Month: August 2015

When Should You Outsource Your Chores?

Posted on by SmartMoneyMD

Professionals are busy people. Whether you are a doctor, lawyer, stock broker, or even financial advisor, there will always be a constraint on the amount of time available per day.  What tasks do you delegate, and what should you handle yourself? This predicament applies to both our professional and household lives.

Should you or your secretary arrange flights for an upcoming business meeting? Should you stop at the grocery store after work to purchase produce and do you cook it? Should you hire a private chef or should your nanny cook the food? Who does the laundry, vacuum the house, or manage the yard?

You Must “Understand” Some Chores Yourself

Regular readers of this blog know that I have written about car and toilet maintenance.  You don’t need to be like MacGyver (hopefully you are old enough to know who he is), but competency in practical matters will only help you become a more well-rounded person.  It doesn’t matter if you earn $150,000 a year or $850,000 a year—you should know something.  My approach is that if you don’t know any practical matters Of daily living, you won’t even know if the people you hire are taking you for a ride. I’ve seen plumbers bill out 2 hours of work for a 15 minute job.  I’ve seen painters charge out 14 cans of paint for a job that would normally require six.

Understand Your Limitations

While you will benefit from being handy, you don’t want to jeopardize your career either by getting injured. Falling off of your roof while cleaning your gutters or cutting your hand while trimming some tree branches is not the greatest outcome for a cardiothoracic surgeon. Likewise, some chores may not be worth your time given your skill level. If you have never tiled a floor, you might not wish to waste an entire palette of fancy travertine tiles and go to town on a kitchen remodel. Just because you can crack someone’s chest open and revascularize their heart doesn’t mean that you are qualified to lay tiles.

Start Simple And Work Your Way Up

The best way to build your fund of common knowledge is to pick a topic and learn about it. Hit up the local resources at the public library in your free time or online. Choose an area that interests you and is low risk to yourself and low impact on your household. It can be as simple as cleaning the grout on your tiles or learning how to wash and wax your car properly. Picking a chore that doesn’t require substantial equipment is useful in case you decide that you no longer which to continue it after the first trial. As you build upon your skills, you can venture into more challenging tasks: (1) Learning to clean your toilet (2) Learning to replace the toilet seat (3) Learning to change the flush valves (4) Learning to replace the entire tank.

Decide How Much You Wish To Diversify

Remember, you still have a primary job. You trained for an entire decade of your life to become a doctor or professional–that’s what still pays the bills. If your side hustles or hobbies end up producing a higher income than your day job, then you’ve done something well.

What household chores do you consider to be worth your time? Where do you draw the line between DIY and outsourcing?

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When Is A Hybrid Car More Cost Effective Than A Traditional Car?

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When I was choosing to buy my first car after finishing my training (read: eminent income boost), I agonized over a handful of dissonant choices: fancy vs budget, SUV vs sedan, SUV vs hatchback, sedan vs hatchback, hybrid vs traditional, and American vs Japanese vs European. Or should I just let loose and buy a Hummer?

I strongly considered getting a hybrid vehicle, not because I am environmentally conscious, but I did not want to spend as much of my time waiting at the pump getting gas. At first glance that’s a silly requirement, but you can lose 20 minutes every one to two weeks at the pump. Combine that with your daily commute and you have wasted at least 5 hours of your week in your car. The environmental advantages of a hybrid have been debated online as well, as some claim that the energy consumed from production of hybrid car batteries and components vastly outweighs any savings from pollution reduction.  While the government has ceased giving tax breaks to hybrid vehicle owners, the price differential between hybrids and their gasoline counterparts has become marginal over the past few years.

I decided to look at two categories of cars:

Mazda 3 vs Toyota Prius

I test drove both of these cars and decided that there were very similar in price point. A mid-range Mazda 3 came in roughly at $20,000 new while a Toyota Prius was around $24,000 new for the base model. I did note that the Toyota dealers in the area often added many accessories into the car, which often drove up the sticker price at least $1,500. I also considered used vehicles for added savings but unfortunately did not have the cash to make a full payment on the car, and there were limited used car options in my area at the time I needed a car. Alas that is the life of a poor doctor!

