2016 | Smart Money MD

Year: 2016

Why I haven’t started tracking my monthly expenses – and why I need to start

Posted on December 8, 2016January 30, 2021 by SmartMoneyMD

why-i-dont-track-expenses It almost seems like keeping tracking of your expenditures is a prerequisite for improving your financial self. For a blogger that writes about money and finance, not documenting expenditures is downright heresy. Well, I am guilty as charged.

I don’t track my monthly expenses.

There, I’ve said it. Now, how can someone be financially conscientious if they don’t even know how much goes out of their bank account monthly?

The beginning.

I wasn’t always like that. In medical school, I meticulously tracked my bank account and credit card statements. It was like checking daily I/O’s in pre renal patients on the floor…only easier. I essentially had no income other than my student loans. Sure, I tutored on occasion but I’d say that I earned less than $100 during my entire 4 years of medical school. The expenses were also easy to track:

rent payments
groceries
furniture from craigslist
occasional bar tab / restaurant meals
the new pair of shoes I bought

I sure as hell didn’t let my balance run close to zero before the next semester’s loan disbursements came.

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In residency, I slacked off slightly, but still kept tabs on my paycheck and expenses. I did not contribute to my 401k/403b during residency for several (perhaps unjustifiable reasons: (1) My rent consumed about 60-70% of my monthly stipend, (2) I thought that the investment options available sucked, (3) I used excess money to repay my student loans.

However, I made sure that at the beginning of the month that I would have enough to pay next month’s rent. I wasn’t married yet, so I didn’t have to contribute to my future spouse yet. (:-P).

The present and the problems.

As an attending, I did open a Personal Capital and Mint account. (referral link on the sidebar if you want to help out the website!). It’s a great asset management tool with cool pie graphs, line charts, and even an retirement planner. This is where some of the hassles emerged:

I had separate accounts for myself and my spouse. This means two different logins. Unfortunately, some of our joint accounts overlapped, it adding up both sides made it seem like we had more money than we actually did!
Many of the accounts did not synchronize well. I suppose that this comes in part from the ever-evolving security mechanisms in online vendors. I had a hell of a time with my employer’s 401k (ADP) and HSA accounts not synchronizing at all.
I buy many store gift cards. This is mainly a means to save some money and earn credit card points along the way. Once a year, my local grocery store sells $100 store cash cards for $90. I essentially buy hundreds (maybe even a thousand) dollars worth of grocery store credit at 10% off. I do the same with certain gas station cash cards whenever there is a sale. What this means is that all of my store category expenditures are front loaded. While I probably deplete the funds within a year, it does make it tricky to follow all of the expenses under Personal Capital.
I am lazy. If you simply click on “Expenses” in Personal Capital, you can get a YTD tally of all of your expenses. However, many of these transactions are erroneous categorized. Many of my bank transfers from my checking account to savings account defaults as a “check” and not necessarily a true expense. Some of the checks I write need to be edited for specificity. How long would it take to keep these numbers correct? Probably 10-15 minutes a month. Why don’t I do it? I can’t be bothered! I need automation!

The future.

The maintenance hassles in Personal Capital may only amount to 3 hours of my life my entire year. Probably not a huge deal to go through. I probably will have to contact the customer support staff to tweak the logins from time to time. It’ll be my New Year’s resolution.

What will I gain from it? For one, I’d have a better idea knowing how much I spend annually. MMM spends $25,000 annually for a family of 3. I’m pretty sure I spend at least $100,000 for a family of two. Wouldn’t it be nice to see how high earning doctors can still be budget conscious and tweak their savings rate?

How meticulously do you track your expenses?

(Photo courtesy of Flickr)

How to fund a Backdoor Roth IRA

Posted on December 5, 2016January 31, 2021 by SmartMoneyMD

It’s that time of year where we prepare for our routine investment account maintenance. For me, one task is reminding myself how to fund a Backdoor Roth IRA. I do this at the beginning of every year in January, so that I can put my funds into the market as soon as possible.

Here are the basic criteria and rationale to fund a Backdoor Roth IRA:

If your gross income exceeds $117,000 if filing single or $184,000 if filing married jointly, then you should proceed with a Backdoor Roth IRA. Otherwise, you can just contribute to a Roth IRA directly.
The Roth IRA offers another “bucket” to invest. You contribute post-tax dollars into this bucket, but there is no tax on any growth in the bucket whenever you take the money out.
This money can go to your heirs tax-free.
It’s not a huge amount ($5500 for 2016), but the amounts do add up throughout your working career, and the potential growth over time is valuable.
This works best if you don’t have any Traditional IRA funds already. The Roth IRA conversions will take into account what you have tax-deferred. If you have Traditional IRA funds, then you will be taxed on any earnings that you convert.

