Where to Bank and How to Save for Big Purchases

INTRODUCTION

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

Dr. Jim Dahle:
This is White Coat Investor Podcast number 439.

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Thanks everybody out there for what you're doing. I don't know if you're exercising, walking the dog, commuting into work, coming home from work after a long day. Maybe nobody said thanks today. Those of you who are docs, we tend to be people pleaser kind of people. And a lot of what we're working for is just to help other people. And so it's hard when nobody says thank you. So if I'm the first one to tell you that today, I'm sorry, but I am grateful for what you're doing out there. It's important work you do. Thank you so much.

We're going to get into all kinds of your questions today. Now you can give us questions in lots of different ways. You can email questions to us, but sometimes it's better if you just leave it on the Speak Pipe, whitecoatinvestor.com/speakpipe. And we can hear directly from you and we'll get your question answered. And it's nice to hear some other voices on the podcast besides just mine. I don't even like listening to my voice. I can't even listen to these podcasts. I don't know how you guys listen to these podcasts, but I can't do it. So it's nice to hear your voices from time to time.

LOCAL CREDIT UNION OR NATIONAL BANK

Dr. Jim Dahle:
All right. Our first one's an email and says “Dr. Dahle and team. It's my first time reaching out. I want to take a moment to thank everyone. “ Thank you very much. “My wife is soon to be graduating general surgeon. I will be moving to a more rural Northern Minnesota town the next year for her first attending position after residency. We're excited since this is our dream location.

We've discovered that our current bank, a major national institution does not have any branches nearby. Given that we plan to settle in this town for the long run, we're considering transferring the majority of our funds to a local bank or credit union.

Do you think this is a wise move or does it not matter much nowadays with online banking options? I've noticed some local institutions offer slightly better interest rates on checking and savings accounts, albeit not significantly. Additionally, we're looking into obtaining a physician home loan through a local bank for our first home purchase once we've settled in. Would it be beneficial to open a checking and savings account with the same bank we choose for the loan or is that not a necessary connection?

I struggle to find clear information online regarding the best direction to take and any insights you can provide be greatly appreciated. I believe your podcast audience would also benefit from this discussion as this is probably an area of finance that many residents don't consider when moving to a new area for jobs. Thank you and God bless you.”

Okay, very nice email from Josh there and thanks Josh for being willing to serve in Northern Minnesota. I don't know how many docs are up there but I imagine it's not quite as popular of an area as the Bay Area around San Francisco. Thank you for being willing to go up there.

There's really three things at play here. The first one is having some sort of a convenient checking account service. This is things like a local free notary public. That's something I use at my local bank account all the time but sometimes you just need to go in and talk to somebody and do something locally that's hard to do online.

We have local bank accounts. Our business bank account is at a local bank and so that's nice to have both on the personal side and the business side. But our main checking account is not a local bank. It's a checking account we've had for literally decades and as we've moved to different parts of the country we've been able to keep the same checking account.

And it's a pain to change checking accounts. You got to change all these bills and all these automatic deposits and stuff like that, all these connections with your investing accounts. So it's a pain to change and it's something nice about having a large national institution.

Ours happens to be with USAA and I don't know that it's necessarily the best for every feature. I don't know that it's necessarily the worst. It doesn't have the reputation of some national banks which there's a handful of institutions I'd probably never give any business to. We're certainly not going to sell them an ad here at White Coat Investor but I think that's the first thing to be thinking about is these kind of checking services, things you need to be able to write checks and have a debit card and deposit things and set of automatic payments, those sorts of things.

And if you want to have a local bank, I think that's totally reasonable to have a local bank to do that. You might want to keep your national bank account and you can figure out what you want to use each one of those for. It's okay to have more than one.

Okay, the second thing at play is getting a good rate on your savings. It worries me when you talk about moving the majority of your assets to this small local bank. I'm like, “Why would the majority of your assets be at your bank?” That's not a place to have your assets. Even your short-term savings, your emergency savings, whatever, the likelihood of you wanting to keep that in a savings account or even a money market account at a local credit union or bank rounds to zero.

That's not where you keep significant money. You need to earn some interest on that money. And that might be a high-yield savings account which is almost always online because their costs are a little lower online so they can offer better rates. But these days, it's probably in a money market fund, whether that's at Vanguard, which usually has the highest yields, or Fidelity or Schwab, which may have a little better IT interface and service.

You're going to be earning 4% or 4% plus on your money right now if you have it at a money market fund. You also have the option of using a tax-free or a municipal money market fund. And so, you can earn tax-free interest. Whether that makes sense or not depends on the exact difference in yields as well as what your tax bracket is. But it's not an option at a high-yield savings account. It is an option at a brokerage account that offers money market funds. That's issue number two. The first one is all those convenient check-in account services. The second one is getting a decent rate on your liquid savings.

The third issue at play here is your physician mortgage. And we've got a list for this. If you go to whitecoatinvestor.com, you go to the recommended tab, you look for doctor mortgages or even not doctor mortgages, we've got recommendations. And I think we've got 15 people on that list that lend in Minnesota. So, go there to see who you should get a doctor mortgage loan from.

Now, some of these lenders do require you to open a bank account at their bank. No big deal. If you're getting a great deal on a mortgage, it's fine to open a bank account. It's no big deal. But that's not necessarily the main banking account you want. Maybe it is, maybe it isn't. But that's not the order I would take it in is not to establish a relationship with the bank and then go get the physician mortgage. I'd go get the physician mortgage. And if they require you to have a banking relationship there, sure, open a bank account there. No big deal.

How should Josh and his family proceed? Well, number one, figure out where you're going to put your savings and emergency fund. If you already have an account at.  Vanguard or Fidelity or Schwab, that's probably where you're going to put your liquid savings.

Then step two is go figure out the doctor mortgage. If the bank offering you one requires you to have a local account, open a local account. If not, don't worry about it.

And three, determine if your current checking account is meeting your needs. If whatever, it's a Bank of America or whatever, that's fine and does everything you need it to, great. You don't need to go open a local credit union or bank account. There's probably not a huge rush to do this, but if you're like, it sure would be nice to have something local and there's no branches of my bank here in town, fine, go open a local one. You can link it to your online national one, but there's probably not a huge rush to do that.

I think you're worrying about something that really isn't that big of a deal. It doesn't take that long to open a bank account if you need to have it. And what you'll probably end up with is your big national bank, Vanguard or something account, and maybe a local bank account with all this said and done. And then you just use whichever one is best for whatever particular need you might have.

So, you want to have something in cash. Most people, unless you're pretty darn close to financially independent or already retired, you need some sort of an emergency fund. This is money that you can get to very quickly. It's very liquid, very safe. And you don't have to worry about selling it low. Like if you had the in stocks or worse, you had it in something liquid like real estate, you can't get your money back very quickly. This is liquid money. That's very safe that you can get to.

