Month: December 2015

The hassles of hiring out your chores

I’m a big supporter of DIY tasks that are minimal risk to yourself and saves you from unnecessarily spending after-tax dollars. Understand that I am a big supporter that money does buy happiness, but throwing money at a problem can sometimes be more hassle than its worth.

Case in point: one of the smoke alarms in my rental started chirping. I am the tenant. The fix is a simple replacement of a low 9V battery…except that the alarm happened to be in the foyer where the ceiling was 12 feet high. I did not have a ladder that high, and it’s unclear whether I should risk falling off a ladder and ending my career over a 9V battery.

Unfortunately, I couldn’t snap my fingers and have a handyman replace the battery at a moment’s notice. In reality, it took many steps to outsource this simple task:

  1. E-mail the landlord listing the items requiring repair.
  2. Wait for e-mail reply stating that it is okay for my to contact her handyman to schedule a repair.
  3. Call the handyman several times to schedule.
  4. Handyman no shows for the repair twice, and does not call back to reschedule.
  5. Handyman shows up 1 hour late, and tells you that the smoke alarm is actually defective.
  6. Handyman takes the defect smoke alarm, and never calls back to finish the repair.

While this process consumed approximately only one hour of my time, having the incomplete task of the smoke alarm looming over my shoulder likely distracted me from other tasks. Moreover, the repair still has not been finished!

Would you hire a handyman to replace a 9V battery on a smoke alarm on a 12-ft ceiling?

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The cons of outsourcing tasks.

Reliability. This is the key factor in determining how efficient you can pay someone to take care of errands for you. I don’t remember the last time I had a reliable handyman who showed up on time, actually knew what he was doing, and took care of the problem quickly. Most of the time, I actually lost productivity by outsourcing minor tasks! If you’ve had a great experience with handymen, comment below!

Theft. Obviously if you leave your belongings out for the taking, you are tempting your housekeeping staff to steal your belongings. I have never used a housekeeper, but I have heard horror stories of my colleagues being robbed by their cleaning staff. Think about it. Most housekeepers are compensated at a mid-low hourly rate. They may only earn $50 pretax for a 5-hour cleaning job in your house. If you leave out your $5,000 Omega watch lying on the counter, you are tempting your $10/hour cleaner to take it.

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Pros of outsourcing tasks.

Manual labor. You are a busy professional. Your livelihood depends on you being able to do a colonoscopy or throw a central line. It would be a shame to become disabled from throwing out your back while mowing the lawn. Yard maintenance, house painting, and furniture moving are all straightforward tasks that are physically taxing. It’s a no brainer to outsource these tasks if you are too tired at the end of the day to be mowing your lawn that needs a trimming every week.

Have someone deal with tasks that you have absolutely no interest in dealing with. This is human nature. I know people who choose to pay for a $150/month gym membership to exercise than to rake leaves in the back yard. I know plumbers who choose to pay another plumber to replace their toilet. I have had a financial advisor tell me that they hire financial advisors to manage their own money! To each his own.

Do you consider yourself to be handy?

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Mortgage Interest Deduction Phases Out with High Income

mortgage interest phaseout for high income earnersOne of the benefits of home ownership is that mortgage interest as well as property tax can be itemized on your tax returns for deduction. This is one the top reasons my mother-in-law insists why I should buy a home. It sounds plausible although you still have to spend money to save money. I’ve mentioned before that I feel that mortgage interest deduction is more of a perk than a reason for owning a home.

How Mortgage Interest Deduction Works.

Let’s say you bought a McMansion and pay about $40,000 a year on your mortgage interest alone (think 30-year loan). Your adjusted gross income before any deductions is $700,000 as a neurosurgeon. For simplicity’s sake, you could potentially reduce your tax burden by $40,000 by deducting your mortgage interest. This means that the government will tax you as if you made $660,000 that year instead. At a marginal tax of 39.6%, you “saved” $15,840 of federal taxes! That’s right, by spending $40,000 of your money, you’ve saved yourself from paying $15,840 in taxes (Yes, you are also building equity in real estate in the process)

High Income Earners Get Hit with the Pease Limitation.