I have my Roth IRA account in E-Trade. It just happened to be there when I used to buy individual stocks. It has a decent web interface with decent market analysis posts under the “Research” headings. If you already have a Vanguard or TD Ameritrade accounts, those also work fine as well. My rule of thumb is to minimize the number of accounts you have across the board for simplicity. After a certain age, you start to forget things! ?

Step 1. Open a Traditional Non-Deductible IRA.

On E-Trade, I select ‘Open a New Account’. From there I select a Traditional IRA. I also keep a savings account on E-Trade, and when the time comes to fund a Roth IRA, I usually transfer funds from my outside bank accounts to my E-Trade Savings Account.

For 2017, the maximum amount that you can fund is $5500 if you are under age 50. Don’t forget to fund your spouse’s account the same way!

Step 2.

Let the funds clear and do nothing. I tried to jump to Step 3, and E-Trade gave me an error message. I remember sitting on this for about 1-2 weeks on E-Trade.

Step 3. Apply for a Roth IRA conversion.

On E-Trade, I usually go to the landing page for conversion: https://us.etrade.com/landing/Roth_Conversion I log in, and click through. Fidelity also has a similar mechanism. Since the funds that you have placed in your account have not been invested yet, you should still have $5500 (or $6500) that you funded previously. If you already have an existing Roth IRA with the custodian, you can select that account at this time and combine the funds together.

Afterward, you can either close your Traditional IRA or leave it empty for next year. E-Trade allows me to keep the account open. You can then decide how to invest the funds in your Roth IRA!

What other tips do you have for Backdoor Roth IRA’s?

Becoming a rich doctor: having the winning mindset.

Posted on December 2, 2016January 30, 2021 by SmartMoneyMD

mindset of a rich doctor I don’t have a bone with pick with the wealthy, but wealth can help you and your heirs get ahead in life. Tennis lessons. Music tutors. Private schools with other like-minded peers. Connections that can get you into high places. Wealth is not a bad thing.

Most physicians in the United States are considered “wealthy” too. Not Sultan-of-Brunei wealthy, but comfortable-upper-middle-class wealthy. We have a relatively good earning potential despite the length of training we incur. Despite the similarly long number of years we spend perfecting our trade, there is still a wide income range across medical specialties. Some doctors will definitely become “wealthy” faster than others.

I previously wrote about becoming a rich doctor through building a strong offense through multiple income sources. I think that these remain strong tenants in maximizing our worth, but the appropriate mindset allows you to keep what you earn and build your wealth through passive means.

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A winning mindset to wealth should include retention of wealth.

You keep what you don’t spend. This is part one of the winning mindset. Whatever you retain can be used to work for you. Your army of millions of pennies can be put to work with almost no effort in an interest bearing fund. If you want more potential for reward with higher risk, use a P2P lending mechanism or simply the index market. If you want to manage your financial minions actively, you can invest in other means like real estate. No matter what you do, you still need to be able to retain that wealth to grow for you.

Understand what you really need to be happy.

We all have material desires to a certain degree. The goal in wealth accumulation and financial freedom is not to restrict these desires, but to actually assess what we actually need. Having that nice $120,000 AMG in the garage does you no good if you only drive it on the weekend and still pay thousands of dollars a year for maintenance. Could you have done without it, and turned that $120,000 into $240,000 in 7 years?

I see plenty of wealthy people, especially doctors and lawyers, who seem unhappy. Are they unhappy that their jobs consume so much of their life but they are loathe to quit because it pays so well? Are they unhappy that the other partners in their practice make so much more money than they do? Are they just unhappy people?

Clearly the lack of money is unlikely the cause of their unhappiness. This is a situation that you don’t want to get yourself into. Most of us really have never thought about what actually makes us happy. It doesn’t really matter either if you’re a hotshot neurosurgeon or a physician’s assistant—if you don’t really have a strong grasp on your needs, you will spend down your income and risk being unhappy in the process.

How to figure out your key to happiness.

