Month: December 2017

Five aspects of your financials that you can clean up for the New Year

Five aspects of your financials that you can clean up for the New Year

As we’re counting down the hours until 2017 is no more, I’m going through my victories, failures, and resolutions for the upcoming year. It’s important for personal development to identify what has worked in our lives, what hasn’t, and what we can do to become better people. Financially, 2017 has been a rocky year for me—medicine has hit various professions hard, and the unlucky have been hit. I personally took an 80% pay cut while working longer hours and bringing in 8% more revenue (Yes, that’s collected revenue and not charges) for my employer! C’est la vie. We hope that  2018 will be a better year for medicine.

Despite what happens with our jobs, my financial plans remain as focused as ever. The upcoming year will still be too soon for me to declare financial independence or cut back on my job, but I hope to hit more milestones within the next five years.

In the meantime, I’ve dusted off my Top 5 Financial Checklist that I will be reviewing for the upcoming new year to keep my financial plans sharp:

Fund the Roth IRA

Anyone who is drawing a paycheck who has no tax-deferred IRA space should be contributing to a Roth IRA. Even if you are in early retirement, you ought to plan to fund your Roth IRA as you are withdrawing to cover your lower tax bracket space as conversions. If you don’t quality directly for a Roth IRA due to high income, you should still fund a backdoor Roth IRA.

You might also like: How to fund a Backdoor Roth IRA. 

If you have the funds, go ahead and contribute to your Roth IRA in January.  I’ve definitely had years when I “never found the time to contribute”. Your future self will thank you for it.

Strategize means to pay off those student loans

Although student loans are fortunately immaterial for me, they were a psychological burden when I was still in repayment.  With federal loans in the 6.8% range, recent graduates will benefit greatly by knocking out those loans as if your hair is on fire.  It doesn’t matter if your college roommate tells you she can get a 7% return on stocks that will compound while your student loans remain on simple interest. It doesn’t matter if a college acquaintance who became a real estate mogul gives you a lead on a 14.5% real estate return. Repayment of a 6.8% student loan is a guaranteed post-tax gain. If you have to refinance at a lower rate, do it. If you receive a sign-on bonus on your first job, consider contributing a portion of it (or all of it) towards your loans. You could probably live without a fancy new car for at least one year, right?

Reassess liability.

Liability to me involves situations that could devastate your financial situation. This includes:

  • Disability insurance
  • Homeowner’s / Renter’s insurance
  • auto insurance
  • umbrella insurance

One interesting aspect about umbrella insurance is that it ties into your auto and homeowner’s insurance. Most insurance companies do require a certain minimal coverage on your vehicles before umbrella insurance takes effect. If you drive a very old beater car that really isn’t worth insuring, you still have to increase the coverage. Yes, you have to pay more to get covered more because you have more money. I’d take more money any day.

Update your financial plan.

Everyone will have different levels of details in their financial plans. Some of us will calculate down to the month and year when we will be able to say goodbye to our daily jobs. Other people are simply going to have a basic financial statement declaring their investment strategy stratified by age. I keep my financial plan relatively basic, and I assess my annual savings rate, stocks to bonds ratios, and whether there are any planned big expenses like home purchases or real estate investments that I need to save for at the beginning of the year. This takes maybe fifteen minutes of additional thought and planning each year. No more, no less.

Update any employer-sponsored retirement savings.

Employer-sponsored plans include HSA’s, FSA’s, basic 401k’s, and the like that should be pretty much on autopilot.  Not every household is suited for high-deductible health insurance plans to qualify for HSA’s, despite what we commonly seen among financial bloggers. Believe it or not, some of us have families with chronic medical conditions that still benefit from health plans with higher premiums but more coverage. Many FSA plans allow you to carry over $500 or less of your balance into the new year. Be sure to make note of any details—you certainly don’t want to give away any money that’s rightfully yours.

Happy New Year everyone! What other financial housekeeping duties do you go through at the end of the year?

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How the Financially Independent can plummet back to Financial Dependence

How the Financially Independent can plummet back to Financial Dependence

Merry Christmas everyone! I hope that everyone is having a safe and relaxing holiday with their families, whether that means opening presents in front of the cozy fireplace or watching films while eating Chinese food.

While I do feel envious of those in the blogosphere who have reached financial independence, I do realize that everyone is in a different situation and phase in our financial journeys. The financially precocious of this world have surely gotten a head start, but building up hoards of money isn’t the name of the game. We just need to be smart about what we put our labor towards and enjoy ourselves during the journey.  Doctors enter the workforce—money people call this the wealth accumulation phase–later in life, but we are fortunate to have good earning potential.  I’d pick compound interest over earning potential any day, but earning potential can get you pretty far in life.  Well, if you are a doctor who doesn’t have good financial firepower, I hope that you are still saving lives and healing people. ?

