Tag: saving money

Losing sight of the forest amidst the trees

Losing sight of the forest amidst the trees

Some of us like to micromanage.  Obviously this trait is useful only for certain tasks that you need to accomplish.  Managing money can take some attention to detail, but fortunately many issues work themselves out if you follow broad principles.  How much you should micromanage your daily expenditures really depends on your own tolerance and your individual financial situation.  We’ve all seen discussions about the cost of daily artisanal cups of coffee at the local barista, or cost savings from cancelling cable/satellite television.  If you are in a dire financial predicament with limited earning potential and wildly out of control costs, there is merit to pinching every penny.  If you are a neurosurgeon paying three mortgages, alimony, and a car lease every three years, foregoing that Blue Bottle coffee might not be the most effective means to put you ahead financially.

All of us face these decisions daily.  Some of us just simply have bigger numbers.  One of the surgeons I work with was eying a new “weekender” car.  He knew that vehicles, especially high-end ones, depreciate significantly during the first few year.  He was on the market for a preowned weekender, and eventually found one.  Interestingly, it took him over a month of researching the regional dealers to find the right model.  Savings: $35,000!

The new model would have cost roughly $120,000, and he was able to score a three-year old equivalent for $85,000! Let’s say that he spent an hour every evening research the car for a month. He “saved” $1167 post-tax dollars per day by opting for the used car.  Not a bad savings rate, but one could argue that this has similar fallacies to negotiating with your cable company every year to cut your monthly rate from $120/month to $85/month.  You’re still spending money, and a whole lot of it too.  Another one of my coworkers had a similar internal struggle with getting solar panels for his house.

How much is micromanagement of your time worth?

Did the coworker who agonized over a weekender car actually make a financially prudent decision despite saving so much? What about the guy who put down big bucks for solar panels that might take a decade to recuperate the initial investment costs?  Who knows, maybe the $85,000 car only amounted to less than 10% of his annual salary.  I suspect that he justified the purchase in the end based on how much enjoyment he derived from researching cars and achieving the end result.  He still enjoyed the forest despite focusing on individual trees.

Different strokes for different folks.  I constantly face the dilemma of buying discounted donuts that neither my waistline nor arteries should have to deal with.  All in the name of saving $2.  Apparently these trivial decisions are important to my psyche.

Most recently my family (myself included) decided to stop putting up with the irregularities of the heating and cooling in our house.  In the summer, the living room is typically freezing from air conditioning while the upstairs rooms are like saunas.  The opposite is true in the winter.  In America, this problem stems mostly from our homes being too large and that it’s prohibitively expensive to route the ductwork with dampers to direct airflow in standard homes.  The real solution to the problem is to zone each room in the house separately, or simply to custom-build a new home.

One of the common workarounds to cold or hot rooms is to install a thermostat with remote sensors in different parts of the home.  This doesn’t solve the problem of overheating or overcooling certain areas of the house but it  ought to make the room that you are situated in more comfortable.  After one weekend of reading all of the reviews on the market on smart thermostats, I pulled the trigger and made the upgrade. All in, I invested maybe four hours of reading plus another thirty minutes of installation, we now have a smart thermostat!

Guess the age of this!

The breakdown:

Projected cost of HVAC tech Actual DIY cost
$600 $200 for thermostat
Half day off of work to wait for serviceman <5 hours on weekend


Satisfaction of a warm home during the winter: Priceless!

Interest is a powerful motivator

How much you enjoy a task ultimately is contingent upon how much we actually rely on that task for our existence.  Doctors gripe about having the see that final add-on patient for the day, but are perfectly willing to volunteer for charity missions.  If we expect compensation, then the expectations change.

You might also like: Doctors need to transform their careers into hobbies

I was able to justify digging through spiderwebs in my furnace to put in a new thermostat, even though I only expected to enjoy a warmer house in the winter as a result.  If I were tasked to service furnaces as a career, I probably wouldn’t enjoy digging through decades of dust as much.

Did I lose sight of the forest in my quest to replace the thermostat? I’d like to think not, but it might be helpful to consider what we are hoping to achieve each next time we decide to embark on any tasks that can ultimately affect our financial outcome.

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Don’t worry if a $5500 decision translates into a $200,000 loss

Don’t worry if a $5500 decision translates into a $200,000 loss

How much we micromanage our lives is dependent upon our compulsivity and how many goals that we set in life.  Medicine is a profession that attracts some of the most goal-driven people I have ever met.  There are egos, obsessions, intelligence, and diligence all packaged into one unit.  This is simply overwhelming.  Fortunately, these habits tend to evolve with age.  I’ve seen some of the most incendiary personalities in medicine mellow with time—maybe these doctors have rediscovered their life goals over time.

