INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 364 – High yield savings accounts.

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All right, welcome back to the podcast. It's probably only been a week since you listened to it, or for some of you who are binging, it's only been a few minutes since you finished the last one. But for those of us who are recording them on our side, which is basically me and Megan, we haven't done one of these for a few weeks.

It's April 15th as we record this. It's Tax Day. Hopefully Tax Day was okay for you. By the time you're hearing this, it's at least the 25th of April. If you're like me, you just filed extensions for Tax Day, and you'll be doing your taxes in September or October, most likely.

It's really nice to file extensions, actually. You might consider it, even if you don't have to. It just takes all the pressure off. All of a sudden, now your tax preparer has all kinds of time for you. You usually have to do a certain amount of your taxes so you know about how much you're going to owe, but it takes all the pressure off getting all the details right and getting all the paperwork in. If you're part of a partnership that doesn't get your K-1s until the week before, you don't have to rush anything anymore. It's really nice. You ought to try it.

All right, I should talk for a minute about April Fools. For those who aren't familiar with April Fools, it's not just a US thing, so not growing up in this country isn't really an excuse not to know about April Fools. It's been around for, I don't know, 600 to 800 years, mostly out of Europe, if you look for the historical origins of it.

Basically, it's a day for capers. It's a day for fun little jokes and pranks that are done. It's been tradition in my family. We run pranks on each other on April Fools and I think a lot of your families do, as well.

We adopted that into the White Coat Investor blog a few years ago. We had a post about how I bought a Tesla. This was a time when I was talking about how all doctors love Teslas. They love Teslas because it's a dual status symbol. You get to say, “Hey, I have more money than you, and I care about the environment more than you do, and so I drive a Tesla.” I was always making fun of Teslas.

Well, the April Fools post that year was that I bought a Tesla, which of course I didn't. I took a picture of a Tesla parked in my neighborhood and photoshopped WCI onto the license plate and ran that picture with the post. Most people understood by the end of the post that it was an April Fools joke. It was run on April 1st, but I was still getting questions about it a couple of years later, saying how they were optioning out their Tesla and asking how I liked mine.

Apparently not everybody realized that was an April Fools joke. So each year since then, we tried to make it more and more and more obvious that the post we're running is just a joke, just a gag, just an April Fools post. And the next year, we had one on how we met payroll by gambling on Ethereum and shorting the market and a bunch of stunts like that.

A year after that, I wrote a post about disinheriting my children. It was pretty over the top. And people seemed to enjoy that one, as well. Although a few people did take it seriously. And it's always kind of funny when you get some emails afterward and get to tell people, “Hey, that's just an April Fools joke.”

Well, this year we decided to do something a little bit different. Instead of joking about my financial plan, we joked about one part of many of your financial plans, public service loan forgiveness. And so, the title of the post was “PSLF Canceled”. And if you're just realizing this now, listening to the podcast, that that was an April Fools post, I'm really sorry. I wrote it in a way that I thought was pretty over the top and no one would get beyond a paragraph or two without realizing that the whole thing was a joke.

Well, apparently that's not the case for a lot of people. And so, given your feedback, a couple of days later, we changed the title to include the words April Fools, and also included some links and some explanations and a couple of follow-up posts that we ran later in the month. So hopefully there's nobody still thinking PSLF actually got canceled.

But there were a few people that I disrupted their life more than I really wanted to. And so I'm going to apologize to those people. There was at least one person who lost some sleep over it. And I'm really sorry about that. And a few people that made a few phone calls and felt foolish afterward, whether they forwarded the article to friends or whether they called up their loan servicer or whatever. I'm sorry if I wasted a bunch of your time. We ended up wasting a few of our staff members' time, as well, replying to some of those things. As I mentioned, our student loan advice guru Andrew had about 10 or 12 emails that morning from people wondering what they should do with their financial plan now that PSLF was gone.

Bottom line, I'm sorry for anybody whose life are really inconvenienced with that post. It was really meant all in good fun. That said, is it possible PSLF could go away at some point in the future? I guess that's possible. But keep in mind, it takes an act of Congress. And if you look at the first paragraph of that post, look what I had to come up with, to come up with some sort of plausible situation where an act of Congress could actually make PSLF go away. It's a pretty big jump, especially to have it done all of a sudden and have the news broken by a blog that typically writes its posts months in advance rather than a real news site. It's just not going to happen.

Plus, those of you who are in the public service loan forgiveness, even if you're just a borrower, you have PSLF already in your promissory notes; you basically have a contract already with the government. So you are highly likely to be grandfathered into any PSLF changes that may occur in the future.

Plus the government, and I'm talking both parties, have shown in the past that PSLF tends to only get more generous. Student loan programs in general only get more generous. They don't really become less generous over time. Certainly there's no history of that in the last 30 or 40 years while the government has been in any way involved in the student loan program.