One aspect of financial savviness that I was skeptical about early in my financial readings was how  one can be confident that safe withdrawal rates can actually be safe? The financially bold were able to set their expenditures within a tight range, build up to a 3-4% safe withdrawal rate, minimize their tax burden, and tell off their employer a la Office Space style.

I see others simply working a “few extra years” with strong savings rates over 50% to build up additional buffer. Then there are the exceptional prodigious who actually develop additional income  after declaring financial independence.  There are many roads to Rome, as they say.

But out of the prominent few out there who are truly level-headed and are able to make unemotional financial decisions, how many out there with decent financial sense, make it to financial independence, and then fall back to financial ruin? Anything can happen in this world, and here are a few habits and life choices that can erode away your financial independence:

Rising Eating Habits

While food in general is much cheaper than what was available a decade ago, there are clearly more wallet-gouging options available now as well. Foodie cultures, microbreweries, organic foods, fad-diets, and Manuka honeys all contribute to increasing the cost of food.  Perhaps you have a dream to dine at every Michelin-starred restaurant you can get your hands on. Maybe your daughter decides to become vegan and your wife goes gluten-free, too.  Uncontrolled, the cost of food for a family of five can easily double or triple with selective eating.  If there is any redeeming aspect of rising food habits, it’s that we only have one stomach. No matter much you crank up your food expenditures, you probably aren’t going to undo years of prudent financial decisions that got you to financial independence.

Vacations

Once you cut back on your job, you will undoubtedly have more time to jet set. Travel can get quite pricey, especially if you go heli-skiing or drink champagne in a glacier.  However, most people who can handle their finances well should be able curb their need to splurge on vacation. I consider vacations to be a possible financial sink, but the financially astute ought to be able to curb their expenses if the going gets tough.

Heli-skiing this area looks like fun but is going to cost a pretty penny.

Kids

The danger with spending on your kids is that they are your kids. Since you’re not spending on yourself, it is easy to convince yourself that you’re contributing to their success. Raising children can be economical but it can also destroy your ability to retire. Just because you thought you had planned out their public school trajectory by moving into a good (read: expensive) housing neighborhood doesn’t mean that your kids will actually go to public school. I’ve seen plenty of highly intelligent parents who, against practical judgment (and sometimes at the urging of their spouse), send their kids to private school. Think that the fifth grade couldn’t possibly get any more expensive when your daughter started attending a $25,000/year private school? Wait until she asks you for an iPhone X because all of her classmates have one too!  You’d better work a few extra years if that happens.

Divorce 

No one ever plans for divorce, but it happens to more than 40% of Americans. If you have children, you’d better believe that there is likely going to be legal influence on that constitutes child support. The toughest part about dividing up retirement savings exactly in half is that it may not be possible to divide up everything in half. I’ve seen some families in these situations forced to sell property at a loss simply to convert real estate to capital so that it could be divided more easily. Your spouse may not necessarily have the same financial goals as you do, and divorce may prohibit both sides from ending up in a good financial situation.

What other situations can whittle away your financial independence?

Correlating expenditures with happiness

Correlating expenditures with happiness

One of the goals of establishing financial security is to have an adequate net worth to sustain our living. In order to get there, we invest in vehicles to grow what we have saved. If we choose (and most doctors don’t really have to), we can also establish streams of passive income (shout out to @PassiveIncomeMD) as a means of cash flow. For most of us, getting to that gratifying number will take time and effort. As physicians, we no strangers of delayed gratification. It is no fun.

The journey to financial security will likely span much of our younger years, so it is important not to lose sight of the present. Amidst the stresses of healthcare changes, we should focus on what we can control. Doctors need to be able to control our happiness while we are building our financial security. This starts the moment we commit ourselves to a financial strategy.  A simple strategy to approach happiness is to stay ahead of the curve. We did it all through college and medical school. In finance, we can view this in two ways:

Expenses as a Percentage of Net Worth

Aspirational early retirees rejoice! This is the same formula that we use to determine when we reach financial independence. If you use the oft-butchered 3-4% safe-withdrawal rate as a reference, you can roughly determine your financial progress.

For instance if you spend $10,000 a year, save $10,000 a year, and have $100,000 in net worth, you should be able to reach a 4% safe withdrawal goal rate ($250,000) within 15 years. How happy  would you be if it’ll take you 15 years to reach your financial goals?

