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Do doctors need to establish a trust for their heirs?

Posted on July 7, 2018January 30, 2021 by SmartMoneyMD

One common question that doctors face in estate planning is whether to establish a trust. This topic gets brought up in the doctors lounges, especially after someone gets a pitch from their financial planner. Most doctors who bring up the topic are quite enthusiastic, and cite that doctors need a trust because “we make a lot of money.”

Fair enough.

Medical students and residents probably do not need a trust

I’ll get this one out of the way. If you’re still in training and have very little wealth tied to your name, you don’t need a trust. You can always establish one later. If you actually need a trust while you are in residency, then you already know why. In this case, your parents probably already have set one up for you. I had several classmates in college and medical school who did have living trusts, and it was obvious. It’s good to have old money.

Establishing a living trust doesn’t necessarily break the bank

Doctors (and everyone else) can have strong opinions. Some of us can’t be convinced that we are wrong. I’ve long decided that my job in this world isn’t to convince everyone else who is right or wrong. Living trusts, along with insurance policies, real estate, and gold are various financial vehicles that can make sense for some people but can instigate argument to no end.

Establishing a living trust won’t break the bank. If you decide to do it yourself, you might spend a few hundred dollars. If you go through official channels with a professional, it might cost you several thousand dollars. If you must, put in a few extra shifts in the ER or cut back on some of your other spendings. It’ll be healthier for both you and your coworker who is trying to talk you out of getting one.

The fundamentals of living trusts

In a nutshell, living trusts are written so that your assets are distributed according to your wishes after you are no longer able to make decisions. You also have to have some net worth that is to be distributed to your heirs too.

Let’s rephrase it:

You probably won’t be enjoying any of your hard-earned assets when the trust comes into play. So the entire premise in establishing a trust is so that your beneficiaries will benefit from your demise. If you wish to have a clear allocation of your assets to those other than your spouse or heirs, then you can specify on your trust.

He does not have a living trust to rely upon!

Won’t a will give me the same results?

Once you die, your will has to be executed through probate court. The exact policies vary per state, but the intention is to make sure that your debts are paid off prior to distribution of your assets to your heirs. This often does not happen immediately and will incur attorney fees.

A living trust allows heirs to bypass probate courts, because the assets in the trust are considered to be part of the trust in the eyes of the probate court (but not to Uncle Sam). Interesting, eh?

There are two types of living trusts: (1) revocable trusts, and (2) irrevocable trusts. The main difference is that the designated instructions in an irrevocable trust cannot be changed once you’ve finalized it unless the benefactor grants her permission. The entire premise behind an irrevocable trust is that you established it for tax reasons. This means that you have enough assets to benefit from this vehicle. Most doctors aren’t going to fall into this category because we probably aren’t going to reach the estate tax limits. In 2018, the gift tax limit is over $11 million. Even if your net worth exceeds this amount, there are plenty of ways to draw down your assets beforehand.

Revocable trusts provide an instruction set on how to handle one’s assets during her lifetime, once she loses her ability to make financial decisions, and death. The person who establishes the trust is labeled the “grantor”. In a revocable trust, the grantor has full control of the assets of the trust during her lifetime, and can add or remove assets into the trust at any point. All taxes from the trust are treated as pass-through to the grantor.

Where the revocable trust comes into play is when the grantor is unable to manage the assets or dies. The designated trustee in the trust will then take over and execute the instructions given by the grantor accordingly. This transition proceeds seamlessly without any involvement of local probate courts. Of course, the grantor’s debts will still have to be paid off, but someone (not the grantor) will end up saving several thousand dollars and the beneficiaries will likely get the inheritance more quickly.

There are also nuances and clauses that can be attached to living trusts, just like in any job contract. What might be most helpful for some doctors is a spendthrift clause. Suppose that you wanted your child’s inheritance dispersed annually until she is an adult instead of in a lump sum. You can specify the terms in the spendthrift clause of your living trust down to the tiniest details.

Interesting material, although it is somewhat morbid to think about it. After reviewing all of the stipulations, I’d imagine that whether to establish a trust is going to be a 50/50 split for doctors.

Do you have a living trust?

Debt-free medical school a financial blunder for doctors?