PSLF is still out there, for anybody who is not aware. That was just an April Fool's Day post. You can go back and read it. It might be funnier now that you know it's an April Fool's Day post. But if it wasn't funny at all, I'm sorry. I didn't mean to offend anybody. And I certainly didn't mean for anybody to lose sleep or waste time or really be freaked out about it.

I think part of what happens is people on the internet in general don't read. You skim on the internet. And I guess if you just skim through that article, you might miss all the stupid stuff that made it pretty obvious it was just a joke post, especially the last line that says it's an April Fool's Day post. But part of it, I think, is it's just so scary. It's like when a scammer calls you up and freaks you out and, all of a sudden, your mind kind of goes to this fight or flight mode, and your logic's not kicking in anymore. And I think that's what happens to some people. It's just so traumatic to think of the idea that PSLF could go away that they kind of tuned out everything else in that post.

Interestingly, our tech guru, James, he is our chief technology officer, he read the post the day before it ran and didn't realize it was the April Fool's Day post for the year. And he's like, “Oh, I wonder what they're going to come out with next.” Because he figured there had to be something that replaced PSLF. But if you got fooled, you are not the only person, even some of our staff was apparently fooled by that post. So, not obvious enough.

I don't know if the staff is going to let me do April Fool's Day posts anymore. As you know, a few years ago, they kicked me off Twitter. I'm no longer on Twitter. I was doing more harm than good on Twitter. And maybe that's the case with April Fool's Day posts as well. So I hope you enjoy the four we've had over the years. I don't know if there's going to be any more.

All right. Tonight, for those of you who are of the feminine persuasion, Megan wants me to announce that the Financially Empowered Women are having an event tonight. It's going to be really good. It's Johanna Turner. She's been a blog sponsor for a long, long time. She's a tax guru. She's going to be talking all about taxes. It's tonight at 6:00 o'clock Mountain. You can sign up for that at whitecoatinvestor.com/few.

Also, tomorrow is the last day to nominate people for the Financial Educator Award. Do you know someone who's passionate about improving financial literacy among their colleagues, trainees, and students? If so, we encourage you to nominate them for the highly coveted 2024 Financial Educator of the Year Award. The winner of this prestigious award will receive a prize of $1,000.

But that's not all. As an added incentive to craft a compelling nomination, we're offering the nominator who writes the best submission, a free WCI online course of their choice. To nominate someone, simply visit whitecoatinvestor.com/educator by April 26th.

We also believe in making financial education accessible to everybody. That's why we offer free presentations on various financial topics, specifically tailored for medical students, residents, and attending physicians. You can modify the attending one for other professions, whether you're a PA or an NP or a pharmacist or an attorney or whatever. It would not take much modification to have that be totally appropriate for you. You can download those presentations today also at whitecoatinvestor.com/educator. Let's work together to make financial literacy a priority in the medical community.

CORRECTION

All right, let's do a correction. In episode 362, we talked about non-competes. And I mentioned that non-competes are basically banned in a few states, one of which is Colorado. Well, I had a correction written in by email. It basically said that's not entirely true for physicians, specifically, as you would still have to pay liquidated damages, which can be quite high.

This particular emailer said, “Here's the wording I found. The Colorado law provides that any non-compete covenant or provision of an employment partnership or corporate agreement between physicians that restricts the right to practice medicine upon termination of the agreement is void.

However, the law permits physicians to agree to pay damages in an amount reasonably related to the injuries suffered by reason of termination of such an agreement. While this provision may read like a liquidated damages provision, the few Colorado court opinions on the statute do not support the parties estimating and defining liquidated damages in advance.

Rather, the Colorado Court of Appeals has held that damages payable pursuant to the statute cannot be analyzed prospectively, but rather must be determined upon the termination of employment.”

So, maybe not a complete ban in Colorado on non-competes. Keep that in mind. Some more wording I found on the internet says, “Colorado has long treated physicians differently than every other worker in the state when it comes to the enforcement of non-compete and non-solicitation agreements, presumably based on the notion that a physician has spent too much time and money to obtain their medical license to restrict where they practice to protect patient choice and or to protect the ability of physicians to stay in Colorado's services population.

Non-compete and non-solicitation agreements are not allowed to be used to restrict the physician from competing for and or soliciting patients. Under the new Colorado law, it remains the case that the only remedy available with respect to a physician who violates a non-compete or a non-solicitation agreement is the award of damages against the physician for breaching the agreement with certain exceptions for the treatment of patients with rare disorders.”

They can't run you out of the state and keep you from practicing, but they can make you pay damages. Bottom line.

HIGH-YIELD SAVINGS ACCOUNTS

Okay, let's listen to a Speak Pipe here. This one's not actually a question, but I'm going to use it to jump off into a topic.

