How to Turn Your Financial Life Around – The White Coat Investor – Investing & Personal Finance for Doctors

I fully admit I spend way too much time on email. But sometimes I get REALLY carried away trying to help someone. By the end of it, I realize that I pretty much have to use that email as a blog post or podcast material to justify the time and effort I put into it. So today I’m anonymizing an email exchange I had recently from a doc who didn’t get the memo about living like a resident until AFTER he became an attending.

This situation is so common that this email could have been written to a huge percentage of doctors. Heck, a huge percentage of my readers. I hope it is as fun for you to read as it was for me to write (and that it actually served its purpose to motivate someone to have a financially awesome life.) He gives some preliminary information and then asks three questions. I’ve split up the questions and my responses to make the post more readable and interesting.

Q. How Do I Turn My Financial Life Around?

I am a new-ish reader of your website…am one year out of residency and will be welcoming a kid into our family soon, and really want to get our finances, and financial plan in order. We have a financial advisor  who — on double checking with your website  — is giving good advice, but paying $3000 a year is grating at me, and I know I’m capable of learning this.

What I would like guidance on is how to move forward “living like a resident.” I read that everywhere here, but there are expenses I never had to pay.

My wife has loans close to $200k, with an income of $50-60k (which I can’t depend on especially with a kid on the way), and my income is around $400k, with loans around $200k.

Our monthly expenses are around $8,250 (mortgage $3,187, car 1 payments $505.34 (to be paid off in 3 years) and car 2 payments $184.17 (to be paid off this year), disability $481.18, $286.42, Groceries/Dining out – $800, Cell Phone $240, Cable/Satellite/Internet $157, Disability and life insurance $767.60, Auto insurance $174). We do not have any credit card debt. I have $20k in retirement saved during residency in a 403b, with $10K in an emergency fund, as well as another $24K in savings to be earmarked towards retirement.

A. Assess the Reality of the Situation You Put Yourself in

$200K for a job that pays $50K is obviously not a great investment. Maybe PSLF or even IDR forgiveness would be an option there. Glad we don’t have to deal with that issue though because we can combine your income and debt. Together you make $450K. Together you owe $400K. Plus cars.

$3K is a great deal for financial advice if the advice and service are good. Nothing wrong with that price. I wouldn’t pay it, but certainly it wouldn’t be wrong to pay that price for good advice. It does seem silly to pay someone $3K for advice and then email some yeahoo blogger on the internet for advice though. Either the guy gives good advice and you should take it and ask him all your financial questions, or he doesn’t and you should not pay him anything.

By the way, I hope you don’t think you’re living like a resident right now. I mean, how could a resident making $4,500-5,000 a month BEFORE taxes possibly make a $3,200 mortgage payment and a $700 car payment each month and still eat? So let’s just acknowledge that you are not living like a resident, most likely not going to live like a resident, and want to still be successful financially in some other way even if it takes a lot longer. YOU chose to buy a house with a $3,200 mortgage payment. YOU chose not to drive a $5,000 car you could pay cash for. YOU chose a $240 cell phone bill instead of these guys.

So now if you want to live like a resident, you somehow have to UNCHOOSE all of those things. I fully admit that is a very difficult and expensive thing to do. Not impossible (see this story), but almost no one does it.

Do you have to do it to be financially successful eventually with a $400K income? Nope. It would be a lie to tell you that you have to. But it is the fastest way.

Now on to breaking down the specific questions you had for me (along with some additional lousy commentary worth about what you paid for it.)

Q.

#1 Do you have any recommended solo 401k companies I should use to set up for retirement? My advisor is recommending an actively managed account that I do not want to do. Do you have any recommendations on info on how to diversify my portfolio once I set up the solo 401k?

A. You Aren’t Asking the Right Questions

First off, Fire the advisor. It’s one thing to pay $3K for good advice. But you’re getting bad advice (remember the bit about actively managed mutual funds?) So either hire a good advisor or learn to do it yourself. Now let’s quickly give you the answers to the questions you actually asked.