Posted on June 30, 2018January 30, 2021 by SmartMoneyMD

Education can be expensive. Higher education can be even more expensive. Even partial scholarships can be deceptive as one might opt for a more expensive school for the sake of redeeming “free money”. As a student, I had no financial understanding of return of investment when I was considering higher education. All in, I plowed through more than a quarter million dollars in my college and medical school after substantial scholarships and grants. And that was a long time ago. If you are finishing medical school today funded solely on loans, you’ll likely owe slightly south of $200,000—if you attend a private school expect to add in another $100,000 to the tab.

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Fast forward to today. My medical school alma mater recently announced that it will become completely tuition/debt-free for all students. That’s right. Zilch. You don’t have to be surviving on subsistence living either. No need to strategize on Public Service Forgiveness Loans either. If you are admitted, your education will be free.

The cynical side of me says that the medical school did well for itself: enough of its alumni have become hotshots so that its scholarship fund is big enough to fund its future graduates. That’s a nice pot of money, especially since tuition today is over $65,000 a year. Getting into medical school itself is challenging enough; going through it without paying a dime is like winning the lottery. The rarity of this windfall is akin to that of Qatar discovering oil and natural gas…big.

The motivation for a debt-free medical school

The elimination of educational debt confers significant advantages for medical students. Remember the Hippocratic oath? It mentions nothing about prepayment, prior authorizations, Bugatti’s, or care contingent upon reimbursement. We chose to become doctors in order to care for others. That is how medical education was intended. The reality, however, is that we also have to make decisions based on practicality. Imagine going through medical school supporting a family with 1.5 kids and studying nearly every waking moment of your day? Your spouse wants to go back to work, but you contribute nothing to the cost of day care. Many medical students contact me simply to ask about the compensation and lifestyle of a particular specialty. Many of those students are drowning in debt. You’d better believe that if you’re half a million dollars in the hole, you probably aren’t going to be tooting the virtues of pediatrics, no matter how much you love children.

If you wipe out educational debt from the picture, you might be more inclined to choose a potentially less lucrative but more enjoyable career path for the long haul. Perhaps you’d end up realizing your calling as a geriatrician and do great work for the elderly.

Debt-free medical school lifts a psychological burden as well. As a medical student, I was always torn between budgeting my time and saving money. Do I study an extra hour and buy take-out for dinner, or do I need to sacrifice precious study time in order to cook dinner? Do I spend my Sunday mornings buying budget groceries for the week or enjoying my limited free time? Without the big price tag attached to medical education, we might even have happier students.

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A happier person makes a happier doctor. Do happier doctors make healthier patients? If you love what you do, you’ll likely be a better doctor. When educational debt is eliminated from the picture, society benefits from having a better doctor.

Debt-free medical education is bad

How can free ever be detrimental?

Because free implies the absence of cost. Free is easy. Easy doesn’t fire the synapses in our brains. And we all know that our brains need to fire in order to learn. Remember the college chemistry exam that you didn’t study for because you thought the class was too easy? You’d bet your tail that you remembered to study for the rest of that semester. No matter how conscientious we try to be, human nature dictates that we are less alert if we are in a comfortable situation.

Free medical education will make you complacent.

Being in debt allowed me to understand the importance of finance and how much doctors are worth. Society does not value doctors adequately. It is appalling to compare my medical school experience with one of my friend’s business school experience. My research job the summer after my first year of medical school granted a $3000 stipend for three months of living expenses. My business school friend secured a two-month internship with a salary of $10,000 and free meals! Neither of us were truly viable in our respective professions as students, yet society was able to value a business trainee much higher than a healer in training. Would I have cared if medical school didn’t come with a big bill? Maybe not. If weren’t already financially invested in medical school, I might have jumped ship straight to a business degree.

Paying for medical school teaches you how much you are worth

As service professionals, doctors exchange their skills and time for money. Fundamentally that is the only way that we are compensated (side hustles and real estate aside). Our earning power is limited by time. And healthcare is constantly devaluing our time. You don’t earn more by spending an extra two hours of your day charting. Quality metrics are great in principle, but the goal of our profession is to provide emphatic expert care.