And how much should you have? Typical recommendations are three to six months worth of expenses. Four months is probably the right number. Because most people that your disability insurance, your long-term disability insurance doesn't start paying until after you've been disabled for three months and it pays at the end of the month. So that's four months.

And that's probably a reasonable amount for most people to have in their emergency fund is four months worth of spending. If you spend $6,000 a month, that's $24,000 you have in your emergency fund. And you just stick it in your money market fund, Vanguard or whatever, it earns 4% and fine. Because the important thing is the return of your principal, not the return on your principal. So you want it very safe, very liquid, et cetera.

And the truth is for most people, some of it's probably in cash in the house, maybe in a little safe or something. Some bits in your checking account and the rest is earning interest at Vanguard or Fidelity or Schwab or whatever.

Likewise, if you're saving up for something in the short term. This is money you're going to spend on your tax bill in three months, or this is money you're going to put down on a house in six months. This isn't money that should be invested in stocks or real estate or something like that. It can just be in cash, earn something on the cash while it's sitting there, but you can put that in the same place as your emergency fund.

If you've been wondering how to get into real estate investing, we have an ongoing masterclass. It's totally free. And you can sign up at whitecoatinvestor.com/remasterclass. It's available all the time. And you can take that and be introduced to all the different ways that you can invest in real estate. This is not as extensive as our online course, the No Hype Real Estate Investing course, but it's also totally free. So it doesn't take any of your money. It doesn't take very much of your time. And it'll give you an introduction, help you decide if real estate is something you ought to be adding to your portfolio. Again, sign up for that at whitecoatinvestor.com/remasterclass.

All right. Our next question comes from Nate. Let's listen to it on the Speak Pipe.

HOW TO SAVE FOR LARGE PURCHASES

Nate:
Hey, Dr. Dahle. It's Nate from the Midwest. I'm a final year MD PhD student applying into anesthesiology. I just had a question about your recommended method of saving up to make large cash purchases for things like a house or a boat. I received some advice from authority figures in my life that basically all expendable income should go into a retirement account of some form and then shouldn't be touched at all until retirement. This doesn't fully make sense to me as it would require taking out loans or making multiple payments with interest for big purchases like a car or something like that.

My question is what is your recommended approach for allocating a sum of money for a big cash purchase without losing the benefits of investing that money in the time that you're saving it up? I understand that you can't have the best of both, but is there a way to optimize here? Thanks again for all that you do.

Dr. Jim Dahle:
Okay. Large cash purchases. You're usually not saving for these things for too long, two or three years, maybe at the most. It's not about the return on your investment. It's the return of your investment. So, you should be investing in a pretty safe way for this stuff. This isn't money you're investing into stocks and real estate itself. But the question was more about investment accounts. And if you're going to be buying a house in two years, you want to save a big down payment. A Roth IRA is not the place for that.

The investing process is number one, set your goals. I want to retire this much on this date. I want to have this much for college. I want to buy a house in two years. I want to buy a boat in four years, whatever. Set your goals.

And then for each goal, you choose the account or accounts you're going to be investing for that goal using. So if I'm saving for retirement, yeah, Roth IRA is a great place. Your 401(k) is a great place. If you want to save more than fit in those accounts, you put it into a taxable account. Great. That works great for retirement. Same for college. We're talking about a 529 account. Same for healthcare. We're talking about an HSA.

We're talking about saving up for a house down payment or a boat you're going to be buying in your thirties? That's called a taxable account. If somebody's telling you, “No, no, put that money into your 401(k) and then borrow the money for the boat”, I don't think that's so wise.

I'd like to see a max out the 401(k) and still save something for the boat. In fact, if you're not able to save 20% of your gross income for retirement and still afford the boat, you probably shouldn't be buying the boat. A boat is not a wise financial decision. I own a lot of boats. None of them are smart as far as finances go. Whether this is my $1,500 pack raft or a $800 inflatable kayak, or I don't know, whatever my raft is, $5,000 for the rubber on my raft or a way more expensive wake boat or this houseboat share we own. None of this is making money. These are not wise investments. These are a way to spend money to try to get a little bit more happiness.

So, it is not an investment in any way, shape, or form. In fact, it's a stupid thing to do with your money, but it's a lot of fun to spend time on the water. But saving up for it, you do that in your money market fund. Vanguard or Schwab or Fidelity. If you want to buy a house and you want to have $150,000 to put down on it and you want to buy it in 15 months, well, that's $10,000 a month. So, you take $10,000 a month and you put it into that money market fund. After 15 months, you got $150,000 that you can put toward that house.

That's how you save up for it. It's not complicated. Don't make this more complex than it needs to be. If it's money you're going to blow in 15 months, no, don't put it in your 401(k) or your Roth IRA. Yes, I know there are some rules where you can take some money out of your 401(k) and not pay a penalty on it if it's going for a first-time home and it's less than $10,000. And I know you can always take your principal out of your Roth IRA. Tax and penalty free.

Yeah, I understand the rules. I've written books about IRAs and 401(k)s and chapters about IRAs and 401(k)s and blog posts about 401(k)s and IRAs. I understand the rules. I just don't think that's the place for your short-term money. Put your long-term money in those accounts. Put your short-term money in your taxable account. If you don't want to pay taxes on it, put it in muni bonds and you don't have to pay taxes on it.

But don't make this more complicated than it is. Don't take financial advice from people who are not financially literate. Just because your Uncle Bob tells you to do some crazy scheme where you're putting your boat money into your Roth IRA or you're putting into your 401(k) and taking out a 401(k) loan to pay for it, no, this stuff does not have to be that complicated.

If you're listening to this podcast, you're a high earner. You can probably save adequately for retirement and still save up for whatever extra thing you want in the short term. You don't have to make it complicated and use tons of leverage in your life to reach your financial goals.

QUOTE OF THE DAY

Dr. Jim Dahle:
Our quote of the day today comes from David Bailey, who said, “To get rich, you have to be making money while you're asleep.” And what does that mean? That just means you're an investor. Yes, it helps to be an entrepreneur and to own a business and have a cash machine. To have rental properties that are paying you every month, even if you're on vacation. It's a beautiful thing, I tell you, to go on vacation and come back wealthier than you left. That is a beautiful thing. I absolutely agree with David there.

But you know what? What we're talking about when we're talking about making money while you're asleep, we're mostly talking about investing. Carve a chunk of your money out of your earnings to invest. And guess what? Those dollars are working 24-7, 365 for you. They're the most reliable employees you'll ever have.