Our financial priorities evolve over time as well.  During two of the years during residency, I opted not to contribute to my Roth IRA account.  This amounted to $11,000 of post-tax monies that I spent for living expenses and student loans.  These decisions were made during a time in my life where I had some understanding of long-term investing but was preoccupied by a seemingly large negative six figure student loan debt I had to repay.  I used to receive monthly statements on my student loans.  Every month these numbers increased as I deferred interest payments.  These increasing numbers were psychologically abrasive.  I made the decision to reduce my debt to zero, and get my net worth up to zero.  If you threw $5,500 in the stock market in 1980, it’d roughly amount to $295,130 in August of 2018!  If you left $5,500 of your student loans unpaid at 6.8% for 38 years, you’d only have less than $100,000 built up (there are certain factors like forbearance limits that actually prevent you from dragging out loans this long however).  The right answer at the time probably would have been to contribute to my Roth IRA.

You might also like: How I paid off $148,260 in student loan debt my first year in practice

That’s roughly a $200,000 difference for a $5,500 initial investment. For me, it would have been double that for two years of lost investment.

Don’t sweat the small stuff

Sometimes I still kick myself for not investing in a Roth IRA back then.  Over time, this “mistake” will actually amount to big stuff.  It’s human nature to focus on the negative. When you do that, it’s easy to get bogged down on the details.  It is not possible for us to make the “correct” decision every single time.  We all have patients [read: engineers] who micromanage ever aspect of their care, and sometimes they actually end up making their care worse.  If you micromanage your finances, you will likely land on your face too.

If this happens to you, realize that you’ve made hundreds of “correct” financial decisions before you make a financial flop.  Sometimes these mistakes right themselves.  Other times they will serve to help us make better choices when they will really count.

Perspective evolves with the size of their wallets

I had coresidents who easily spent $5,500 on a single vacation.  I doubt that they were wondering what their Roth IRAs would have in them in 38 years.  It’s all about perspective, and how much buffer one has to fall back on.  We all have coworkers who don’t bat an eye when they drop $100,000 on a Tesla.  Many of them have mortgages several times the cost of the Tesla and student loans.  I suppose that if you have five times the income of a resident, you are able to stomach an equivalent amount of leverage.  Only their financial advisors will truly know how much wealth is hidden under the veil of nice material wealth.

The moral of the story, if there is one, is that you alone will determine what is more critical to your happiness.  If that means having a stable nest egg in retirement you will make appropriate choices to get there.  If that means owning a fast car while you still have the dexterity to drive it, you can still make it happen.

Fortunately these rides aren’t as expensive as those at Disney!

I used to balk at the cost of an $4 cup of Coke at Disneyland.  Now that Coke is $6 at Disney (and I finally feel that I can afford it), I still opt for water simply because I can afford the calories and sugar!  Maybe psychologically I never wanted the Coke in the first place!

How has your perspective on money evolved as you’ve made better financial decisions?

How doctors should be using the Internet to get smart…and rich

How doctors should be using the Internet to get smart…and rich

The beauty of building stealth wealth, saving more than you spend, and achieving financial independence is that the knowledge to achieve all that is freely shared among the online community. Communal knowledge is power. If there is some convoluted financial calculation to be proven, you can bet that someone online will have the time to do it. If you have a money question that needs an answer, you will likely have more than one anonymous online surfer who will be more than willing to offer you her opinion. Make a mistake, and you will also be put in your place. I love the Internet!

Medical knowledge cannot be mastered through online forums

This is my soapbox. I like that our search engine engineers perform miracles to scour the Internet for answers. Medical knowledge is free to be absorbed by the masses, and improved medical knowledge by the masses has overall been positive for our society.

The problem with medical knowledge is that the material is vast, and there is probably a reason why it takes at least nine years from the start of medical school until finishing general surgery residency just so that you can remove someone’s appendix.  What you can find in any textbook or online forum simply cannot substitute for the pain, lost sleep, and diligence in those nine years of training.

This is where an educated layperson can go wrong.  How about engineers charting their PSA scores and arguing with you the best way to treat their prostate cancer? (Looking at you @WallStreetPhysician). Or a self-taught expert in herbal medicine substituting their U100 insulin with cinnamon tea? We’ve all had our cocktail hour stories of getting in discussions with our patients who, if they had gone to even 6 months of medical school, probably would have realized that their reasoning is puerile.

I once had a patient whose stomach had no antrum from prior surgeries who was severely vitamin deficient. He claimed that doctors were trying to “poison” and “torture” him from the megadoses of parenteral vitamin shots while a simple “low-dose” pill with plenty of water would have done the trick. He bought his pills from an online retailer in India.

