Month: April 2016

Why I still shine my shoes

For a mere $8, I can have my wedges shined at the airport. Sometimes it will cost $10 or $13 after tip, depending on how generous I feel. It doesn’t break the bank, but it sure isn’t cheap either. I suppose that I could take my shoes to a local street vendor and save a few bucks, but that requires going out of my way to make an extra stop before going home.

This is a chore that I’ve wondered whether there is validity in doing myself. I probably have a pair of shoes shined every few months. The problem is that I have a good number of shoes.  Eventually the time and costs add up. How much do I need to earn in my primary job to make this worthwhile? Is it $100/hr, $150/hr, or $200/hr? That’s a tough call. I’d imagine that if I can command $500/hr consistently on a full-time schedule, I probably can’t be bothered to polish my own shoes.

But I don’t.

So  Shoe shining can be quite simple. All you need is shoe polish, a rag (old sock), and maybe a brush. Go ahead. Help keep your expensive leather pumps looking new.

why i still polish my shoes

Would you be willing to polish your own shoes?

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How much money do doctors really have?

Previously, we discussed examples of how much wealth an average doctor with aggressive saving strategy can will have after working for five years. There were a few comments that the saving strategy was indeed a bit aggressive, but I think that it is clearly doable. Part of the strategy is to become a good doctor, work hard and hustle, and learning to diversify your income stream.

Medscape recently released a survey on physician net worth, and it provides an interesting snapshot of our profession. Head over to Medscape to read all the details. One graph that I found interesting was the stratification of physician net worth by age:

medscape physician net worth by age

I think this survey reveals a few findings that are reassuring and expected from the profession. The “Under 28” category is not surprising. Most of us are still in residency, and either have a zero or negative net worth. I’m surprised that 4% of the respondents actually had over $1 million in net worth. This demographic has inherited money or other unusual windfall.

Under the age 28-34 category, 12% of respondents already have over half a million dollars in net worth! I’d expect these doctors were unlikely to have incurred student loan debt and have entered specialties with relatively short training periods and moderate to high salaries, such as Emergency Medicine or Internal Medicine. Assuming that the average Emergency Room doctor finishes a 3-year residency at age 28, she will start earning at least $300,000 her first few years on the job. Very few other medical specialties will be able to command such a high salary early on in their working careers in such relatively short amount of training.

What is reassuring is that 12% of doctors before age 40 actually become millionaires. You don’t even really need a working spouse to reach this threshold if you are prudent with your earnings. The White Coat Investor was able to do it with aggressive saving, smart investing, and diversification of income. Imagine that you are a Hospitalist earning a flat $250,000 annually. At age 40, you will have worked 10 years, and $2.5 million in pretax dollars. At a 30% effective tax rate, you have taken $1.75 million home after taxes. If you are very conservative and spend on $50,000 a year, you will definitely have at least $1 million in the bank. Even if you aren’t a frugal, you should still have $1 million in the bank.

Doctors should be able to do well overall. 

Based on the Medscape survey results, doctors are still very well off compared to the general population. The sole reason for this is that we as a profession have a good offense in the form of high income. Even if we may not control our expenses as well as we should, we can still survive. About a third of the survey respondents close to retirement age (60-64) reported a net worth above $2 million. Not bad. The other two-thirds of the group have less. While I don’t anticipate seeing doctors out on the streets, we should be able to do better given our 30+ year high earning career. You can take control of your earnings, spendings, and let your money work hard for you.

(Photo courtesy of Medscape)

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Will I get rich from becoming a restaurant franchisee?

will i become rich running a restaurant franchiseRunning a restaurant franchise ranks high on my list of fastest ways to lose a ton a money. Now if this were inherently true for every entrepreneur, there wouldn’t be any fast food restaurants or people getting rich from running food establishments. If you’re a busy doctor looking for a way to stash your hard-earned cash to work for you, keep moving along. Running a restaurant as a franchisee is by no means passive or risk-free. If you’ve always dreamed of owning a McDonald’s, it’s still an option for you once  you’ve built up at least $2 million in the bank…literally.

Restaurants can be high-revenue businesses.