Caleb:
Hey, Dr. Dahle. I’m Caleb, a dentist in northern Colorado. Just wanted to say thank you. Not really a question. I recently had a windfall of about $150,000. I was listening to a podcast about what to do with windfall or savings money that you plan to use in the next six to 12 months. And I had just had it sitting in a checking account earning nothing. And so, I immediately put it in a high yield savings at 5%. Thank you. You just made me $5,000.

Dr. Jim Dahle:
All right. Well, congratulations, Caleb, on your windfall. I'm glad you were able to get that earning some money. And this is a good point. Interest rates have gone up. You are no longer making 1% in a money market fund or in a high-yield savings account. You can make 5 plus percent. I think the last time I looked it up, the Vanguard Federal Money Market Fund was paying 5.27%.

And the most recent news from the Fed is that they still not going to lower interest rates. So presumably it's going to be something similar to that throughout most of the year. And so, why make 0% when you can make 5%? If you got $50,000 sitting around, checking account, some piddly credit union or local bank savings account, paying 1% or 2%, get that money into someplace real. You don't have to chase a yield. You don't have to get the one that has the very highest percentage. But get us something that's paying at least 4%, 4.5%, 5%, 5.25%. You might even find a few places that are 5.5%.

For reliability purposes, I find Vanguard's money market funds to be the most reliably high accounts. A lot of the high yield savings accounts and banks can be higher, but they tend to only be higher temporarily. A lot of them are just a little bit lower, 4.8%, 4.9%, 5.0%. Whereas I find the money market funds of Vanguard to be pretty good.

Now, when rates were like super low, they were not the highest. Vanguard was paying like 0.25%, and I get 1% at Ally in their high yield savings account. But most of the time, you're going to find a little bit higher rates in the money market fund. Now, technically, those don't have FDIC protection, but it's also a pretty darn safe investment. I wouldn't spend a lot of time worrying about it if it's sitting in the money market fund, Schwab or Fidelity or Vanguard.

Keep in mind, one of the really nice things about Vanguard, and people have lots of complaints about Vanguard, that they can't get anybody on the phone when they call or whatever. Maybe their IT is not as awesome as it is at some other brokerages. But one thing I really like about Vanguard is their money market funds and their bond funds too. But their money market funds in particular are spectacular.

And your sweep account, basically where your cash just sits at Vanguard, is in one of those money market funds. Whereas if you go somewhere else, the sweep account is different from the money market funds. Now, if you're over at Schwab, and I think maybe Fidelity too, don't quote me on that one. It basically sits in a 0% account. That's your sweep account. And you got to deliberately invest in any money market fund. Well, that's not the case at Vanguard. If you forget to reinvest a dividend, no big deal. It's making 5.25%. So one nice benefit about investing at Vanguard. And like I said, none of those three companies sponsor this podcast. I like them all, but I can't get them to sponsor this podcast for some reason.

DR. DAHLE REACTS TO ONLINE CRITICISM ABOUT WCI

Okay. Let's talk a little bit about some criticism on the internet. And the internet is a fun place. You can criticize anybody you want, really. As long as you're careful about libel, it's unlikely to come back to bite you. And the way search engine optimization works is you want to criticize somebody that is searched for more often than you are.

And so, of course, there are a few people out there trying to take advantage of the name of the White Coat Investor to try to get some traffic to their website. It's really flattering, actually, that people view us as that important or that popular, that they're willing to write things about us just to try to get more traffic on their website. I'm actually very flattered by that.

But let's go through some of this. This is an article talking about unveiling the risks of subjective financial advice, the case of the White Coat Investor. Yeah, it's very interesting to read through here.

“The White Coat Investor, a popular platform offering financial advice tailored to physicians, has garnered a significant following in the medical community. However, scrutiny has emerged. You guys know this? There's scrutiny out there surrounding the subjective nature of the advice provided and the qualifications of its owner to dispense such guidance.

In this article, we delve into the concerns raised by critics regarding the White Coat Investor's financial recommendations and the potential implications for physicians seeking sound financial advice, as well as the WCI's advertising model raising concerns about the quality and reliability of the financial advice offered on the platform.”

Never mentions who the critics are. I'll tell you who the critics are. People like the fellow who wrote this article, who is an insurance agent who doesn't like that I tell people not to buy whole life insurance, I suspect. At any rate, those are who most of our critics are.

But he says, “Critics argue that the financial advice offered by the White Coat Investor lacks objectivity and may be influenced by personal biases or vested interests. Unlike certified financial advisors who are held to fiduciary standings and must act in their client's best interest, White Coat Investor operates as a for-profit entity, raising questions about the motivations behind his recommendations.”

That's all true, by the way. We are not a fiduciary and we are a for-profit entity. That's why we do a big disclosure every year in our state of the blog. It tells you what our financial conflicts of interest are. You can find them anytime throughout the year, but it's important that you understand them. We do have financial conflicts of interest. This is a for-profit entity. If we don't make money, we don't make payroll, and there is no White Coat Investor. I'm sure that's no different from the business of our critics, but it is important to keep in mind. This is interesting, though.