One answer: first-pass metabolism. (The bit about mail-order vitamin supplements isn’t worth my energy to discuss).

I know I speak for all surgeons that after mastering this model, caring for horses will be a piece of cake!

Doctors can (and should) use the Internet to further their lay knowledge

Basic knowledge, however, can be gleaned from self-education. This can be done quite effortlessly through online forums.  Doing so can save you a lot of headaches and money if properly applied.

Case in point: Your air conditioner breaks down in the summer. The local HVAC guy, who provides free estimates, gives you an itemized quote for a repair job. Even if you knew nothing about air conditioners, you could probably find the average hardware store price for the equivalent part. When you realize that the markup cost is like 9000% of the retail cost, you could probably ask the repair man a few questions. Hint: folks in this line of work rarely buy parts at even retail cost.  Even if you were completely off base with unfounded questions, you hopefully learned something.

We get asked unfounded questions all of the time in medicine. I’ve been asked by patients to operate at a “cheaper” hospital or to decrease the price of surgery, when the patient very well knows that I work for a hospital and simply have no authority over the health insurance company to make these calls.

Do yourself a favor and invoke your resourcefulness to your advantage.

Use your resourcefulness to get rich

Doctors are in demanding professions.  Some of us are in specialties that consume more of our free time, but the beauty of Internet knowledge is that you can learn as much or as little as you choose.  Pick the highest yield tasks to outsource, and deal with what you enjoy.

You might also like: The calculated approach to outsourcing your life

This is how the wealthy become wealthier.  If you plan to take out a $1 million mortgage for your McMansion, you’d benefit from learning a little bit about mortgage lenders, points, and rates even if it takes some time away from your golf game.  If it only takes a few hours of online surfing to save you tens of thousands of dollars on a home renovation job, you ought to do it.  Eventually you won’t be able to afford the extra back pain from pulling extra shifts in the ER to make up the difference in savings.

Remember, you were quite resourceful to make it through medical school and residency. Think outside of the box. You’ve made it into a career that confers good income. Extend that income even further by learning to be smart with your finances.  Surprisingly, it really doesn’t take much time.

What knowledge do you typically use the Internet to acquire?

Rethinking the 529 Savings Plans – Do I really need it?

Rethinking the 529 Savings Plans – Do I really need it?

When I was growing up, 529 education plans did not exist. My parents had to save up extra money if they wanted to fund my college education. That didn’t really happen, simply because the price of college was outside of our family budget. Ultimately it didn’t really matter since our fair country is built upon credit—I was able to borrow for college and medical school, albeit at interest rates much higher than what you’d get with a mortgage or a car.  Maybe the easy credit in this country contributed to the housing crisis a decade ago. Who knows?

My car dealer allowed me to walk off his car lot with zero down payment on a 5-year loan at 0% interest! If college tuition were only like that…

The back story

529 Plans are great in that it allows families to receive some state tax benefits while providing a tax-free vehicle to invest in education expenses.  You can essentially deduct a set amount of your 529 contributions from your state taxes–this varies according to state rules.  This amount can also grow tax-free as you invest within the account.  States like South Carolina allow you to deduct the full amount that you contribute from your state taxes, whereas California gives you no deduction.  If you are fortunate enough to live in a high-tax state with a great custodian and investment options, you can build up a pretty penny to fund your kids’ education.

Even if your state doesn’t have great investment options in its 529 program, you can even invest through other states’ plans. You won’t get the state tax deduction, but your investments can still grow tax-free if used for education.

Since your money can only grow if it is invested, one of the power moves with 529 investing is that you can fund up to 5-years of contributions ($70,000 as of 2018) at once while avoiding the federal gift tax penalty. If you include your husband in the mix, that’s $140,000 of contributions towards the 529 at once! You can rinse and repeat in 5 years to maximize the time that your investments stay in the market.  By the time Junior is applying for college, you’ll have hopefully stashed $210,000 in the bucket plus investment gains. That’s more suited to fund an expensive private school education.  And you can do that with every single child you open a 529 for—the child doesn’t even have to be yours!

The caveat

There are two considerations when trying to invest big bucks into an educational fund: (1) what if your educational needs exceed the amount in the account when you need it, or (2) what if Junior opts to forego higher education?

College and graduate school expenses have no upper limit. The longer you remain in school, the more money you’re going to spend. College alone cost me over $120,000 decades ago, and medical school racked up another $200,000. With rising education costs, there is a good chance that your 529 will not have enough to fund a private school education, even if the stock market is on a tear. I prefer to view education not only as a financial investment in one’s future, but also as a privilege—you apply and are accepted. I’d be willing to borrow some money to enroll in a great school, but not a fly-by-night online school.  If your 529 investments made any money, then you’ve come out ahead.