Every time I’ve walked past the McDonald’s on 8th Ave across from Penn Station in New York City, it’s packed. The place is open 24 hours a day. Hell, the other McDonalds one block over on 7th Ave is also open 24 hours and also packed. Chick Fil-A looks even more successful. In the suburbs, the Chick Fil-A drive-thru line is packed at all hours…2pm, 3pm, 4pm, 8pm. Insane. Owning one of these franchises has to be gold mine, right? A busy restaurant can generate around $1.5-$2 million in revenue annually!

 

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The advantages of franchise ownership. 

The franchise company wants its subsidiaries to succeed. They have well-developed business models, plans, and statistics that help you establish the appropriate market to succeed. There is typically strong brand placement to the public. Everyone knows what the Golden Arches symbolize. There should not be any difficulty with customer awareness. Additionally, the products that each franchise carries have been tested. There is no unknown in the product.

The business model from top to bottom is clear cut: the construction, permits, materials, flooring, appliances, electronics, food suppliers, and staffing is laid out in the business plan. As a franchisee, you simply front the construction and operational costs. The rest of the supply chain will take care of itself.

Cons of running a franchise.

Unfortunately, I can think of an equal number of issues running a franchise. There is never a free lunch. The market research and business model that is provided to the franchisee comes at a cost. There is almost always an initial franchise fee that owners pay to the parent company. This often ranges in the mid-five figures. Royalties have to be paid monthly, and the initial investment costs can be high.

Let’s look at one of my favorite restaurants: McDonalds. The typical initiation fee is $45-$50,000. The initial cost to construct and acquire the facility is at least $1 million. Last I checked, you have to prove to them that you already have a certain amount of cash in the bank, like $750,000. If you construct a brand new building, you will have to abide by the constraints set by the parent corporation.

Once you’ve finally set to open your doors, you have to pay a monthly royalty fee of around 4% of your sales. The food supply purchases all have to go through McDonald’s recommended supplier, which may or may not be the cheapest option you have. Some franchises like McDonald’s also has an annual renewal fee that you have to maintain. It is not cheap running a franchise.

 

How much can I make owning a franchise?

Restaurant franchises have huge revenue streams. According to QSR magazine, an average McDonald’s sold approximately $2.5 million worth of goods in 2014!

Chart courtesy of QSR
Chart courtesy of QSR

 

How much of that revenue actually translates into your pockets? The numbers vary, but I’ve seen profits on McDonald’s to be as low as $60,000 to the low six figures! Is that worth it if you already have a busy job that pays relatively well? I don’t think so.

How do restaurant franchisees actually make big bucks? I think that the secret is in the numbers. After speaking to several store managers at my local fast food restaurants, most of the owners actually were larger corporations or small businesses who owned several locations. Every one of them managed restaurants full-time.

Even then, it’s likely that you may never see your business flourish in one generation. Should doctors consider opening franchises? My take: no way. Park your money elsewhere.

(Photo courtesy of Flickr).

 

Would you consider opening a restaurant franchise?

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How much time should I spend managing my finances?

how much time should i spend learning financeI spent about eight to ten hours per day studying for my USMLE Step 1. I believe that I did this for about a month of my life. Prior to that, I was probably reviewing the material about five hours a week in addition to studying for my classes. I don’t think that I’ve ever worked that hard in my entire life trying to learn something from a book. Several of my internship rotations were similarly life-consuming, like my general surgery months. I think I was salaried at like $24.40 an hour before taxes, or $50,752 a year. This was good money, except that I worked at least 80 hours a week for more than six months of the year. I think there was a two week period that I spent 252 hours in the hospital! The hospital sure got a great deal having residents putting in central lines, tapping effusions, and pulling JP drains at near-minimum wage. We got an education in return. This lifestyle was absolutely horrible for my health.

But, boy was I good at random medical knowledge. Bezoars? I bet you didn’t know that there were three categories of them. How about George Gershwin’s GBM? Piece of cake.

 

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Since then, I’ve grown utterly lazy. I clock in an easy 55 hours a week. Some of my colleagues in the ER only do 34 hours a week and earn quite a bit more than I do. Is it time to kick back and relax?

 

Strengthen your knowledge outside of medicine.

