Category: finance

Lifestyle creep and the 4% Rule

Lifestyle creep and the 4% Rule

Posted on by SmartMoneyMD

If you’ve been keeping up with the online money blogging world, you’ve probably heard about the 4% Rule, or 3% (3.5%) rule for some. However flawed, it gives you a decent start on estimating how much to build up your nest egg before you start telling your managers at work how you really think about their Maserati while you’re stuck with a fifteen year-old Honda Civic.  Once you figure out how much you spend annually, you can estimate how long your money will last.

For instance if you spend roughly $50,000 in today’s dollars annually, you’d need $50,000/0.04 = $1.25 million in today’s dollars to last at least 25 years. This has to be invested in some manner too to stave off inflation, and gold bars under the mattress doesn’t count.  Fair enough, but what happens after 25 years? We don’t have much data in the ill-referenced Trinity Study to extend beyond that, so some just adjust the percentage withdrawal rate more conservatively. With a 3% withdrawal rate at $50,000 annual expenditure, you’d need $1.67 million invested.

Lifestyle creep

“Lifestyle creep’s a bitch” -says somebody. I will claim it as my own if no one else does.

Living your entire twenties holed up studying and drowning in debt while your friends in banking enjoy their youth is the prime way to fuel your desire for lifestyle creep.  That’s what doctors go through.  Sprinkle in a few of your classmates who overextend their future self or have family money, and you’ve got a good (false) sense of how doctors should live.

You might also like: How to make a doctor’s salary and still feel poor—and how to fix it

Financial discipline can be an acquired skill, but like many behaviors in life it is highly influenced by our childhood. Not everyone can be like Mr. Money Mustache who grew up in an average Canadian household with “normal” expenses and discover that there is an alternative financial blueprint to life.  The majority of people I know who are financially conscientious have had some foundation in their younger days.  It could be as simple as mowing the lawn for an allowance or just seeing someone in the family struggle financially.  There has to be an exchange of work for money.  The ultra-savers at a young age typically are a subset of this group who use these fundamental principles and kick into overdrive. The rest of us without the head start of financial intelligence simply learn it the hard way—through experience and time.  We get into credit card debt or some financial ruin that triggers our brain to fix the problem.

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Doctors, on the other hand, might have never witnessed financial responsibility in their childhood or gotten themselves into financial ruin. Many doctors that I’ve known come from middle class families who had food on the table every night and family vacations every year.  By the time they start earning some money in residency, they will have acquired substantial borrowing ability from banks or predatory lenders.  We are prime victims for lifestyle creep.

I’ll be first to admit that I’m guilty of lifestyle creep.  After all, why shouldn’t we own at least one nice pair of Louboutin’s if we’re curing cancer every day? That is exactly how lifestyle creep catches you.  When I was a resident, I earned around $40,000 a year and spent 60% of my earnings living in a HCOL area. There wasn’t much left to repay my loans and live lavishly.  There was a lot of pent-up consumerism in me.  Once I got a real job I was tempted to live in a larger place, buy a nicer car, and upgrade my wardrobe. The problem with increasing your living expenses proportionally with your income is that you never make any headway towards your financial goals.

The doctor who owns this car can actually afford it. Doesn’t mean you can though.

Over the years, I’ve been slowly tracking my lifestyle creep. The brunt of the lifestyle creep comes from our mortgage, which in a way is a necessary evil. If you are obligated in your profession to stick around and work a certain number of years before you make any career changing decisions, it might be worthwhile to own a piece of America in the meantime. The other contributions to lifestyle creep end up being discretionary.

You might also like:  How to burn through a $1 million salary

Between the end of fellowship to my first year of practice, I increased my living expenses by around $15,000 a year. This rate slowly crept up until it skyrocketed another $40,000 with mortgage expenses. Purchases like an overpriced refrigerator do not necessarily increase quality of life, but do dig into your savings rate. At some point, our earnings actually plateau and any lifestyle creep will start eating away at your magic number. If we hope to have any possibility of reaching our savings goals, we have to constantly reassess our expenses. If we can’t adjust down, then we’d better find a way to increase our earning potential

How often do you assess for lifestyle creep?

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What situations do you exchange money for more time?

Posted on by SmartMoneyMD

The fundamental tenet in building wealth is to save more than you earn. Easy enough. At some point, there is a threshold in which you pull the trigger to exchange those hard-earned dollars for goods and services. Most of the us who espouse responsible financial practices have streamlined what goods we consider to be suitable for our needs. Yachts, McMansions, and other extravagant material wealth or experiences should be logically put in check until we’ve reached a certain financial stability.  Cooking at home instead of hiring a private chef is another example (yes, I know a surgeon who does that).  Fair enough.