If Junior doesn’t go to college, all is not lost. You can easily transfer the savings bank to another family member, relative, or friend who still has potential for higher education. You can even cash out of the 529 if you’d like, but you’d be on the hook for any tax liabilities on the gains.  In this case, just hope that Junior has found her calling in life and won’t be asking mom and dad for handouts or a place to crash while in between jobs.

Should you even risk having to cash out of a 529 Plan?

This situation is more of a judgment call.  How much tax savings are you gaining through a 529 plan? The savings would be any state tax reduction plus tax drag compared to investing in a taxable account.  If your state had a 6% marginal income tax rate and you invested a lump sum of $70,000 to cover five years worth of contribution, you’d reduce your state tax burden by $4,200.  Is this pocket change?

You’d really have to think about it, and whether saving that amount over five years would make a difference to lock your investments into education.  It would be worth it to some people but I definitely have colleagues who would rather have more flexibility with their money.

This guy never got a 529 plan, but clearly is doing just fine!

When you are ready to use the money, investment gains within the 529 are protected from the marginal investment tax rates. For high-income earners, this is 20%. You might be able to save another $4k or so of long-term capital tax gains.

If you are a high-income earner and do not live in a state that offers any tax advantages, you should consider what advantages a 529 would have for you–do you want your kids to have a means to fund for college? Should they fend for themselves? Would you serve them better if you took that same amount and funded a real estate venture that can provide cash flow to fund college and have the flexibility in case your children aren’t destined to be college-bound?

Do you have a 529 Plan for your children?

Correlating expenditures with happiness

Correlating expenditures with happiness

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

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

Expenses as a Percentage of Net Worth

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

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

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

Happiness ∝ 1 / (Number of years to FI)

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

Happiness ∝ Net worth / Expenses

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

Expenses as a Percentage of Income

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

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

Can you achieve happiness with a milk stout?

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

How do you track your happiness?

Working hard for the next generation

The other day I met up with a retired physician and his adult kids for dinner. His (the retired physician) father was also a physician as well but the kids are not. From the looks of their home, it was clear that there was a bit of generational and self-generated wealth—six acre land, fine artwork, sculptures, $200,000 piano—you get the idea. While not professionals, the children were successful in their own right. The daughter was a professional musician on tour. She was a classically trained violinist, pianist, gymnast, and held some history degree. The parents spoke of how gifted their children were like any other proud parents would.

Just like any pragmatist would, I started to wonder what factors influence how we choose our lifestyles and careers.  How much of these factors depend on family finances?  Music lessons are not cheap.  Piano lessons can run anywhere from $50 to $100+ an hour.  These lessons can recur on a weekly basis.  These activities do add up.  If this physician’s daughter went through childhood without those music and sporting lessons, she may not have even realized any potential in a career in artistry.  How do parents even know if their children will have any talent to nurture?  Maybe without those lessons she would have still carved out a career doing the same thing. We’ll never know. What is important is that this physician’s next generation was still able to carve out a successful career, albeit perhaps less financially successful than their father’s.

“I worked hard so that my son could be in a band.”

Not everyone who pursues a life in art can be financially successful.  I’ve met plenty of gifted musicians whose daily chore consists of struggles to find performance venues along with trying to write their own music.  Many of them have other blue collar jobs in order to make ends meet.  Another doctor who I work with occasionally has a son in a band. I’ve never heard of his band, but I do hear about the struggles of getting discovered by a scouts. Perhaps they will become famous one day, but it sounds like a tough job. I’m not sure how he actually makes a living.  The son drives an M5.

I’ll stop judging now.

I like to think that with proper financial decisions and continual hard work, wealth can be sustained and built upon in successive generations.  However, I can see through my colleagues why sometimes even conscientious families will have difficulty sustaining wealth.

We want the best for our children.

No, I don’t intend to blame our kids for society’s downfall.  But it is tough to withhold opportunities for our children especially if we are able to offer our time, money, or knowledge.  I know that my parents sacrificed their paychecks, savings, and time to help further my fund of knowledge.  With our children, we can often be biased to think that they are more capable than they might actually be. Who knows if your kid has the talent to be the next top professional golfer? Better start those lessons early and get the best set of clubs on the market!

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This not a parenting blog, but rather a financial and lifestyle blog for high income earners. Chances are that if you’ve stumbled onto this website you probably have enough compulsion to prevent your hard-earned wealth from ending after your generation. But many of our coworkers may have a different view of their lifestyle and could be spiraling down a path that they don’t want. I suppose that in the end, it may not matter to you anymore if the next generation struggles.

How much assistance do you offer your kids?

(Image courtesy of Flickr)