What Matters Most in Personal Finance – Podcast # 28

Podcast #28 Show Notes: What Matters Most in Personal Finance

As I have spent time speaking across the country and meeting with many of you, I am amazed by how many of you have listened to and expressed appreciation for the podcast, which up until this point, we had viewed as a relatively minor part of this whole enterprise. With that encouragement the WCI team is working hard to make it more useful to you with episode show notes and transcriptions of the episodes. We're going to run these as a blog post on Thursdays, the same day the podcast goes live. We hope to eventually get to the point where there is one EVERY Thursday, but for now you'll have to be content with getting a new podcast episode (with its accompanying shownotes blog post) MOST Thursdays.

You can still subscribe and download the podcast from ITunes, Overcast, Stitcher, or Google Play. Or now listen to it right here on the blog or if you prefer, just read the transcript at the bottom. Enjoy!

Podcast # 28 Sponsor

This podcast is sponsored by Sofi, one of the world leaders in student loan refinancing. Sofi has been refinancing White Coat Investor readers for several years now and refinances literally dozens and dozens of you each month. Over the last few years they have probably refinanced thousands of you to lower rates, saving millions of dollars in interest for White Coat Investor readers. You can learn more and get the special White Coat Investor deal at Sofi.

Quote of the Day

“I spend half my time worrying about why I have so much in stocks and half worrying about why I have so little.” – Jack Bogle

Opening

Thank you for what you do for your patients and for each other. I love to hear your success stories, but I love it even more when it is a result of one of my readers or listeners reaching out to a colleague.

Main Topic

[1:58] A few years ago I wrote a post about this topic and we are going to talk a little bit about that today. We spend a lot of our time talking about and worrying about the minutia compared to the big things you should be worried about. Realize that there are somethings that matter far more than other things:

1. Get married and stay that way. One house. One job. One spouse.
2. Have a high salary
3. Career longevity
4. Insure against catastrophe
5. Live well below your means
6. Don't sell low
7. Buy and hold reasonable portfolio
8. Be uncomfortable with debt
9. Limit educational costs
10. Pursue inexpensive hobbies

In the News

[13:28] T.D. Ameritrade announced recently that they are going to remove Vanguard ETFs from their no commission fund list.

[16:36] I saw an article recently from Physicians Practice that talked about the best states for physicians to practice in. I was appalled however when I looked at the top five which included states such as Mississippi, Texas, Alaska, California, and Arkansas. Well one of those things is not like the others. It's California. I couldn't believe they put California on the list of best places for physicians to practice. For their 2017 analysis, they utilized the latest data for cost of living, tax climate (state collections per capita), physician density, and Medicare's Geographic Practice Cost Index (which adjusts physician reimbursement based on regional variation in the cost to treat patients). If California isn't the worst state for cost of living and tax climate, they are in the bottom three!

Success Story

[17:19] From a California doc couple in the Bogleheads forum who went from graduating med school with no idea of even what a high yield savings account was to hitting their seven figure milestone in less than 10 years at the age of 34.

“Thanks WCI! Your blog, book, and generous advice via email, these forums, etc have all been incredibly influential in our financial (and thereby general) lives. I've recommended it to so many physician/high-income friends/trainees etc. We feel incredibly blessed to be in medicine, getting paid decent money to do some pretty fulfilling work (recognizing that it isn't all perfect and that eventual FI may help us minimize some of the less appealing aspects). It is also helpful that family upbringing etc have made it pretty easy to continue living like a resident for the most part. But yes, after sorting out housing out here (geographical arbitrage is appealing but so is the lure of family and familiarity), figuring out how to use the money effectively (including giving and loosening the purse strings a tiny bit) will be the next challenges to look forward to. Thanks again for all you do.”

Q&A from Readers and Listeners

Can I deduct my personal trainer?

[20:11] “Is that deductible?” isn’t the right question.

Even if you could, it would be subject to a 10% of income floor on Schedule A line 1. That’s not going to leave you much on a physician income unless 3 of your family members also got cancer that year.

By the way, this topic is covered in Publication 502. You might try page 2 where it says this:

What Are Medical Expenses? Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation. Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.

Page 16 is interesting too:

Health Club Dues You can’t include in medical expenses health club dues or amounts paid to improve one’s general health or to relieve physical or mental discomfort not related to a particular medical condition. You can’t include in medical expenses the cost of membership in any club organized for business, pleasure, recreation, or other social purposes.