What about services? Guys like @Mr1500 are pretty handy and have built bookshelves and flipped houses with their skillset. No need to spend hundreds of dollars at Home Goods for a particle board desk when you can build your own out of cedar.  MMM is able to haul laundry machines on his bike. Strong-willed doctors like @PoF have the ability to bike to work instead of firing up our standard fossil fuel-consuming vehicles. You get your cardiovascular benefit while saving the environment.  Win-win.  Some of us were not meant to be tough, no matter how hard we try.  Mending a skirt? Only under duress.  Hiking down a canyon or starting a campfire? No way.  Some of us are in careers that make us less inclined to become true masters of DIY or machoism. I work with plenty of neurosurgeons, and I don’t know a single one who bikes to work before an anticipated five-hour craniotomy case. (If you do, please send me a note!) However, I do know a neurosurgeon who would rather run marathons and bike on Peloton than to bike to work.  Peloton subscriptions are not cheap either.

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Where is the cut-off? Is there a cost-savings benefit ratio that you look at before you start opening up the wallet? Most of us probably choose not to change our own oil in the car not only because we might not derive much pleasure from it but also because Jiffy Lube will do it for $29.99. For thirty bucks you can get your oil changes and keep your hands clean! I have two basic criteria to look at before I open up the checkbook:

Minimal risk and skill

First, the task has to be something that I don’t hate. I know some people who simply refuse to cook.   Is it the smell, the difficulty, or just the risk of ruining the shellac? (Probably all of the above) That’s fine, but if you have a financial plan to get ahead in life you’d better have other ways to make up for the expenditures.

Secondly, I just look at how difficult the task is and the consequences if I mess up. For instance, I’m not an expert at baking cookies, but I’m pretty sure there is a low chance that I’d burn the house down if I tried.  Check.

You might also like: Step by step instructions to replace the Mansfield toilet flush valve seal

If the task or service is often performed by many other people without much difficulty, then it is a good sign that I could reasonably attempt it myself.

Hourly rate

The hourly rate argument is a touchy subject. Many plumbers I know charge an hourly rate above that of many doctors.  This doesn’t mean that you should go ahead and change out a broken water valve or toilet yourself in order to save a few Benjamins.  But if the task or service meets the difficulty and skill requirement already, it might be worthwhile to tackle a project or service that could save you some money (especially if you have available time).

My experience at the Department of Motor Vehicles

My driver’s license came up for renewal recently, and I was tasked to step foot in a Department of Motor Vehicles office. There was an automated kiosk to get a number for line, and my number was 417.  To my horror, the next customer in line was 333!  It took another ten minutes before the next customer was called, and it was #289!

If this isn’t a representation of reality, I don’t know what is!

I had cancelled some of my afternoon patients and left work early to arrive at the DMV by 2pm. They close at 4pm. It was apparent that I was rolling the dice if I expected to be called up by closing time. There was no way that I be able to reschedule another surgery or clinic day to wait in line again.  I ended up going straight to a commercial motor vehicle outlet, paying an extra $60 to renew my license, and left by 3pm.

The moral of this story? I need to get into the commercial DMV business.

What situations have you encountered where you decided to pull out the wallet to save time?

Negotiating the Three F’s: Fame, Fortune, or FIRE?

Posted on by SmartMoneyMD

This entry is more of a philosophical debate that I’m sure many of my colleagues (myself included) have contemplated at least once. Ambition can be a powerful motivator in our daily lives, and I’m sure that every doctor is no stranger to ambition. While one would hope that every person who has any authority to dictate our health have good attention to detail, there are doctors who surpass the normal expectations of being a doctor. We all know those people as “gunners”. Some of us might even be “gunners” at heart.

So how does ambition relate to our finances? For the professional who has dedicated her life to delivering excellent healthcare to our society, ambition can be self-defeating.

Fame

Many of us dream of fame. Some of us strive to be famous.  Only a select few in our profession achieve fame. Some of this fame can even become notoriety. Fame in medicine is represented in many forms. Academic medicine is a common route to achieve fame in our field. We work under the auspices of a university or academic setting. By default, there is some prestige from association with higher learning.

You might also like: Is a prestigious medical school useful for doctors?

There is a trade-off, however. Are you going to earn a similar amount from working at an academic institution? Probably not. Most academic hospitals will provide doctors with a fixed salary with a small incentive for productivity. By working there you are essentially accepting a potentially lower salary in order to have your name tied to an institution of higher learning. Is it worth it? Some people would agree.