Having been in debt makes you hungry to succeed in life.

I don’t think that I would have such a profound opinion of the value of our medical skills if medical school did not come with a price tag. Knowing that I invested a significant portion of my youth and finances towards medical knowledge has allowed me to negotiate a fair salary for my time and experience.

The cost of medical school teaches frugality

After digging myself in a hole of student loan debt, I knew not to crank up my luxurious expenditures when I started making good money as an attending. I wanted no chance of reliving those days. Would I have become as conscientious about money if medical school were free? No way.

Obviously medical school debt isn’t the only way to learn frugality, but medical students frankly don’t have many opportunities to learn it. Most doctors never hold a real job before becoming a high-income doctor. Our training is arduous and takes many years. Sometimes the only thing that gets me through my long days of surgery is the thought of buying an overpriced outfit or car. What often reels me back to reality is remembering that medical school came with a big price tag that took a lot of effort and sacrifice to repay.

Do you agree on the principles of a free medical education?

Why do young doctors hate medicine so much?

Posted on June 23, 2018January 30, 2021 by SmartMoneyMD

There is a perpetual mentality that generations after our own seem more entitled than we ever were ourselves. Since when did a second grader ever need the latest cellphone? Avocado toast, month-long honeymoons, extended vacations after residency, and baby moons are just some of the luxuries that prior generations were unlikely to have experienced. Maybe society is simply more advanced, or maybe I’m just getting old.

In the medical world, more doctors are asking for more time off, shorter workweeks, less call, and more pay. No way would younger doctors willingly sign onto a job with a call schedule of every other day. Is quality of life that much more important to us even though many recent graduates have upwards of a quarter million dollars of educational debt? I once had a senior partner who opted to take more hospital call when he was in his thirties so that he’d earn more to support his family. What happened to good work ethic?

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I see this trend in doctors not only in generations after my own, but also in a few years my junior. They seem to be working less, wanting more, but all seem to hate medicine. Some of these gals are doing amazing things, like resuscitating dead people, putting in new heart valves, and curing cancer. What is there not to like?

What gives?

Medicine offers a lot to be disgruntled about.

If you remove the aspects of patient care, healing, and all of the reasons why we became doctors, there really isn’t much left over to praise. Prior authorizations, meaningful[less] use, patient satisfaction scores, inordinate amounts of charting, useless meetings, and reimbursement cuts are just some of the recent inventions in medicine that erode the enjoyment out of medicine. Autonomy frequently gets replaced by mandates. How sad.

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The irony about these unfavorable healthcare mandates is that most of our administrators tell us that with a little more hard work, we can accomplish all of the expected tasks. Most doctors are not opposed to working hard—we did go through a decade of servitude in order to master our specialties—but the problem with the ancillary tasks associated with medicine is that there is little perceived return in our effort.

The intention of these time consuming tasks associated with medicine is primarily to improve safety and cut costs in the healthcare system. There are so many layers in the bureaucracy that it is essentially impossible to determine whether working doctors harder is going to pare down the cost of healthcare.

Follow the Benjamins and you will realize why doctors are unhappy

Capitalism. I love it. If it works well, there is a direct correlation between hard work and return. Unfortunately, capitalism doesn’t always work if you’re an employed physician. The reward for completing more charts and seeing more patients doesn’t always translate into direct financial gain. In fact, if you save the healthcare system more money you might actually benefit the guy in the C-suite or the company’s stockholders first.

Young Padawan with $300k in debt has a lot to learn from the elders

Several weeks ago, I was in a meeting where one of the administrators in my organization (who holds a pseudo-degree from an online for-profit institution) alluded that one of the trauma surgeons ought to be working harder given that the group was paying him $X. That amount was about a third of what a normal trauma surgeon ought to be earning. I was blown away that this trauma surgeon was even willing to work for a fraction of what he is worth. I was even more shocked to hear that the administrator thought that the surgeon was overpaid.

These instances reflect that people holding the power in healthcare still believe that doctor salaries play a role in cutting down the cost of healthcare. One hospital that employed 60 doctors reported a deficit of $87 million. There is a problem when you think that cutting your neurosurgeon’s salary is going to solve that problem.