And yes, in the short term, the value of your investments might go up and down. But in the long run, as long as you're making reasonably wise investments, you're going to be making money while you're asleep, becoming wealthier as you go along.

Okay. Let's take a question about mid-career physicians.

WHEN A NEW JOB TAKES YOU TO A NEW STATE

Speaker:
Hello, Dr. Dahle. I'm a 43-year-old mid-career GI physician amidst a job switch. I have been an avid listener to your informative podcasts. I find particularly useful the special podcasts you build around July for new residents and similar ones for new attendings, giving them a checklist of financial decisions they should consider at the time of those life and career transitions.

Can you kindly consider creating a similar podcast focused on mid-career physicians amidst W-2 job switch across state borders to educate them about the best financial practices built around 401(k), whether to keep with the original employer or roll it over into some sort of traditional IRA, giving them more flexibility of investment options and their impact on ability to perform backdoor IRA, what to do about existing mega backdoor Roth IRA options with the existing employer, 457, 529, if moving from a state without any state income tax to one which has state income tax, and other pertinent points. Thank you so much in advance.

Dr. Jim Dahle:
Okay. Congratulations on your new job. This is exciting. Presumably this is a better job or a better place you want to live than where you were. So congratulations. I don't know we're going to devote an entire episode to this topic because I don't think there's that much to say about it, but there is something to say. So let's go through each of these things and talk about what you're going to do when you change jobs.

Issue number one, you're moving. That probably means selling a house in one spot, buying a house in the other spot. So what do you do? Well, the worst situation is to own two houses at once and be paying two sets of utilities, be paying two sets of property taxes, be paying two mortgages. That's a drag. I've done that before.

When we moved in 2010, we got a great deal on our house in Utah, but we could not sell the one in Virginia for the life of us. And so for years afterward, we had the expenses of two places. It took us about a year before we gave up selling the place in Virginia because at any price we could have sold it for, it was a fantastic investment. We put a renter in there for a few years and we eventually sold it like five years later. Accidental landlord situation, not super fun, didn't love it. But at least that rent coming in offset those expenses that we had from that second home that we owned.

Ideally you figure out a way to sell the first one at the same time as you're buying the second one. And you can do that by putting contingencies in the contract that we're not buying your home until ours sells. That's traditionally the way people have done this for years and years and years. Now in a hot real estate market, they might not take your offer. They're like, “We'll take this other one without a contingency.”

You have to be careful in a hot market, that might not be the best way to do it. Sometimes people use some sort of a bridge loan. They borrow home equity out of the first one to make the down payment on the second one. And that's an option. You have to be careful though, because you're going to have two mortgages if you don't get that second one sold.

And if you're only carrying it for two or three months, that's probably no big deal. You can probably afford to do that. But if you're carrying it for two or three years, that can really make you somewhat house poor. Manage the house as you move states.

Next issue is your taxation. You're probably going to end up having to file as one of the two states being your main residence for that year. And if you move right on July 1st, well, I guess you have a choice there. Maybe you're filing as a part year resident in both states, but you have to sort out how you're going to file taxes that year you move. And usually, you file as a resident of one state and you file as a part year resident of the other state. And it works out, your accountant can help you with that. That's not that big of a deal.

You're leaving one employer and going to another employer. And typically the new employer will offer you different retirement accounts than the old employer did. So you have to figure out what to do with the old employer retirement accounts.

There's no huge rush to do this. Most employers do not, and maybe cannot even, kick you out of the old retirement plan. So there's no rush to do it. And in fact, you often don't qualify for the new retirement plan for six months or a year after you take the new job. There's no huge rush. You don't have to do this before you ever leave the old place. When you get to the new place, sort out what you've got and then you can figure out what to do with the old retirement plan.

Probably what most people do is they roll the old 401(k) or 403(b) into the new 401(k) or 403(b). That has a couple of advantages. One, the new plan might be a lot better, might have lower expenses, better investments. That's great. It also keeps things simple. So you're not managing two separate accounts. You just have one. That's great.

But the other benefit of moving it directly into the new employer's plan rather than a traditional IRA, which is the classic teaching for people when they leave an employer, is to just roll it into a traditional IRA where you have control over it, maybe you have lower expenses over it.

The problem with doing that is White Coat Investors and other high earners don't want to have any money in a traditional IRA, SEP IRA, simple IRA or a rollover IRA, because that balance at the end of the year goes on line six of form 8606 for your backdoor Roth IRA, makes your Roth conversion each year for the backdoor Roth IRA process become prorated. And you don't want that. Basically, if you're going to do the backdoor Roth IRA every year, you've committed not to have a traditional IRA throughout your working years. That money needs to stay in 401(k)s.

Now, I guess if it was relatively small, you could just do a Roth conversion of the whole thing when you leave an employer. That's one way to get rid of that traditional IRA. But most people have substantial assets in those accounts, and it'd be really expensive to just convert the whole thing. So they just roll it over into the new plan.

For your 457, you're going from an employer that had a 457 to a new employer that has a 457, and they're the same kind of 457, you can do a rollover there as well. Now, if the old employer had a governmental 457, well, those can be rolled into all kinds of retirement accounts. They could be rolled into an IRA, you don't want to do that, though. They can just be rolled into the new 401(k) or 403(b).

If it's a non-governmental 457, you're not allowed to do that. Those can only be rolled over into other non-governmental 457. And maybe you're lucky and both employers have a non-governmental 457 that you're happy with. But otherwise, you're stuck with whatever the distribution options are in that old 457 plan. And it might be that it's a lump sum when you retire or when you separate from the employer. But hopefully, there are some better options than that, that you evaluated when you first started funding that 457 account.

Typically, those are spent relatively early in retirement. If you retire early, 457 money is usually one of the first things you tap into. There's no age 59 and a half rule on 457 money. And it's also your employer's money so you don't want to leave it there any longer than you have to in case something happens to the employer. That deferred compensation is not technically your money yet. So, spend that money first in retirement.

529s. You can just leave it in the old state 529. You do not have to move it to a new state 529. You can have 50 different 529s if you want for each kid. There's no rush to do this. Check out both 529s, see which one's better. It may be that you're going to a state with no state income tax or they have a lousy 529 or whatever. You just want to use the old one, fine. Or that state doesn't give you a tax break for contributions to their 529. Great, just use the old one. There are a lot of states that if I moved to, I would still be using the Utah 529 because it's better than theirs.

Evaluate the benefits and you have to choose which 529 you're going to use. If the new one is going to be good and you want to use it, you can just transfer money from the old one to the new one, unless you're up against the total amount you're allowed to have in 529s, which is usually more than half a million dollars. You don't have to worry about that. You can just combine them and put them into the new state's 529, no big deal.