The Mazda 3 and Prius were advertised to support a 39mpg and 48mpg highway fuel economy, respectively. This was impressive since the Mazda is not a hybrid vehicle! I decided to compare the annual cost of gas for each car and made a graph:

Comparison of Gas Expenditures Between Mazda 3 and Toyota Prius

At the time I was deciding to buy a car, car prices were at an all time low, around $1.85/gal! During the past two years, I believe that the higher I would have paid for gas was around $2.60 a gallon, with averages in the $2.20 range. For the purposes of the graph, I assumed that gas was $2.50/gal. At 15,000 miles per year, the difference in gas expenditure between the Prius and the Mazda would have been $180.29! Assuming that the Mazda 3 and Toyota Prius are equivalent cars (they are not), is it worth spending $4,000 more up front for the Prius to save around $180 a year in gas? Obviously the breakeven point could change if I clocked in more mileage per year or the price of gas were higher, but cost-wise, it did not make sense in my situation to drive a Prius.

Lexus ES300h vs Lexus ES350

What if I wanted a luxury car? A hotshot doctor shouldn’t be driving a common car, right? We need leather seats, power, and class! I looked into a Lexus ES350 and its hybrid counterpart, the ES300h.  The advertised prices were $38,000 vs $40,920, respectively. There doesn’t appear to be as much of a price differential. The fuel economies were 31mpg on the highway for the ES350 and 40mpg combined for the hybrid. At 15,000 annual miles, the hybrid would save $326.61 if premium gas were $3/gal (yes I live in an area where gas is cheap!)

Annual Cost of Gas Comparison Between the Lexus ES350 and Lexus ES300h

Conclusion

At any rate, it is clear that the gas cost benefit of a hybrid vehicle increases as the price between the hybrid and its gas equivalent diminishes. The breakeven time will of course diminish as price of gas rises and number of miles driven increases (you don’t need a graph to understand that). The estimates that I used compared highway driving for the gas vehicles to combined driving for the hybrid (highway fuel economy for hybrid cars can actually be less than city driving since the gas engine has run).

There is also a huge discrepancy between the cost of the hybrids from model to model. My example of the Lexus ES350/ES300h is seems to be an anomaly at a $2,000 difference. The Lexus LS460 commands a price of $72,000 while its hybrid counterpart (LS600h, albeit with more features) comes in at $120,000!

Frankly, if I had the money to buy a used vehicle with cash, I would have done so. I opted for the best choice I could afford at the time, a Mazda 3 from the dealer. I was able to finance (cringe) the vehicle at 0% APR for 5 years! That’s right, no interest for the life of the loan. I currently average around 38-41mpg combined driving (no hypermiling tactics used) on the car and drive around 16,000 miles a year (MMM would give me a face punch for driving so much, but that story is for another time).

My selection against a hybrid (Prius or Civic) works for me because gas is so inexpensive in my area. Regular gas at its peak was only $2.60/gal!

Did I make a reasonable choice for a car purchase at the time? What car would you have opted for?

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Your House Sucks As A Retirement Account

Posted on by SmartMoneyMD

Soon after my colleague asked me about 401k Plans and retirement, a real estate agent (who was trying to sell me a house) pitched to me that homes are a good means to “diversify my retirement”. After all, I have to live somewhere, right?

Owning a Home “Forces” You To Save.

The sales pitch definitely hit a nerve. Owning a house can be considered a method of “forced savings” through mortgage payments into your home.  You get a mortgage tax deduction and have a place to live! If putting money into your home is the primary means for you to save for retirement, you are screwed. Yes you could have purchased a flat on Champs-Elysees in the 1950’s or a plot of farmland in Shenzhen worth billions now, but buying a home does not equate to buying a lottery ticket.

Can owning a home serve as a means to park your money? Absolutely. But it doesn’t mean that it’s a good place to park your money. My parents bought their home in rural America in the early 1980’s for $66,000 where interest rates were around 12%. They put in another $20,000 in the 1990’s to add a garage and bedroom, but needed to move a few years later for medical care. We ended up selling (after 3 years on the market) for $70,000 before realtor and closing fees. While I don’t have the exact numbers, I believe that my parents paid approximately $150,000 in just their primary mortgage after interest rates!

To make numbers simple, suppose that my parents invested $48,000 in the 1980’s and kept it in a bank that only pays up to the inflation rate. In 1995, that $48,000 should grow to $88,777. Instead, we spent approximately $150,000 to own and live in the house (not including all other expenses of owning a house) and sold it for $70,000 (minus fees).

If you consider this strictly as a way to park you money and “forced savings”, my family clearly made a crappy investment in buying a house.  From a qualitative standpoint, we did have great memories and a stable place to live.

But You Made A Crappy Investment In Buying A Crappy House In A Crappy Location!

Sure, hindsight is 20/20. Sometimes you end up living in a lousy part of the country with horrible real estate options simply because of your job. Maybe it’s not possible to move elsewhere because of family. Some markets have limited rental options and you end up having to buy a home in an artificially inflated market.