Do doctors who aren’t considered young have the same sentiment?

In general, we all do. The difference is that doctors who have been working twenty or thirty years are in a different point their careers. Most of their children who are out of the house and even self-sufficient. Some of them even practiced medicine in the heyday and hopefully invested their earning appropriately. Maybe some of them are financially independent. They are no longer in the earning phase in their careers, so many of the burdens that we endure do not necessarily impact their long term career plans. If the hospital mandates too many EHR clicks or an excessive number of patients per day, they can just hang up their hats and ride off into the sunset.

What can younger doctors do in this situation? You already know the answer if you’ve read this far. Make it so that you, too, can ride off into the sunset if you have to.

What to do when your expenses exceed your budget

Posted on June 2, 2018January 30, 2021 by SmartMoneyMD

It can happen. It’s happened to me time after time. I remember in grade school, lunch meals were $1.25, and I usually brought $1.25 to school every day. Except the many days where I forgot to bring an extra quarter or simply lost the quarter that I so carefully kept in my front pocket. Those were the days where my expenses exceeded my budget.

Fast forward several decades into medical school. I was purchasing a latte and a pastry from a cash-only local barista, and ordered a ‘tall’ cup. Rookie mistake. On their menu ‘short’ was the smallest size, and I only had $10 to my name. I exceeded my budget once again (I opted not to take the pastry so that I actually had enough to pay).

Fortunately both of those financial faux pas were trivial, but recurrent large expenses can leave you in financial ruin especially if you are in your later years of your career. These are situations that we all hope to avoid, but just because you crushed your board exams doesn’t mean that you won’t make financial mistakes. Exceeding your budget is incredibly easy, with credit card companies extending incredible lines of credit to doctors who otherwise earn slightly more than minimal wage.

Don’t allow your expenses to exceed what you can afford

The easiest way to bail yourself out of budget-breaking activities is not to get yourself into that situation. If you don’t have the money to buy something, then don’t do it. With the number of physician bloggers out there, it’s clear that many of us have some sort of fundamental understanding of frugality, whether from our upbringing or experience. I don’t expect the majority of the online crowd to have a spending problem, but the majority of doctors still do not have that mindset.

If you aren’t sure if you have a spending problem, then do yourself a favor and figure out how much you have leftover every month after your expenses. Track your expenses on free software like Personal Capital. You can see how much is coming in, and where your hard-earned dollars are going towards.

What can you do if you do end up overextending your pay rate? While I hope that no one ever gets herself into this situation, but the following are some short-term strategies to dig yourself out of a financial disaster.

Balance transfer checks can actually bail you out

I get these blank checks relatively frequently in the mail from credit card companies. Some of them actually have 0% interest for even two months. After that, mega-interest rates kick in and destroy any hope of repayment. If you are in a high-interest repayment sort of situation, perhaps from a credit card or [loanshark], you can potentially negotiate a balance transfer to buy you a month or two to get your act together. I kid you not—I have seen doctors use these to make short-term repayments on loans.

Figure out what is bleeding your savings

The next step is to figure out what is destroying your bank. As most doctors generally have high incomes that negate most bad financial choices, it usually isn’t enough if you have multiple streams of big-ticket expenses. Multiple vehicle leases, multiple mortgages, bad real estate investments that require recurrent contributions, kids’ education, and expensive hobbies are some of the items that can destroy you. One of the doctors that I work with actually cut short her lease on a Mercedes SUV and purchased a Honda Civic (I’m not sure of the circumstances, but I suspect it was financial-related). Plan to unload any property that’s bleeding your savings. Too many handbags or outfits in storage that aren’t getting use? Consider unloading them on ThredUp, and figure out how to stop making unnecessary purchases. You can always ease back in slowly once you get your financial act together (try not to).

Puppy strollers can definitely bleed your earnings

Expenses for your children are harder to deny, but remember that financial support does exist for education. This is a valuable lesson for everyone to realize that there is always a cost-benefit analysis involved with education.

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Your kids will have to learn that few opportunities come for free, and the earlier that they become involved in financial decision-making, the more likely they will be equipped to make financial decisions for themselves. If they choose to go to fancy private primary school, they have to realize that mom and dad had to make sacrifices to make it happen.