All right, I think I talked about everything you wanted to hear about as far as changing states at mid-career. It's not that big of a deal. Make sure that if you had insurance at the old employer, you were counting on your employer-provided disability insurance, that you're either getting it from the new employer or you need to go out and shop an individual policy. And we've got recommended people that can help you with that. Go to the recommended insurance agent tab at whitecoatinvestor.com and they can help with that. But otherwise, it's mostly just transitioning one thing at a time as you go to the new job. Again, congratulations on the new job. It's probably going to be awesome.

DIVERSIFYING OUT OF A SINGLE STOCK

Okay, here's an email we got. This one is from someone who's got some Apple stock. Well, that's been good the last few years, everybody likes Apple. “My wife and I are a non-doc household and my grandparents have gifted our toddler $30,000 worth of Apple stock to our UTMA account this past year.” I don't know what you mean by our UTMA account. I assume the toddler's UTMA account.

“We would ideally like to diversify out of this one stock. We were struggling with the best strategy to sell the stock. If it were our money, we would sell most, if not all of it and put it into index funds.” Okay, I like that plan.

“Our toddler currently does not have enough income to need to file taxes and we would like to avoid selling it and paying taxes at our current tax rate. Cost basis of the stock is $25 a share and there are about 150 shares. Any advice on what you think might be appropriate options to diversify away from single stock risks while minimizing tax rates for the child? We're extremely blessed to be in this situation and quite thankful to have to think about these options.”

Okay, well, when I got this email, Apple was trading at $203 and apparently the grandparents bought it at $25. Okay, this is a good move for the grandparents. Take something that's highly appreciated and give it to somebody whose tax rate is really low, like this toddler. This is a good move for them. Instead of giving cash to the toddler, you give these appreciated shares. The only better move is giving them to charity where nobody pays the taxes on it. But this is a good way to give money to grandkids and minimize the overall family tax bill.

But there's a big capital gain there. $203 minus $25 times 150 shares, that's a gain of like $27,000. So it's a little bit of a hard decision. You got to understand the kiddie tax rules. The first $1,350 this year is tax free for that kid. The next $1,350 is taxed at the kid's rate, which since these are long-term capital gains is going to be $0. But if you want to sell the rest of it this year, the next whatever it is, $24,000 or so is going to be taxed at your long-term capital gains rate.

So, depending on what everybody's capital gains rate is, maybe better for the parents to sell it and give you after tax cash than for you to sell. Essentially, this kid's now got a legacy investment in their UTMA.

Now, you can just leave it in there. And if Apple continues to do fine over the years and your kid gets financially independent from you in their 20s and they still don't have a very high income, well, maybe they can sell the whole thing, even with it continuing to appreciate, maybe they can sell the whole thing at a 0% long-term capital gains bracket.

So, that's an option. Don't reinvest the dividends or anything, but just let it ride. Then the kid sells it in their 20s and maybe there's no tax cost at all. That, of course, leaves the kid not diversified for a couple of decades. That might be bad if Apple doesn't do very well. So maybe it's worth it just to bite the bullet and pay the taxes and get the kid out of the investment.

The alternative is you could just sell a little bit each year. Maybe you're selling $2,700 a year worth of gains. So maybe that allows you to sell a little more than that. Maybe you're selling $3,000 or $4,000 worth of shares. And over the course of five to 10 years, you can get completely out of that investment or at least have less of the kid's money in that and still not be paying any capital gains. But you're weighing these capital gains taxes with diversification. And this is an issue people have all the time with legacy investments.

The first thing you do is when you find yourself in a hole is you stop digging. So stop reinvesting the dividends. And then you decide, “Well, how much lack of diversification do I have? How much am I willing to pay in taxes to get rid of that?” And you can get out of it very slowly and minimize the taxes paid, or you can get out of it quickly, pay more in taxes and get diversified.

But it's a hard decision to make. And certainly you're going to want to pay attention to how Apple's doing. It looks like Apple's not going to do very well and they're going bankrupt. well, maybe you want to sell as soon as possible. Besides when it falls back to its basis, well, there's not going to be any tax bill due anyway.

So look into it, figure out how much you want to be diversified, how much you're willing to pay in taxes to get there and take the free lunches you can find and go from there. I hope that's helpful.

Okay, we have somebody writing in with what they call an FYI, not a question, but thought it would be useful to have on the podcast. And I can talk about this topic for a little bit as well.

WHEN YOUR PARENTS SHOULD STOP DRIVING

Dr. Jim Dahle:
The email says, “Everyone knows someone who shouldn't drive any longer. That person might be you or me someday. Physicians are in a unique position to advise aging patients to do what my mother did. Later in the 70s, my mother was a financial rockstar having done many of the things that you teach decades before blog was even a word.

Another legacy was her wisdom regarding driving in her later years. She was 60 when she promised in the presence of her children to surrender her keys when we thought she should no longer drive. The time came and while she was not happy, she complied because either one, she was not of sound mind at age 60, which wasn't true or two, the people who loved her most wanted to make her life miserable, which also is not true.

In essence, she painted herself into a logical corner. It was impossible to escape. I doubt any written financial plan includes willful injury or worse of someone due to negligence. My mother's plan is a great way to mitigate that risk. And I intend to borrow her wisdom. Thanks to you and your team for what you do.”

Okay, I thought that was a great tip. And obviously that's up to the individual if they want to commit to their family to allow them to decide when they stop driving because stopping driving is a big deal. You're losing a lot of independence when you stop driving. And most people want to preserve it just as long as they safely and legally can even if they're driving into their 90s.

But sometimes we have parents that are like my parents. My dad was not really that safe of a driver at 40. Now he's 80. And not only is he still driving, he's still flying his plane. If he gave us that option of stopping his driving when we thought he wasn't safe to do so, we would have all stopped him when we were in high school.

You have to balance it out. Every family is a little bit unique. But I think there's a lot of truth there. To think about it in advance, recognize you're probably not driving until the day you die. What do you want the criteria to be of when you stop driving? And how are you going to take care of your transportation needs at that point?

Maybe you're wealthy enough that you can hire an Uber everywhere you want to go or have your own dedicated chauffeur for your limousine. I don't know, but give it some thought. Maybe make a commitment to those who care about you most about when you'll stop driving and save them from that really awkward conversation of trying to drag you into the doctor or the DMV and get your driving privileges taken away.

And to whichever one of you out there in White Coat Investor land that keeps passing my dad on his flight physical, I'm amazed he can still fly a plane these days. I'm glad in some ways that commercial pilots are all forced to retire at 65, even if private pilots can continue to put their own lives and those of their passengers at risk.

All right, the next question comes from a medical student talking about PSLF.