If you are a high income earner, you don’t get off the hook that easily. The Pease limitation starts phasing out how much you can deduct as your gross income increases. For 2015, this phaseout range begins at $258,050 for a single filer (not married).

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The deduction amount is decreased by 3% of the difference between your gross income at the phaseout limit. For the neurosurgeon example, this amount is: ($700,000-$258,050) x 3% = $13,258.50. This means that instead of deduction $40,000 in mortgage interest, the neurosurgeon can only deduct $40,000 – $13,258.50 = $26,741.50. At a marginal tax bracket of 39.6% your deduction is not pocket change, but it is certainly still reduced.

Buy A Home For the Right Reasons

Don’t just buy a home for the mortgage deduction with the expectation that you can sell it in a heartbeat if you need to move. Understand that home ownership comes with both perks and headaches. There are plenty of people who opt to rent for life. As a high income earner, you will be hit with phase-outs. Remember that the Pease limitation is annoying but not a reason why you shouldn’t own property. If it stings you, the way out is to make more money. Hustle.

(Photo courtesy of 401k 2012)

How much in mortgage interest do you pay annually?

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Money Does Buy Happiness

money can buy happinessDoctors need to care about money. Not only because we deserve it, but it also helps provide a roof over our heads and keeps our bellies full.  Those who say that money doesn’t buy you happiness are misled or lying.

Being Poor is no fun.

One could say that all college students are impoverished, but that is simply NOT TRUE. There are plenty of wealthy kids in college, especially elite private colleges. I was by no means poor in college, but felt like I was financially disadvantaged being surrounded by kids with huge bank accounts who could go to parties and enjoy expensive meals every weekend (I had no bank account). There were a lot of wealthy college kids in the U.S.

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In medical school I felt the same way, except that I had borrowed money sitting in my bank account at 6.8% interest. Since my medical school class was smaller than my college class, the concentration of wealth surrounding me seemed magnified. My classmates planned weekend ski trips and international spring break trips. I skipped out on those trips (as did many other people) simply because there was not enough money to go around.

In contrast, the business school students put the medical students to shame—their weekend and holiday excursions consisted of jetting to Europe, South America, and the Pacific. I’m sure that many business students have pre-existing bankrolls to fund their trips, but perhaps they are exercising financial leverage for their future self. Who knows?

Money Solves Problems.

I can recall that money would have solved many of the problems I have faced in my career. If I had more money to order food as a student, perhaps I could have spent more time studying or networking instead of making spaghetti for dinner!  If money were not a concern, I would have sprung for a more expensive direct flight for my job interviews instead of taking a more budget friendly multi-layover flight. If I had more income, I would not have had to live in a roach-infested rent-stabilized studio during my residency.

Even as a practicing physician making a comfortable low six figure income, I would say that having more cash reserve attached to my name would give my family a larger buffer of reassurance. You never know when you might lose your job, get injured, or suddenly have large expenses.

Use The Power of Money As A Goal

Just because you understand that money buys you happiness doesn’t make you a greedy pig. You can use its allure to drive your success as a doctor. Make yourself rich doctor. Once you reach your goal, use your experience to guide others in your field, care for your patients, and make the world a better place. After all, isn’t that why you went into medicine?

(Photo courtesy of Nick Ares, Flickr)

Has there been a situation where having more money would have made your life easier?

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The Practical and Basic Ways to Inspect Your Tires

I’ve written before about low risk practical measures to maintain your vehicle such as changing the headlights and taillights. Today we will discuss two fundamental principles of wheel care: tire pressure and alignment.