Fame in medicine can come in another form.  There is mass-appeal fame. These are the doctors who are known to be public communicators to the world. Mehmet Oz is a clear example of this. Following in his father’s footsteps as a highly skilled thoracic surgeon, Dr. Oz himself trained to become a famed cardiothoracic surgeon. He tied himself to an academic institution and was willing to accept a potentially lower salary.  He then associated himself to daytime television and established widespread mass appeal. In a way, he was able to achieve the fame of being associated with an academic institution and fortune. In the process, he likely transitioned himself out of truly practicing medicine. I doubt that he’s scrubbing into Milstein OR 23 for any heart valve surgeries with any frequency these days.

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Fortune

Aside from Dr. Oz who has the fame and fortune, doctors can simply go the fortune route. This is most commonly achieved by working at regional hospitals or, better yet, a private medical group. Hard work, long hours, and some business savviness can translate into a nice income. These are incomes that can fund family vacations into exotic regions in the world, all without gaming any credit card points or strategizing hotel stays. I’ll be first to admit that I’m sort of jealous of some doctors who can pull in the annual 7-figure incomes. They may not have the fame of medicine, but they can surely get the fortune aspect of it. Pick your poison.

FIRE

Okay, some of us just don’t have the fortune to amass a fortune or fame through medicine. We’re not doomed. In fact, we might be the luckiest of the bunch. These are guys that worked hard to enter a career in medicine and are able to earn a relatively comfortable salary. There is perhaps some flexibility in our schedules and we aren’t necessarily burdened by the perils of crazy-high incomes or fame. We can still achieve some financial independence in the process.

Sipping a cup of ‘joe on a weekend morning at home probably isn’t the worst thing in the world.

Having a relatively high income, saving up a decent amount of our earnings, investing in some real estate, and counting up our pennies isn’t necessarily a bad arrangement. You’re not going to be in any extreme category of medicine, but the lifestyle probably isn’t too much to gripe about either.

I’ve struggled to identify myself in one of these three F’s in medicine. The ego in my psyche wants to achieve the first F. The ambition side of me wants the second one. The rational side of me realizes that I probably belong in the third F, and that is okay. If I play my cards right, I’ll still turn out okay.

Which F do you belong to?

How to impose financial literacy on your peers

Posted on by SmartMoneyMD

I’m not much of a board game fanatic, but many of my friends and peers are. Perhaps this makes me an outlier, but group games seem to be a common hobby among my social group. There are subgroups among the board gamers too. You have those who go for the mainstream games like Settlers of Catan. Some of my friends like collaborative games like Pandemic, where everyone is playing to achieve a unified goal.

Others like strategic games with some element of chance. Fair enough.

Then you come across the super-intense board game fanatics who delve into games that no normal person would ever understand. Several months ago I was convinced to join in on a game called “Vast: the Crystal Caverns”, which was funded through Kickstarter and apparently very highly rated. Search for it online and you can be the judge.  I think I lost about two hours of my life in that game and still couldn’t really understand how it worked—this is coming from someone whose board game interest ended at Monopoly and Sorry!  Specialized games are just that; if you don’t fall into that targeted audience, you will be lost.

I came across a game the other day that would fit into that similar niche category.

Wi$e Money

Want to scare off your spendthrift friends? Bust out this game during get togethers!

That’s right. I’ve never heard of this game, but I’m not one in this demographic. Looks interesting. You might be able to scare off some of your party guests with this one.

Here’s a teaser question from the cover:

Q: “When you start a new job, what tax form must you fill out, and what does it do?”

I went to the company website and they also have high dollar games for companies. I guess that they aren’t a high volume business:

I guess if you have small number in your targeted audience, you can charge whatever you want for a board game.

Would you be interested in playing Wi$e Money? If so, we should do it at one of the financial blogger meet-ups!

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How should the Smart Money MD portfolio be rebalanced?

Posted on by SmartMoneyMD

The beauty and challenge of investing is that there is no single ideal portfolio. Do you keep all of your investments in equities or split the difference based on your age? Is there a better formula, similar to how we estimate peat heart rate during exercise (220 – Age = maximum heart rate)? Or do you go against the grain and just throw all of our investments into real estate?

Just as how there is no single method to pass your boards, there is no single solution that we should all follow to invest our earnings.  The winning portfolio is the one that leaves you with adequate funds during your entire withdrawal timeline. This element of unknown is why many of us choose to prolong our working career.  I hope that I won’t have to do the same.