PSLF VS. PAYING OFF LOANS AS QUICKLY AS POSSIBLE

Speaker 2:
Hey, Dr. Dahle, thanks for all you do for the professional community, period. I am a fourth year medical student in the United States. I will be graduating with around $350,000 in federal student loan. My wife and I are currently debating whether to start the PSLF route, considering all that's going on in that landscape or just taking on a loan servicer, making low payments during residency and then attacking the debt in one to two years after I'm out of residency.

Can you discuss the pros and cons of each of these scenarios, especially in the setting of what we are going to miss out on compounding interest and investments if we send all of our money towards the debt in the first two years after residency? Thank you.

Dr. Jim Dahle:
Okay, great question. Just a comment about how the Speak Pipe works. We just play what you record. It's not being transcribed. You're not sending me a text or anything like that, so you don't have to include your punctuation. Just talk into the mic, no big deal.

Second point. You don't make this decision as a medical student. I love that you're trying to think ahead and think your way through these questions, but whether you go for PSLF or not is a question you make after you leave training.

The main factor is, does the job you want qualify for PSLF or not? If it does, going for PSLF, at least for the portion of your loans that are federal loans, is almost surely wise, unless for some reason under the new RAP payment, there's not going to be much left to forgive, then maybe fine, refinance it and pay it off. But for the most part, if you're taking a PSLF qualifying job, it makes sense to go for PSLF. It's really that simple. So don't try to do a bunch of calculations and sort it out.

Now, if you're trying to decide between a job that qualifies for PSLF and a job that does not qualify for PSLF, well, that's a different story. It's certainly worth hiring our folks at studentloanadvice.com, help you run the numbers, figure out exactly how much you're going to get in PSLF. And then you can compare apples to apples between the two job offers. That's reasonable to do.

But as a med student, you don't even know what specialty you're going into. You don't know how long you're going to be in training. You don't know what job you're going to take afterward. It's way too early to be making this decision. So, if you have private loans, it's fine to refinance them at any point during med school. If they will, they probably won't. Or residency, you can refinance those private loans early and often.

But don't refinance your federal loans until you know for sure whether or not you're going for PSLF. And that's probably at least your last year of residency, right, when you're applying for jobs. So way too early to be making this decision.

Now, other part of your question was the classic question we all struggle with. At least until you're debt-free, you'll struggle with this question. It's probably the second most complicated topic in personal finance. The first most complicated is whether you make your Roth or your tax deferred contributions to your retirement plans or whether you do Roth conversions. That's the most complicated thing in personal finance and investing.

But the second most complicated is trying to decide whether to pay down debt or invest. And there's a lot that goes into it. Interest rates go into it. Available investments go into it. The terms of the loan go into it. Your current financial situation, if you're declining bankruptcy and that debt's going away goes into it. What retirement accounts you have available to you, whether you're getting an employer match. There's all this stuff that goes into the decision.

But for the most part, if you've decided you're not going for PSLF and you're going to pay your loans back, well, not only do you want to refinance them early and often, but you want to decide when you want to be out of debt. Now, maybe that's in two years. Maybe that's in five years. I would not recommend picking a date beyond five years from finishing training. I think very few people want to still have student loans when they're five plus years out. So I would pick a date within five years of graduating and set that as your goal to pay off your student loans by then.

Now, if you really hate debt, maybe you're going to pick an earlier date. If you don't mind it and you're like, “Well, if I'm investing, if I'm borrowing at 4% and I'm earning 8% on my investments, I could come out ahead.” Well, maybe you're picking a date that's four or five years out.

And then just work backwards. How much do you have to pay every month to be out of debt in three years or whatever your goal is? And if you owe $360,000, you're going to have to pay a little more than $10,000 a month to be out of debt in three years. Set that goal, make those payments, everything else gets invested. It's really that simple.

On the other hand, if you're like, “I hate debt, I want to be out of debt ASAP. I don't care what employer match I'm missing out on. I don't care what tax protected space I'm going to lose out on. Everything's going to debt until the debt's gone. I'm going to live like the most hardcore resident ever until the debt's gone.” Well, the wonderful thing is the debt's probably gone very quickly and then you can get on with the rest of your financial life.

The downside is you might miss out on some employer match. You might miss out on some tax protected space. You might miss out on some compounded interest on your investments. If you were paying off debt that's 3 or 4% and you could have been earning an 8 or 10%, well, you're going to come out a little bit behind mathematically, but you're probably going to catch up very quickly. Because you're so hardcore about it, you got rid of your debt early on.

What I would not do is be unintentional and just let it ride or just make the minimum payments on your debt or heaven forbid, set up a plan to be in debt for the rest of your career. I think most people that do that regret it. Don't do that.

But you don't have to decide today if you're going to go for PSLF or not. I appreciate the anxiety that medical students feel when they start owing more money than they've ever made in their entire life. But I promise you, if you manage your finances well, it's still a good investment to go to medical school even if you got to borrow $400,000 to go. Because the average doc is making close to $400,000. And if you'll just live on half of what you're making, you can pay off your student loans in a couple of years or so.

It's not that complicated. You can do it. You'll be able to take care of this debt. You don't want to ignore it. You want to be intentional. But don't lay awake at night worrying about it. You should be worrying about how you're going to pass the USMLE or how you're going to pass histology or how you're going to get the grade you want in your pediatrics rotation. Worry about that. Don't worry about the money so much. It's going to take care of itself.

As long as you're intentional, reasonably financially literate, reasonably financially disciplined, you can take care of your med school debts. You don't have to plan it out seven years in advance, but you want to, as you're coming out of school, put together a student loan plan so you're managing appropriately during your residency and fellowship in your first few years of attending hood.

But the plan can be relatively simple. At most, you're going to pay a few hundred bucks and sit down with Andrew or somebody else at studentloanadvice.com and work out a plan if your situation is really complicated. But most of you can probably come up with a plan on your own that's going to work out just fine.

SPONSOR

Dr. Jim Dahle:
As I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.com/whitecoatinvestors to see all the promotions and offers they've got waiting for you.

SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions apply. NMLS 696891.

Don't forget about our real estate masterclass. You can sign up for that at whitecoatinvestor.com/remasterclass. Thanks for leaving us five-star reviews. A recent one came in from Rural Maine Doc. Thanks for being a doc in Maine. I love Maine. Super pretty. I want to spend some more time.

But this review says, “Helped me get on track. This podcast has a practical and pragmatic approach for high-income professionals who become financially literate and achieve the financial goals they may not have even known they have. I appreciate that so much of what is discussed here is good sense for everyone to live below your means and to make a plan for the future. The variety of people at many different stages of career brings a depth of perspective. I love and appreciate growing my financial literacy while feeling connected to a larger community. Thanks for all you do.” Five stars. Thanks for that great review.