Generate more income

If you need extra income to bail yourself out of a financial pickle, you can try to work more. Specialties that are structured around shifts like Emergency Medicine or Hospitalists will be more conducive to earning income. I’ve seen some people take locums positions while on vacation from their primary job too! Working harder isn’t necessary the best long-term solution to our financial problems, but our profession fortunately can help dig us out quickly.

Once you’ve bailed yourself out of short-term financial disaster, head over and read: A financial plan for busy people – finance.

What other ways can you destabilize your budget?

P.S. Try out Personal Capital. It’s come a long way, and does a nice job with graphs and trending on your net worth.

The number one reason doctors need to be financially independent

Posted on May 26, 2018January 30, 2021 by SmartMoneyMD

Most doctors are goal-oriented, which is a useful trait (or personality quirk). Motivation helped get us through a decade of training, and to get to the next step. But putting in your A-game for more than a decade can be tiring if you’re not hypomanic. As I mentioned on a previous posting, once we escape from doctor survival mode it’s normal to let loose the reins and slow down.

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I consider anyone to be out of survival mode if she has accomplished most of the following goals:

Finished medical school, residency, and fellowship
Board certified (no more exams, at least in the interim)
No more high-interest student loan debt (>4%)
Gainfully employed or working with a steady income

Obviously there are many other financial goals that one might add onto the list such as buying a house, having enough to send your kids to school, or simply being financially independent. What’s more important in this checklist of goals is that we all need to enjoy the process as much as possible. YOLO. Leaving your kids with $10 million does you no good if you aren’t around [physically] to enjoy your hard earned sweat.

For most doctors out of financial survival mode, the timeline to further reach our goals tend to get relaxed. At this point in our careers, we typically feel comfortable with our clinical practice, we have a steady income, and most of us are still healthy. There is no longer an immediate urgency to reach the next step in our financial timeline, especially if college savings or another bigger goal requires five or more years to reach anyway. This has certainly been the case for me. It’s better to play the long game rather than sprinting.

Doctors need to remember that nothing lasts forever

That’s right. When the weather is fair, you ride the wave. Don’t expect the wave to carry you through your entire career, however. Bulls can transform into bears, as we’ve seen in 2018. The medical profession, while traditionally stable is fraught with transformations unfavorable to doctors. If you want to hear some unhappy people, go to @SERMO or the doctors’ lounge of your local hospital. 😉

Common complaints I hear and experience in my medical profession include:

Loss of autonomy – No, we’re not talking about rules preventing us from throwing scalpels in the operating room whenever things don’t go our way. Administrators tell us to improve our Press-Ganey scores when we actually have less control over of the numbers. The death blow comes with our salaries end up getting tied to these dubious numbers. By the way, we also have to chart more than ever without much noticeable improvement in outcomes. This is just the tip of the iceberg!
Medical insurance restrictions – Prior authorizations. Medical necessity. Painful. This falls under loss of autonomy.
Medical insurance reimbursement cuts – Doctors are seeing more patients than ever on their schedules, yet salaries don’t necessarily even grow with inflation. Some specialties have even seen salary cuts.
Electronic Health Record issues – No one wants to spend more of their life clicking around a poorly conceived UI on underpowered computers with way too many icons on the taskbar. ‘Nuff said.
Getting locked out of a market – Some health insurers won’t permit smaller medical groups or single-doctor practices from enrolled onto their insurance plans because larger groups bid for the same contract [read: willing to pay their doctors less for more work].
Being characterized as a provider – This hits a nerve with all doctors.

It is upsetting that I see more of my colleagues under some sort of squeeze, and none of it even has to do with the inherent intellectual challenges of being a doctor. How does one get out of this mess?

The key to job freedom is to become an administrator, just like this guy here.

Financial independence solves all of these problems

If you want to get out of the hamster cage, you cannot be beholden to the system. We practice medicine because we love to take care of people. We also do it to put food on the table. Once we have a suitable means sustain a healthy livelihood outside of our day job, the burden becomes lifted.

Think about it. Why do some of us go abroad to volunteer our skills? We do it because we get intrinsic satisfaction outside of a monetary payment. I find that it’s more fun to volunteer than to go to my day job.