 

Tire Pressure

As part of my routine car maintenance, I typically check my car’s tire pressure to make sure that they are properly inflated. Insufficient air in the tires will result in decreased fuel economy and uneven wear. Overinflated tires will also result in uneven wear on the central treads. Tire pressure maintenance is particularly important in cold weather, as air pressure decreases as the molecules slow down with decreased temperature.

The first step in management of tire pressure is to know what is a normal number for your car. Most cars will have a detailed chart on a sticker in the frame of the driver’s side the car:

recommended tire pressure in front door

Many vehicles will have different ratings for the front and the back tires depending on the expected load. The photo above shows that my 2006 Subaru Impreza has a recommended tire pressure of 33psi in the front tires and 20psi in the back. Note that the tire pressure in the spare tire is much higher (nearly double) that of the standard tire. Since the spare tires are typically smaller than the standard tires (less contact area), a higher pressure is required to hold up the weight of the car.

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Newer vehicles actually have pressure sensors built into the valve stems of the car and will notify the driver whenever the tire pressure is out of range. If your car doesn’t have sensors, then all you’d need is a tire pressure gauge from any department or hardware store. To check your tire’s pressure, simply unscrew the valve cap and place the gauge to the Shrader valve.

To refill your tires, either add air via a pump at the gas station or use a portable tire inflator/starter.

Wheel Alignment

Wheel alignment is a more subtle phenomenon that is critical in maintaining durability of your tires. Misaligned tires will wear unevenly. The key to measuring wheel alignment is to check the tread depth of your tires. The magic number is that you need to keep the tread depth to be thicker than 2/32”. To measure the tread depth, use a ruler gauge:

Check tire tread depth with card ruler

Or you can also use a penny to track the tread depth. Please the penny upside down in the groove of the tread and if you see Lincoln’s head, then your tread depth is <= 2/32”. Uneven tread wear will result in decreased traction on the pavement and decreased control during slippery road conditions.

check tread depth using lincolns head on a penny

Check every tread in your tire (outside to in), and see if the depth wear is even. I recently noted that my outer treads were worn asymmetrically with the inner treads. This results from positive camber, and means that I should look into my suspension or take my car to get the tires realigned. I take my tires to Walmart every 7500 miles to rotate (I get free balance and rotation since I purchased the tires from them), but clearly the mechanics never did note uneven tread wear on all of my tires. YMMV on discount service centers!

How often do you inspect your vehicle's tires?

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Your Spouse Is The Best Retirement Plan You Will Ever Have

Courtesy of an iconoclastWhile most of us consider having a stable job and effective investment plan our best strategy for ensuring a financially secure retirement, having a spouse whose financial beliefs aligns with your own is even more important. Whether or not your spouse has any control over your finances, he or she will influence your flow of money anyway.

Your Spouse Can Spend You Into The Ground.

It doesn’t matter if you earn $100,000 or $1,000,000 a year. If you spend 99% of what you earn, you won’t have much left over. You will end up making expenditures whether or not your spouse has an income. If your partner/spouse is a spendthrift, you will likely have a longer working career. This applies to husbands and wives. I’ve seen plenty of husbands of doctors who enjoy their fancy custom-made suits and alligator shoes as much as their female counterparts. Everyone has their own spending habits. Make sure you and your significant other agree on your finances?

Your Spouse Can Cut Your Net Worth in Half. 

Yes, we’re talking about divorce. I’ve seen divorce rates quoted to be as high as 50%, whether or not the statistic is true. While most doctors I know stay married, I also know a good number of doctors who are divorced or separated. The reasons for separation always revolve around similar themes: spending too much time at work, incongruent spending habits, and infidelity (probably stemming from the problem of work). Add in legal fees, and a bad divorce can destroy years of hard work. If you’re less fortunate, add in child alimony and you will be in bad shape. We’ve worked too long and too hard for our family lives to implode. Don’t let that happen to you.

Does your spouse work?