All right, we're out of time. Keep your head up and shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

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

INTRODUCTION

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

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 242 – Solo Family Practitioner Reaches Financial Independence.

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

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

Don't forget, our Champions Program is open now. Now we're starting earlier this year. This is the program we use to give first year medical, dental, other professional students a copy of the White Coat Investor's Guide to Students. We can't send them individually. We can't afford it. We don't have the time nor the money to do it. We got to send them in bulk. We want to give them to your entire class.

All we need is somebody to volunteer to pass them out. That's the champion. And it's just a volunteer. It's not like a competition to become the champion. You just got to say, “Hey, I'll pass the books out.” And you got to show us how many people are in your class, so on and so forth. We send you a box of books. You pass them out. That's the whole program, the White Coat Investor Champions Program. You can sign up at whitecoatinvestor.com/champion.

But think about the value you're providing to your classmates. This information is worth a couple of million dollars to each of your classmates early in their career. And there's 100 of your classmates in your class. That's $200 million worth of value that you can provide for them with what? 12 minutes of your time, however long it takes to pass these books out.

It's super easy. It's totally free. We'll even bribe you to do it. We'll send you some WCI swag if you'll be willing to be a champion. But you sign up for that, whitecoatinvestor.com/champion.

I think the best we've ever done is getting this book out to 70% of medical students in the country. Let's beat that this year. Let's see if we can get it to 90% of them. All we need is a champion in each class. Please volunteer.

All right, we got a great interview today. We're talking to a solo family practitioner. Been solo for his entire career. Done lots of cool stuff. He's got lots of tips. Now, he's a talkative guy, but there's a lot of pearls that he throws in as he talks about it. Pearls that I think a lot of you out there trying to get into solo practice or trying to stay in solo practice will find useful. Stick around afterward. I'm going to talk for a few minutes about the concept of financial independence.

INTERVIEW

Dr. Jim Dahle:
My guest today on the Milestones Millionaire podcast is Eric. Eric, welcome to the podcast.

Eric:
Thank you so much, Jim. I really appreciate you having me here. I've been a huge fan of yours for quite a long time, and I'm honored to be with you today.

Dr. Jim Dahle:
All right, well, let's tell everybody a little bit about you, what you do for a living, what part of the country you're in, how far you are out of training.

Eric:
Yeah, I'm a family medicine physician in solo practice in Southern California, specifically San Bernardino County, a high desert area of a little town called Hesperia, kind of right off of Route 66. I've been in practice for 23 years now and independent practice the entire time and really have gotten to the point where I am finally figuring things out.

I wish I had access to your podcast at a much earlier stage in my career because I probably would have been in a lot better shape financially. Even though I feel like I'm in good shape now, I'm sure I would have been double if I'd had access to your advice. But anyway, that's a little bit about where I'm practicing and what my position is in my field.

Dr. Jim Dahle:
Yeah. Now, I understand not only have you been in solo practice for a long time, which is no small accomplishment by itself, but you are also debt-free and financially independent. Is that right?

Eric:
Yeah. Just recently, actually, I guess it's been two years now, I was able to finally pay off those student loans. It kind of gets into my milestones of how I was able to achieve those things. But yeah, as far as being independent, as far as debt, that is a huge burden taken off of my shoulders for sure.

Dr. Jim Dahle:
Yeah. Now, you took your time, it sounds like, getting your student loans paid off. A couple of decades paying them off is longer than lots of docs want to have those. Any particular reason you decided to spend that much time doing it? You've clearly been saving money and building wealth if you're now financially independent, but you decided that the student loans weren't a super early priority for you. So, tell me about that decision-making and how you decided to do what you did.

Eric:
Yeah, that was just really more about the math. It was looking at the interest rates on those loans compared to interest rates on, say, the mortgage for the building or the mortgage on the house, and then really trying to figure out what made the most sense financially on what to pay off first. And so, I guess that was really the main thing.

The other is, there's always so much income to go around. I had to pay my way through college. I was able to get through at least university debt-free. So it was medical school. But by the time of residency, four years of deferment, it was a good $350,000 in debt. And that's no small chunk of change.

And so it was always just another mortgage payment I made. Like I said, once the interest rates started climbing, then it was to the point it was like, okay, well, no, this doesn't make any sense anymore. And then just actually just went ahead and paid those off.

Dr. Jim Dahle:
Now, you came out of your school not that long before me. And when my classmates were coming out, they were refinancing at like 1% or something, crazy low. Well, what was the interest rate on your loans?

Eric:
Yeah, I think the best I ever got was 3.2%. I was nowhere getting any rates like those. I did consolidate about halfway through, at least to try to lower that variability and get any fixed rates I could. But yeah, once it started getting to about 7.5%, then like I said, it made no financial sense anymore.

Dr. Jim Dahle:
You'd been a little bit arbitrage in that debt and just going, hey, I can borrow money at 3%. Now I'd invest that.

Eric:
Right, right.

Dr. Jim Dahle:
When did you find out what financial independence was and decide that was something you wanted to pursue?

Eric:
Yeah, I think it really builds off of the milestones that I really have measured along the way that really inspired my entrepreneurial spirit all along. And that goal to be independent, it's not just in how I practice, but also financially independent. I grew up on a small ranch down not far from where I live now and learned really early on from my family construction business that you get up at 02:30, 3:00 A.M. You come home 07:00, 08:00 o'clock at night. You work hard days all day, every day. I could get $5 to rake all the leaves on a hillside, but on a 27-acre ranch, there's a lot of hillsides. And we had animals and shoveled everything you can imagine.

I learned the value of a dollar real early. And I think that stuck with me, that work ethic and the value of money and making sure that everything I ever achieved, it was always hard-earned. And no one ever gave me anything. I didn't have help with school. I had to figure everything out on my own.

I think that just stuck with me. And I think that that independence in thought and also in money management has served me well. I really commend my parents for teaching me how to work hard early on. Probably not unlike your experience, I know from your previous interviews of how you grew up.

Dr. Jim Dahle:
Now, one of the things that's actually more and more impressive every year is simply owning your own practice. What would you recommend to somebody coming out of training now that wants to own their own primary care practice of some kind?

Eric:
I was lucky enough to be affiliated with a IPA, Independent Physician Association, that I had kind of gotten in touch with the president of that IPA early on during my medical school career, actually doing rotations in neurology, which was his specialty.

And so, I maintained those relationships that when I finished residency were there still. They said, “Hey, when you get done and you want to come and practice in this region, we will help you get started.” It was an opportunity that I took advantage of, where they helped me find the office space, helped me get set up. And then shortly after that, I was off and running and basically just took everything over myself.

It was always my intention to be on my own. But there were advantages to relationships and building those relationships early. As far as advice to the medical students, the residents, look at that and don't just limit yourself to training just at large facilities. Get a broad education, get experience in independent practice, because the rewards are many, as I can discuss here in a few.

Dr. Jim Dahle:
Yeah. Well, let's talk a little bit about the rewards. What kind of income have you seen over the last 20 plus years working as an independent family practitioner?

Eric:
Yeah, it's evolved. And I think it might make more sense even to just tell you why I even got involved in medicine in the first place. I think that was really kind of the first milestone for me, which was just to break that family tree, as you quoted before and get into a position where I could actually work towards a different path.

It all started actually when I was in high school, sophomore in high school. I had a best friend that I'd known for since we were five. And we never really tried. There was never expectation other than just work hard and you're going to go and you're going to be a tile setter. That was the expectation. Education was never something encouraged.

I had a dream that he and I had both gone to medical school together. And I told him that. And he said neither one of us are smart enough to do that. And it really struck me because no one had ever told me that I couldn't do something or that I wasn't smart enough to do something. Growing up on the ranch, if the tract was broken, I fixed it. If I needed to fix my bike or the car engine or anything, I fixed it. No one ever told me I couldn't do something. That stuck with me. And a month later, he was killed in a car accident. That was my best friend that I had been throughout school.

And so, I spent my junior and senior year in high school, basically kind of a loner. And I guess it could have gone multiple ways, could have just gone into depression or not figured out your path or what.

But I remember what he said about not being smart enough to be a physician, to be a doctor. And it drove me. And from that moment on, I just started working harder and harder. And all of a sudden, I started getting good grades. I'd never even worried about them before because it was always expected I would just be in construction, which is a great life. And it served my father well and my uncles and everyone else in my family.

But I knew there could be something else for me. And I kept working hard towards that goal and continued and made that decision that I wanted to be a physician, that it was something really interesting to me and I didn't have anything that I felt was going to get in my way.

But the part about being independent, I think that stuck with me. And that's why I diverted back to that story because it's so important, I think, of what really formed me, how I look at money, how I look at my practice.

And that becoming independent was that other milestone, I think probably the big milestone too, was that I never considered that I would remain a resident, basically working for someone, making someone else money. And so, that was always something that really drove me initially too. I think the financial independence probably was that third milestone.

And to get back to your original question, which was how did I figure out when I was independent financially? And I would say just early on in my practice, I realized that it probably only took me two years to start making enough profit that I was paying my own salary, paying my staff well, taking good care of them so that they take good care of me, but then also starting to build towards something else.

My wife and I bought our home right out of residency as a new home buyer. And we almost have that paid off actually now as well. And so, we were heading in that direction, I think very early on, just planning ahead, building that family, building the wealth. But with limited income, you do what you have to do. You don't just go spending money like crazy. And I was doing hospitalist work for 11 other doctors doing 13 hour days, five days a week. And you do what you have to do.

And then when my daughter was born, there was a shift and I didn't want to be the dad that was never there. We hear a lot of physician stories about failed marriages or dads that are gone all the time working. And I made a shift because I was independent. I changed my schedule and I started working. Now I'm only doing three and a half days of actual patient care. The other time is actually off or if I have to put patients into half days here and there. So I've been able to evolve my schedule and my lifestyle to fill the work-life balance, I think. That independence is that other thing that gives me that freedom that I know I don't see in a lot of my colleagues that are working for a large system or that kind of situation.

Dr. Jim Dahle:
Did you find that that level of control came at a cost that you ended up having to make less money in order to have that much control over your workplace? Or were you able to make more than your colleagues that were employed by large systems?

Eric:
Yeah, I believe even at the beginning, my earning potential was at par with what the going rate was for family medicine primary care in my socioeconomic district. I think after probably about year 10 and I'm 23 years into this journey here, I surpassed anyone else's abilities to the point where now I'm probably at about, I know you didn't ask me, but you may at about $450,000 a year earning potential for family medicine, working three and a half days a week, taking approximately four months off of vacation time per year just for lifestyle. And so, that's nothing compared to any of my colleagues in family medicine, I'm sure. At least not a lot.

Dr. Jim Dahle:
Yeah, it sounds to me like all your hard work's paid off at this point.

Eric:
Yeah, I still feel like I'm going to work till I'm 90. I don't know, but I do feel like I'm prepared. I think that as far as investments, I wish I had learned about defined benefit plans much earlier, I'll tell you, because that's been only about eight years. Had I learned about them earlier, I probably could have been doubled as far as savings is concerned right now. And so, one big piece of advice, especially to those new physicians, is look into a defined benefit plan if you're an independent physician, for sure. That was a huge, huge step for me, I would say.

Dr. Jim Dahle:
Well, there's somebody out there that thought, “Oh, I want this classic traditional doctor's life. I want to own my own practice. I want to be able to make my own decision, not only the patient care, but with the business.” What advice do you have to somebody coming out now who wants to own their own practice throughout their career?

Eric:
Yeah, and I'm trying my best to spread this word. I'm on faculty at three different medical schools, and I've been doing lectures for years and years to medical students and residents just on this subject, on independent practice, because we're all told that you can't make it, you can't do it, and that that's the way of the old days. And there's just no possibility.

Well, I'm here to say that is absolutely not true, because in my mind, that's someone else telling me what I can't do. And we all know how that went. I would say, stay true to yourself. And as far as advice is concerned, really, you just need to never lose the common touch, is what I always tell those students. If you treat your patients like they are family, they will come and you will be busier than you can handle. And then it's just about managing the small business right.

And in this situation, for me, I had to learn the hard way all along. But there were steps that I took as a small business that allowed me to prosper and not just survive. And I had to be very picky. In fact, at about 10 years ago, I actually closed all my commercial HMO panels. And that was something that's a big decision because I was getting probably nine new patients a day, not sustainable. I had to basically ration care in a way, but strategically to the payers that made it be worthwhile to work that hard.

And so, a big piece of advice is once they're on their own, pay attention to the payers. Contracting is important and you are all ahead of it because you have links actually for a contract review on your site. I really commend you for that. But I would say pay attention to those payers because you need to, as a small business, make business decisions and be a physician.

But you are smart enough. You went through medical school. You did the hard part. The easy part is actually just paying attention so that you are working smarter, not harder. And so in my situations all along, I've changed my patient profile from my practice so that I'm doing just that.

The cancellation of the commercial contracts because the per member per month was so low on commercial, but much better for senior HMO. I focused on senior HMO with the IPA that I've been exclusive with for 23 years. That made business sense at that moment.

The latest has been probably in the last four years and I guess four and a half years participating with shared savings programs and basically through Aledade, an ACO that's nationwide. But this is value-based care, it's called. For those Medicare patients and some PPO patients, they were always a money loser. I would stop taking Medicare for like eight years because of the diminishing returns on Medicare reimbursement since I started. It was down like 23%. But with value-based care, that model, it actually now currently this year with my participation with Aledade, those Medicare patients per member per month now surpass the IPA.

And so, being aware of those changes and what is out there and available to you is absolutely critically important as a small business. And I'd love to be able to put links into your website so that people can access to this information because this, again, information, I wish I had it in a much earlier phase. But I was adept at making those changes and we still even, maybe even every couple of months, we'll change which PPO patients we're taking as new patients. I never get rid of any patients. It's just that I won't take new ones if it makes no business sense.

And so, I would say that is a huge piece of advice because that way you're not looking at burnout. That way, as you are working along in your career, your career hopefully gets to the point where I'm at now, where I actually enjoy going to work. And I never thought that early on when I was working those 13-hour days that someday it would come that I would enjoy getting up and going to work. And I'm there now.

I think that to answer your question from long ago about the independence and financial independence and knowing that I was there, I would say that's probably been in just even the last year or two that I really felt that joy in doing what I do. I think it comes off with the patients as well. They know it when I can spend half an hour with them and I'm not looking at my clock and they know that I'm there for them at that moment. And I'm not just worried that I've got to see 60 people today or I won't be able to pay everybody's check for payroll. I think that that was a huge step for me.

Dr. Jim Dahle:
Well, congratulations, Eric. You've been very successful. You've outlined a path that I think a lot of people want and demonstrated pretty well how that can still happen in today's modern medical world. Thank you so much for being willing to come on the Milestones to Millionaire podcast, sharing your story and inspiring others to do the same.

Eric:
I really appreciate the time you've let me spend with you. And there was one quick one and I'll just say it really quickly. If you have the option, build your own building. That was a huge step for me. Paying myself rent. That was a huge thing. Plus taking the deductions that you get while I'm building new real estate. And I know you've done other segments on real estate investment. That kind of fits to two categories there. But thank you again for having me on your show.

Dr. Jim Dahle:
I hope that was helpful to you. As I mentioned at the beginning, Eric is a talkative guy, but I wanted to let him talk because of what he was putting out there. A lot of these little tips are worth tens or hundreds of thousands of dollars over the course of your career that he was dropping on you.

Paying attention to the payers. You don't have to ditch your patients you already have. You can just use that information you have to decide who the new patients you're going to take are. Because you know what? If the payers, the insurance companies usually don't want to pay you for your work. Well, you got to stay in business. You got to make payroll and you want to be paid fairly. So you got to pay attention to that stuff. And if you could handle becoming a great doctor in medical school, you can handle running your practice. So don't be afraid to do that.

FINANCE 101: FINANCIAL INDEPENDENCE

Dr. Jim Dahle:
I told you at the top, we're going to talk for a few minutes about financial independence. Sometimes this is called FIRE. Which stands for Financially Independent Retire Early. But you don't have to retire just because you became financially independent. I didn't retire when I became financially independent. In fact, I've got two jobs now. What I'm doing here at the White Coat Investor as well as my clinical practice.

But I'll tell you what. It provides a lot of benefits. Even if you don't retire. You don't have to do things just for the money anymore. If you want to take a lousy payer because you like the patient, you can do that. If you want to spend your time doing something that's more aligned with your life's mission and really doesn't make much money, you can do that.

When we became financially independent, one of the things Katie did, she ran for office last year. She wasn't able to campaign very well because she was nursing me back to health after falling off a mountain, but she still got elected. And so, she's working on the school board now, something that maybe we wouldn't have had the opportunity to do if we hadn't taken care of our finances early on. There's all these benefits of financial independence. Besides just being able to stop working.

How do you determine if you're financially independent? Well, it basically means you have enough money you don't have to work for money at any point in the future. That's typically a number that's something like 25 times what you spend.

Notice that it's not the same amount for every person, nor is it a function of how much you make. It's only a function of how much you spend. And yes, that includes all your spending. Including any charitable giving you're doing every year, including your tax bill, including any financial advisory fees you're paying, that all counts toward that amount.

Add that amount up, multiply it by 25. That's the amount you need to be financially independent. If you're spending $100,000 a year, it's $2.5 million. If you're spending $200,000 a year, it's $5 million. You're spending $300,000 a year, it's $7.5 million. See how this works? It's not that complicated. Okay, now that's a lot of money. Don't get me wrong. $5 million dollars is still a lot of money.

How do you get there? Well, for most of us, it takes time. It means putting money away something like maybe 20% of what your gross earnings are each year. Put it away, investing in some sort of reasonable manner. And over time, as you continue to add money to that stash, that pile of money, it grows. And after a while, your money's growing more each year than the amount you're putting in there. And eventually it becomes a seven figure amount. You become a millionaire.

And then it starts going really fast. Because your money tends to double every seven to 10 years, no matter what you do. And if you're still adding more money to the pile, well, it gets there faster. The first million is definitely the hardest million. And then it just starts piling up. And before long, you look around and go, “I don't actually have to work anymore if I don't want to.”

And then you have an existential crisis every day for the rest of your life of what you want to do with the time you have left on this planet. And that's a beautiful thing to struggle with. And maybe it involves some work. Maybe it doesn't. Everybody's a little bit unique in how they do that. But that's how the process works.

I think financially independent doctors can be better doctors because they can make decisions without regard so much to the financial consequences of those decisions. And I think that's a good thing.

I hope that's one of your goals out there to become financially independent at some point. Now, for some people, that doesn't happen until they're in their 60s, especially as they start seeing some of their expenses like health insurance drop off and be replaced by significantly cheaper Medicare. Sometimes it's when they start getting payments from Social Security that gives them a boost to that income so they don't need quite as big of a nest egg to be financially independent or they qualify for a pension or something like that.

But there's no reason you have to wait until your 60s to be financially independent, especially if you invest wisely and especially if you have a really high savings rate. In fact, a lot of ways it mostly comes down to your savings rate. The more you save, the sooner you're financially independent. Because the more you're saving, the less you're spending and you're working now on both ends of that stick. And it doesn't take long before that stick is very short.

And so, we run into people all the time in their 30s, 40s, early 50s that are already financially independent. They don't have to wait for Social Security or Medicare to get there.

SPONSOR

Dr. Jim Dahle:
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All right. That's the end of our podcast. If you want to come on this podcast, apply whitecoatinvestor.com/milestones. We want to celebrate your milestones and use them to inspire others to reach their own milestones, whether they're the same as you or not and to realize that they can do it because you can do it.

Keep your head up and your shoulders back. You're a very capable person and you can accomplish anything you set your mind to. See you next time on the milestones podcast.

DISCLAIMER

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