Full Transcription:

[00:00:00] 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.

[00:00:18] Podcast number 28. We titled this one What Matters Most. Today's podcast is sponsored by Sofi one of the world leaders in student loan refinancing. Sofi has been refinancing white coat investor readers for several years now and refinances literally dozens and dozens of you each month. Over the last few years, they've probably refinanced thousands of you to lower rates saving millions of dollars in interest for white coat investor readers. You can learn more and get the special white coat investor deal www.sofi.com/whitecoat. Welcome back to the podcast. I'm glad you're here. Thank you for what you do both for your patients and for each other. I love hearing about your success stories but I love it even more when it is the result of another one of my readers or listeners reaching out to you and giving you the help you need. Seeing that happen is just awesome because it is basically exponential growth in physicians becoming more financially literate and becoming more financially successful and that's better for everybody. The quote of the day today comes from Jack Bogle who said: “I spend half my time worrying about why I have so much in stocks and half worrying about why I have so little.” That's really the truth. You want to be someplace where your worries are equal that you're not being as aggressive as it should be and also that you're being too aggressive. And when those are equal you know you're at the right asset allocation for you.

[00:01:48] Today we're going to talk a little bit about what really matters most in personal finance. A few years ago I wrote a blog post on this subject and we're going to talk a little bit about that today. I mean the truth is we spend a lot of our time talking about and worrying about the minutiae of personal finance and investing a few basis points in expense ratios on a mutual fund for instance or whether you should use a Roth 401k or a traditional 401k or how you should use your HSA whether you should spend it now or spend it a little later. All of that is really kind of minutia compared to the big things that you should be worrying about. People who are having financial difficulties aren't worried about those kinds of issues. Those of us who read financial blogs tend to be maximizers whereas sometimes it's OK to just be a satisficer or you know a maximizer will pay every penny of tax he owes to the IRS but refuses to leave even a one cent tip but a satisficer isn't going to keep track of charitable miles just to knock 50 bucks off his tax bill. So you really got to realize that there is something that is matter far more than other things. So let's talk about them. Kind of an order of how much they matter.

[00:03:03] So let's talk about the first to get married and stay that way. Really the very worst thing you can do for your finances is to get divorced.

[00:03:15] Not only do you lose your act half of your assets but if you're a physician or other high-income professional you're probably going to be paying some alimony and maybe some child support for quite a long time. And that has a serious drag on your ability to build wealth.

[00:03:32] You've heard it before but I'll say it again one house one spouse one job. That's what really can make a huge difference in your finances. All right. Item number two that makes a big difference. Have a high salary making a lot of money.

[00:03:47] It is a huge factor in whether or not you build wealth. You know it's tough to become a millionaire when you're only making 20 or $30000 a year. It's pretty darn tough. But you know what. Most of us there's something we can do to increase our income and oftentimes increase significantly too many people downplay the impact of a high salary on your personal finances. While it's obviously true that you can be broke as a higher earner it's far more difficult as a high earner than as a low earner to be broke. And

[00:04:19] those that have high salaries are just far more likely to build wealth even a modestly paid physician has a significant advantage over the average American household. the average American household only makes about fifty-five thousand dollars a year. Even a relatively poorly paid pediatrician maybe making $150000 a year. Three times as much. And so that has a huge impact on your personal finances. All right. Item number three is your career longevity. Burnout is all too real and in fact when they do surveys of physicians oftentimes 50 percent of the physicians surveyed have some aspect of burnout affecting them. My specialty is actually the worst in the surveys. I think it's 33 percent of emergency docs at any given time have some aspect of burnout although I believe the actual severely the burn out is worse for intensiveness than it is for emergency doctors. But the truth of the matter is that if you can extend your career you're better off making less money for more years. And the reason for that is because it allows more time for your money to compound. It allows you to pay more money into Social Security increasing your Social Security benefit and it gives you more money after tax earning a smaller amount of money over more years results in less tax paid than earning a lot of money in just a few years due to the progressive nature of our tax code. You also need to make sure that you're insuring against catastrophe that's a seriously important factor in building wealth.

[00:05:54] And the reason why is not only are you protected in the event that something happens to you which something almost surely will over a few decades of your financial career.

[00:06:05] But also because knowing you're protected allows you to take significant risks with your career.