“Furthermore, the White Coat Investor's advice often revolves around a one-size-fits-all approach, failing to consider the individual financial circumstances, goals, and risk tolerances of physicians.”

I'm not sure what approach you're talking about with one-size-fits-all, unless it's something like, “Maybe, hmm, could it be, I think 99% of doctors don't need a whole life insurance policy?” Well, if that feels like one-size-fits-all advice to you, I guess that's what it is.

It says, “This cookie-cutter approach may lead to suboptimal outcomes for physicians who rely solely on the platform's guidance without seeking personalized advice.” Well, if you need personalized advice, go get personalized advice. I'm a big fan of it. In fact, we'll even refer you to some people not like the people writing this article, who will give that to you.

All right, “Lack of proper licensing. Another point of contention surrounds the qualifications of the owner of the White Coat Investor who provides financial information without holding the proper licenses in both finance and insurance. While the owner may have personal experience and insights into financial matters, critics argue that expertise alone does not substitute for the rigorous training and regulatory oversight required of licensed professionals.”

Okay, well, I guess if you want that and not just expertise alone, you can do that. It goes on to say, “In the realm of finance, licensed professionals such as CFPs and RAs are held to strict standards of competence.” Oh, if only that were the truth. Ethics, certainly not true, and professionalism.

The ethics bars for people who are financial advisors are so low that your grandma could get over them. It's just not that high of a standard. It wasn't that long ago where they were trying to make everybody have to be a fiduciary in this space, and basically, a bunch of companies went and lobbied Congress so it didn't pass. It's really unfortunate. So yes, there's a fiduciary standard. It means almost nothing. There are people out there calling themselves financial advisors who are commissioned salesmen in disguise.

Okay, they go on. “The implications for physicians. Subject nature of the financial advice provided by the White Coat Investor in the lack of proper licensing raised several concerns for physicians. Physicians may inadvertently receive misleading or incomplete information from the White Coat Investor, leading to suboptimal financial decisions, potential harm to the long-term financial well-being.” Okay, I guess that's possible, especially if you only read the posts that run on April 1st.

“Limited advisor pool. By featuring only advisors who pay for advertising space, the White Coat Investor may inadvertently limit the diversity of perspectives and expertise available to physicians seeking financial guidance. This approach may overlook qualified professionals who choose not to participate or pay to be part of the advertising model, potentially depriving physicians of valuable insights and alternative strategies.”

Boy, it sounds like somebody got turned down. Oh, were you not allowed to advertise at the White Coat Investor because you rip off doctors? Hmm, it seems like you got a beef here, buddy.

“Potential conflicts of interest. Advisors who pay for advertising space may face conflicts of interest. They may prioritize their own financial interests or the interests of the platform over the best interests of their clients.” Well, that's true. Everybody's got conflicts of interest.

“The WCI implements a screening process only admitting advertisers that conform to the financial beliefs of the White Coat Investor, which could influence the recommendations provided to physicians, leading to suboptimal outcomes or biased advice.” Yeah, we don't bring on insurance agents that are going to sell you a bunch of whole life insurance.

“Lack of transparency. The advertising model employed by the White Coat Investor may lack transparency regarding the selection criteria for featured advisors and the financial arrangements between the platform and their advisors. Physicians may be unaware of the underlying biases shaping the advice they receive, undermining trust and confidence in the platform.”

Okay, in case it's not clear, almost everybody, not quite everybody, we have a few people that we don't get paid to recommend, but almost everybody on our recommended pages, we have a business relationship with. Most of them pay us for that listing. Yes, they have to meet our criteria, but they also have to pay us. The financial advisor fills his practice and he's like, “You know what? I got 125 clients. I don't need any more clients.” They're not going to pay us to advertise anymore and we're not going to list them. It's not helpful to you to list somebody whose practice is full, number one, even if we think they're a great advisor.

And number two, we have to make payroll. So we're going to send you to people who are still accepting clients and willing to pay us to advertise at the White Coat Investor. For-profit business, that's what we're running here. Multimedia company, yes. Hopefully it provides some entertainment, yes. Hopefully it provides some useful information to you. But at the end of the day, we have ads just like everybody else in the business world.

All right. And then he goes on and says, consult certified professionals, do due diligence, diversify your information sources. Can't say I disagree with any of that. He did a follow-up article a few years later and said, “While Dr. Dahle’s work has undoubtedly provided valuable insights, it's essential for doctors to understand that may not always be the best or most objective source of information.”

He says, “Because Dr. Dahle has niche expertise, limited medical specialty perspective. Dr. Dahle is an emergency physician, which means his financial advice often reflects the experiences and challenges specific to his medical specialty. What works well for an emergency physician might not apply to other specialties or healthcare professionals with different income structures and demands.”

Okay. Whatever.

Megan:
He knows that?