If you know that you can walk away from the painful regulations of a broken medical system at any time, some of the daily burdens are no longer burdensome. You might even start considering your day job to be volunteer work that actually generates a salary! If you ever need the motivation achieve your financial goals, think of the negative changes that you’ve witness in our healthcare system even in the last several years. Use this as motivation to get yourself to financial freedom sooner.

Doctors, if you want to be able to help others with your skills, get yourself to financial independence sooner.

What motivates you to achieve financial independence?

Why doctors need to do their own taxes at least once

Posted on May 6, 2018January 30, 2021 by SmartMoneyMD

For decades, I had been the DIY type. If the task at hand conferred low risk to my main career and if outsourcing the job was more expensive than what I could generate with my own career in the same amount of time, I was game. Tasks that I’ve tackled included changing the lightbulbs in my car, fixing a sensor in my hot water heater, replacing a fan in my furnace, and even repairing a chest freezer relay. I still consider myself the DIY type, except that with age and limited time I am more often faced with outsourcing tasks that I otherwise would have tackled years ago.

I don’t expect most doctors to be handy, techie, or even analytical outside of their careers. I’m willing to bet that most doctors don’t ever track their monthly expenses, let alone be able to draft out their financial plan. We are all capable of doing it, our jobs simply rob us of our brainpower. I need to unwind after a long day at work, and after a week of long days, the weekend simply can’t come soon enough. Sometimes the weekends are consumed by on-call emergencies. The last thing I really want to deal with in my limited free time is to fix an irrigation line or come up with strategic ways to increase my savings incrementally.

Grade school math and compulsiveness is all you need to file your taxes

Before tax software became mainstream, basic math and an incredible amount of persistence in reading about the U.S. tax code were all you needed to file your taxes. The biggest impediment was the time, energy, and motivation to thumb through pages of instructions not really knowing if you’ve interpreted the rules correctly. The challenges came when certain blanks were ambiguous–do you ask an accountant, check with a lawyer, or just fill in the numbers to the best of your abilities?

The game has changed with the Internet and tax software. You only need to follow basic instructions in order to file your taxes through tax software, and with some persistence with online forums you can easily become an advanced beginner to tax nuances. The beauty with tax software is that you can view changes to your filing dynamically and work backwards to figure out how each line on your 1040’s and Schedules are populated. Do that for a few years, and you’ve got the system down pat. Moreover, you’ll become less daunted when new tax rules are enacted.

All doctors should spend some time learning how to file their taxes

Even though all doctors should understand how to taxes are filed doesn’t mean that we need to be filing our taxes every single year of our lives. The principle of tax filing can be compared to learning the clotting cascade during medical school. You needed to learn it for your tests, but as an orthopedic surgeon you probably don’t need to be able to recite it by heart. However, even if you’re a bone doctor, you know that aspirin and direct clotting inhibitors work in different segments of the cascade.

Likewise, understanding how you file your taxes and what information is needed to file your taxes is helpful even if you have a tax accountant. You have to produce the tax documents for your accountant anyway, and it’d be a whole lot easier for your accountant to do your taxes if you already know what forms are needed. You’ll be more attuned to any changes in tax code, and you can even ask meaningful questions and confidently know that your accountant is doing the right thing for you by reviewing the results.

Start filing your own taxes in residency.

Even though you are chronically sleep deprived in residency, your tax status ought to be at its simplest—it would behoove you to try to file your taxes while the forms are still straightforward. Most medical residents will find themselves taking a standard tax deduction. Those who can itemize will likely have mortgage deductions, a working spouse, and children. Even then, residents are paid through a W2 as employees so income is easily reported.

Farm out your taxes to an accountant once you become rich

That’s right. You don’t have to be condemned to filing your own taxes forever…unless you love working through the tax code. Many doctors will have real estate investments, multiple income streams through dividends and stocks, and more complex business deductions. You can still figure out how each one of these variables fit into the tax returns, but at some point in your life you won’t have as much time to dedicate to this.

There’s no shame in farming out your taxes to your accountant, as long as you have a fundamental grasp on how the forms are completed.