[00:06:12] So make sure you have malpractice an umbrella policy and disability insurance and if someone else is dependent on you life insurance.

[00:06:21] The next factor is really the cardinal rule of personal finance and I call live well below your means not just live below your means but live well below your means. When you live below your means you build wealth. If you live just a little bit below your means you build a little bit of wealth. If you live well below your means you build a lot of wealth.

[00:06:42] I throw out that number 20 percent to attending physicians. I recommend you save 20 percent of your gross income for retirement. If you got to save for college or a boat you want or another house or whatever that's above and beyond the 20 percent you know if you're in that range 15 percent 18 percent whatever you're probably OK. But the fact of the matter is a 5 percent savings rate isn't going to get you where you want to be. I know a lot of wealthy people but you know what. I don't know any who didn't follow this rule.

[00:07:11] It's really an important rule and it matters a lot for your personal finances. It turns out for doctors the biggest culprit is usually that big fat Doctor House limiting your mortgage to two times your gross income will make a huge difference. Just this week I was conversing with a doc. He has a seven figure salaries making plenty of money but already owes. A couple million dollars in debt and is considering building his dream house on a lot. He already purchased and owes half a million dollars on. But this dream house is going to cost another million dollars to construct and it's just too much debt. In total you can't be spending all your money on this house that you think is going to bring you this great amount of happiness when in reality six months or 12 months or two years after you move in is just going to be like your old house. You're going to go there and you're going to do the things you do in your house and it's not going to bring you some magical amount of bliss. Certainly not enough to justify spending massive quantities of your income on it.

[00:08:18] OK factor number 6 is don't sell low. This is a major problem among physicians. They don't have good investing behavior when the value of an asset goes down. They sell it and that is not the time to sell something.

[00:08:35] Buying high and selling low is a recipe for disaster. And that was particularly poignant during the 2008 global financial crisis. Three of my partners in my emergency medicine group basically sold low at that time either because they were nervous or their spouse was nervous about all the money they had lost. And what did that result in. Well if you're near the end of your career that resulted in more years work sometimes five sometimes as many as 10. You cannot be selling low. You've got to learn how to be an investor. And part of being an investor is staying the course even when things aren't going well. You need to have a written plan and you need to follow it. Speaking of which let's move on to number seven which is buy and hold a reasonable portfolio. I'm continually surprised to see how many people hold a completely unreasonable portfolio. There's a poster on the white coat investor forums who's very conservative shall we say and all of his money is basically tied up in cash and cash equivalents and gold and precious metal mining stocks and that's it. He's basically ignored the entire rest of the investable universe. That is not a reasonable portfolio. Most of the time people who have unreasonable portfolios however have just been investment collectors they've got a few individual stocks here and a few mutual funds there and a few privately traded Rietz in the corner without really a written plan or any you know a four. Mentioned asset allocation.

[00:10:07] You know there's no written plan that they're following or they may be investing in hedge funds or penny stocks or maybe just a handful of individual stocks. It's so easy to have a reasonable portfolio. It just seems silly not to have one. If you don't know what a reasonable portfolio looks like check out my post called 150 portfolios better than yours any one of those is better than all of the unreasonable portfolios I run into all the time. The next factor that really matters for building wealth is to be uncomfortable with debt. This one's actually a little bit of a pet peeve of mine. I keep getting contacted by people who just have incredible amounts of debt that don't even seem bothered by it. They don't realize that they've already given away several years worth of their labor and they don't feel it as an emergency in any way shape or form. It might be a resident who owes 400 or 500 thousand dollars in loans. But more often it's somebody who has all kinds of different debts from car debts to credit card debts to student loans to mortgages. You know it's pretty amazing to me just how comfortable some doctors become with debt and they are entirely too comfortable with it. A little leverage can be helpful at times. There are some things in life like your medical education and like your primary house where it's pretty difficult most of the time to buy it without any debt at all. But you know what you ought to try to minimize it. Keep it to a reasonable amount and pay it off in some reasonably rapid fashion. It's not OK to buy cars on the installment plan.