What do you actually need to get you through the day? Does that daily Starbucks coffee actually make you happy, or does that just get you through a 10-hour workday? Would you be happier if you got to ride your bike to work everyday? Do you prefer to spend your day tending to your garden? Typically that core set of needs will not cost you millions. MMM is able to pare down his family spendings down to $25,000 a year. Where is your number?

What is your magic list of happiness?

(Photo courtesy of Flickr)

How to change the cabin air filter in a Mazda 3

Posted on November 25, 2016January 30, 2021 by SmartMoneyMD

I recently took my Mazda 3 to the dealer for a routine oil change (more on this later), and the service attendant reminded me that my cabin air filter was due for replacement. The typical fee is $80+tax, but they have a 10% service discount for the month. I politely declined.

Most people aren’t even aware that their car has a cabin air filter (CAF). The CAF is different from the standard air filter (AF) under the hood. The CAF cycles air entering the passenger cabin. This includes the heat, air conditioning, or fan air that enters the through the car’s vents. The maintenance schedule for the CAF ranges anywhere from 12,000 miles up to 30,000 miles. A dirty CAF can mean more exposure to dust, pollen, and outside particulates every time you turn on your car’s fan.

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What most people don’t know about the CAF is that replacing it is a 5-10 minute job, even faster if you are a car mechanic working at the dealership. It took me less than 5 minutes to replace mine. You can order the filter for the Mazda 3 (2010 – 2013 models) on Amazon.com for less than $15. If it takes 10 minutes to replace the filter at a rate of $65 ($80 dealer charge – $15 retail cost of filter = $65), the labor cost of replacing the CAF is $390/hr! If you are a high income earner taxed at a federal marginal rate of 39.6%, you just saved $609/hr or $101.50 for a 10 minute job!!! I ordered a generic CAF on eBay for $9 and saved even more.

Here’s how to do it:

The CAF in the Mazda 3 (2010-2013 models) can be accessed from the front passenger’s side under the glove compartment. The only tool that you need is a Phillips screwdriver. The first step is to remove the plastic side panel of the center console. There is a gap where you can reach in and pull:

mazda_side_panel_passenger

There is also a plastic cover that can be removed by pinching through the plastic pins:

mazda_under_glove_compartment

There is a sensor cable connected to the air filter cover. It is held in place with a plastic snap. Depress the snap, and disconnect the cable first:

mazda_connector_cable

The cover can be removed by unscrewing TWO of the screws on the panel. You can remove the lower left two screws:

mazda_3_bottom_screws

A Phillips head screwdriver is all that you will need. After the cover is removed, you now have access to the CAF . There are actually two filters that are stacked on top of one another. Reach in the pull out the bottom filter. Be sure to note the orientation of the filter as you are sliding the old one out. The longer plastic fin should be pointing to the left (toward the passenger).

The top filter can then be pulled down and taken out the same way. Note that the side with the foam edge should be on top. If you have a shop vacuum, you can remove any of the leaves and debris that have accumulated in the system. Place in a new filter, and reverse the steps! Voila!

Overall, it does not take long to do this replacement. The stakes are relatively low, and you can learn more about your car in the process!

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How Mustachian can a Doctor Be?

Posted on November 5, 2016January 30, 2021 by SmartMoneyMD

how mustacian can a doctor be One of the guest speakers at this year’s World Domination Summit, was Pete Adeny, of Mr. Money Mustache fame. You can watch the talk online, but MMM essentially summaries his venture into reducing the excesses of life and how it allowed him to transition to early retirement around the same age I finally finished my fellowship training and started my career.

I’ve been a longstanding reader of his online ramblings, and have admired his willingness to carve out his own path off the typical career trajectory that most of us go through. It is also amazing that his trailblazing career decision has gathered a significant following online. Mustachianism, as his “followers” call the mindset, has been an inspiration for me to take a step back and analyze what is important in my life and what I actually need to have to be happy.

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I didn’t really consider that this approach to life actually works for doctors until I saw other like-minded physicians like White Coat Investor (WCI) and Physician on Fire (POF) cropping up in the online world. These guys live a frugal approach to life just like MMM. Great! You CAN be a high-income physician and still be practical!

Is that really true?

I began to wonder where the average doctor falls in the spectrum of luxury, and where I fall in this spectrum. Can this work for all physicians living anywhere in the country? Doctors like WCI and POF live in Utah and the Midwest, respectively. I grew up in the back woods of the Midwest, and I’d agree that these areas constitute the bulk of what it means to live in the U.S.