 

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How did I design my investment portfolio?

I’m embarrassed to say that I started late in the finance game. I blame my shortcoming on working in a conservative field that has an overly long vesting period.  Medicine is one of the most conservative careers out there.  There is nothing radical in becoming a doctor. You study hard in college, take your MCAT, and apply for medical school. Rinse and repeat during every step of your medical career. Once you master the basic skills and keep working hard (very hard), you can really become a kick-ass doctor.  You just have to trade over a decade of your life to do it. By the time I was studying for my USMLE, @MillenialMoney had already started his journey to make millions.

Finance, on the other hand, is full of uncertainty.  Sure, there is a science to it, but I wasn’t bright enough to open a open on the subject or read a blog or two.  I spent my waking hours learning how to treat prerenal azotemia.  The problem was that I did not realize how important the financial aspects of medicine were.  I had a negative net worth with zero cash flow during medical school.  Someone in that situation isn’t like to take too many chances.

The moment I started earning minimum wage as a resident, I bought individual stocks.  The stupid way.  I bought stocks that were at their 52-week high and ready to tumble.  Tumble like the time you decided to teach yourself how to ski at age 30 by watching some Youtube videos.  I bought stocks without knowing what a stock really was.

That’s right. Indiscriminate stock purchasing marked the birth of the Smart Money MD investment portfolio.

The current Smart Money MD portfolio.

Fortunately I had so little disposable income that the individual stock purchases didn’t probably only set me back a year or two in the grand financial scheme. Over time, I did begin to index and bought funds that my employer 401k offered. With job changes came different options, and hence, the current Smart Money MD portfolio:

I love making spreadsheets during my free hour every week!

Those of you investment buffs will see that there is a bit of redundancy in the portfolio. Fidelity’s FSTVX fund essentially mimics the total stock market while Vanguard’s VINIX follows the S&P500.  Both of these funds already invest in Berkshire stock, which I have purchased separately.  In fact, most of the individual stocks that I hold are replicated in the index funds! Live and learn.

What do I intend to change in the portfolio?

The Smart Money MD portfolio is tilted towards equities, which has made 2016 a great year in growth. However, these bull runs don’t last forever. Eventually everyone will need and should have a means to temper these unsustainable runs. I have been more interest in short-term CD’s over bonds as fixed sources of income, although tax-free municipal bond funds also seem to be appealing.

The downside of CD’s is that they are taxed as ordinary income. For high-income professionals in the growth phase, this means paying taxes at the marginal rate. At the current interest rates, one would be lucky to keep up with inflation in fixed assets. Not bad, but also not great.

Other options I’m currently considering:

  • Surgical center investments. Yes, as a doctor all sorts of investment opportunities are thrown at you. Doesn’t mean that they are great, but they can be a great way to generate ancillary income. Some of these investment opportunities really seem too good to be true (and some are), but they are interesting propositions to entertain.
  • Real estate. Who doesn’t like a great flip story? Or a cash flow opportunity in a rental property? Up until now, I have only been interested in REITs as a way to get into the real estate market simply because anything else appears to be too time consuming. Fortunately there are additional startups and services that allow investors to purchase property (or shares of property) after vetting their location and potential growth options. I guess these startups are an in-between for busy working people.
  • Dividend portfolios. This is more of a variation of handpicking equities that produce some higher dividends. We’ve seen our share of portfolios with hand-picked high-yield dividend stocks like with @DvdndDiplomats. Very interesting way to get more involved with individual stock picking. However, I have been loathe to spend my free time reading about individual stocks.

How much should doctors even care about in their investment portfolios?

A good number of my colleagues are loyal users of Roboinvesting services like Betterment, Personal Capital, and to a lesser extent, Motif. I personally only use Personal Capital for tracking my expenditures and investments mainly because I didn’t feel that I had enough disposable income to invest when I started my first job. However, our needs change over time and I might reconsider in the future.

 

You might also like: A Financial plan for busy people.

 

I think that Roboinvesting isn’t a horrible idea. It actually sounds like a great idea (Note: no financial interest in the mentioned companies).   Most doctors aren’t going to retire early, so hyper-saving isn’t the goal.  I don’t expect every doctor to map out her investments in multi-page spreadsheets, and you don’t have to do it to get rich. You just need to watch your expenses (avoid time-shares, “investment clubs”, and divorces) and keep a strong savings rate.

What suggestions do you have to diversify the Smart Money MD portfolio?

Earn some airline miles while investing in low-cost funds

Posted on by SmartMoneyMD

I like airline miles and fancy hotels just like everyone who has gotten themselves in this predicament. There are practical ways to redeem these perks (converting to cold hard cash), and highly luxurious ways of capitalizing on them (like flying in first class with your personal butler) that don’t actually save you money but simply allow you to travel and vacation in style.

In any case, those of us who are looking for low-fee ways to invest can choose low-fee funds from Fidelity while earning airline miles. If you are able to put $100,000 in a taxable investing account in Fidelity for at least 9 months, they will award you with 50,000 airline miles! They have offers for American, Delta, and United miles.

This can translate into at least one free domestic airline ticket (maybe $400) or something fancier if you are into that game (this may be a topic for future posts).

Fidelity lowered its index fund fees earlier this year to compete with Vanguard’s fees. The differences in savings are negligible over the long term, but worth noting:

Chart courtesy of Fidelity Investments

For instance, Fidelity’s S&P 500 index fund has an expense ratio of 0.045%, compared to Vanguard’s at 0.05%.

You can still receive a certain number of miles if you put in a smaller amount. I typically keep my taxable investments inside a Vanguard account, but given the recent change of lower fees with similar funds and airline mile perks, I plan to roll in some uninvested funds over the next year into my Fidelity account.

 

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Note: I do not have any financial interest in Fidelity or any of the airline affiliates. All of the links in this post are public links.

You don’t have to become a doctor to get rich

Posted on by SmartMoneyMD
No, this isn't a cave. It's the inside of a septic tank!
No, this isn’t a cave. Hint: it does hold everything that leaves your home’s plumbing!

This post isn’t intended to deter future physicians of the world—the world already has a shortage of healthcare professionals and will continue to see a greater demand for all healthcare workers in the next decade.

This post also isn’t to condemn all of us doctors who entered this career path to make the world a better place. In fact, we can all live a happy and wealthy life as doctors. WCI and PoF are two great guys in the medical field who have publicly documented their trajectory in building a comfortable financial safety net relatively early into their careers. I’m sure that there are thousands of other like-minded doctors out there who are doing the same thing but aren’t as easily found since they don’t have a web footprint.

Those of you who are still building into your careers—medical students, residents, fellows, law students—can start getting prepared to become a rich doctor by riding the wave and getting psyched mentally.

 

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The background: there are a lot of rich people out there. 

According to a report by Credit Suisse in 2015, there are 15.7 million millionaires in the United States alone. Last I checked, there were only roughly one million doctors (MD’s and DO’s) in the United States. What this means is that among the ranks of millionaires are plenty of other professions: lawyers, businessmen, CEOs, computer programmers, writers, politicians, and both professionals of the like.

Some of the wealthiest people whom I’ve met are everyday guys you would see on the street (On the flip side, I don’t take care of any celebrities or high profile people, so the likelihood that I would run into anyone else is slim!) These multi-millionaires include the general contractor who owns his mega-home inspection business, the professional blinds installer, the septic-tank installer, the concrete manager, the car dealer, and the loan dispersement agent for home mortgages.

Sam from Financial Samurai recently featured a janitor in San Francisco who was able to earn more than $271,000 a year! That’s more than what a starting Hospitalist can earn!

What does all of this have to do with me if I am already a doctor?

We can all learn from others who have succeed before us. My view is that we all inherently have traits that can help us get what we want. What traits do you need in order to be rich? Why, the same ones that got you where you are now!

Motivation. You have to want something badly enough. Most doctors worked relatively hard and long hours to get to where we are right now. That requires motivation, whether internal or external. If you want to be rich badly enough, you should be motivated enough to get there.

Resilience. You will fail. But we can learn from our failures. Figure out what set you back, and what you can do to avoid failing next time. In medicine, setbacks come in the form of patient adverse events, administrative snafus, illness amongst family and ourselves. But we have ways to learn what to do next time and bounce back stronger.  In finance, you will take risks and you will lose money. But we still use these experiences to help make us stronger.

Flexibility. We have to adapt to situations, learn from our mistakes, and keep forging ahead. We cannot be too proud of ourselves, and understand that we are not correct all of the time. You have to ‘own up’ to your mistakes. That is how we learn and improve.

Acknowledgement of your limitations. Just because you are a doctor doesn’t mean that you are the smartest person in the room! It almost has no bearing to you getting rich either, if that is your goal! You do, however, possess unique skills that you can leverage to reach your goals.

What have you done recently with your skills to improve your financial situation?

 

(Photo courtesy of Flickr)