The longer it will take to reach your goals, the less happy you will likely be. For the mathematically inclined:

Happiness ∝ 1 / (Number of years to FI)

If you throw expenses and percentage of net worth into the mix, you can make some more equations:

Happiness ∝ Net worth / Expenses

If you don’t care much for distilling life into a core set of math equations, just realize that the more your expenses dig into your net worth, the less happy you will be. As you are building your net worth, stay happy by watching your expenses.

Expenses as a Percentage of Income

I find that tracking expenses as a percentage of net income a more manageable approach to happiness. As long as you can keep that ratio low, you know that you are working towards your financial goals.

Another way to look at this method is simply your savings rate—the higher your savings rate, the sooner you ought to be reaching your financial goals. Most financial professionals that I speak to strongly recommend saving at least 20% of your income. (Pretax or post tax, no one ever specifies!) This also means spending 80% of your income.  As I have progressed throughout my career, I’ve discovered that percentage of income spent has translated to increased happiness. There was a minimum threshold that I needed to exceed, which was anything beyond my residency and fellowship income. Afterward, the closer I became to a net zero net worth (repayment of student loans) the happier I became. Setting realistic goals and achieving them allowed me to sustain my financial happiness. As each one of my mini-goals was reached, I’ve found that lowering my expenses as a percentage of my net income has helped remind me that I was succeeding in reaching financial independence.

Can you achieve happiness with a milk stout?

That caveat is that this method is going to look a whole lot better for people with high incomes. The key is that each one of us is going to have a different savings velocity. The key in happiness is not to treat our earnings and savings as an arms race with others—as long as we are progressing according to our means, we are doing well and living a healthy lifestyle in the process.

How do you track your happiness?

Why I’m Dollar Cost Averaging through the Bull Market

Why I’m Dollar Cost Averaging through the Bull Market

Seasoned investors know that market timing has historically been little more than a gambling move—try buying some Bitcoin right now in Q4 2017 and see where that takes you. You might still win big, but history has to have losers.  But it’s human nature to want to be above average. This is especially true in finance. Everyone wants to have some alpha in the game. After all, you spend your free time reading finance literature, swear off the financial advisors, and even try to educate your colleagues.

I’ve certainly inadvertently “timed” the market when I bought shares of Berkshire B stock in residency. It was at a 52-week high at the time, and by market timing criteria it was too expensive to buy. Guess what? It’s grown by more than a five-fold since then (maybe more).

I came across an interesting article with infographics by Wes Moss (http://clark.com/personal-finance-credit/stock-market-record-high-invest-now/). He breaks down the effects of investing in the stock market at highs and lows. It seems like even if you invest right before a significant market correction, you still come out ahead over time. I remember William Bernstein in his e-pamphlet If You Can commenting about stocks:

“How risky are stocks? You’ve no idea. During the Great Depression, stocks lost, on average, around 90 percent of their value; during the recent financial crisis, they lost almost 60 percent.”

We all have to realize that not everyone can be above average, yet alone beat the market. For a brief while years ago I thought that I could do it, but then realized that I had no time or interest in delving into the financial world while I was inundated in the medical field. That is still the case for me.

Okay kid, are you picking the fruit bar because it’s healthier than Mickey or less expensive?

I am still in the growth and investment phase of my career. Most of my passive investments are still going towards stocks and bonds while I decide how to diversify my earnings further. I still am working full-time in my medical career and have little time to hold my earnings in cash until the next big investment.  Dollar cost averaging works for me, even though the market is perhaps at its relative high.

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The FBI is calling for Emergency Medicine Doctors!

The FBI is calling for Emergency Medicine Doctors!

Yes, this is the Federal Bureau of Investigation.

Are you getting burned out by those late night opioid addicts hitting up the emergency room during your shift? Is the stress of the conventional ER bringing you down? I’m sure many of us have dreamed of finding an alternative career at times when we’re getting burned out by our healthcare system.

If you’re an emergency room doctor and want to have even more action, look no further. I was perusing the FBI website (yes, the Federal Bureau of Investigation), and one of the specialists that they are looking for include EM doctors.

Accountants and Emergency Medicine doctors welcome! Anesthesiologists need not apply!

That’s right, Emergency Medicine doctors would be a good fit for the FBI! Many doctors speak another language too, so you could potentially fit several criteria for employment! I would imagine that physicians could actually be deployed in the field, since they can perform life-saving measures in combat.

Interestingly enough, there is a strict age requirement between 23-37. I assume that these positions are physically demanding, and anyone over that age may not meet the health requirements.

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@WCI, you’re over the hill! Would a log of all your heli-skiing and canyoneering trips count for physical fitness?