The truth is that you have to decide whether a home purchase is going to be for living in OR an investment. The math becomes easier if you make the distinction between investment property or a house you live in.

Buying a House To Use As A Primary Residence

Objectively, you can determine the costs of renting an equivalent dwelling or buying a house to live in. The costs of renting typically include the rent itself, renter’s insurance, and any other ancillary costs of renting.

The costs of buying are more complex. You must consider the purchase price, mortgage (plus interest), down payment costs, property taxes, insurance, maintenance fees, and hassle of dealing with problems. You can deduct mortgage insurance and property taxes from your net income, but you still end up spending the money to own.

Owning your home confers more stability from rent increases but limits mobility in case you find a new job in a different city.

The Right Approach To Using Your Primary Residence As An Investment Is To Treat It As A Non-depreciating Asset

Treating your primary residence as an investment actually isn’t a horrible means to stash your cash.  There are plenty of other worse options like buying speculative plots of land, precious metals, or timeshares. Statistically, there is a low chance of you losing your home completely (like in a fire, natural disaster, or robbery). However, it is nearly as difficult expecting your house to rise in value without putting any work into it. Extracting value out of a home is nearly as challenging. You have to put your house on the market and hope that someone will come along and make an offer. You will eventually make the sale, but it is certainly not as easy as executing a trade and selling your mutual fund.

How much you can get out of your house will depending on regionality, the current real estate market health, and your desperation desire to unload your home. I wouldn’t expect you to lose a significant amount of money on the home, but it is often difficult to extract enough value to consider your primary home as an investment.

Would I consider your home as a means to store your money? Yes. As a retirement account, it doesn’t fare as well.

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Do you treat your home as a primary investment? Does it make financial sense?

Your 401k Plan Sucks As A Retirement Account

Posted on by SmartMoneyMD

One of my more financially interested colleagues recently asked me how it is even possible to retire even after maximizing his 401k his entire working career. This is definitely a valid questions. If he were to contribute  every year for 35 years (starting contributions at age 30 right after he finishes residency), he’d only have $18,000 x 35 = $630,000 in today’s dollars, not assuming any growth from his investments.

That’s not a huge amount of money, especially by doctor standards.

In contrast, a poll by Financial Samurai shows that 25% of his readers have between $201,000-$500,000 in their 401k’s and 17.5% have over $500,000! To add insult to injury, 76% of his readers are between the ages of 26 and 45!

Financial Samurai’s poll is both enlightening and motivating. Clearly the majority of his audience are not doctors—if you look at my friend’s situation, in the absence of investment windfall there is no way he’d have as much in his 401k as his non-medical professional counterparts. This is simply due to the fact that doctors are usually at least 10 years behind their peers in retirement contributions. The maximum limits for 401k contributions are set universally; sometimes you can shove more in with profit-sharing plans, but duration of working life plays the largest role in building your 401k size.

It’s also sobering to think that despite earning solid six-figure incomes, doctors are still typically in the lower end of high net worth individuals. Those that fill the top can include real estate moguls, small business owners who picked the right niche for their industries, and the community college dropout who started a business selling parts for construction cranes.

If You Want To Get Rich, You Have To Work For It.

Just as we spent weeks mastering our basic medical science knowledge to pass the USMLE Step 1, we have to spend time and brainpower in order to get rich. I’ve discussed ways doctors can become rich previously, but the fundamental principle in doing so is still blood, sweat, and tears. As doctors, we can work harder than probably 90% of others around us (exceptions that come to my mind include the marines, military workers, and a handful of other grueling labor-intensive occupations), so I have no doubt that we can become rich if we want it badly enough.

We’d have to want money badly enough to become rich because time is limited. Success requires many trials, failures, reassessments, perseverance, and luck.  It’s difficult to experience all of that simultaneously. To win, something in our lifestyle has to be sacrificed.

Great surgeons I’ve known became great from talent and the years they spent operating emergency cases while being away from their families.  Prolific scientists dedicate their time on their research and publications—this is time not spent on any of their ancillary hobbies. I’ve also known a handful of successfully rich doctors who are twice divorced with alimony from L.A. to Washington D.C.!

If A 401K Not The Solution To Retirement, What Is?

Even though there is a limited amount that can be squirreled away in a 401k, it still is one of the only means for a doctor to save in a tax-deferred manner. You still have to max it out. But know that contributing to a 401k in not enough. You will have to build your retirement by saving through other means. This means that you have to make an active plan to put away a percentage of your income towards retirement. This money should be put to work, either through interest growth from CD’s or savings, dividends in equities, or capital growth. If you believe in banking on yourself while having a defined amount of your net worth allocated for your heirs, buy some whole life insurance. Whatever you do, save some before you buy a fancy car.