Have you filed your taxes yourself before? If not, take the leap and start!

Where to invest for short-term gains

Posted on April 8, 2018January 30, 2021 by SmartMoneyMD

As long as we are in our earning years, our investment strategy should target the long game. Get rich quick, buying and selling, and IPO schemes are only great for excitement and anecdotes over cocktails. If you hedge your future on gambling, you are betting against the house.

The name of the game in short-term gains ultimately lies in liquidity. This is your pot of funds that allow you to have immediate or near-immediate access. This is sort of like your emergency fund stash. Some people are against keeping any sort of emergency fund, citing that credit cards or lines of credit will allow some flexibility in a pinch.

I sort of keep my emergency fund stash in the same pot as my short-term fund storage bin. This is a set amount of money that I keep around that might come in handy somewhere in the 3-9 month range. These are funds that I might need for a big ticket purchase, like a deposit for a mortgage, tax payment, or sizable investment. Now as with any smart investor, you don’t ever want to keep too much money lying around that’s not working for you. You work hard enough in your day job. It’s your money’s turn to make more money.

Time is on your side if you can get your dollars working for you.

In my book, short-term investments simply need to have decent liquidity and safety. You don’t want to end up losing half of your money due to volatility by the time you need to withdraw it for other uses. This only leaves conservative investments like money market accounts, CD’s, and bonds.

Money Market Accounts

By default, I keep all of my in-limbo funds in my money market account. I get FDIC protection, debit withdrawals or even check writing. This is just money that I’d otherwise transfer to my checking account to pay the bills, only that there is a slightly higher interest rate (approximately 1% these days in high-interest MMAs). Hey, 1% is not much but better than nothing. In the grand scheme of things, unless you’re keeping a sizable chunk of money in the savings account what else you do with your money probably isn’t going to affect your retirement.

CD’s

This is another form of financial security that banks and credit unions offer. It’s essentially a way for the financial institution to have cash on hand in its books for lending, negotiation, or even borrowing. For the investor, CD’s offer a risk-free means to get a set rate of return. In 2018, the interest rate is roughly twice that of a MMA. The only downside is that you have to lock up the money for a fixed period of time.

Treasury bills

Treasury bills, or T-bills, are financial securities that are sold by the U.S. government. While I studied hard for my high school AP U.S. History exam, I’ll be first to admit that I frankly do not have enough political or economic interest to evaluate how the government decides to use these funds. What is important for me is that these securities are backed by the U.S. government. This means that T-bills are safer investments than bank accounts themselves because those funds are also backed by the government. If the government ends up defaulting on its T-bills, then we’d all have bigger concerns to worry about than losing our investment.

Most recently, you can purchase T-bills that mature in 3,6, or 9 month intervals at an interest rate nearly at 2% annually. That is probably the best deal you can get for short-term, essentially no-risk investments. You can purchase them through the U.S. government directly at http://treasurydirect.gov, or through your broker. I’ve purchased mine through Fidelity. These rates are currently much better than what you’d otherwise get from a bank CD.

Short-term Investment Strategy

Before purchasing T-bills, I had only purchased bank CD’s in a ladder so that I’d have certain amounts maturing as I needed the money. It was a convenient means to improve my passive earnings since it was easy to open CD’s at banks that offered high rates. I was too lazy to open an account on treasurydirect.gov. Then I realized that I needed to be strategic to minimize my tax burden as well.

T-bills are not subject to state taxes. Sure, everything else is taxed at your federal marginal tax bracket, but if you live in a high income tax state like California, you could save up to 10% on state taxes. For a 9-month T-bill investment of $10,000 at 2% discount, you’d gain roughly $150 before income taxes. If you were to buy a CD at the same rate while living in California, you could end up paying an extra $15 in state taxes when you’re at the top tax bracket (you will be as a doctor).

Is $15 worth your time to open a T-bill? You can decide. If you are drowning in cash flow from your multi-unit apartment rentals you probably can’t be bothered to mess with the low-end T-bill investments. On the other hand, if you are stashing $300,000 for an upcoming mortgage in 9 months, a T-bill isn’t a bad way to grow some interest while you wait. It’ll buy more than a few espressos at your local barista.