Emergency medicine doctors are in a unique situation in that their residency training is relatively short–many programs still train for 3 years while some train for 4. On average, you can be a board-certified EM doctor at age 29. That means you can have a solid 8 years to apply for the FBI before you get ousted for being too old. If you are accepted, you can work up to the mandatory retirement age of 57.

What is more important for our finances is whether joining the FBI will count towards your years of PSLF…

EM doctors! Would you want to join the FBI?

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Diversifying with Managed Futures

The following is a guest post by Don Wieczorek, who is the president of Purple Valley Capital. Don is a sponsor for this website. The views expressed in this article are solely his own.

In my opinion, if there is one subject in finance that everyone agrees on, it is that diversification can increase returns while also decreasing volatility and limit portfolio-wide drawdowns. Many investors think they are diversified because they own equities in different industries or countries, some bonds, and perhaps even have exposure to real estate, but true diversification should reach well beyond this standard portfolio. True diversification includes not only spreading capital across different asset classes, but time frames and methods of investing as well.

 

Some investors look to the industry known as “managed futures” to help fill this void. Managed futures is made up of professional money managers who are known as “Commodity Trading Advisors” (CTAs). CTAs are required to become registered with the U.S. government’s Commodity Futures Trading Commission before they can offer themselves to the public as money managers. The industry is large, with over 1,000 registered CTAs, cumulatively managing well over $100 billion.

 

CTAs generally manage their clients’ assets using a proprietary systematic trading system or discretionary method that may involve going long or short various futures contracts in areas such as metals (gold, silver, copper), energies (crude oil, natural gas), grains (corn, wheat, soybeans), equity indexes (S&P500, Nikkei 225), food//soft commodities (coffee, sugar, cotton, cocoa) as well as foreign currency and U.S. government bond futures. The majority of CTAs employ a trend following approach, which aims to capture the large trends, both up and down, in the various futures markets. By entering markets when they break out to either the upside or downside, systematically cutting losing trades very quickly, and holding onto winners, trend followers aim to skew returns and volatility to the upside. When market prices trend, often the result of trending fundamentals that are accentuated by the various psychological biases of market participants, trend following CTAs can perform well, but when markets are flat and choppy, they will perform poorly. The main advantage of allocating to a CTA is that it can implement all three pillars of true diversification: different asset classes, different holding periods, and different method of attempting to make money.

 

Although allocating to a CTA can be a fantastic diversifier if used properly, there certainly are risks in getting involved, and the use of such a strategy is not for everyone. First and foremost, CTAs buy and sell futures contracts, which are inherently leveraged products and carry with them a risk of large potential loss. Because trend following CTAs, almost by definition, aim to be positioned in the hottest markets (those hitting new highs or new lows), performance can be volatile and have deep drawdowns as well. Psychologically, this type of investment can be very difficult, because it can produce frequent small losses in exchange for infrequent but large gains. Drawdowns can be lengthy. Although this strategy can perform well during periods of trending markets (i.e. strong economic growth, crises, inflation, etc…), it performs poorly when markets are range-bound and flat. For example, the last couple of years have been meager for the trend following CTA industry due to zero interest rate policies (thus few large currency moves), subdued economic growth, and no inflation. Fortunately for the industry, this is finally starting to change, and many markets have started to trend again, however there is no telling if, or how long, it will last. Managers simply follow the market action and attempt to manage risk at all times. Success in futures trading requires an immense amount of psychological fortitude, discipline, and patience.

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In full disclosure, I own and operate Purple Valley Capital, Inc., a CTA that has traded client (and my own) capital for over nine years, having started it in 2008 during my senior year of college. I originally just traded my own capital but became legally registered and incorporated when my family, friends, and outside investors began showing interest in my strategy in order to help them achieve further diversification within their portfolios. I built my trend following strategy from the ground up, and have seen, along with my investors, the benefits and risks of such a managed futures strategy. Whether it is with managed futures, or some other investment strategy, the idea of trying to achieve true diversification is an extremely important matter. Again, there are many ways to diversify, and CTAs are simply one way to try and go about doing so. Hopefully this article will help others think about diversification slightly differently than they had in the past, and perhaps stimulate an interest in looking for a diversifier that spans different asset classes, time frames and method of trading, whether it be with a CTA, or some other vehicle.

 

Regards,

Don Wieczorek

 

President

Purple Valley Capital, Inc.

www.purplevalleycapital.com

 

FUTURES TRADING IS SPECULATIVE & INVOLVES A HIGH DEGREE OF RISK. IT IS NOT SUITABLE FOR EVERYONE. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS