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Goals when building finances

Posted on December 12, 2020January 30, 2021 by SmartMoneyMD

When students apply for medical school, they submit a personal statement as part of their application. This statement serves to outline the why in our actions. Why do we want to devote ourselves to a career in medicine? What motivation fuels our drive for excellence? This statement can potentially be as helpful for the applicant as it is for the reviewers, as it helps the applicant reflect why she wants to enter the profession. Putting your goals down on paper commits you to the process. For some applicants, the writing process might actually help them realize that medicine isn’t the right profession for them and help save them the pain of entering the profession.

In personal finance, there is a similar equivalent commonly referred to as the personal financial statement. This statement consists of a list of financial goals and milestones that you plan to achieve. This list has to be written (or typed), not mental. Having a physical list serves two main purposes:

A written list can help distill thoughts concretely, just like in the medical school application. The act of writing goals down helps set realistic milestones.
Accountability. One you have realistic milestones, you can gauge when they are achieved. If you go too long without reaching a short-term milestone, then having that list allows you to reassess whether this goal should be scrapped.

A financial statement can also include instructions on how to handle windfalls or potential financial scenarios so that you can separate emotion from your objectives. Examples in a personal financial statement include:

Commitment to contribute fully to all pretax retirement accounts.
Instructions on what to do if the stock market crashes.
Financial milestones at given stages in one’s career.
Tax lost harvesting criteria for your investments.

Getting those goals on paper is unrealistic
Now we are all busy…jobs, meetings, family, down-time…all of this eats into our most valuable asset—time. As physicians, we are good at prioritizing but it’s also easy to get sidelined with inconsequential activities. A doctor that I worked with once spent so much free time doing medical surveys that she forgot to submit her CME receipts for reimbursement! If finances are your priority, then you don’t want to leave money on the table!

Even the smallest of goals can be impactful.

Most people aren’t going to go through the work of writing down their financial aspirations, even though doing so might increase your chances of achieving your goals. Frankly, the financially compulsive ones among us are already going to have a written statement and already have reminders set on our phones to revisit them twice yearly.

If you are not in this category of financial compulsiveness, what should you do?

You can still achieve financial success

Even if you aren’t in the mood to review your finances twice yearly and have a financial statement the length of a living will, you can still win the finance game! The key is to start out small. Your goals can be as simple or complex as you’d prefer.

Incremental gains are are better than no gains at all. You can instead opt to build a basic list of financial goals and actions that you can slowly build upon.
Aim for financial goals and tasks that can be automated. We see this frequently recommended as behavioral changes to help get people out of debt, but automation can help reduce brainpower burden:

401k contributions, front loaded in the year if doesn’t affect employer matching
calendar reminder for Roth IRA contributions at year beginning
automate post-tax investment contributions, no matter how small
Automate credit card and utility payments. This doesn’t mean you should ignore your charges, but most utility companies and credit card issuers have e-mail bill notifications for you to quickly review your charges every month even though you autopay the bills to prevent late fees or service charges.

Develop a general idea your monthly income after expenses, and set a net worth growth goal. For instance, if your net monthly earnings is $5000, then aim to see if your net worth has grown $30,000 after 6 months. You might be pleasantly surprised to see that with investment gains, your net worth gain will be greater than the amount that you’ve saved. Eventually, the amount of gains that you can generate may even become a psychological game.

Establish an interval to assess how your career is progressing, and whether your financial situation at work has plateaued. Since medicine is a service-based profession, our incomes typically plateau when you reach peak efficiency with volume and what your compensation structure allows for. It is important for career development to decide how to maintain fulfillment in your job. Putting this in your financial goals helps you decide whether an increase in income would impact your career fulfillment and whether any changes would impact your personal happiness.

These are quite basic yet productive objectives to place in your beginning financial statement. Remember that the biggest impediment to success is inaction. Remember, you have to have goals in order to reach them.

Do you have a personal financial statement?

How to choose a custodian for your basic investments

Posted on December 5, 2020January 30, 2021 by SmartMoneyMD

So now you’ve decided not to let your earnings erode to inflation in your savings account earning 0.05% interest, taxed at your doctor’s marginal income rate. Congratulations. The first step in putting your money to work in the stock market is to choose an account custodian, or brokerage firm to invest with. It is important to remember

Physician Burnout – an alternative analysis

Posted on November 22, 2020January 30, 2021 by SmartMoneyMD

Physician burnout has been a much discussed subject in recent years. The term itself is often broadly defined, but the general consensus is that burnout frequently describes a feeling of unhappiness. This unhappiness is often directed towards or fueled by the activities that one has to endure throughout the day, week, or an entire career. Some people have described burnout as having to deal with a series of activities that we dread. In response to physician burnout, hospitals and employers have invested into significant programs to “remediate” their physicians.

I have yet to find any legitimate study supporting the efficacy of these remedial programs, but there is clearly an increase in coaching services, self-help manuals, and aids to combat this growing problem.

Sometimes we are burning on down to the wire.

The source of physician burnout has been attributed to a multitude of reasons, many stemming from increasing regulatory demands in the workplace, more menial work with electronic health records, and even motivational huddles mandated by administrators to combat the very same problem. There is no doubt that these issues contribute to disgruntled physicians, but there is another problem in our modern healthcare system that is not as commonly discussed.

Your patient is part of the problem

Medical training emphasizes the need to put patients before ourselves. The Hippocratic oath reminds us not to do harm, and we frequently go out of our way in order to get patients the best outcome. In medical school, we undergo simulated scenarios to diffuse conflict. We are taught to emphasize with the patient. Doing so is entirely reasonable and an appropriate exercise for everyone in healthcare, but is it the right approach? Empathy is certainly the socially acceptable answer, but the dark side to empathizing with those we care for is that undoubtedly we end up biting our tongue and perhaps compromising what our moral compass tells us otherwise.

We’ve all had our unpleasant patient and workplace encounters. It’s part of the job, and somehow we’re all expected to brush aside these experiences and continue throughout our days as though it were only a scratch. But we can all attest that the frequency of these encounters has gradually increased over recent years. No matter how insignificant, these battle scars build up. We internalize the pain. We remember the good and the bad cases, and not infrequently, the bad ones are the ones that gall us during our entire career. They cause us to toss and turn in our sleep, disrupt our family lives, and even cause physical ailments.
These unpleasant experiences are uncommonly justified, and they sting. Here are a few scenarios that we end up dealing with in our daily lives:

A patient demands a refund on their copayment after a visit because they are unhappy for their care. Then they ask for a copy of the visit record. (You can’t legally void a patient visit afterward if you are accepting health insurance.)
An unreasonable patient lashes out with an unfounded social media review on a 3rd party ratings website. The physician’s office is unable to remove the review because these websites actually hold business reviews hostage. But these websites are quick to push their services onto your practice.
A patient hammer calls the office with questions that should be asked during a patient visit in order to avoid paying a visit charge.

Medical practice is burning us out
If doctors have always taken care of patients, why are we only burning out now? Two reasons come to mind: (1) the healthcare environment is constantly evolving, and (2) both good and bad information is more readily accessible to the lay public.

The healthcare system is complex. Much of the complexity is due to trying to fund uncontrolled expenses with a finite and insufficient budget. For the workers involved in direct patient care, this has translated into limitations on our resources. Our profession was built on physician autonomy. Physicians have always chosen how to diagnosis ailments, and how to treat them. Our current system imposes strict financially driven boundaries on how physicians can practice. In principle it is great to make healthcare decisions based on prudent cost-saving measures. However, drug formularies are not all created equal. We have all experienced health insurance denials of our recommended treatment regimens only to find that what is recommended by health insurance is not equivalent by any standard. Physicians are now having to fight more than ever with insurers and regulators. This is a mentally and physically exhausting endeavor.

Properly informed patients are a blessing, but there are problems when people are armed with misinformation or are unable to arrive at the appropriate conclusion even with correct information. This situation is increasingly more common with easy access to online information. We see this among healthcare workers as well—we are sometimes armed with the wrong information, but unable to correct our shortcomings due to pride and ego. As physicians we have always struggled with the paternalistic desire to do the right thing, offer the facts, and arrive at the best possible solution for a given situation. It is a struggle whenever we our recommendations do not align with what our patients expect. The patient as a person is not the problem. It’s the availability of unfiltered content open to erroneous interpretation that causes stress. When you throw in the complexities of health insurance that no one truly understand completely, you have are surely going to struggle. Repeated struggles will burn anyone out.

Bringing the sources of burnout to light

Physicians shouldn’t have to dread their work. Our patients don’t deserve to have doctors who are burnt out either. But our current system has made it easy to stress out and find blame. Those of us near the end of our careers can surely attest that practicing medicine just isn’t what it was used to be. It is now up to the current and future generations of physicians to make medicine great again.

What aspects of medicine do you dread?

Beginning investments for busy professionals – How much can you make?

Posted on November 15, 2020January 30, 2021 by SmartMoneyMD

In our previous article, we discussed a few fundamental concepts on investing in index funds, as a simple means to putting your money to work for you. There are plenty of technical write-ups online written by those who enjoy financial analysis for further education, but this guide helps cut out technical details that are not necessarily critical for those limited on time.

As physicians, we are well-versed in technicalities in our field. There is no doubt that if you dedicated as little as one hour of your week to learning further about investing fundamentals that you will likely be more attuned to the terminology and principles in 6 months than most of your colleagues. If you have the motivation and time, this is a good subject to familiarize yourself with. If not, then you can still get your feet wet and manage well with what is discussed in this series.

Index investing is not a get-rich-quick strategy
For whatever reason, doctors are willing to put in a whole lot of effort with little return frequently in our daily lives. Prior authorization calls, utilization management calls, walking specimens over to the pathologist so it doesn’t get lost…many of these activities are for the benefit of our patients, but rarely translate into direct benefit for ourselves. This scut is implicit in our job description, so that’s why we deal with it.

If you like the drink, maybe you should invest in the company.

On the other hand, it is quite frequent that I hear physicians bantering about strategies to earn a lot of money with little effort. Who doesn’t want that? Just as the survival rate for Stave IV pancreatic cancer is so dismal, the get-rich-quick schemes are so few and far between that no one should realistically think that wealth will magically present itself. You have to work for it.

Index fund investing ranks high on the list of investment modalities that yield relatively well with little effort. Since most broad market index funds are tied to the economy, it is likely (but not guaranteed) that any economic downturn that would affect the performance of these funds will also affect most other alternative investments.

The S&P500 Index, which consists of a collection of stocks that are considered to reflect the overall health of the stock market, has returned an average of 10% (before inflation) since its inception in 1926. Any index fund that tracks the S&P500 performance will likely return a similar (but lower) annual return as the index itself. Conservatively, you can expect to get a 7% annual return on this fund. This means that your initial investment may take roughly 10 years to double.

That’s not bad for minimal work, and significantly better than keeping your savings in a bank account losing value to inflation.

Tax efficiency of stocks

Most physicians’ marginal income tax brackets are going to be in the 30% or higher. State tax will add on another 5% to 12.3% (Californians pay the price).

Most alternative income streams other than through stocks are taxed under these income tax rates. What this means is that profits from real estate rentals are going to be taxed at your marginal rates. While each investment strategy may have its own tax deferral strategies (depreciations and 1031 exchanges come to mind in real estate), you will eventually need to pay the tax man if you are going to turn a real profit unless you intend to pass your dealings to your heirs.

Profits from gains in stocks are much simpler. A stock sale is categorized as a short-term capital gain if you held the asset for less than one year, or a long-term capital gain if you held it for longer. Short-term gains are taxed at your the marginal tax rate like your regular work income. Long-term capital gains are taxed at either 0%, 15%, or 20% on profits depending on your annual income.

While it’s clear that stocks confer tax advantages, it is also important to remember that you only pay taxes on the amount that a stock/fund has gained. Given that you’re expecting roughly a 7% annual return on these index funds anyway, the goal of investing is to buy and hold for the long term.

Reassessing the goal of index fund investing

With any investment, it is important to acknowledge the expected risks and returns. It is also important to determine what your investment horizon is, and how easily you need to access your investment.

It is not uncommon that someone at the local hospital talks about a new high-interest money market account that pays 10x of the current average savings account. Too bad that it still only amounts to 0.60%. Nonetheless, these options are perfectly reasonable if the goal is to have liquidity in the short term for a mortgage down-payment or to have a temporary holding account until you decide where to invest for the long term.

Likewise, it doesn’t matter how great an investment is if the window of return is beyond what the investor is comfortable with. Index stock funds are an interesting investing modality, because the outcomes are highly predictable:

Investment horizon is long.
Profits are stable but not necessarily life-altering.

You are definitely going to be inflation with index fund investing, and it also won’t get you out of bankruptcy.

In the next article, we will discuss some of the technical details of finding a custodian and making an investment.

How to start investing for busy professionals – The Basics

Posted on November 9, 2020January 30, 2021 by SmartMoneyMD

Most physicians who I end up talking to tend to belong in one of two extreme camps regarding their finances: (1) those who are completely clueless about how to manage their money, and (2) those who micromanage everything down to rebalancing periodically or actively generating losses for tax loss harvesting.

Those in the first group can further be divided into: (1) those who don’t invest at all, and (2) those who just pay someone to fully manage everything. The second group consisting of the micromanagers are often hustlers in seeking out money—these are the ones who actively seek out real estate deals or other alternative investment opportunities to maximize their earning firepower.

If you devote a significant portion of your time and energy towards your finances, you will likely have a good chance of becoming financially successful. The principles are much simpler than starting a craniotomy, and a portion of financial success is related in part to luck. However, not everyone is going to be able or willing to compromise their time.

The basics of investing is not as difficult as brain surgery

We each have our priorities for our time. Some of us are incredibly efficient with our time and able to multitask multiple simultaneous ventures, but may outsource essential tasks. Hired childcare, personal assistants, housekeepers, and landscapers are some some of the task keepers that could be recruited to handle your time when you’re negotiating deals to acquire your next skyscraper.
Some of us would rather spend more time with our children and families, even if that means not hitting a retirement net worth in the 8 or 9 figures. Others would rather vegetate on the couch after a long operating room day. There is nothing financially irresponsible about doing what makes you happy—as a physician, dentist, or any high income professional you ought to be able to sustain a comfortable living without being a miser.

However, there is no reason for anyone to be completely uninformed about finances. The bar isn’t high, and you don’t have to fully understand modern economic theory to become financially successful. Technology and others who are able to dedicate their time into money have already done the homework for us. Making your money work for us can be as simple as reading the instructions manual.

The next series of posts intend to provide you with a concise outline to get you started on investing. No B$. Simple concepts for busy people with limited time to devote away from our primary work and family. Read on.

Stock funds are your friends
Companies often sell fractional ownership in the form of stocks in order to raise capital. When you purchase a share of a company as a stock, you don’t actually own the company—you own the share of stock. This entitles you to vote in shareholder meetings and sell your shares. Sometimes companies also issue dividends periodically to shareholders. If you ultimately sell the stock at more than what you paid for it, you get a profit.

Stocks get a bad rap because everyone typically only remembers the sensational stories. Someone we know buys Tesla stock at a low price, the stock rises by an extraordinary amount, and they sell at a wild profit. Fast money. Or someone else who invests her life savings into a stock only to find that it loses 95% of its value…so she sells her stock and ends up with a huge loss.

While it is plausible for a company’s stock to plummet, it is highly unlikely for the entire stock market to collapse permanently. There are certain instances over the past century where stocks “crashed” but in every single case the stock market erased its losses soon afterward.

This is where index funds come in. These are portfolios of stocks that track performance of a certain market. There are index funds of the entire stock market, the U.S. market, and international market. Index funds are considered passive and conservative investments. There is still risk in index investing, although risk is mitigated through investments within the category the fund is designed to cover. As with any stocks, losses are only realized if you sell your shares for less than what you paid for them. So you could theoretically hold an index whose value is less than what you paid for them for years and still experience a profit if you sell high.

How to get started with index funds
We will discuss investing in taxable accounts and other basic investing concepts in the next post, but you can get started with index funds right away. If your employer offers 403b or 401k accounts, you probably have access to some of these funds for retirement investing.

When employees sign up to have paycheck withholding for their retirement accounts, the custodian (the company that manages the investment accounts for your employer) will often provide a pamphlet that we toss in the corner or in the recycling that describes all of the investing options available to participating members. Go dig that booklet out or look on the custodian’s website for details.
Most custodians will offer some index fund options. Some of these are great with low expense ratios (more on that later), and some of them are incredibly lousy.

Many of these plans also offer broadly descriptive investment options that are based on your expected working timeline. Remember that often the more intricate the options seem, you might be paying for someone on the other end to handle things.

Next time, we will discuss further concepts on indexing and basic stock market tools.

Can you achieve financial independence without real estate?

Posted on November 2, 2020January 30, 2021 by SmartMoneyMD

One of the most frequently discussed avenues for alternative revenue streams among physicians is owning real estate. Crowdfunding, syndications, private equity, or simply down and dirty rental property are hot topics to increase net worth and provide additional income. This fervor isn’t limited to doctors only—it seems like everyone including the average Jane has known someone with a great real estate investment story. The amount of interest among physicians in real estate, however, is fascinating. Decades ago, it was okay to just focus on one’s professional career. Doctors could get to retirement relatively easily given the amount of income in their primary profession. Today physician income is all but secure, and a surprising number of physicians even strive to become real estate professionals. Being able to find income outside of our profession is an asset—who knows what variables in our practice would make medical practice untenable in the future? Real estate certainly is a viable route to get to your end goal.

How do you get to Rome?
The name of the financial game is to achieve a means to survive when our primary income source is no longer viable. Some of us achieve this by simply saving a portion of our earnings during our working years for use during retirement. Others opt for more material income in the form of alternative businesses or real estate. Part of this end game involves allocating to charities that support our beliefs, and also leaving a part to subsequent generations to build upon.

Some of us aim to retire around Medicare age. Others choose to call it decades earlier.

What is important to realize is that each person’s definition of Rome is different, and everyone’s journey there will undoubtedly take a different course.
What this means is that real estate investing is a great option for only some of us.

In other words, some of us will not do well investing in real estate.

FOMO
I remember a time in the recent past that everyone including those who never cooked wanted an Instant Pot. People spoke of it so highly that I almost bought one myself.

Anyone want to buy this and turn it into a short-term rental?

Or the several weeks where no store had any stock of toilet paper, even though there was no rational urgency to squirrel away a year’s supply of it.
It’s human nature not to want to miss out on a deal or opportunity, even if the thought had never crossed your mind prior to everyone else talking about it. Real estate investing has a similar allure for those who have never considered it, except that we all probably know someone who claims to be making “good money” on real estate. We all know that real estate can generate fabulous wealth, but it can also cause a lot of grief.

If you don’t do your homework or master it, it can cause a bit of financial damage.

Why do people love real estate?
The benefits of real estate are too lengthy to discuss in a brief overview, but one of the more commonly discussed reasons for real estate is that it generates cash flow. There is a real allure about having money coming into your bank account every month. Whether you are an employee or business owner, there is generally a consistent interval where money appears in your bank account. Real estate as an investment vehicle often provides reliable cash flow that can be used for living expenses. This is not necessarily the case for stock market investing or purchasing bond funds, where you have to sell the invested currency in order to obtain cash.

Additionally, the endpoint of real estate is that you actually end up owning a building. Something concrete. Something that you can physically leave to your heirs. It sounds more substantial to own a physical building rather than something non-material.

The case for financial success
As with any task we embark upon, nothing comes for free. In order for us to become physicians, we gave up lots of money and lots of time. If you choose to become a successful real estate investor, then you have to give up time and money. Even with syndications, the investor still has to spend time to do the homework. We all have a finite amount of time, energy, and health to devote towards our interests.

To answer the original question, it is certainly plausible to achieve financial success without real estate if you are focused on achieving financial success.

Remember, there are many roads to Rome, and Rome wasn’t built in a day.

What percentage of your total investments are in real estate?

How to recuperate financially from a divorce

Posted on October 5, 2020January 30, 2021 by SmartMoneyMD

I remember reading a post recently on a Facebook physician group that involved cardiologist who asked for help on how to manage her finances after a divorce.
The pertinent aspects of this situation involves the physician being left with essentially nothing in retirement savings. She is mid-career with children, and wants an option to reduce her schedule eventually to spend time with her children during the weeks she has custody. Her gross income is roughly $700,000+ a year.

Now most readers are going to pause at that income and say that there’s no financial dilemma, but there are in fact many issues with this situation. People get into financial trouble for only two possible reasons: (1) spending too much, or (2) not earning enough. This physician earns enough by most accounts, and is unlikely able to carve out more time to dedicate to earning more. She should tackle her expenses, especially since it sounds like she is on the short end of the divorce settlement.

Divorce

The original poster did not mention any further details about divorce settlement other than the spouse works in the financial sector and “made out like a bandit”. Fair enough. If we assume roughly a “worst case scenario”, the physician might have to pay out five years of alimony, maybe a chunk of childcare expenses, and some lawyer fees. Maybe the payouts for the first year might look like this:

Alimony – $150,000

Childcare – $100,000

Lawyer fees – $50,000

The second to the fifth year might incur $250,000 each, and childcare costs may never end (only half-joking about the childcare costs). Note that one can raise children for much less than $100,000 a year, but her financial strategy should function independently of childcare expenses.

A $700,000 pretax salary on a W2 will likely result in a 30% effective federal tax rate. If you assume that state and local tax rates chew up another 10%, then she will bring home roughly 60% or $420,000. After divorce payments, the physician should have $120,000 in the first year and $170,000 in subsequent years.

Live like you’re poor (because you are)

This mid-career cardiologist may be in her late 40’s or early 50’s. She will likely need to dedicate the rest of her working career of 15 to 20 years rebuilding what is lost, but her options might be significantly more favorable depending on the terms of the divorce settlement. There is a good chance that childcare expenses are not nearly as high as portrayed but this would not alter the financial recovery strategy. Should ought to be able to retire at a “normal” age, and even opt for fewer hours if her financial situation recovers quickly.

The most challenging aspect of handling finances in mid-career is that it is not easy to go counter to lifestyle creep. Any physician who is at least decade out of residency is going to have difficulty cutting back, but this physician will need to itemize her lifestyle expenses and figure out how to pare everything down.
Car lease, mortgage, travel consumption, food consumption, discretionary spending should all be assessed and slashed.

The goal in financial recovery is to assess all variables that are under her control. This includes everything that is unrelated to her divorce expenses. However unfavorable, she might benefit from downsizing her home or reducing costs on her vehicles. These recurrent costs typically consume progressively substantial amount of earnings that could be better invested elsewhere for retirement.

Back to the basics

This physician simply needs to go back to the fundamentals of building wealth for residents and new graduates. She should maximize her pretax retirement vehicles like her 401k and contribute to any profit sharing plans that her practice offers. She should also make sure she is contributing to a Roth IRA as long she does not have savings already in a Traditional IRA. She should immediately try to save at least 20% of her post-tax, post-divorce fee income and build up.

Sometimes all we want is a guidebook to tell us what to do.

Remember that the longer that your investments are in the market, the more they will have time to grow. After her divorce payments are completed, she should contribute that same amount towards her retirement. Even with conservative estimates, she ought to be able to retire comfortably by age 65.

Reducing hours

Going to part-time is solely a practice-specific and specialty-specific endeavor. Shift-based professions tend to be more conducive to part-time status simply because colleagues can simply pick up the shifts that you don’t do and receive clear-cut compensation. Cardiology tends to be more challenging, especially in the proceduralist subspecialties. For instance if you are an Interventional Cardiologist, you will likely need to make compromises in the on-call schedule if you opted for reduced hours. The math doesn’t always work out in your favor, but the hope is that your financial health is able to take the hit if going part-time significantly reduces your income. It would not be surprising if a 1.0 FTE cardiologist making $700,000 would see her salary reduced to $250,000 if she were to drop to 0.5 FTE.

She is going to be fine

Wealth is often defined by a relative number. This cardiologist will unfortunately not have the option to live a wildly extravagant lifestyle had her divorce not occurred. But she will not likely be out on the streets and there is a good chance that she will be able to enjoy many purchased luxuries that her colleagues in less lucrative (and less busy) fields may not necessarily be able to. What this means is that if she is able to quickly rebuild wealth in the next five years, she will have the option to cut back to spend more time with her children.

If her salary were “only” $300,000, her divorce settlement will likely be less and she ought to be able to recover similarly.

The moral of the story? Financial disasters can happen to everyone. Obviously having a greater earning potential will get you out of trouble sooner, but everyone has the ability to rebuild financially no matter where we start out.