little bit more normally and opening up restaurants, etc.
Dr. Jim Dahle:
But finally, in the ER, I’m actually seeing cases, which I’m not sure I saw a positive case up until my last couple of shifts. In the last two shifts, I’ve seen four positive cases. I’ve admitted three of them and one of them has died. And so, it really feels like a switch has been flipped. One of my patients was a 31-year-old, totally healthy female, who couldn’t walk around the bed without dropping her sats into the low 70s. So, it’s very much real and definitely, even if it doesn’t kill most people that get it, you don’t want to have this disease. So, stay safe out there, wear your PPE.
Dr. Jim Dahle:
I guess I should be grateful that it was kind of delayed hitting Utah. It was nice to be able to get prepared. It was nice to have plenty of PPE and plenty of ventilators and get lots of practice using it before we really get into it. But it’s kind of feels like maybe we’re getting into it now for the first time. So here we go into our wave of coronavirus.
Dr. Jim Dahle:
All right. Our sponsor today is a Guideline. A 401(k) provider on a mission to help people save as much as possible when saving for retirement. Their investment portfolios contain the low-cost Vanguard funds, which are automatically rebalanced to keep it diversified and on track for retirement. And the best part, no added AUM fees, which would typically take a chunk out of your retirement savings year after year after year. Check them out at guideline.com/wci.
Dr. Jim Dahle:
All right, our quote of the day comes from an unknown physician. It is, “I married a gold mine. My spouse is thrifty.” And that’s so true as we’ll talk about a little bit later with one of the questions from a White Coat Investor Facebook group member. Getting on the same page with your spouse is really key to being financially successful.
Dr. Jim Dahle:
So, I lost my wallet this weekend. I think I kicked it out of the car when I was at the hospital. I realized that when I went in for my shift the next morning and started looking around. I was at a different hospital that day. So, I called over to the hospital. I had one of my partners check my cubby, even go out and look at my parking spot in the lot to see if it was out there on the ground. I checked with security to see if I left it there. I even went by the gas station I was at on the way into that shift to see if I’d left it there.

Dr. Jim Dahle:
Nobody had seen it. I searched all over the car and couldn’t find it. So, I decided, “Well, I better check the credit cards that are in it”. And sure enough, when I got home that night, about eight hours after I started looking for my wallet, there were a bunch of charges on a couple of my credit cards. It’s interesting, in this wallet, there were probably five credit cards. Three personal and a couple of business credit cards, as well as a couple of debit cards. So, all they used was two of the credit cards. And it’s interesting with all that credit available to them and all those assets in the bank accounts, although that might not have been so available due to the lack of having the pin, what did they buy? Well, they bought eight Lyft rides and a few DoorDashes, and that was pretty much it.

Dr. Jim Dahle:
They actually tried to buy some DoorDash gift certificates. At that point, it triggered the fraud issues and shut it down. So those purchases didn’t go through, but they got a few meals and they got a few Lyft rides. And that was pretty much it. Maybe a couple hundred dollars total in charges they were able to put on that, which of course, I won’t be responsible for. So, the worst part about it is actually having to go replace my stupid driver’s license with all the DMVs closing for coronavirus issues. And they won’t even make an appointment with you. So that will likely represent several hours to replace my driver’s license, unfortunately.
Dr. Jim Dahle:
Moral of the story, keep a hold of your wallets and try not to lose your stuff. And if you do, get on top of it quickly and they won’t hold you responsible for the charges on your credit cards. That’s one of the great things about using credit cards, rather than having hundreds of dollars of cash in your wallet. I didn’t have very much cash at all in there. $20 bucks, maybe $50, something like that. Obviously, I won’t be getting that back and I’ll have to buy a new wallet, but the main pain is going to get my driver’s license replaced.
Dr. Jim Dahle:
All right, I’m excited to announce a sale we’re having on our online courses here at the White Coat Investor. This sale goes through next Monday. That’s July 13th at midnight. Now our two main courses that we sell right now include our classic Fire Your Financial Advisor course, as well as our Continuing Financial Education 2020 course.
Dr. Jim Dahle:
The Fire Your Financial Advisor course is the basic course that helps you get a financial plan in place. This is the one that takes you from zero to hero over the course of about eight hours. If you take the pretest, the posttest, the quizzes on each of the modules and do the exercises as you go along. The idea with this course is that not only do you come out of it financially literate with a framework in place to hang future financial knowledge on, but you also come out with a written financial plan that you wrote yourself that you can follow to financial success.
Dr. Jim Dahle:
And so, it’s a great course. It’s a wonderful course, we get great feedback on it. It’s normally $499. It even comes with a money back guarantee. You have a week to return the thing. If it is not awesome, if you don’t think it’s worth the money, you have a week to return it, no questions asked. You just shoot us an email. We give you your money back. Very few people do this. It’s less than 3% or 4% of people that take this course that actually return it because it’s that valuable.

Dr. Jim Dahle:
It can save you literally millions of dollars over the course of your lifetime, thanks to your high income and just applying some basic principles of financial literacy and a financial plan to that high income. So, we encourage you to buy that course and we’re encouraging you even more from now through Monday at midnight. We weren’t quite sure what promotion we wanted to do with this. We’re thinking about giving you a discount. We’re thinking about just giving you some extra material with it. And in the end, because we couldn’t decide, we’re just going to give you both.
Dr. Jim Dahle:
So, if you will buy Fire Your Financial Advisor between now and Monday at midnight mountain time, you get 10% off. So instead of $499, you get it for $50 less. In addition, we will give you WCI con Park City. This is 12 more hours of video from people like Bill Bernstein, Jonathan Clemens, Mike Piper, Nisha Maita. All these great people that come to WCI con and speak. You’ll get their presentations as well. So that’s like 300% as much material as you would normally get for an even lower price. So, it’s a great discount.
Dr. Jim Dahle:
The other course that we are selling is our Continuing Financial Education 2020 course. This is the course that mostly comes from WCI con in Las Vegas. However, it has material that wasn’t even presented there. It has another six hours of material from speakers who weren’t able to make it because of the pandemic. And so, it’s actually 34 hours of video included in that course. That course normally sells for $649. It is also 10% off. And if you buy it, we’ll give you WCI con Park City that additional 12 or 13 hours of material.
Dr. Jim Dahle:
So, this is a great sale. You get not only a discount. You get that extra 12 hours of video material from some real superstars in the personal finance space. It’s all available through Monday at midnight. So, don’t delay. The sales are actually already been going for a few days before I’m announcing this on the podcast. Hopefully, you saw it on the blog and the newsletter, but if not, you’ve got a few more days, as long as you’re listening to this podcast, as soon as it comes out.
Dr. Jim Dahle:
Okay, let’s talk about Vanguard. I love Vanguard. I am super grateful for Vanguard. I love what they have done over the years. They are focused on mutual ownership. So, the investors in the funds own the company as well as low costs and passive investing has done wonders for the investment industry. Jack Bogle truly is a Saint. He could have easily been as rich as the owners of Fidelity. He could have easily gone down that route, but he didn’t. Instead, he tried to give a fair shake to investors and I will be eternally grateful for that.

However, things are maybe not the same as they were 10-20-30 years ago, as far as Vanguard and its competitors. And that’s kind of illustrated by an email question I got this morning. It says, “I’ve recently, thanks to you, made large strides in becoming financially literate. I’m about six years out of training. I have a financial account in Fidelity with one taxable, one Roth IRA and one solo 401(k). So, I’m rectifying some past mistakes after creating my financial plan, determining my asset allocation, I stumbled onto some zero expense ratio funds with Fidelity. I’ve not heard anything about them on the podcast I’ve listened to so far, nor in the books I’ve read, including both of yours, “Little Book of Common Sense Investing”, “The Bogleheads’ Guide to Investing”, “The Physician’s Guide to Investing”. Yes, $5. Thank you, Covid-19, for all this free time.

Dr. Jim Dahle:
My question is what’s your take on the zero expense ratio index funds? And it seems the no fees must be better than some fees or in this case, is it one of those things where there’s no such thing as a free lunch? Well, I wrote a post about these new Fidelity’s zero expense ratio funds. It was published back in August of 2018 on the blog. And it was published shortly after Fidelio introduced the 0% expense ratio mutual funds. They basically introduced this on a total stock market fund that was tracking their own made up index. And really it was the logical progression of a marketing strategy that they along with Charles Schwab have used over the last few years with some limited success in order to compete with Vanguard. Vanguard made their name became the world’s biggest mutual fund company based on low cost index funds.

Dr. Jim Dahle:
So basically, Fidelity and Schwab are now competing with Vanguard on price by literally offering their index funds at a lower expense ratio. Now it’s not significantly lower. When you got your expense ratios down to 0.05% a year, it really doesn’t matter if it’s 0.05 or 0.04 or 0.03 or 0. But they’re able to say we charge less than Vanguard does on these funds. Basically, here’s the way it works, right? Vanguard’s got this total stock market index fund at 0.04%. Fidelity’s total market index premium fund had an expense ratio of 0.015%. And Schwab’s total stock market index fund had an expense ratio of 0.03%. So, all of a sudden investor who’s been told that expenses matter assumes that differences of one to three basis points matter. Well, I guess they matter, but they just don’t matter very much. And in fact, once you’ve gotten down to the differences of less than 10 to 20 basis points that matter a whole lot less than some other things.

Dr. Jim Dahle:
That principle still applies with the natural continuation of the strategy to a 0% ER that’s happened at Fidelity over the last couple of years. If you look at them, what they’ve got is they’ve got a zero total market index fund. The ticker is FZROX and a zero international index fund with the ticker FZILX. Based on the number of people who are actually thinking about changing their investors holdings, based on this change, I would say that this marketing strategy is working very well. Notice that I said, this is a marketing strategy and not an investing strategy. If I was more cynical, I just call it a publicity stunt. There’s no actual new investing strategy going on here. It’s the same old, same old investing strategy. You buy all the stocks, you hold them, you keep your costs and taxes down.

Dr. Jim Dahle:
And in the long run, your money grows at the same rate as the market. And if you save enough, you eventually become financially independent. Nothing’s really different about the fact that the expense ratios went to 0%.
Dr. Jim Dahle:
But let’s talk about what’s really going on here, right? Vanguard has the largest index funds. And so, they benefit the most from economies of scale. They operate at cost. They’re a mutually owned company, so they operate at costs. They have to charge the investors, the owners of the company enough to cover the costs.
Dr. Jim Dahle:
An index fund that’s charging less than Vanguard is therefore operating at less than cost. It’s a money loser. And no, I don’t buy the Fidelity runs a more efficient operation with a fund that’s 1/14th the size of the Vanguard fund. A for profit business is willing to lose money on a product line for one of two reasons. Either it’s going to soon make money on it, or it hopes to make it up elsewhere.

Dr. Jim Dahle:
If your strategies to attract the nonsticky money, using it very slightly lower ER, and then you raise prices, the same nonsticky money will then leave you. The only possible reason for Fidelity and Schwab to charge less than it cost to run a mutual fund is so they can make money on their other products.
Dr. Jim Dahle:
What you need to ask yourself is “Do I really want to support a business that is doing that with my investment dollars in order to save one to four basis points?” number one. And number two, “Would Fidelity, Schwab, etc. be doing this if it wasn’t for Vanguard giving investors a fair shake on Wall Street by decreasing the cost of their funds as much as possible?”
Dr. Jim Dahle:
But perhaps the most important discussion we should have is we talk about these very low-cost index funds is what matters with index funds. And when it comes to index funds, three things matter. The first is “What index does it follow?” Second is, “How well does the fund track the index?” And third is, “Do I get other benefits like tax efficiencies, simplicity, status, etc. flagship status at Vanguard that gives you other benefits?”

Dr. Jim Dahle:
Notice that the expense ratio really isn’t on the list. That’s because it’s baked into number two. The higher the cost, the less well the fund is going to track its index. And also keep in mind that if you’re investing in a taxable account, the return you care about is the after-tax return.
Dr. Jim Dahle:
Back when I wrote this post in 2018, I actually looked to see what the annualized fund returns were for these total stock market funds at Fidelity and Schwab. And I looked and saw that Vanguard’s with a higher expense rate 0.04, compared to 0.03 had a 15-year annualized fund return of 9.77%. Whereas the Fidelity Schwab ones were slightly lower 9.71; 9.74.
Dr. Jim Dahle:
My point with that isn’t to illustrate the Vanguard as somehow markedly better because it’s obviously not. It’s trivially better. But it’s not trivially worse. And what that demonstrates is that once you get to these very low expense ratios, the expense ratio doesn’t matter. What matter more is what index are they tracking it and how well are they tracking it? And so, I think that’s an important thing to understand.
Dr. Jim Dahle:
Realize that the Fidelity and the Schwab total stock market index funds don’t track the exact same index as the Vanguard index fund. And honestly, the index probably matters more than the expense ratio. And so you can read more in that post from August of 2018 about how well a fund track these index in next and what some of the data there suggests on the Vanguard and Fidelity and Schwab funds, as well as some additional factors like tax efficiency.
Dr. Jim Dahle:
And the bottom line of the post ended up being is if your money’s at Fidelity or if your money’s at Schwab and you have a simple portfolio, because remember Schwab and Fidelity only have limited numbers of index funds. If you have more complex portfolio, they’re not going to be able to have index funds for all of the asset classes you want. But if you’re there already and you have a simple portfolio, go ahead and use your index funds guilt-free. I have used Fidelity funds. They’re fine. These low-cost index funds that Fidelity offers are fine. Same with Schwab. Especially if you’re in a tax protected account where the slightly better tax efficiency that Vanguard offers does not matter as much.
Dr. Jim Dahle:
But if your money’s at Vanguard like mine is already, there’s no reason to switch based on the trivial differences and these expense ratios. And you certainly don’t want to pay any capital gains taxes to switch from one to the other. But the reason that Vanguard is the biggest mutual company in the world is that they earned the trust of millions of investors by doing the right thing over and over and over and over again for decades.