I’ve said this before, and I’ll say it again. The disadvantage of being highly knowledgeable in a particular subject means that you are less likely to be knowledgeable in other topics. To disprove the stereotypes that doctors or other highly trained professionals don’t know anything outside of their fields, I suggest that you learn about something outside of your profession.

Anything.

Hiking, sports, photography, finance…whatever. Find a designated time each week to find something you enjoy and learn about it. You’ll be doing this same stuff when you’re retired. If you decide to retire early, then you’d better be prepared to do this for a longer time. Carve some of the time you waste looking through Facebook each day and improve your fund of knowledge. Your future self will thank you later.

How much time do I need to study finance?

Answer: a whole lot less time that it takes for you to do your primary job, unless you are in the financial world yourself.

Most people will figure out quickly how much they love or hate reviewing financial history. If you love it, you’ve found yourself a new hobby. Otherwise, you’re out of luck. Fortunately, one could become relatively fluent in a subject without having to go into profound detail. Think Cliff’s Notes. I remember that I went through review books and summary outlines to learn particular subjects in school. I aced those tests. Did I actually understand the material well? I doubt it. Ironically, I actually synthesized the concepts years later. Yes, I do believe that condensed knowledge can still be absorbed; it just might take longer.

Fortunately, you have time. Commit to learning something about finance, whether it be terminology or principles. If you really hate it, spend an hour on this subject for every five hours you spend with your CME (continuing medical education). If you really like it, ramp up your efforts. Set aside one hour a week to read some newsletters, financial handouts, books, or blogs (like this one!). Your public library has a wealth of resources.

 

Does gender play a role in financial knowledge?

Gender can place you at a disadvantage with finance. I’ve gone through plenty of finance blogs and books—I think that we can all agree that this a male-dominated niche. Most of the commenters on early retirement websites are male. I don’t think that men are more financially savvy than women either—look at Suze Orman—but I believe that there needs to be more of a female voice in finance.

The medical profession has traditionally been male-dominated but this is changing as well. My medical school class had 54% women. I suspect that the percentage will begin to grow. What this means is that it will be more likely that women will transition to being a breadwinner in a medical professional household. There will continue to be a need for understanding how to maximize our hard-earned dollars.

 

How do I get started? 

Reading this website is a good first step. Eliminate your student loans. Become good at your job. Find the hunger. Live up to the stereotype and become a rich doctor.

How many hours per week do you spend learning finance?

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(Photo courtesy of Flickr)

How to replace the engine air filter in a 2006 Subaru Impreza

I neglected to follow the maintenance schedule for replacing my engine air filter and realized that it had been over two years since I last replaced the this part. The replacement process is simple and also relatively low-risk, meaning that it is unlikely for you to screw up, hurt yourself, or destroy your vehicle.

In the 2005-2007 Subaru Impreza series (non-WRX), the replacement process is quick and simple. The engine air filter is situated on the passenger side of the engine.

Access to the engine air filter is on the passenger side under a plastic vent cover.
Access to the engine air filter is on the passenger side under a plastic vent cover.

The housing includes two clamps that can be released without any tools:

Push the clip away from the edge of the cover to release.
Push the clip away from the edge of the cover to release.

The plastic vent hood can then be lifted up vertically to expose the engine air filter. The tubing should have a little bit of give and offer you plenty of room to move the cover aside. My old filter was disgusting and pitch black:

This is what a dirty engine air filter looks like. Don't let that happen to you.
This is what a dirty engine air filter looks like. Don’t let that happen to you.

Typically the airflow through the filter is not through the center of the filter but rather from the side. Most of the time only half of the filter becomes dirty simply due to the positioning of the airflow. My filter was black throughout, as I clearly had rotated it around to extend the life of the filter.

This is what a clean engine air filter looks like
This is what a clean engine air filter looks like

I ordered my air filter through eBay for $8.05. You can simply take out the filter and replace it with a new one. The dealer charges $40 plus another 0.25 hrs of labor @ $100/hr. The entire job took me about five minutes, which included the time it took the pictures for this entry. That is an insane amount of cost savings especially since I didn’t even have to take the car to the shop! I could have even splurged and used a high-end oil-based filter that will outlast the life of your car (rated to be used for 1 million miles!)

Have you replaced the engine air filter on your vehicle before? Is the cost and time savings worth your pay scale?

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How Much Net Worth Should Doctors Have?

How Much Net Worth Should Doctors Have?

how much net worth should doctors haveMost doctors will spend anywhere from eleven to sixteen years after high school to become a fully trained and practicing physician. This is a long time to delay your income and life. Most of us go through four years of college, four to five years of medical school, and anywhere from three to seven (or more) years of residency and fellowship. Assuming that we started at age 18, we finish this journey around age 29 to 34. The only upside I can think of being old is that most of our patients expect older doctors to have more experience! (Who do you really want doing your robotic prostatectomy: a 38 year old youthful appearing surgeon or a 64 year old greying surgeon who has been practicing for thirty years?)

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Since most doctors graduate with debt, we do have to play our cards strategically to “catch up”. Unfortunately, the average doctor will not become richer than an average aggressive financially savvy IT guy or white collar worker, we can come close.

Here’s how the net worth of how a financially conscientious Hospitalist progresses:

Most Hospitalists who do not pick up a huge number of additional shifts or locum jobs have a relatively narrow range of income. On average, we expect a starting salary around $200,000, which may increase to $220,000 the second year, $250,000 the third year, and perhaps a cap around $260,000 in year 4 and beyond. For simplicity, we’d assume an effective federal income tax rate of 25%. Let’s also assume that this Hospitalist has a student debt of $250,000 upon finishing residency. We can also ignore any investment growth on the savings or interest payments on the loans.

Gross Income Net Income after tax Expenses Savings Net worth

Year 1

$200,000 $150,000 $30,000 $120,000

-$130,000

Year 2

$220,000 $165,000 $40,000 $125,000

-$5,000

Year 3

$250,000 $187,500 $40,000 $147,500

$142,500

Year 4

$260,000 $195,000 $50,000 $145,000

$287,500

Year 5

$260,000 $195,000 $50,000 $145,000

$332,500

Year 6

$260,000 $195,000 $60,000 $135,000

$467,500

In this simplistic example, the average Hospitalist who starts work at age 29 will come out of student debt by age 32 if she saves relatively aggressively. Those of us who have dug ourselves out of a significant amount of debt can agree how therapeutic that last payment can be. The average doctor can get herself out of debt relatively quickly with a clear strategy to tackle the debt. Obviously the growths are going to be different depending upon your profession. An ophthalmologist who starts out with a measly $165,000 salary will need to budget more carefully than the neurosurgeon who will command $500,000 out the door.

Based on this example above, we should be able to make several general conclusions regarding the financial situation of most doctors:

  1. We should all be able to repay our student loans within the first five years of practice assuming that you started with an average amount of debt. Most of us should be able to repay it all within the first three years if we wanted to.
  2. The average doctor may not become a millionaire by age 40 on her own income, but all of us should be millionaires by age 45. Unfortunately a million dollars really isn’t a whole lot of money now, but it sure as hell is nicer than what the rest of the general population can earn.
  3. We can all make a decent living in medicine. It still isn’t easy after your grueling training, but with today’s aging population we do have job security.
  4. You will not likely be able to afford the $3,000,000 mansion in Miami. Some doctors will be able to do solely through pre-existing family wealth, higher paying specialties, or through alternative streams of income.

Let’s take a look at another doctor who is an Intensivist (someone who works in the intensive care unit). Assume that she also comes out of fellowship with $250,000 in student loans. She will also have an effective income tax around 30%:

Gross Income

Net Income after tax Expenses Savings

Net worth

Year 1

$300,000 $210,000 $30,000 $180,000

-$70,000

Year 2

$325,000 $227,500 $40,000 $187,000

$117,000

Year 3

$350,000 $245,000 $40,000 $205,000

$322,000

Year 4

$375,000 $262,500 $50,000 $212,500

$534,500

Year 5

$400,000 $280,000 $50,000 $230,000

$764,500

Year 6

$400,000 $280,000 $60,000 $230,000

$994,500

In this scenario, the Intensivist will most likely become a millionaire by year six. It’s interesting how doctor income varies among the specialties.