Middle class America.

Down to earth folks who you’d say “hi” do when you see them walking down the road.

How does Mustachianism and frugal living apply to doctors living on the coasts?

Does this belief and lifestyle work for a doctor trying to live in California, New York City, or Boston? There is a different mentality in these areas. I hate to generalize, but we have a more materialistic life in New York City than in Milwaukee. It takes a lot more convincing of someone living in Boston to save 50% of her income than her counterpart in Indiana due to external pressures (cost of living, high-end foods, general habits of your peers) in Boston.

In medicine, there is a term coined, “herd immunity”, which means that if enough of a population is immune to a certain condition (immunized), it essentially can provide protection to those who aren’t immune simply by numbers.

In financial terms, I’d call this “herd susceptibility”. If the bulk of your doctor friends in Manhattan wear Louboutin’s or Tory Burch’s, you might look like a pariah if you wear a pair of Xhiliration flats (Target brand) as a Gastroenterologist.

I’m all for driving a normal car, avoiding yearly $3000 a night safari vacations in Tanzania, or cooking your own dinner, but you most likely are expected to have a baseline appearance and level of living as a doctor. This baseline expectation is higher in Manhattan than in Memphis. Who wants a hobo as their doctor?

You would need to have a higher level of financial discipline working in the metropolitan areas. It can clearly be done, as there are plenty of MMM followers who live in NYC and Boston. As a doctor, you have to be extra motivated to live in a modest apartment, seek out like-minded peers, and desensitize yourself from you coworkers who frequent the Michellin-starred restaurants on the weeknights.

Some medical professions are more conducive to Mustachianism.

Some physicians work in outpatient clinics while others work in the hospital. Some of us see patients essentially only once and hopefully never again (Emergency Room physicians, Hospitalists, Anesthesiologists). Some of us never see patients (pathologists and radiologists). Some of us take care of patients for our entire career and see them every year (primary care, dermatologists, internists, ophthalmologists).

The frequency and duration of interaction with the patient determines the level of expectation from the patient of the doctor.

Let me explain.

For example, Emergency Room physicians take care of the acutely ill. The majority of these doctors wear scrubs to work or other clothing that they don’t mind soaking up the smell of vomit in the middle of the night. Their patients are sick and probably don’t care what car this doctor owns, what clothing she wears, or whether that is the latest Apple Watch on her arm. You can be driving an $80,000 Tesla or a $20 bike to work and no one will care.

In contrast, Plastic surgeons are most likely well-dressed, and their patients expect them to have a higher “expenditure for appearance”. How would you feel if your plastic surgeon drove a 12 year old Honda Civic and wore Tevas?

The disconnect is that an ER physician earning $400,000 a year living in Memphis will be more likely to reach financial independence earlier than a plastic surgeon earning $500,000 in the Upper East Side.

Ironic, isn’t it?

Who would have thought that it might be harder to save your money if you became a plastic surgeon or dermatologist than an Emergency Room doctor, even though your earning potential might be higher as a plastic surgeon?

How would you guys approach this conundrum?

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[Photo courtesy of of Flickr]

Why doctors need to be financially independent

Posted on October 28, 2016January 30, 2021 by SmartMoneyMD

Most people would want to become financially independent, but some of us want to be financially independent (FI) much earlier in life. There are plenty of reasons (including some very obvious ones) why anyone would want FI, but I’ve seen one consistent theme over the years regarding FI:

Work is more enjoyable if money is not a factor.

I’ve wavered on this conclusion for years, and no matter how much I try to dismiss this notion, it keeps recurring. I see the most blatant of this in the doctors in my clinic. Many doctors gripe about having to see more patients. Often the finances dictate that in order to remain net neutral, a physician needs to see one more patient. Sometimes, it’s one more patient per day. Other times, it’s one more patient every other day. Is seeing one additional patient per day or week too onerous? Perhaps, but the interestingly, the doctors that fight the most about seeing one more patient often spend their weekends or vacations volunteering at free clinics!

How ironic is that?

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How can one logically refuse to see one more patient in a day of clinic yet be willing to spend an entire day doing the same thing pro bono?

Humans are illogical. I know doctors who come from significant levels of inherited wealth (read: several generations-worth of extreme wealth) who work at academic institutions at salaries in the tenth percentile of the expected norm. Frankly, I’ve never asked them why they do this, but my impression is that this particular type of job is absolutely rewarding for reasons other than financially. Kudos to them that they didn’t have to rack up over $148,000 in medical school debt.

With FI, you can always walk away

Sometimes patient care is stressful. Sometimes the administrative aspects of medicine are stressful. Administration and insurance companies are the two aspects of medicine that I hate the most. Sometimes these are the factors that cause doctors to quit or retire.

If you are not working for the money, you can walk away from a bad practice situation without worrying about feeding your family. You could find other career options elsewhere without having to clamp down your finances. Hell, even if you don’t leave a bad practice situation, FI might allow you not to care so much about the small stuff.

Life is just better if your livelihood doesn’t depend on your day job. Period.

Why would a doctor even want to retire early?

The general population of doctors really do balk at the notion of early retirement. Why? We leave a relatively high income on the table by not working. A significant amount of our life is spent training to achieve our unique skill set. It would be a waste to curtail a potentially 25-30 year working career to do something else, especially if you had taken up a valuable medical school and residency spot from someone else who would have otherwise worked for thirty years.

The truth is that the goal of financial independence is not to quit early—it’s to allow yourself the option of not having to your job dictate your life. The premise of FI is that you can choose to do whatever the hell you wanted and still have enough to feed your family, take reasonable vacations and trips, and stay healthy and happy. It doesn’t mean that you take excessive luxury vacations every month.

For a doctor, this means that you can spend more time taking care of your patients, taking care of your family, and taking care of yourself. Most doctors I know actually like what they do.

What are you doing to get closer to FI?

Photo courtesy of Flickr.

How much net worth should be put into your house?

Posted on October 8, 2016January 30, 2021 by SmartMoneyMD

net worth home Given the easy access to credit that we have in the United States, it is easy to purchase a house that commands several times your salary. Physicians are prime customers for lenders, as we are low-risk clients who have high earning potential and stable jobs. Easy access to credit is also a curse for us, since it is incredibly easy to overextend our earning potential to buy a McMansion.

Consider your home as a stable asset.

Those who encourage us to maximize the amount of our net worth into our primary home (not just real estate) really seem to argue that our home is a stable asset. A house is unlikely to lose its value overnight. Even if it burns down or gets wiped out by a hurricane (assuming you have hurricane insurance), you can recover a large portion of the loss through insurance. We need a place to live anyway, so keeping part of your assets under your roof is a logical approach, right? If you need to withdraw cash out of your property, you can obtain a home equity line of credit (HELOC). Your home provides you with an additional “bucket” to store your wealth.

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How liquid is a home asset?

While you can withdraw your assets in your home from HELOCs and reverse mortgages, it may only be practical for one-time uncommon large-ticket purchases. It’s not like you can cash out your home to pay for hospital bills and a new car to move into an RV without having to sell your home outright. You can withdraw equity in the home relatively quickly, but you can’t unload it completely without selling it. And as we all know, you can’t force your home to be sold. What if you ended up getting a new job in a new city? Many doctors change jobs after purchasing a new home and end up having to pay a mortgage for a house that they can’t even enjoy.

The liquidity of homes are highly variable, even within the same market. Homes in the Bay Area move like hotcakes—I have a friend who sold his house in Burlingame, CA within a week after listing. Other homes in San Francisco can be sold before hitting the market. In contrast, higher priced homes (>$500,000) in second and third tier markets can sit for years before being sold. One of my friends in Iowa has had his $550,000 home in a Grade A school district sit on the market for over a year without any buyer interest, but another friend whose $600,000 updated home in a Grade B- school district in the same city sell within a few weeks.

What I’ve concluded so far is that you can’t rely on your home to be much of any asset. You have to get lucky and sell it quickly (preferably cash deal) in order to withdraw all of your equity in it.

How do I approach home ownership in terms of net worth?

Because of relatively instability in where we live and how our primary jobs turn out, I don’t consider a primary home an investment, only a luxury. While I am building equity while paying down my mortgage, I have not seen much of a tax benefit yet from tax deductions yet. Additionally, the cost of owning a home for me has been significantly higher than renting. I have to deal with broken fixtures, lawn work, and regular upkeep costs that I would not have had to worry about in a rental.

Ultimately once I own my property outright, I can breathe easier about the rest of the expenses. I do not reside in a highly competitive real estate market, so I do not expect my property value to rise significantly if I decide to sell and move out.

Do you intend to keep any part of your net worth in your primary residence?

(Photo courtesy of Flickr)