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A Working Spouse Supercharges Your Net Worth

If you have a spouse whose income isn’t whittled away by taxes and opportunity cost from being outside of the home, you’ve hit the jackpot. Anything that your family can do to generate income will translate into more opportunities to contribute to your tax-advantaged accounts and savings. Having a dual income is NOT an excuse to spend more; consider it a luxury and opportunity build your target nest egg faster.

Additionally, your working spouse is likely also contributing to his Social Security earnings. While I don’t consider Social Security in my retirement calculations, it would be a nice bonus if it still existed by the time we need it. Having extra governmental money from your spouse would be even sweeter.

A Working Spouse Makes Losing Your Job Less Stressful.

If you are the sole breadwinner in your family and you lost your source of income, you are screwed. You have mouths to feed, and your entire family will be out on the street if you don’t find work. It also means that if your boss is taking advantage of your work, you can’t walk away. Not so if your husband is gainfully employed. If you have a second source of income, you could tell your boss F-You if you needed to.

Think about it. If you want stability in a web server, you need redundancy—multiple means to stay online. If you want security and redundancy in your financial plan, you need a spouse who is on board. Your spouse is your best means of achieving a sound retirement.

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(Photo Courtesy of an iconoclast)

The Truth About Deductions – You Keep What You Don’t Spend

Courtesy of Tax TimeI still receive a good amount of advice from colleagues, friends, and family that it’s okay to buy a service or product because I can deduct it as a business expense.

Business deductions are great if you own a business. Small business owners have a great deal of flexibility in terms of deductions. Essentially any purchase or expense related to the business can be included: mileage driven to work, desks, computers, postage, utilities, rent…etc. The purpose of deductions is essentially a tax credit against your profits.

A simple example is that if you earn $100 but incurred costs of $80 in order to earn that $100, you only have a tax liability of $20. This amount is quite huge if your marginal tax rates are high, which is typically the case for most high earning individuals. The U.S. tax laws are quite generous to small business owners and allow many options for a business to succeed. For expensive equipment, you can opt for a Section 179 to depreciate items over a number of years. If you are going to spend the money anyway, you might as well take advantage of these benefits.

 

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Deductions are not for everyone.

Unfortunately, the majority of doctors are shifting towards salaried positions, which means that we receive our income through W-2 payments. As an employee, your ability to deduct your expenses is dramatically less than that of a business owner. Expenses for employees can only be itemized if they exceed 2% of your annual gross salary! Even then, you can only expense the amount that exceeds 2% of your income. For an employed physician who grosses $200,000 a year, you can only deduct the amount over $4,000. Let’s say that you went to one CME meeting and spent $5,000 on all expenses, and that your marginal federal tax burden is 35%. Essentially, the government will consider that you made $1,000 less in income, thereby “saving” you $350 in taxes. Okay, by spending $5,000, you “saved” $350 in taxes.

The math is better than having no deductions, but does that impact your spending decisions? Did you have to attend that particular meeting? What if you spent only $3,000 at the same meeting (stayed at a less fancy hotel, and ate cheaper food)? At a gross salary of $200,000, you don’t meet the 2% minimum requirement for deductions. However, you spent $2,000 less than you could have otherwise and also paid tax on the amount that you kept.

In scenario #1 ($5,000 meeting), you spent $5,000 and paid taxes (likely marginal) on $4,000 (the amount less than 2% of your income) of it.

In scenario #2 ($3,000 meeting), you spent $3,000 and paid taxes on $3,000 of it. However, you are “ahead” $2,000 from the amount that you didn’t spend. At a 35% marginal tax bracket, you still end up with an extra $1,300 to spend on other things.

Understand your goals.

Everyone is going to have different goals. If spending only $3,000 at a meeting would make you miserable, then you might as well spend $5,000 to enjoy your hard-earned money. Otherwise, you might be better off roughing it with $3,000 at the meeting, and putting the $1,300 you save towards your kids school tuition or a nice vacation.

What are your thoughts on deductions?

How are you paid?

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(Photo courtesy of Tax Time)