Dr. Jim Dahle:
Are they perfect? Not even close. I want to talk about that in just a minute. But ownership matters. And in Vanguard, you’re the owner. So, I encourage you to show a little loyalty to the company and not bail on it just because Schwab or Fidelity comes out with a fund that’s a couple of basis points lower.
Dr. Jim Dahle:
Now there are some issues of Vanguard. One of the big issues I think is their customer service. I don’t think they’ve done a great job keeping up with the growth that they’ve had over the last 5-10-15 years. It has been the fastest growing mutual fund company on the planet. It really has grown very quickly as these gathered assets, as people have realized, “Oh yeah, index funds are good idea. Keeping costs low are a good idea”.
Dr. Jim Dahle:
And I don’t think their customer service has kept pace quite frankly. They try to keep costs low. They try to run it at cost, but they’ve probably been too skimpy on their customer service. They probably should have charged a little more to the investors, to the owners and spent a little bit more money on making sure that there’s plenty of people behind the phone lines and that those people are well trained.
Dr. Jim Dahle:
And so, because Schwab and Fidelity are offering these low-cost funds, just like Vanguard is, and they tend to offer better customer service, you can hardly blame somebody for going to Fidelity or Schwab and housing their assets there. You can buy the low-cost funds at Schwab or Fidelity, or you can just buy the Vanguard ETFs for very low commissions for $5 or $6. So, both Schwab and Fidelity to have a commission when you buy and sell the ETFs. And so, that’s a totally reasonable approach to have. If you want to have a little bit better customer service experience.
Dr. Jim Dahle:
A couple of other things people complain about a Vanguard. Their individual 401(k) still doesn’t allow IRA rollovers into the 401(k). And that’s annoying. So, a lot of people looking to buy or looking to open an individual 401(k) have to go elsewhere. Maybe that’s why this questioner has his 401(k) at Fidelity, just like I do. Mine’s for a little bit different reason because Vanguard’s cookie cutter plan didn’t allow me to do make a backdoor Roth IRA contributions. I wrote about that on the blog, if you’re interested in that. But they don’t allow IRA rollovers. And so that’s a reason people haven’t gone there.
Dr. Jim Dahle:
Another problem people have is when they go to do their backdoor Roth IRA every year. I mean, you should be able to do the conversion step the day after you do the contribution step. And a lot of times Vanguard’s making you wait two or three or seven days until everything settles in between the contribution and the conversion step. It’s annoying to check back there every day for a week to see if you can finally do it. You shouldn’t be able to do it 10 minutes later. And if you go to Fidelity, you can do that.
Dr. Jim Dahle:
These little customer service things are starting to drive Vanguard investors nuts. And I think if they’re not a little bit more careful, they may see that they really got serious competition for gathering assets.
Dr. Jim Dahle:
Some people have wondered is Vanguard going to become like iShares? Look at what iShares does. They don’t have this big brokerage. They don’t run these 401(k)s and all this other stuff. All they do is they run the funds, they run the ETFs. And so, they do a great job running them. These index ETFs at very low costs. And then they’re purchased at other brokerages like Vanguard and Fidelity and Schwab and TD Ameritrade. And maybe Vanguard’s pathway is eventually to get there.
Dr. Jim Dahle:
But I think that’s a real travesty. I think it is great to have a real mutual fund/brokerage company that’s owned by the investors, that’s run at cost. I just think they need to put a little more focus into handling their growth better and getting their customer service on par with Fidelity and Charles Schwab. And so, I’m hopeful they’ll do that. I’m obviously thankful for what Vanguard’s done. I’m thankful for what Jack Bogle did, but more and more people are going to be asking Vanguard, “What have you done for me lately?”
Dr. Jim Dahle:
All right, you may or may not know about the White Coat Investor network. The White Coat Investor network is a network of blogs where we cooperate with each other and try to promote each other. And so, I have selected three blogs, three bloggers and blogs that I think are worthy of your time and consideration.
Dr. Jim Dahle:
The newest one of these is called The Physician Philosopher. And this is a great blog. All three of these are actually written by anesthesiologists. There’s a great blog by an academic anesthesiologist who is located out in North Carolina by the name of Jimmy Turner. And his blog focuses on personal finance, but with a twist that he focuses on wellness. And how improved personal finance can improve your wellness, decrease your burnout, etc. And he’s been very productive. In the last few years, he’s written a book. He does a podcast. He actually cooperates with Ryan Inman and does a podcast on that. And actually, recently came out with an online course. So, he’s been very productive. He has been blogging long, just a couple of years, but have been very productive in that time and has a lot of good stuff. So, you can check that out at thephysicianphilosopher.com.
Dr. Jim Dahle:
The second one of these is Passive Income MD. This is run by Peter Kim. He’s an anesthesiologist out in Southern California and he blogs primarily about passive income type stuff. It ends up being a lot of real estate focus, a lot of entrepreneurship focus, a lot of multiple streams of income, kind of focus. There’s a little bit more of a rah rah to it, I think, than you see in a typical mutual fund focused blog. That’s kind of the nature of real estate investing. As you may have noticed, there’s a little bit of Tony Robbins flashing lights and booming music kind of approach to a lot of those information things.
Dr. Jim Dahle:
But there’s definitely a big focus on inspiring you to take the next step, to get busy doing something in addition to medicine. And so, it might be a side gig, it might be real estate investing, it might be opening your own business, etc. But if you are interested in that, check out Peter Kim at Passive Income MD.
Dr. Jim Dahle:
He also has an online course that teaches you how to evaluate passive real estate investments. He actually did a conference as well last fall. We’ve been calling it PIMD con. Passive Income MD con. That’s not its official name, but it looks like that’s probably going to be a virtual conferences fall, but take a look at that if you’re interested. So, he also has started a podcast.
Dr. Jim Dahle:
The first of these blogs that joined the White Coat Investor network is Leaf Dahleen’s blog, the Physician On FIRE. When he started blogging, he was already financially independent, but he was still working again as an anesthesiologist up in Minnesota. Since that time, he is actually fired. He’s retired early and he’s now doing slow travel whenever possible, when there’s not a pandemic with his two sons and his wife.

Dr. Jim Dahle:
And so, he’s living the FIRE to life. He has become financially independent and retired early. He’s out of medicine. I think he’s still keeping the license for another year or two in case he changes his mind, but it doesn’t sound to me like he’s going to change his mind. And it’s interesting. He continues to blog regularly, but he’s really not interested in developing online courses and books and conferences. He’s interested in being retired early. So, if you want to learn more about retiring early as a physician and punching out of medicine, this is a great blog. You can check that out at physicianonfire.com.
Dr. Jim Dahle:
Okay, let’s take another question. This one comes in from an anonymous doc.

Speaker:
Hi, Dr. Dahle. Thank you for everything you do for the white coat community. I have a question for you. I’ve been doing some medical legal consulting for one of the largest law firms in the United States. They’ve been notorious for being late in their payments, but I have one outstanding invoice that’s now crossed the one-year threshold. I’ve sent multiple emails to the accounting department, to the secretary and the lawyer, but I have yet to be paid for my services.
Speaker:
The services have since run dry, but I’m hoping that an opportunity may present itself in the future where I have more consulting work coming back in. Because of this and because it is a large law firm trying to go about receiving the payment from a collection agency just doesn’t seem like a good option to me. My specific question to you is that, is there a way to claim an unpaid invoice as a business deduction? And if there is, do I have to claim that deduction in the year the invoice was created? If anything, maybe I can have the amount in the invoice deducted from my income tax for this year. Thank you again for your help.
Dr. Jim Dahle:
Okay. So, a few things to learn here, right? As law firms supposed to be paying you for medical legal consulting. Let’s first answer the question you asked, which is, can I take this unpaid invoice as a business deduction? And this is really the equivalent of a question I get a lot, which is, can I use any charity care I do as a physician or a dentist as a business deduction? And the answer is no in both cases. You cannot take it as a deduction because you never had the income from it, right? It’s not income. So, you basically already had the deduction by not getting the income. So, no, you can’t take it as a deduction.
Dr. Jim Dahle:
But there’s a broader point here. First, if you’re going to do any sort of medical legal work, whether it’s consulting, chart review, expert witness testimony, whatever, get paid in advance. These guys are notorious for not paying doctors. So, you need to basically have a retainer. And when the retainers used up, you stop working until you get more money. It’s not like your clinical care where you are used to patients with insurance, where you get paid 6 to 12 weeks later. This is not the case. If they’re not paying you up front, they’re probably not going to pay you.
Dr. Jim Dahle:
So, what would I do at this point? Well, if it’s enough money and it’s worth your time, I’d try to collect personally. If this law firm is in town, I’d go down there and knock on the door and demand to talk with a lawyer and ask him why he’s not paying you. And if that didn’t work, I’d send it to collections. I wouldn’t have any qualms whatsoever.
Dr. Jim Dahle:
I hear you that you’re like worried. If you send them to collections, they’re not going to send you any more business. Why would you want business from somebody who hasn’t paid you? That sounds terrible, right? You don’t want to be in business with people that treat you like that.
Dr. Jim Dahle:
I recently found out one of our advertisers was three months behind on payments to us. Somehow, we didn’t realize that until that had happened and they eventually did come even. But we don’t really extend them any more lenience, any sort of lenience to this advertiser anymore. And frankly, I’m not really sure how comfortable I am sending readers to them, knowing this is how they do business. So, we’re actually doing less and less with them all the time.
Dr. Jim Dahle:
In business you say what you’re going to do, and you do what you say you are going to do. And that’s how you create trust and how you have ongoing business. A lot of people think that millionaires and billionaires and business owners are crooks, but in general, you can’t build a big business being a crook because people stopped doing business with you. Nobody wants to do business with you and you’re continually taking advantage of them or ripping them off.
Dr. Jim Dahle:
So, treat people well. And that’s how you build a business. In this case, this law firm hasn’t treated you well. Why would you keep doing business with them? If you want to do medical legal, I assure you there are plenty of other firms out there that have medical legal work for you to do.
Dr. Jim Dahle:
All right. Let’s take our next question from Steve, from Nevada.

Steve:
Hi, Dr. Jim. Thanks for helping us crush our finances. I’m a physician and I work for a company in California and Nevada and make income in both states. I live in Nevada. My question is regarding Roth conversions. The company I work for in California has the ability to convert in my 401(k) through that company that’s based out of California to do a Roth conversion. My question is, if I do a Roth conversion with my 401(k) money, am I subject to state income tax in California, or just the federal income tax on the conversion? My income significantly decreased this year, which is why I’m going to do the conversion. And I was just wondering if I am subject to California state income tax on this Roth conversion, even though I live in Nevada. The money that’s in the 401(k) was made in California if that is a contributor. Thanks for everything you do.

Dr. Jim Dahle:
All right. I like this question. You’re earning money in California and in Nevada. You live in Nevada. You want to do a Roth conversion. Do you have to pay California state taxes on it? Well, no you don’t. You’re not a California resident. A Roth conversion is not about where the money was originally earned. It’s not about where the company that has the 401(k) is physically located. At this point, all that matters is your state of residence. So, I would do that conversion. I would not pay state income taxes on it. It would not be reported on my California non-resident return. I don’t think any CPA is going to have a problem with that. But there’s plenty of you listening to the show. So, if you think there’s a problem with that call in on the Speak Pipe and I’ll play your answer, but I’m pretty sure that you do not have to pay California state taxes on a Roth conversion, just because the money was originally made there. That doesn’t make any sense whatsoever.
Dr. Jim Dahle:
All right, let’s take our next question. This one’s from Shawn from Detroit.

Shawn:
Hi, Dr. Dahle. This is Shawn calling from Detroit. My question is about buying and selling a home at the same time. I’m an emergency medicine attending. My wife is a pediatrician. We are considering selling the home we bought during residency and purchasing a new home. We have never sold a house before. However, when I mentioned that we were looking at houses, it seems like everyone has an opinion on whether or not this is a good time to sell and or buy a house. As someone who we both selling and buying a house, won’t whatever benefit to me as a seller, cancel out the benefits to me as a buyer?
Shawn:
For example, if the real estate market is really hot, that would be a great time to sell a house, but not a great time to buy. If the real estate market was in a slump, the opposite would be true. This sounds to me like trying to time the real estate market. Is that even a thing? It seems like it would be just as foolish, just trying to time the stock market. Am I thinking about this wrong? What am I missing here? I have no interest in being a landlord. If the time is right to move for me and my family does the other stuff even matter? Thanks for your help. I really appreciate it.

Dr. Jim Dahle:
Okay. I like Shawn question too. A lot of people are worried about buying a house in these times, which perhaps housing values are going to go down. I don’t know. Maybe they go up. Maybe they go down. My crystal ball’s always cloudy. What I wouldn’t be worried about though, is swapping one equivalent house for another. Anytime you do this, what you lose on one end, you’re gaining on the other end. Now, obviously you could lose here. There’s an element of timing it that could work out well for you. If you’re going from a less expensive house to a more expensive house, obviously you hope the market’s going to go up afterward. If you’re going from a more expensive house to a less expensive house, obviously it will work out better for you if the market goes down after that move. But if these houses are equivalent, it’s really not going to matter.

Dr. Jim Dahle:
One thing I would be very careful about, however, is that you don’t get stuck with two houses at once. And I think that’s the big risk, the big problem with buying and selling in a downturn. So how do you avoid that? Well, you don’t sign a contract that says you’re going to buy the house, the new one, until you’re under contract on the sell side. And it looks like that’s going to go through. You can make the buy contract contingent on the sale, but then does make your offer a little bit less attractive in a hot market. But in a hot market this usually isn’t a problem because everything sells fast. In a down market, maybe that doesn’t make your offers so much less attractive that they won’t take it. But mostly you just kind of want to wait until that sell contract has gone through inspection and has gone through appraisal. Once you’re at that point in the contract, you’re pretty sure it’s going through. And I think it’s okay to get that buy contract going.
Dr. Jim Dahle:
It usually takes less time to find and buy a new house in my experience than it does to sell the old house. So, I’d start with selling and when it looks like that’s going well, then move on to buying. But no, I wouldn’t worry about swapping houses in a hot market or in a down market. What you lose on one side, you’re going to gain on the other.
Dr. Jim Dahle:
All right. I wanted to just give you a save the date announcement. We have assigned a contract with a hotel in Phoenix for White Coat Investor con 2021. I just wanted to give you the dates on that so you can save them for those of you who would like to come, and you would like to be able to get your clinical schedule clear for that.

Dr. Jim Dahle:
The dates are the 3th through 6th of March. It’s going to be in Phoenix. We’re not going to have the sign up for a few more months. It’ll probably be October before we do signups. Although we’ll start taking speaker applications soon. So, watch for that announcement in the monthly newsletter and on the blog. But we won’t be making a final decision about whether to hold the conference until later in the fall. And obviously that is very pandemic dependent right now. The coronavirus pandemic is not going great in Arizona. And if that’s still the case this fall, there may not be a WCI Icon 21 in Phoenix. Our hotel contract is actually very good. It allows us to actually push the conference back a year all the way until October 31st. So, we’re really not going to be making a final call on it until that point. And so, we’ll provide away for you guys to be able to have a no risk way to sign up for the conference if it looks like we’re going to have it.
Dr. Jim Dahle:
But I just wanted to get those dates out there for those of you who need to clear clinical time. It’s March 3rd, through 6th of 2021. It’s going to be in Phoenix, but more information to come on that throughout the fall. Definitely watch for information on that. Especially in September and October. If it’s anything like our last two conferences, it’s still going to sell out and probably very quickly so you don’t want to want to miss those dates, but there’ll be more announcements on that coming up.
Dr. Jim Dahle:
All right, let’s take our next question. This one is from John, from Seattle.

John:
Hey, Dr. Dahle. I’m hoping you can help me with a small business tax question. I am an early career subspecialty physician and my wife, who is a stay at home mom has been working on starting a sole proprietorship small business for the past few years. Her business has claimed a tax loss every year for the past three years as her earnings have been small and her startup expenses have been significant. This year however, things have started to pick up and her earnings have become much more significant. So, we’ve invested more in the business to allow it to grow. She’s currently right on the cusp of breaking even albeit with substantially more earnings this year than the prior three combined. I know that the IRS allows you to claim losses for three out of five years before they make you classify your business as a hobby.
John:
My question is if we end up with a net profit this year, would we still be able to deduct all of this year’s expenses from her business earnings? If her business ends the year slightly in the negative, is it correct that we’ll still have to claim all of her earnings as hobby income, but not be able to claim any of her expenses? Could we claim only enough expenses to negate her earnings, but not have so much that she ends the year with a loss again? I don’t know if the IRS mandates that you have to claim all business expenses against your income. We would really appreciate your help on this. Thanks so much.

Dr. Jim Dahle:
Okay. So, this is exciting. It’s fun to have a side gig. It’s fun to have a side business, but if you’re going to put a lot of time into it, it’s also nice to make money. So, she’s not really starting a sole proprietorship. She’s had one for three years already, and she’s lost money. The first three years of this sole proprietorship. She’s had a good year and she’s on the cusp of breaking even. That doesn’t sound like a great business that you’re in year four, you had a good year and you’re almost breaking even. Here’s the problem. If your business never makes money, the IRS calls it a hobby and they don’t let you deduct losses forever for something that is a hobby.
Dr. Jim Dahle:
So, the question is, should you deduct all the expenses? Well in year four, when you’ve got losses in years one through three, I probably would not deduct all my expenses if I meant I was going to have another loss. I would deduct enough of them to ensure I still had a profit. So at least it looks like in your fourth year you finally turned a profit on this business.
Dr. Jim Dahle:
There is no requirement that you report every single expense that the business has and claim it on your taxes. That is not a requirement. I would definitely leave some expenses off and make sure you turn a profit this year.
Dr. Jim Dahle:
But if you actually ask the IRS of how they define, if a business is a hobby or a real business, they basically look at nine factors. So, the first one is whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records. So, do you have books? Do you have a separate bank account? Do you have a separate credit card? Are you running this thing like a business or is this just you going on rafting trips or are you crocheting? Is it a real business?
Dr. Jim Dahle:
The next question is whether the time and effort you put into the activity indicate you intend to make it profitable. If this is something you do three hours a year, it might be hard to convince the IRS you’re really doing it as a business.
Dr. Jim Dahle:
The next factor is whether you depend on income from the activity for your livelihood. Now for many side gigs, for physicians and their spouses, you’re not going to meet this factor because you have that physician income that’s really providing your livelihood.

Dr. Jim Dahle:
The next factor is whether your losses are due to circumstances beyond your control or whether they’re normal in the startup phase of your type of business. So, if most businesses of this type lose money for a couple of years, they’re not going to be thinking about it very hard, but if most businesses become profitable very quickly and you’re still turning in losses, it looks bad.

Dr. Jim Dahle:
Another factor is whether you’ve changed the business, whether you’re making changes in your methods of operation to try to improve profitability, or you are just doing the same thing every year and reporting this loss and taking it as a deduction on your taxes.
Dr. Jim Dahle:
The next factor is whether you or your advisors have the knowledge needed to carry on the activity is a business. Maybe you know nothing about being a general contractor and you’re trying to convince the IRS that you’ve got a business as a general contractor. That might not go over very well.
Dr. Jim Dahle:
Another factor is whether you’re successful in making a profit in similar activities in the past. Did you work in this industry before? Whether as an employer or as an owner of another business?
Dr. Jim Dahle:
Another factor is whether the activity makes a profit in some years and how much profit it makes. So maybe if you make gobs a profit in years, one through three, and then you have four years of losses, maybe the IRS will be a little more lenient about it because you obviously were profitable at some point.
Dr. Jim Dahle:
And finally, the last factor is whether you can expect to make a future profit from the appreciation of the assets used in the activity. Sometimes you’re losing money. And I think real estate is a classic example. You’re losing money at least on paper for years until you sell the property. And then that’s when you lock in all the profit. And so, if it looks like that maybe it’s a little easier to convince the IRS it’s a business and not a hobby.
Dr. Jim Dahle:
But they’ve kind of implemented a practical standard for classifying, whether it’s a business or a hobby. And the IRS Safe Harbor rule is that if you’ve turned a profit in at least three of five consecutive years, the IRS would presume that you were engaged in it for profit.

Dr. Jim Dahle:
This may be extended to a profit in two of the prior seven years in the specific case of horse training, breeding or racing, I guess, because that’s a particularly risky business. But in your case, you’ve already had three years of losses. So, I wouldn’t push this anymore. I think you really need a profitable year. The IRS is going to start looking at this a little more closely and may audit that business’s return.
Dr. Jim Dahle:
And if the IRS classifies your business as a hobby, it won’t allow you to deduct any expenses or take any loss for it on your tax return. You may be able to claim it as a loss somewhere else. It used to be on our miscellaneous deductions on schedule A maybe you could take some of these deductions, but starting in 2018, even that’s harder to take.
Dr. Jim Dahle:
So, if your business is legitimate, keep accurate and extensive records, demonstrate your professional approach to the business, have a written business plan. That’s often the difference in whether the IRS calls it a hobby or a business. And show that you really do intend to make a profit eventually. I hope that’s helpful.
Dr. Jim Dahle:
Our next question comes from the same person, John from Seattle, but it’s totally unrelated question.

John:
Hey again, Dr. Dahle. One more question that is completely unrelated to the tax question I left for you earlier. My wife and I have recently found out that because of our family lines, we are eligible for Italian citizenship. We very much love Italy and often dream of owning a vacation home there someday to live for part of the year. I’m wondering, do you know of any financial reasons why we should be careful in applying for Italian citizenship? We would of course not be renouncing our U.S. citizenship by doing this. I am an employed physician and my wife and I both have sole proprietor side gigs.
John:
Otherwise our financial situation is essentially exactly as you have prescribed, since I started following your writing around 2012. Would there be any issues with our life or disability insurance policies? Any implications on my ability to come back to the U.S. to practice medicine for part of the year? Any implications on drawing down investment accounts after retirement, while overseas? Anything else that we should think about before going through with this? Thanks so much for your time and your help.

Dr. Jim Dahle:
Okay. I love Italy too. I’m not an expert on Italian law, but there’s a few things you need to be aware of when you go for dual citizenship. Dual citizens enjoy a lot of benefits, right? You have the ability to live and work freely in two countries. You can own property in both countries. You can travel through them with relatively ease, but there are some drawbacks. It can be long and expensive to get that dual citizenship. You are now bound by the laws of two nations. And that can be tricky. It’s like a military people that are under the UCMJ – Uniform Code of Military Justice. All of a sudden now you’re bound by two sets of laws.
Dr. Jim Dahle:
But perhaps the most significant one, at least while we’re talking about finances, I mean, this is a financial podcast. The most significant one is the potential for double taxation. You don’t want to have to pay taxes on all your income in the U.S. and pay taxes on all your income in Italy. Now, the U.S. has tax treaties with a lot of countries, and I don’t pretend to be an expert in these, but in general, the United States imposes taxes on its citizens for income earned anywhere in the world. So, you don’t want to end up having to pay taxes in both places. So, you want to know about these treaties.
Dr. Jim Dahle:
Now the U.S. – Italy tax treaties are from 1984 and 1999. You can find them on irs.gov with a simple Google search. Just Google “U.S. Italy tax treaties”, and they’ll pop right up. But they’re about 300 pages long, and they’re all totally written in legalese. You probably ought to at a minimum skim through these before taking up dual citizenship, especially if you’re planning on having any income in Italy.

Dr. Jim Dahle:
But honestly, if you’re in this situation, I think it is worth paying for formal advice on this before purchasing something as substantial as another home. Especially before doing any paid work in Italy. I think you really need to understand how those tax laws are going to apply to you. And I think you probably need an attorney that specializes not just in foreign tax law, but frankly U.S. Italy tax law. And I don’t know where you find one. I suspect if you Google it, you can probably find one. Might be based out of New York City, I would guess, but that’s where I would start. And I would get formal advice before I even became a dual citizen to know how that is going to affect your particular assets and your plans going forward.
Dr. Jim Dahle:
All right, let’s take another question from Brad off the Speak Pipe.

Brad:
Hi, White Coat Investor group. I’m a current internal medicine PGY2 soon to be PGY3. My significant other is in a four-year program, and we both plan on applying to fellowship together. This will mean I’m going to take a hospitalist position for a year so we can apply to fellowship the same year. Do you have any recommendations about contract negotiations for one-year hospitalists gigs? If there are any other than making sure that it qualifies for PSLF? And would you recommend telling them upfront that I plan on applying for fellowship within that year? And then we’ll probably only be there for a year. Thanks.

Dr. Jim Dahle:
Okay. You want to do a hospitalist year while your spouse has finishing fellowship. That’s great. What contract issues should you be thinking about? Well, the usual contract issues. You want to make sure you’re being fairly paid. You want to know what happens if you choose to leave. You want to know what happens if you’re fired. You want to know what the benefits are going to be. You may focus more on total salary because you might not be eligible for the 401(k) that first year, for instance.
Dr. Jim Dahle:
And of course, if your plan is to go up for public service loan forgiveness, you’ve got to make sure that hospitalist position directly employees you as the employee of a 501(c)(3) not that you’re the employee of a physician partnership or the employee of a physician group that’s for-profit and contracts with a not-for-profit hospital. You want to make sure you’re actually an employee of a nonprofit or government entity.

Dr. Jim Dahle:
All right. The big ethical question. Should you tell them you’re only going to be there for a year? Well, in general, I don’t like lying to people. So, if they ask me how long I’m going to be there, I’d probably tell them what my plans are. I’m not sure that’s the first information I would volunteer in the interview however. Obviously, it’s a pain in the butt to hire doctors. And the longer somebody stays the better because it costs money and time and hassle to hire a new doc. And so, I probably would not reveal that information any sooner than I was required by law to do so.
Dr. Jim Dahle:
However, you also don’t want to leave people hanging. So, treat people right. If they ask you what your plans are, I would probably tell them my plans, but I wouldn’t necessarily start out saying “I’m looking for a one-year position” as that may keep you from getting the position you want. And certainly, it will give you a weaker negotiating position than you would otherwise have.

Dr. Jim Dahle:
All right, let’s take a question from Corey on the Speak Pipe.

Corey:
Hi, my name is Corey. I’m a third-year resident and a city/state with a high-income tax. Thanks in advance for your time with this peculiar situation. To date, I’ve not been heavily investing into retirement for various personal reasons, but I’m looking to make the shift this year. In addition to making the max contribution to my Roth for 2019, I plan to do the same thing in 2020 as possible acknowledging and may have to use the backdoor option because of a one-time increase in income for this year.
Corey:
My resident salary is about $80,000 and my wife makes similar. This year, I’ve received over $50,000 in a lump sum of what is essentially backed pay from an old 1099 job. I’m struggling a little bit to figure out the best way to maximum lower my tax burden for 2020. Pretax, I can contribute to a 403(b) through my W2 residency job, and I’m investigating the other best options for pretax investment with the 1099 pay, mainly looking at solo 401(k) versus SEP-IRA. I plan to give about $5,000 to $10,000 to church and need to replenish my emergency fund with about $10,000 as well. Thanks in advance again and stay safe.

Dr. Jim Dahle:
Okay. Corey’s in a high city state tax place. I don’t know, probably New York City. What’s the best way to lower your tax for 2020? Well, in general, for doctors, there are two big tax deductions. The first ones are your tax deferred retirement accounts. The second one is the 199A deduction for self-employed people. So, you have 403(b) available to you. I’d max that out. That’ll help you keep things lower. If you have some 1099 income, you can have an individual 401(k) or a SEP-IRA. Individual 401(k) is usually better. It depends on how much you make. You may be able to contribute a fair amount to that, and that’ll lower your taxes somewhat.
Dr. Jim Dahle:
But mostly Corey get used to it, man. This is the way it works. When you make a lot of money, you pay a lot of taxes and you just got to realize that and be grateful that at least some portion of those taxes probably goes to a cause that you agree with and that you’re supporting. And as part of what makes living in this wonderful country possible.
Dr. Jim Dahle:
As far as what you’re donating to the church, $5,000 to $10,000, if you’re single, maybe that helps you get above the itemized deduction. So now you can itemize rather than taking standard deduction. If you’re married, it’s almost $25,000 an itemized deduction you have to have before any of them do you any good.
Dr. Jim Dahle:
So, if you’re only itemized deduction is $5,000 to $10,000 in charity. that’s not really going to move the needle. Although they’re talking about some laws that still allow you to deduct maybe $300 worth of a contribution in the event that you still take the standard deduction. But that’s just not gonna move the needle for someone who’s donating $10,000 a year to charity.
Dr. Jim Dahle:
All right, here’s a great question I got by email. This one comes in from Leo. It says, “I followed your valuable advice and decided to buy in and joined my senior partner in private practice in South Florida. Our two main practice is in at least building, and the landlord wants to sell the building. We’re doing due diligence at this time, but the cash flow appears quite favorable. Plus, we’d be getting favorable loan terms because we are owner users. My question is because of my recent, large ticket practice buy, and I’m now practice rich and cash poor. What it’d be the best option for me? And he lists off six options. Liquidating my solo 401(k). It’s got $165,000 in there. Get a hard money loan, ask a family or friend for money. Walk away from the deal. Ask for a regular loan or use the $50,000 to $60,000 I’ve gotten cash right now. It’s a $2 million building. They’re planning to finance 80%, but 20% down. There are two other providers in the deal. So, there’s four members putting in $100,000 each. I’d like to participate in this opportunity. Any input would be greatly appreciated. Feel free to share it on the podcast.”

Dr. Jim Dahle:
Okay. I’m sharing it on the podcast. You got to come up with $100,000. You’ve only got $50,000 to $60,000. So how are you going to make up the difference with the last $40,000 or $50,000? Well, a few things I think you have to think about first. First you say the cash flow is good. Is the cash flow still good if you’re only putting 20% down? Because a lot of times with real estate investments, you need to put down 25% -30% -33% just to keep a building cash flow positive. So, remember that just because it’s good for that current owner, it might be because he’s only got a mortgage on $400,000. That might be why the cash flow is so awesome for him. Once you have a huge mortgage $1.6 million mortgage, you may have negative cashflow. So really look at the details of the deal.

Dr. Jim Dahle:
Second, you need to know what happens when one of these four owners want out? What’s the plan? Are the others required to buy him out? If so, over what time period is required to stay there until the building sold? Have that all worked out in advance. Dave Ramsey is fond of saying “The only ship that doesn’t sail is a partnership”. And that’s because you’re herding cats here, especially with other doctors trying to get everybody agree on how this building’s going to manage. So, have those details knocked out in advance.
Dr. Jim Dahle:
But since you only need $40,000 to $50,000, there’s probably lots of options here that would work. You might be able to borrow from the practice for instance, against your future earnings. If the practice has the cash. If you’ve got a few months, perhaps you can just save it up. Doctors make pretty good money. If you’re still living like a resident, you can take that money that would be going into your 401(k) or would be going towards student loans or would be going to the work of the practice buy in and reroute it for a few months to save up this down payment so you can take advantage of this opportunity.
Dr. Jim Dahle:
The other thing is, if it’s really going to be a loan that’s a very short time period loan, you’re going to pay this thing off in three or four or five months. Then you’ve got other options. For example, you could borrow against that individual 401(k). You could even take out a credit card loan. A lot of those introductory deals are 0% for 12 to 15 months. Maybe there’s a 3% up fee, but 3% is a whole lot better than the 10% to 12% plus two points you’d pay for a hard money loan.
Dr. Jim Dahle:
Honestly, you probably can’t get a hard money loan anyway, because they want to be in first lien position for the most part. And you’ve already got the bank, that’s footing the $1.6 million in first lien position. So, I’m not sure a hard money loan is really much of an option.
Dr. Jim Dahle:
When I look at your options, some of them are not good. For example, liquidating the 401(k). That’s dumb. You’re going to pay taxes and penalties on that. Especially if you only need the money for a little bit of time. So, I wouldn’t do that. I would probably try to avoid a hard money loan in this situation. Family, friend loan? Boy, it might work, but be super careful with that relationship. Thanksgiving dinner does not taste the same when you owe money to somebody sitting across the table. If it’s for a few months and it’s your parents and they’re in a wonderful financial position, maybe I wouldn’t worry about it so much. If it’s going to be a long-term loan to your brother-in-law or to a good friend, maybe that’s not something I’d get involved in.
Dr. Jim Dahle:
Should you walk away from the deal? Well, if it truly is a good deal after you do the due diligence, I hate to see you walking away from it. There are no called strikes in investing. You can always walk away from it, but this one seems nice since it’s the building that your practice is actually in. So, if the numbers work, I’d certainly try to do it. I don’t know what you mean by regular loan, but most loans, if you go to a bank and say, “I want to borrow money to buy a property”, they want to be in first lien position. So, I’m not sure that’s going to be an option for you. And of course, you should plan to use cash that you have for now. So, I hope that’s helpful. Hopefully you’re able to get into that deal and it works out great for you in the long run.
Dr. Jim Dahle:
All right, I want to make a public service message about money market fund yields. If you haven’t transferred your cash back to a high yield savings account from your money market fund, it’s probably time to do so. Go look at the yields. Money market funds are now paying like 0.23 – 0.25, etc. Whereas if you go to a high yield savings account, to Discover bank or Ally bank, these sorts of places, you’ll see they’re still paying 1% or 1.1%. Now I know none of that’s a very attractive yield, but 1% still beats 0.25%.

Dr. Jim Dahle:
So, I keep both of these. I have money market funds at Vanguard. I have a savings account, a high yield savings account at Ally bank. And I just move money back and forth depending on which one has a higher yield. And so, right now I’ve moved all my money back over to Ally bank in order to take advantage of that.
Dr. Jim Dahle:
All right, I’ve got a question from Facebook. “I’m trying to figure out how to balance finances with my significant other and we’re at different stages of life. When she finishes school, she’ll likely be over $200,000 in debt, but I will have all debt paid off except the house. Any suggestions on how to balance paying off her debt with my house that’s partially paid off? Also, I already spent my years paying down my quarter-million-dollar debt, and I don’t particularly want to pay hers. At the same time, I don’t want to live like a broke student until she gets through her debt. Any ideas on how to balance all of this? She wants to talk to a financial advisor, but I want to avoid that expense. Assume, we’ll both be making six figures easily”.
Dr. Jim Dahle:
Well, here’s the deal. I think you ought to draw a line. And where I would draw that line is at marriage. When you’re married to someone, I think you combine everything. It’s now our income. It’s our debt. It’s our expenses. Until you’re married, I would keep everything separate. It’s his and her debt. His and her expenses. His and her income. But if you’re together for the long term, you’re married, you’re committed each other for the long-term. I think you’ll have a lot more financial success by combining your finances.