Dr. Jim Dahle:
Yeah, exactly. Megan's like, “He knows that?” So insurance agent is apparently going to be better for you than emergency physician, because he's much more like an orthopedist or PM&R doc, whatever.

“Product affiliations. The White Coat Investor generates income through various means, including book sales, advertisements, affiliate marketing, and offering courses.” Yes, we're running a business here. Surprise.

“Some readers have raised questions about potential financial affiliations with insurance providers that may be in line with this one-size-fits-all approach to financial planning.” I think this is what this whole thing all comes down to. One-size-fits-all to this agent means I'm telling them not to buy whole life insurance. If you think whole life insurance is the cat's meow and every doc ought to buy it, you're not going to like what you hear about insurance at the White Coat Investor. “Simplified advice, one-size-fits-all approach.

Limited depth. Complex financial topics. Medicine and finance are both complex fields, and navigating the intricacies of financial planning requires in-depth knowledge and expertise. While the White Coat Investor provides valuable information for beginners, you may lack the depth needed for advanced financial strategies, tax planning, and investment management.”

Yeah. You shouldn't be using index funds. You need advanced stuff. We certainly never talk about advanced tax stuff here, never mind that half of your accountants can't figure out how to file form 8606. Unbelievable.

“Changing financial landscape. The financial landscape is continually evolving with new investment products, tax laws, and economic conditions. Relying solely on a single source for financial advice may result in missing out on the latest trends and strategies that could benefit your financial future.” Okay. I guess it may result in that, but probably not.

“Bias and subjectivity. Every financial expert has their biases and personal preferences.” Okay. Well, hard to argue with that. Yeah, it's okay to get information elsewhere. I don't know how they take it from this person, but it's good to get information from other places. You'll find good financial advice crops up in the same places over and over and over again.

I remember when I was first becoming financially literate, I lived across the street from a used bookstore. I went over there and I bought a whole bunch of $2 and $3 and $4 books and I read them. And most of them were terrible. But you know what? The good books, they were all saying the same thing. And so, when you're going to multiple different sources and they're all saying the same thing, you can be pretty sure that that's pretty good advice.

All right. Well, that's enough time on some critics for the White Coat Investor. If that's all you got, well, I'm feeling pretty good about that. I feel a lot better about that than the poor doc who lost sleep based on an April Fool's Day PSLF post.

Speaking of sponsors, I have one of our sponsors that we're going to be talking to here a little bit about real estate. MLG has been with us for quite a long time now, actually. They do commercial real estate investing, mostly multifamily. And we're going to do a short interview here with one of their folks. Let's bring him on the line.

INTERVIEW: MLG CAPITAL

Hey, I've got two of our partners here, Nathan Clayberg and Tim Wallen. Tim is the CEO with MLG Capital. Nathan is a vice president with MLG Capital. Thank you so much for being on the White Coat Investor podcast today.

Tim Wallen:
Thank you, Jim. Thanks for being here.

Dr. Jim Dahle:
We're excited to have you on today. We want podcast listeners to learn a little bit more about MLG and the opportunities available there, but also wanted to talk with you a little bit about one of the decisions you've made with your funds. Many real estate syndicators, many real estate funds have gotten into a little bit of trouble in the last couple of years with floating rate debt. But you guys have decided to basically only use fixed rate debt, at least for the period of time in which you're holding the assets in your fund. Can you talk to us a little bit about why that was so important for you?

Tim Wallen:
Sure. We've been doing this for 35 years, at least me and Nathan's got five years in, but we've been doing this for 35 years. Debt can get you in trouble. Debt is a tool of our industry. It's used, but the combination of managing how much debt, and we typically target 60-65% debt leverage, can allow you to go as high as 80 or 90% leverage. But that creates lots of risk.

And then on top of that, floating rate debt, as we use evidence here in the last 24 months, can cause a lot of pain when it moves quickly. Our philosophy was, let's focus on how we grow net average income, how we grow gross revenue, how we manage control expenses. Let's eliminate interest rate risk and debt risk as much as possible.

In our funds, historically, we were about 70% fixed rate, and then 30% floating, but the floating rate debt piece, we always bought interest rate caps, meaning that we cap how high the interest could ever go in a floating rate debt vehicle. And we hit all those caps. And our cap was at a 2.5% interest rate, and we went up to 5.5%. We saved us 3% per year by buying those caps in the floating rate portion of our debt.

Again, we're just trying to manage risk. Preservation of capital is critical to what we do, and you want to manage your risk, and you don't want to put yourself in a position where you can lose people's equity. I'm heavily invested in real estate. I'm not a stock bond guy. I got less than 1% of my net worth in the stock market. I'm all invested in what we do. I'm not looking to lose my money. And so, we're going to manage that risk and your risk as well.