I told my colleague that he still needs to maximize his 401k every year, and even consider front loading the entire amount during the first quarter of the year to maximize the amount of time his money is in the market working for him. Whether or not his employer decides to match or offer a profit sharing plan within the 401k is irrelevant.  As a moderately high income employee, he should have no problem contributing the maximum allowed amount. Additionally, he should aim to save 20% of his post-tax income for additional investments with the intention of increasing that percentage until the amount left over after each paycheck is sufficient only for living expenses. As living expenses change, so will that percentage of income that you save. The earlier he can contribute his earnings into workhorses for the market, the higher chance these workhorses will grow. Remember, he is financially a decade behind his non-medical peers.

If he is motivated, he can project out his savings rate and rate of return on his investments to predict the amount that he will have in 1, 5, or even 10 years.

How else are you contributing your earnings towards retirement?

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Money Looks Better In Your Bank Than Your Garage

Posted on by SmartMoneyMD

While the statement is a bash on impractical fancy cars that make your garage look pretty, you can substitute in any money-draining hobby, object, or recurring expense. I am not opposed to enjoying our hard earned dollars–we’ve worked long and hard enough–but it is always a good idea to reassess our desires with reality and practicality.

I once had a medical school classmate who asked me why I would ever need to buy a skillet. It was evident that she never cooked anything her entire life. Fast forward 6 months and I noticed that her closet had at least 100 different pairs of designer shoes! Despite the seemingly outrageous expenditures she had, it was clear to me that she was financially set for life. Not from savvy financial sense, but from inheritance money. Thomas Stanley calls this “economic outpatient care”, which is fine as long as the income channel never runs out. Hey, 10 years later, it really hasn’t stopped and she became an anesthesiologist (although I’m not sure if she still works).

The people who actually run into financial trouble are those whose expenditures ramp up as their earning potential increases. This applies to the majority of my doctor readership. We start out dirt poor, generate hundreds of thousands of dollars of negative net worth, and get slapped by insurance companies trying to restrict every single penny doctors deserve while bringing in a low 6-figure salary. Actually, M.B.A. grads follow a similar track, albeit at a more extreme level. I’ve met recent M.B.A. grads who managed to see 22 countries and build up elite airline status with multiple carriers all in a 2-year span during business school! Afterward, they join private equity firms and command salaries in the $300,000 starting range and up to $500,000 within a few years!  The advantage and dangers of such earning potential is that you can build up wealth quickly but can also lose it even more quickly.

If you don’t have a trust fund to fall back on, you have to play an active role in squashing out your debt and building your assets…no matter how big your paycheck is.

You Must Reassess Your Lifestyle Regularly.

Hold onto your receipts or review your credit card bills. Remind yourself what you are spending your hard earned dollars on.  Find out where your earnings are going towards and get angry at unnecessary expenses.  $2,000 a month restaurant bill? $800 heating bill in the winter? Routine last-minute cross-country airfares to visit friends? It doesn’t matter if you bring in $10,000 or $30,000 a month of income. If the expenses aren’t justified or sustainable, cut them out. I am relatively cost conscious but still find myself susceptible to lifestyle creep.

Since I rarely use cash for purchases, I track my expenses using Personal Capital. You can link up your bank and credit accounts to one system and categorize your I/O’s of your finance. Each week I can pull up a chart showing where my income and expenses were directed. They also provide a robo-investment/advisory service at relatively low costs (that is how they make money), but I currently only use the online financial information services. My investments are also categorized and I can quickly assess how much tilt or where my funds need to be rebalanced.

Direct Your Earnings Towards Your Bank

Every time you receive a raise or paycheck, be sure to pay yourself first. This means allocating a fixed amount or percentage of your income towards retirement and investments. Set realistic savings goals that are achievable. I currently allocate 50% of my post-tax income towards savings. Is that sufficient? Yes, but as high income earners who are able to control our expenses, it is conceivable to save up to 70-90% of our income!

Your savings goals will depend on your short and long term plans. Do you wish to reach FIRE? At what age? Do you have kids that you have to put through an Ivy League education? Do you want to be a millionaire or a $5 millionaire? Do you plan to quit your medical practice after five years and start living out of an RV? It makes good financial sense to draft out 5 and 10 year plans (I admit that I have yet to put much in writing either because I haven’t decided if I will settle in my current city or move on). As long as you do have an approximate plan and savings mechanism, you are much better off than the majority of our peers.

Conclusion

It is okay to spend your hard earned cash, but it is also important to reassess your financial goals regularly.

What strategies have you implemented to build your nest egg?

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