Dr. Jim Dahle:
And so, if this is really the person you’re going to be with the rest of your life, I got news for you. That is not her $200,000 debt. It is you all’s $200,000 debt. Luckily you guys have plenty of income, but now it’s time to pay it off.
Dr. Jim Dahle:
Now at the same time, I’m not going to be totally unreasonable about this. For example, if now there’s a discussion of whether she stays home, becomes a stay at home mom with this $200,000 in debt that comes from her schooling. Well, maybe the discussion at that point is we can afford to do that as soon as the student loan is paid off. So, you got to work for two or three years until we can wipe this out and then you can be a stay at home mom. So, I think I would have those sorts of discussions together, but mostly you have to be on the same page. If you’re not on the same page, at least be reading from the same book if you want to be financially successful.
Dr. Jim Dahle:
Another question on Facebook. “Hi, should I get life insurance if I refinance my student loan? It’s probably a very elementary question, but I’m new at this. And it’s hard spending another $200 a month each for my husband and I, when we both will have large student loan payments come September 30th. Thanks for the input”.
Dr. Jim Dahle:
Well, you may need life insurance anyway. I mean, look at what your financial plan is if one of you dies. If it requires more money than you have, you need life insurance whether you have student loans or not, whether you refinance them or not. Federal student loans generally go away. Not generally. They go away if you die. Your federal student loans go away. Many of the private student loans still go away if you die. So read the fine print when you refinance. If they’re wiped out of your death and just forgiven by the company, that’s great. You don’t need to cover that with life insurance. But if not, yes, buy some term life insurance to cover that. You don’t want your spouse to have to take care of that, especially after losing you.
Dr. Jim Dahle:
And so, the good news is that doesn’t cost very much. Term life insurance is super cheap. I mean, what are we talking about here? You got $200,000 in loans. You need term life insurance of $200,000 for five years when you’re 30 and healthy? That’s totally cheap. That’s like pennies. You’re saving way more than that by lowering the interest rate on your loan. So, don’t let that keep you from refinancing your student loans just by a little bit of extra term life insurance.

Dr. Jim Dahle:
Okay. Another question on Facebook. “I’m looking to buy a starter home in a super competitive market. I found a fixer upper in a good area, but the seller is requesting we not work with agents to avoid the extra fees. I’m a first-time home buyer feeling a little uneasy about his request”.
Dr. Jim Dahle:
This is not a crazy request. If you’ve already found the buyer and the seller, you’ve done 90% of the work that the realtors do. There are a few things to keep in mind here, though. First, the seller should be splitting that commission with you, right? They shouldn’t get to keep all of it. So, the saved money ought to be split with you as a buyer. Second, you want to make sure you’re not over paying. This is one function of a realtor. They help you to not overpay for a property. And obviously the more you pay, the more they get paid. They have a little bit of conflict of interest there, but they’re supposed to be working for you and should at least show you comparable so you have some idea of what the property is worth.
Dr. Jim Dahle:
Then their final thing they do is they help you with all the paperwork. That part’s easy to hire out. You can just go to a real estate attorney and do that. I bought a house without a realtor before. The attorney helped and got us through the closing and took care of everything. And it only cost a few hundred dollars rather than thousands of dollars that it might cost to have a realtor.
Dr. Jim Dahle:
The other thing you can do is you can just go out and hire a realtor and you can pay them yourself. And in fact, you’ll probably get a pretty good discount if all you’re doing is asking them to help with the paperwork. They don’t have to drag you around to see 30 houses. And so, those are all options that you can do. You shouldn’t necessarily be nervous about not having a realtor. There’s lots of other good options. Just make sure that it works out as well for you as it does for the seller.
Dr. Jim Dahle:
All right, let’s take our final question today. This one’s also off the Facebook. “Hello, I’m new to investing. Do you recommend cryptocurrency or stocks through the Robin Hood app? Any advice for investing would be helpful as a starter”.
Dr. Jim Dahle:
I don’t know what to say. This stuff happens in the Facebook group all the time. It’s like people have no contact with the White Coat Investor whatsoever, except what’s in that Facebook group. So, if you’re in the Facebook group, please take that responsibility seriously. These are people who’ve never read the blog, who have never listened to the podcast, who have never read a book, who haven’t taken an online course. They’re not taking my newsletters. This is all totally new to them. And they’re trying to choose between cryptocurrency or speculating in stocks through an online app.
Dr. Jim Dahle:
The answer is you need a plan. You need a financial plan. If you are not capable of drafting that up yourself, you got a couple options. One is our Fire Your Financial Advisor course. This will teach you financial literacy. It’ll help you write out a financial plan. It’s only $499. It takes about eight hours of your time.
Dr. Jim Dahle:
The second option costs more money, but requires a little bit less effort. You just go hire a financial planner to help you put together a financial plan. But just saying you should invest in cryptocurrency or you should invest in stocks is not doing you any favors. The answer is you need to educate yourself. You need to get financially literate. You need to get a financial plan in place because the real answer to this question is that you shouldn’t be doing either. You shouldn’t be buying individual stocks and you shouldn’t be buying cryptocurrency. Certainly not as the main aspect of your investing in any way, shape or form. So, I hope that’s helpful.
Dr. Jim Dahle:
Remember that discount we’re having on these courses. It only goes for a few more days. It goes through Monday at midnight. Monday, July 13th, at midnight, it’s 10% off. Either Continuing Financial Education 2020, or Fire Your Financial Advisor. And if you buy either of them or both of them, you can buy both of them if you want. But if you buy either of them, you get WCI Icon Park City with it. And so that’s a great opportunity.
Dr. Jim Dahle:
There’s really no risk to you with either one of these. The Fire Your Financial Advisor comes with a one week. No questions asked, a hundred percent back guarantee. Continuing Financial Education 2020 also comes with a one week. No questions asked, a hundred percent money back guarantee. As long as you’ve watched less than 10% of it, but either way you get 10% off and you get WCI Icon Park City with. So, check that out.
Dr. Jim Dahle:
I hope that’s helpful. Your feedback is always appreciated. Put positive feedback into our ratings. That would be great. It’s wonderful to get five-star reviews. Thank you to Shehab Imam who left us reviews. He said, “Wonderful podcast that should be required for any high-income individuals. Dr. Dahle and his team does wonderful work”. Five stars. Thank you very much for that, Dr. Imam. So, leave your positive feedback there. If you’ve got negative feedback, shoot me an email. I much prefer it that way.
Dr. Jim Dahle:
I wanted to thank today’s sponsor Guideline. A 401(k) provider who’s on a mission to help people save as much as possible when saving for retirement. Their investment portfolios contain low cost Vanguard funds, which are automatically rebalanced to keep it diversified and on track for retirement. And the best part, no added AUM fees, which would typically take a chunk out of your retirement savings year after year after year. Check them out at guideline.com/wci. If you need a 401(k) for your practice, here’s a great company that’ll do it for you.
Dr. Jim Dahle:
All right. I think that’s it for today. Keep your head up, your shoulders back. You’ve got this and we can help. We’ll see you next time on the White Coat Investor podcast.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.