[00:11:39] You are a doctor you can pay cash for your cars and certainly not for stuff like appliances. credit cards aren't for credit there for convenience. If you use it for credit you need to cut them up and quit using them at all. If you can get uncomfortable with debt you're far more likely to become wealthy. This idea of borrowing money at a low interest rate and investing it in a high interest rate obviously works mathematically but that's not what I see people doing. The people I see that are actually investing healthy sums of money are also getting rid of their debt quickly. Number nine is to minimize your educational sites in your educational costs. I'm pretty amazed at what some people spend on education not just to send their kids to college but also to send their kids to high school. And in many ways it involves them taking on even additional debt. But you've got to realize that these costs are pretty significant. You know I don't know how the public school system might be in the area you live. Maybe it is really terrible but chances are it's not as bad as you think. In a lot of ways you'd be better off moving to a slightly better school district and spending that money on a mortgage than you would live in. And the other school district and spending it on private high school. So keep that in mind. Same thing with college. I mean if you look at these college rankings on the U.S. News and World Report you may see schools that are ranked about the same but cost six or eight or ten times as much.

[00:13:11] For example one year George Washington University was ranked 52 52 on that list and had a tuition of something like $47000 a year.

[00:13:22] Trinity University was also charging $47000 a year and was ranked 36 on that list.

[00:13:28] But if you go down the list a little bit you see places like Brigham Young for $5000 a year and Berea College for a thousand dollars a year. You know I mean there's no way that George Washington University has forty seven times better than Berea College. It just isn't the case. So you need to actually look at the value when you pay for education. And finally I recommend you pursue inexpensive hobbies. At least until you're wealthy if you're already wealthy spend your money on whatever you want. But if you're not wealthy you might want to think twice before you start taking up hobbies like boating. And trust me I know you've got a post coming up on this in a few months but also things like flying and antique cars and horse racing and things like that. They're just a huge drain on resources that could be going toward retiring debt investing and otherwise building wealth. All right let's leave that subject for a minute and let's move on a little bit to a more current issue. T.D. Ameritrade announced recently that they are going to remove Vanguard ETFs from their no commission fund list.

[00:14:38] Basically up until this month you were allowed to go to T.D. Ameritrade open a brokerage account and trade any van or you know the Vanguard ETF on their list. Without having to pay any commission whatsoever and this is very helpful for those of us with an HSA an HSA bank because you could tie that HSA account into TD Ameritrade investing account and invest most of your HSA but other people have their 401k through T.D. Ameritrade and this actually affects a lot of people. But you've got to keep in mind that this isn't a massive effect. I mean you're going from zero dollar commissions to $7 commissions. So every time you buy and sell an ETF. Sure. You got to pay seven bucks. Now if you're trading a hundred dollars worth of ETFs that adds up in a hurry. But if you're trading tens of thousands of dollars each time you trade an ETF it just doesn't matter that much. For me I basically do one purchase a year in my HSA you know six or seven thousand dollars I put in there and you know and now I'm going to have to pay a $70 commission every time I do that.

[00:15:47] So it's not that big of a deal it's only seven bucks a year. I mean I can save that much just by not stopping by McDonald's one day. So I don't know that some of the drastic things I see some do it yourselfers talking about doing because of this minor change are really warranted. I see people talking about using ETF that are very thinly traded and have bid ask spreads that are going to be larger than that seven dollar commission. And so I wouldn't necessarily make a huge change in your plans because of this although I think it's a really dirty trick by T.D. Ameritrade. I mean they can increase that list from the 100 or so funds they had on it to 300 but they took all the good ones off and added a bunch of crappy ones. And so it's really kind of pretty lousy to see them do that because that was a pretty good free lunch for a while.

[00:16:36] I saw an article recently from physicians practice it talked about the best states for physicians to practice in. I was appalled However when I looked at the top five which included states such as Mississippi Texas Alaska California and Arkansas. Well one of those things is not like the others. It's California. I couldn't believe they put California on the list of best places for physicians to practice.

[00:17:04] I especially couldn't believe it when the first two factors they included in the study were cost of living and the tax climate. If California isn't the worst for those two things two things. It's certainly within the top three.

[00:17:19] They looked at some other things they looked at physician density and the Medicare Geographic practice cost index. But even all that shouldn't be able to overcome those two big whammies on California. It's not that California's bad place. I like California. There's a lot of fun stuff to do there. I get that a lot of people are very connected to it. But I would not count it living there as a good financial decision for most physicians many physicians not only get paid less there but they pay far more in taxes and far more in living costs and discover that their payer mix is due to the poor rates that Medi-Cal pays are really not that great. I hope those of you in California have found a situation where it makes sense for you to be there but I sure run into a lot of you who are considering moving elsewhere whether it be Idaho or Arizona or Texas in order to improve your financial situation. Speaking of California I saw a note from a California physician couple recently I believe it was on the bogleheads forum. They had to hit their seven figure mark. They'd become millionaires and were just basically right to say thank you to the forum. They said I feel like this is a pretty significant milestone for us. But outside of Bogle heads are probably not a lot of venues to really share the news and be excited about it. Also since there is certainly no more comments to come it seems worth commemorating in some small way at least. Anyhow much thanks to Bogle heads as well as white coat investor.

[00:18:47] We went from graduating med school with no idea of even what a high yield savings account was to hitting this milestone in less than 10 years at the age of 34. My wife and I are both physicians that certainly helped but we also had a combined $250000 in student loans to pay off and have only had a combined four years bartending salaries between the two of us so millionaires four years out of residency. That's pretty awesome I think. They attribute it to frugal living. He says I still drive my 11 year old car. Oh my goodness can physicians drive an 11 year old car. I had no idea you know. Mine is 12 years old this year. Says he did a lot of moonlighting on the side and enjoyed Of course the bull market the last few years. He's got to grow his money two more times or so before he can actually afford to buy a home in the Bay Area where they live. At any rate he told me thank you. Your blog book and generous advice via email these forums etc. have all been incredibly influential in our financial and thereby general lives. I thought it was very nice of him to say that. You know it's interesting. Even they thought about it despite the fact that they became millionaires and for years even they thought about the geographical arbitrage. He says yes to housing out here geographical arbitrage is appealing but so was the lure of family and familiarity figuring out how to use money effectively will be the two next challenges for them to look forward to.

[00:20:11] All right speaking of forums Let's talk about a question that I saw in the white coat investor forum recently and that I see similar questions to a lot. Basically this is a doc who asked if he could deduct his personal trainer. You know as some sort of a medical expense and my reply was that that's not necessarily the right question. The question isn't whether it's deductible it's whether deducting is going to do you any good whatsoever. He basically said My understanding is that you need a physician to write you a prescription for a personal trainer for a specific illness to improve like obesity hypertension high cholesterol etc. and he wants to know what documentation what I need for the IRS other than say the prescription or letter from the physician.

[00:20:57] Well here's the deal where do you deduct medical costs you deduct a month's delay they're part of your itemized deductions. So if you're not itemizing it's not deductible. If you also if you are itemizing it's subject to a 10 percent of adjusted gross income floor. So if your adjusted gross income that lane at the bottom of your first page of your 10 40 is $200000 you got to spend $20000 that year on medical costs before any of it is deductible. And even if somehow you go over that $20000 limit only the part over the twenty thousand is deductible. So for the most part for a physician no medical costs are going to be deductible. You just can't rack up that much in a single year because the maximum out-of-pocket for your health insurance is likely only in the 5 to $13000 range. So I wouldn't count on being able to deduct a lot of medical expenses while you're a practicing physician. But returning to the question he actually asked if whether it's deductible or not you actually need to look at publication 5 02 from the IRS where it tells you what how the IRS defines medical expenses. It says medical expenses are the costs of diagnosis cure mitigation treatment or prevention of disease and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians surgeons dentists and other medical practitioners. They include the costs of equipment supplies and diagnostic devices needed for these purposes. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness.

[00:22:43] They don't include expenses that are merely beneficial to general health such as vitamins or vacation. And I would add or a personal trainer.

[00:22:53] In fact he specifically talks about health club dues. You can't include in your medical expenses health club dues or amounts paid to improve one's general health or to relieve physical or mental discomfort not related to a particular medical condition. So you need to be careful when you go to deduct things. We're all looking for ways to lower our taxes. We're all looking for more deductions. But you've got to keep in mind just because something is deductible doesn't mean it's actually going to save you a bit on your taxes. Concentrate on the big deductions out there and the big deductions for most physicians are maxing out their retirement accounts.

[00:23:33] Want to thank sofi for sponsoring this podcast. Again Sofi is one of the world leaders and student loan refinancing. If you haven't refinanced your loans yet please do so today was so fine. You can get the white coat investor deal at www.sofi.com/whitecoat. Head up shoulders back. You can do this and we can help. See you next time.

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