Where to Open Your Solo 401(k)

How to Make an Investing Plan

150 Portfolios Better Than Yours

Now, the questions you should be asking…

Let’s be honest. Your problem isn’t asset allocation. It’s your savings rate, i.e. the percentage of your income going toward wealth building. Who cares what your asset allocation is on a $20K portfolio? How can you increase your savings rate?

If I were a new attending making $400K, >$200K of it would be going toward building wealth every year. Not $40K of it. If it weren’t for taxes, >$300K of it would be going toward building wealth.

You have a net worth of -$350K. You’re one of the poorest people on the planet. Certainly in the top 0.01% of poor people, at least as measured by net worth. And with a top 1% income. Sit on that little fact for a few minutes and let it motivate you!

Q.

#2 I HATE having student loans, and want to get rid of them as soon as possible. Even though I hate having loans, I also know my desire to be aggressive paying off loans needs to be balanced saving for retirement. We have a lot of incurring debt that I listed. Are we spending too much? Can you please guide me on how much to put towards loans to get rid of them while also putting enough money towards retirement? What’s a reasonable amount of time to get loans paid off?

A. Do You REALLY Hate Debt? Really?

You HATE student loan debt? No, you don’t. You SAY you hate student loans, but you really don’t. How do I know? Because instead of paying them off while living in a 2 bedroom apartment, you bought a house with a $3,200 mortgage and bought two cars on credit. Because instead of putting $24K toward those loans, you are planning to use that $24K for retirement. Because you go out to eat.

People who truly HATE debt don’t do those things. They sell everything that isn’t bolted down on Craigslist. They sell their car, pay off the loan, and buy an $800 car like the one I bought this summer for my daughter to learn to drive a stick shift. It is plenty reliable to get me to my shifts and will probably last a year or two. If not, I can buy another one tomorrow (and you could too.) They stop eating out. They stop vacationing. They listen to the Dave Ramsey podcast all the way to work and from their first job to their second job and from their second job home at 11 pm.

I think you really need to ask yourself how much you actually hate debt. Because you’re saying one thing and doing another.

Paying off Debt vs Investing

At any rate, your question is totally reasonable — How to balance debt pay off and investing. I think you ought to aim to be out of student loan debt within 5 years of residency as a general rule. If you HATE them, then maybe two years. Either is fine. Then invest everything above and beyond that that you can carve out of your budget. If you can’t pay off your student loans within 5 years AND save 20% of your gross income for retirement, then you spent/you’re spending too much. That’s the bare minimum.

How Much Should You Be Saving?

Someone living like a resident is generally dedicating more than 50% of their gross income (remember 20% or so is going toward taxes) toward paying off debt and building up savings. So that person might be putting 40% of their gross toward student loans each year and another 15% toward retirement. Then when the loans are gone, they go to 30% toward retirement and 25% toward a down payment. Then in another year or so, they buy the big doctor house and end their “live like a resident” period, still saving 20% for retirement. No student loans. Big fancy house with significant equity in it. Nice little nest egg that is now growing rapidly. Set for life financially.

Q.

#3 When we are talking about living like a resident, what are we including in the budget? Disability and Life Insurance, CPA costs? I’m including that in the current budget I gave you, and I am not sure if that’s what you mean.

A. What Does Live Like a Resident Mean?

So live like a resident refers to your lifestyle. Obviously, when you become an attending, you are going to pay a lot more in taxes. If you’re a tithe payer, you’re going to pay a lot more in tithing. If you’re not an idiot, you’re going to pay more in disability insurance and probably a little more in life insurance. Yes, you’re going to put a lot more toward student loans. But what you spend on housing, driving, eating, vacationing, etc needs to at least have some passing resemblance to your life as a resident. If you did your own taxes as a resident, do them as an attending. If you can’t figure out Turbotax, then I guess you’ll have to pay a few hundred bucks to a CPA each year. Cheaper than the $3K you’re paying now for bad advice anyway.

How to Completely Turn Your Financial Situation Around in 5 Years

So now knowing all that, what are you going to do? Since you’re not living like a resident (and probably won’t), what’s going to give? Are you going to drag the student loans out longer than 5 years? Are you going to not save for retirement until the student loans are gone? Here’s what I would do if I were in your situation. You do as much of it as you can stomach and hopefully, it’ll be enough.

1. I would get on the same page with my spouse about money. That is so key to everything.
2. I would take stock with exactly where we are at. You’ve already done this halfway. You know your income, you know your assets, you know your debts, and thus you know your net worth. Now you need to know your spending just as well. Where every single dollar goes. Write it down. Is it going toward what you value? Does every dollar have a name? What is your savings rate? What is your marginal tax rate? What was your investment return last year? What are the interest rates on your debts and what could you refinance them to etc.
3. I probably wouldn’t sell the house at this point even though you should not have bought it YET. The transaction costs are just so high to sell a house and move. So I’d keep it. But I sure as heck wouldn’t renovate it. Or buy window coverings. Or any furniture that doesn’t come from a thrift store. And I wouldn’t be paying anyone else to clean it or mow its lawn.
4. I would pay those cars off tomorrow. You’ve got $24K sitting there earning nothing. And two car loans. Put them together and see what happens. I just found you $700 a month that can go toward those student loans you say you hate. I might even sell the one I drive and buy a real beater that would remind me every single day how badly I want to build wealth so I don’t have to drive that thing anymore.
5. I would start living on a budget. For real. There is no way in heck that the two of you have a written spending plan. This stuff isn’t rocket science. If you can diagnose a pulmonary embolus, you can figure out how to make a budget. If you can get through residency without punching anyone, you have the discipline to follow it. Figure out where your money is going and make it behave.
6. I’d take whatever is left of that $25K after you pay off those two cars and throw it at the student loans.
7. I’d figure out how much you really hate debt (2 years or 5 years) and do the math. $400K/60 months= $6,700 a month. $400K/24 = $17,000 a month. $400K of income is $33K a month. So either of those numbers is entirely within the range of possibility, but I bet you don’t hate debt enough to put $17K a month toward it. I bet you do hate it enough to put $7K toward it though. So why don’t you do that? While you’re at it, why not refinance it so a little bit more of what’s going toward interest now can go toward principal? This all assumes neither of you is going for PSLF of course.
8. I’d invest the rest. A minimum of $90K (20% of your income) a year. If you want to put that $90K toward student loans for a couple of years because you really hate debt and can have it paid off in 2 years if you do that, I’m okay with that. But I’d try to invest $90K a year AND have those loans gone in 2-5 years if I were you.
9. I’d try to talk my wife into working until the student loans were gone. While $50K isn’t much compared to $400K, it does help.

But if you put $100K toward those loans and $90K toward your investments each year and paid $150K in taxes, you should be able to still have $110K to live on. Even with your expensive house, that’s still $70K a year, more than the average American household. In 5 years, you’re debt-free, you’ve got half a million saved toward retirement and you’re ahead of 80% of doctors. You (and especially your wife) are mostly financially rescued by the fact that you chose a well-paying specialty, are willing to work hard and are rapidly learning how to manage money.

I hope this email pissed you off, but just enough to motivate you to have a financially awesome life and not enough to just hit delete and scream “Screw that WCI Guy! What a jerk!” I really am trying to help even if I lost you in the tone somewhere. Shoot me an email in a year or two and let me know how it all went. I bet you actually do take a lot of this advice and that it actually works, even though you bought that house earlier than you should have. Here you go, your very own blog post with all your identifying information removed. It won’t run for months. You might even be back to broke by then!

His response:

Holy crap, that was way more in depth than I was expecting. Are you using Dragon to dictate your emails? To answer your question, I love a good kick in the pants, and this was definitely one of them. Thank you for taking the time to go through everything like you did.

P.S. Challenge accepted ?

What do you think? What would you tell someone asking you these questions? Do you think they’ll take my advice? Comment below!