What is your target net worth after ten years on the job? How does it match up to these examples?

 

(Photo courtesy of Flickr)

Tax Deductions in Real Estate Rentals

deductions in rental real estateRich people love to rave about how they were able to reduce their tax burden. How about paying 15% in effective taxes on a $1,000,000 income? In the United States, laws favor those who are small business owners. In the previous post, I discussed fundamental ways that one makes money from rental real estate. Here I will go over some of the more common ways to reduce your tax burden as a landlord in the real estate business.

Why are tax deductions important?

Running a real estate business is not easy. You are basically taking out a loan to purchase an expense property to generate cash flow while hoping that the property appreciates over time. This is by no means passive—things break, renters can be deadbeat, your property can go unrented—in essence, in real estate you are hoping to generate a stream of growth on the money that you locked down. Can you get 4% growth? How about 7%, 9%, or more? Whatever you do in real estate, make sure you end up with more money that you started, beat inflation, and get a tolerable return for the effort you put in.

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Fortunately the U.S. tax system allows you to offset your paper gains with many of the expenses of running a business. If you do venture into the real estate business, make sure you are taking advantage of what is available to you.

Common deductions that you can tax in your rental real estate business.

  1. Mortgage interest is deductible. Most landlords will obtain bank loans to finance the purchase of a rental property. The interest on the mortgage paid every year can be deducted from the business earnings to reduce your tax burden. Uncle Sam is effectively reducing your marginal income tax if you spent that amount of money on interest payment on a loan!
  2. Depreciation of real property — Depreciation is a complex subject that is beyond the scope of this generalized overview. However, depreciation should be construed as MONEY IN YOUR POCKET. Commercial real estate is treated differently than residential property. In the broadest sense, real estate for tax purposes loses value over time. The amount lost can be used to reduce your tax burden. For instance, residential real estate can be depreciated over 27.5 years. This amount only includes the building structure, and not the land. So if you purchase a home for $500,000, with the land accounting for $150,000 of the purchase price, you can divide up the remaining $350,000 cost of the home to depreciate over the next 27.5 years. Yes, this seems like a long time, but the amount becomes quite substantial over time, especially if you can keep generating rental income in your property.
  3. Repairs — Things break. Fortunately if a critical component of your rental property needs to be repaired, you can use that to offset income. There is a fine line in this perk. If the roof needs to be replaced, the fan on the AC air handler breaks, or the garage door needs to be patched, these costs can be deducted from your income. The rules are quirky too. If you pay the HVAC person to clean your AC fan for $50 because it wasn’t working well, you can deduct the cost of your repair. If you do it yourself, you cannot.
  4. Personal property — Items such as carpets, furniture, and appliances used in a rental property can also be depreciated as personal property. This means that the cost of this type of item can be depreciated over 5-7 years instead of the 27.5 years for the building itself.
  5. Insurance — You can essentially deduct any insurance you pay for your rental property from your income. This includes fire, theft, landlord liability insurance…etc. Not bad!

There are plenty of other nuances in the U.S. tax system that allows real estate investors to maximize their options for reducing income tax. You can’t do this with other types of investments.

The caveat of tax deductions for high income earners.

Remember, you are a highly paid professional. Maybe even a neurosurgeon. Maybe you are a horrible businessman (or woman) with no ideal how to operate a real estate business. You still forge ahead and buy real estate to rent out to your unsuspecting neurosurgery residents (they are locked into your rental for at least six years!) You lose money in the process. Can you deduct your losses from your professional income as a surgeon?

Unfortunately not.

The tax system does forgive lower income folks with rental property. (lower income is obviously a relative term) If you earn less than $100,000 a year from your current job, you are allowed to offset up to $25,000 in rental business losses from your earned income! This deduction benefit phases out until an earned income of $150,000, where you don’t qualify at all. The neurosurgeon earning $600,000 of annual income will not receive any remorse from Uncle Sam.

What deduction benefits of real estate ownership do you like the most? Which other ones do you use?

 

Note: I am not a licensed tax expert, accountant, or financial or business advisor. All information contained in this post and this website are solely opinions of the author. We are not responsible for any damages incurred from information contained on this website.

 

(Photo courtesy of Flickr)