Dr. Jim Dahle:
Another really interesting thing about MLG is that it offers its funds in two different structures, a typical K-1 structure, partnership structure, where the depreciation is passed through to you, as well as a dividend fund, if you will, where you just get a 1099, or if it's in a retirement account, I guess you don't get anything at all. Can you talk about why you chose to put those options out there, and who tends to pick one over the other?

Nathan Clayberg:
The concept is really that the two different vehicles into our funds, you get the same basket of assets, we target the same returns. But the difference really lies in how the income that you're realizing is structured from a tax perspective. Within the private fund or option A, like Jim mentioned, it allows for the maximum depreciation passed through to investors, and it also allows them to recognize passive rental income and loss. This passive ordinary income is often deferred by the losses that we pass back through to investors. That's a really powerful tax tool.

The dividend fund, by contrast, flows the distributions from the properties through a non-traded REIT vehicle and up to investors. Actually, investors still participate in an LLC, so they still receive a K-1 in this structure.

However, by flowing the cash through that REIT, we accomplish two things. One, for those investors that are looking to invest through a retirement account, we have a lot of investors who have a lot of wealth built up in their 401(k)s and IRAs. They'd like to get diversified out of public markets in those accounts. We can accommodate that within the dividend fund structure, and we avoid triggering an additional tax on that income called unrelated business taxable income, or UBIT, which is commonly recognized in retirement accounts that invest passively in debt-backed real estate. That's one benefit.

The other, the downfall of the first option, if there is one, is that we invest across multiple states. It's a great diversification technique and mitigates risk that way. However, it can create an obligation to file taxes in different states that we're investing in.

For those who are investing a smaller dollar amount, call it $50,000 to $100,000, they may find that the additional tax prep costs for the multistate filing can be more burdensome than their worth in their investment. They can invest in the dividend fund and avoid the multistate filing obligation.

As you invest more money, or if you're a person that has significant other passive ordinary income in your tax picture, the private fund can start to make a lot of sense, especially for those who are taxed at or near the highest rates. That's when you'll see the most benefit there. If you're investing cash, post-tax dollars, you can invest as low as $50,000 in either fund. If you invest through a retirement account, the minimum is $100,000.

Tim Wallen:
I just had one more comment there. Overall, we want your income tax at cap gain rates, not ordinary rates. We're very disciplined about creating structures that achieve that if you're taxable money. I'm one of 12 CPAs within MLG. We're very focused about delivering great after-tax results in addition to economic results from our real estate investments.

Dr. Jim Dahle:
I assure you, White Coat Investors very much appreciate that. A lot of us have pretty darn high marginal tax rates. Anything we can do to help with that burden goes a long way to helping us build wealth, especially when we start so late in our careers to do so.

Let's make sure we cover the details for what you're raising money for now, which is Fund 6. You mentioned the minimum investments, which are $50,000 or $100,000 within a retirement account. Can we talk a little bit about the preferred return there and the waterfall structure?

Nathan Clayberg:
Sure. We target all-in returns in Fund 6 of 11% to 15%. We do that by bringing together a basket of 25 to 35 different real estate investments diversified geographically across the country and across different asset classes.

The way we get to that 11% to 15% all-in return to the investor is comprised of a three-tiered waterfall structure. The first is an 8% accrued compounded preferred return. I say accrued and compounded because it's not likely that we'll pay 8% out of the gates. In fact, we'll more likely pay in the 4% range. It takes time. We buy these properties with a strategy to grow the operating income, and we're not going to pay a 4% right out of the gates.

However, if we pay a 4%, the unpaid portion of that, so another 4%, is accrued to our investors. It's owed to them, and it earns 8% compound interest until we make them whole on that. Our first obligation as the manager of these funds is to get investors' current on their 8% preferred return.

The second phase of our waterfall is a full return of capital. We expect that we'll start selling properties in these funds within probably the first three to four years and continue that throughout the remaining life of the fund with the target of returning all investors' original capital within six to eight years of when the fund begins.

One critical differentiator within our structure is that investors get 100% of the net cash flow produced by the fund until they have an 8% rate of return and all of their money back. Many other groups are able to sell the first property in the fund. They make $10 million. They can reach in and pull out their share of the investments at that time. In our structure, 100% of those proceeds go to the investor to make sure that they're taken care of first.

If and when we return 8% annualized and all the investors' capital, then all the remaining distributions, because if we've done our jobs well to buy 30 properties, we might sell 15 to get you caught up on the 8% preferred and all your money back. The remaining distributions are split typically 70% to the investor and 30% to MLG as the manager.

We have a special deal with the White Coat Investor group. We're thankful for the relationship we have. We give you a better profit split on the back end. For White Coat Investors, now that the group has surpassed $5 million in total investment with MLG in Fund 6, you guys get 75% and our share is reduced to 25%. It's a very investor-first return structure. We think it allows for complete alignment of interest overall.

Dr. Jim Dahle:
Thank you so much, Tim and Nathan, for coming on the White Coat Investor podcast and for what you're doing at MLG for myself and for other White Coat Investors. For other White Coat Investors out there who are interested in learning more about investing with MLG, you can go to whitecoatinvestor.com/mlg and learn more or sign up to invest.

Obviously, as with most private real estate opportunities, you have to be a credited investor. But otherwise, since most White Coat Investors meet that requirement, this is an option for diversifying your portfolio.

All right. I hope you enjoyed that interview. Let's get to some of your questions here. This one is coming from Josh. I love this question because it makes me want to rant like crazy. Let's listen to the question first.

WHY DOES YOUR FINANCIAL PLAN NEED TO BE WRITTEN DOWN?

Josh:
Hello, Jim. My question for you is about a written financial plan. Why does it specifically need to be written down? If I know my asset allocation, where my money is going, when I rebalance, and all the factors that have to do with a financial plan in my head, then why does it specifically need to be written down? Thank you so much for all you do.

Dr. Jim Dahle:
Okay, Josh. Let me get this straight. You're going to spend 60 years as an investor, 30 years while you're working, 30 years while you're retired. The biggest financial task of your life is acquiring a nest egg big enough to support you after you're done working that can support you the rest of your life. 20%-ish plus of your income is going to go towards saving for retirement. It's too much work to write down a page or two of your financial plan? That's too much work? Really? That's what you're trying to avoid is doing a couple of pages of writing. You must really hate writing is what I'm saying.

I think there's two benefits to writing it down. The first one is, as you write it, it exposes the holes in your knowledge. It exposes the gaps in your thinking. You get to the end of it and you're like, “Oh, I don't have anything for estate planning. Oh, I didn't put anything in on rebalancing. I didn't put anything in on my behavior in a bear market.”

It exposes these gaps and you're like, “Oh, do I want bonds? I don't know if I want bonds.” Well, now you got to go figure out if you're going to have bonds because you got to write it down in your plan or how you're going to introduce them later or how you're going to withdraw your money in retirement. All these questions that pop up when you write it down and realize, “Oh, I don't know what to put in that section of the plan.” I think that's benefit number one.

Benefit number two is a commitment. It's a commitment to the process. I'm actually going to spend some time to write this down, number one. Number two, you're going back to it later. 2008 happens. 2020 happens. 2022 happens. December 2018 happens. “Oh yeah, what did I say I was going to do when this happened? Let me go back and look at my written plan. Oh yeah, it says not only am I not going to sell low, I'm actually going to see if I can come up with some extra money to put in this month into the market because it's down 25%.”

I think there's benefits to it being written down. But hey, you know what? If you have no better use for your limited memorization space, your limited brain space than to put your financial plan in there, go ahead and memorize it. Don't write it down. It's no skin off my nose.

But I think this is a really useful exercise for people to have a written financial plan. So much so that I think it's worth paying thousands of dollars to a financial planner to help you draft one. I think it's worth paying whatever we're charging right now for Fire Your Financial Advisor, $800 or whatever it is, to have us walk you through the process of writing your own financial plan. I think it's extremely valuable.

Only about 50% of White Coat Investors in the surveys tell us they have one. And I think almost all of them ought to have one, including you, Josh. So even if you just jot down a few things on an index card and throw it in your filing cabinet, I think it's worth it.

Hey, here's another benefit of having a written down. I'll bet your partner, if you have one, is not as into this stuff as you are. So maybe you've got to memorize in your head what happens if something happens to you. It'd be nice to have the written plan there that at least your partner can take to a financial planner to help them once something happens to you.

QUOTE OF THE DAY

All right, end of the rant. Our quote of the day today comes from Mellody Hobson, who said, “The biggest risk of all is not taking one.” Got to keep opportunity cost in mind when you're scared about taking risks.

All right, the next question comes from Noah.

SHOULD YOU HAVE A 529 IF YOU WORK FOR AN INSTITUTION THAT HELPS PAY FOR YOUR KID'S COLLEGE?

Noah:
Hi, Jim. This is Noah from the East Coast. Thanks for all you do. Your blog and podcast have really helped me get our financial ducks in a row, as you like to say. My wife and I are academic physicians in relatively low paying subspecialties. The institution where we work offers a benefit where the institution will pay for a significant part of a college tuition for our children. And with the two of us combined, we would have nearly the entire cost of college tuition paid for for our kids. The problem is that this isn't some fund that we can take with us if we leave these jobs. If we leave these jobs before our kids get to college, then we are out of luck. We have two kids under six, and my 15-year crystal ball is cloudy.

How do I factor this into our college savings plan? I know with the Secure Act 2.0, we could potentially use leftover money from 529 to fund Roth IRAs for the kids, but I hate to put a significant amount of money in a 529 and then not be able to use it. Do you know any other docs in academic positions with college tuition benefits like this? How do people navigate this situation? Thanks.

Dr. Jim Dahle:
Great question. The local university, University of Utah, lots of docs there at University of Utah Hospital, I think they get 50% off tuition for their kids. And that's not just for docs and their families. If your spouse is a nurse and you're a student up there, you get 50% off tuition. So, it's a really great benefit. It's a great way to pay for part of school, send your spouse to work at that university for the few years you're in school. It really makes a big, big difference, obviously, if you're getting 50% of tuition off.

As far as what I'd do in your situation, though, six-year-old kid, it's a long way from college and you don't know that your kid actually wants to go to your institution. You have to hedge your bets a little bit here.

I think what I would do is I'd save some money for college, but maybe not in a 529. I'd save it either in my own taxable account or I'd save it in a UTMA account, which becomes the kids in most states at age 21, depending on how much you trust them, I guess, how much control you want in your life, whether you put it in your brokerage account or their brokerage account.

That way, if you decide to go somewhere else, you've got something saved for college that you can use. And if they decide to go somewhere else, there's something there that can be used to pay for college. But at the same time, you're not locked into a 529. And it's not like being locked into a 529 is the worst thing in the world.

As you mentioned, there's now this cool provision that you can roll $35,000 out into the beneficiary's Roth IRA. It's limited each year to the amount of the contribution limit. They have to have earned income, and it has to have been in the account for 15 years. There's always rules about it, but that's one escape valve for a 529. The better escape valve, in my view, is you just change the beneficiary to the grandkids.

All our 529s are almost surely overfunded. Our kids are all talking about cheap in-state schools. Even our kid, I'm very proud of her, our second just got 36 on the ACT and she's got nearly a 4.0, probably be a 4.0 because she wants to retake her A- class this summer. She can probably go anywhere in the country that she wants to go. She's still talking about going somewhere cheap in-state, and given her grades and scores, she's probably going on a full ride. And so, her 529 is dramatically overfunded for college. Where are these going? They're going to our grandkids. That's where they're going to go to.

It's not the end of the world if you overfund the 529. You can even take the money out, pay the taxes and penalties and buy a sailboat with it if you want. It's not like the money just goes away or something. But it's not the end of the world. But in your case, as you describe it, I think I wouldn't save in a 529. I'd save somewhere else. I'd save something. And then if it doesn't get used, they can use it for a house down payment or you can use it toward your retirement or whatever. I hope that's helpful.

Next one comes from Rob.

IF YOU ARE AN OLDER PARENT SHOULD YOU USE YOUR 401(K) TO PAY FOR YOUR KIDS COLLEGE?

Rob:
Hello, Dr. Dahle. I'm a self-employed consulting engineer and old dad. I'll be 61 when my daughter starts college in seven years and 66 when my son starts if they decide to go that route. And paying for our kids' college is our biggest, most uncertain financial goal given that we don't know what they'll want to do, how much college will cost or what the markets will do. It's really the only thing that gives me any pause about our financial future.

We started 529s for them and the balance is about $30,000 each. We live in a state without an income tax, so there's no real tax benefit there. And given all the uncertainty and the fact that I'll be able to tap my 401(k) without penalty by then, should I just plan on using that to pay for college?

In addition, my wife stopped working in the school system and started working in my business. So we could theoretically max out another 401(k). We'd also be able to save at a higher rate since it won't be restricted to college expenses and we'll get a much bigger tax benefit in the present.

Does that seem reasonable? Are there tax, college financing or other implications we should think about? Does that affect the ability to make contributions to the 401(k) in addition for myself or my wife once I start drawing on it? And if it makes sense, should we and can we take the contributions to the 529 plan and put them to something else, either to a brokerage account, which we don't have yet, or to UTMA accounts for the kids, which we've planned to set up. But again, given the uncertainty in college saving, we haven't done that to now. Thanks for everything that you do.

Dr. Jim Dahle:
It sounds like he ran out of a minute and a half there. I think we got the questions though. It's nice to have a question from someone who's not a doc. We don't get those as often. So thanks for what you do if nobody's told you today. And that goes for all you docs out there too.

This week, we've been doing brand new EMR. We just switched to Epic. I'm actually thrilled to have Epic. I've used it before. It's way better than the Meditech where you were using. I'm excited about it, but there's growing pains anytime you switch EMRs in a hospital. And for whatever reason, my hospital decided to change the entire telephone system while they're at it. So it's been a heck of a week. And if you're dealing with something like that at work too, I'm sorry. And thanks for putting up with it in order to help patients, and in the case of you engineers out there, clients.

Okay. Old parents. Man, you're making me feel old. I'm going to be 58 when my last kid starts college. I guess there's plenty of us old parents out there. Lots of docs, of course, put off having kids. 35, 40 years old before you're having kids. I guess you're old parents too.

There's a cool benefit though when you get to those older ages is you can use your retirement accounts to pay for college. If you're 55 and you've separated from an employer, you can get into that 401(k) with no 10% penalty. If you're 59 and a half, you can get into your IRA with no penalty.

Now, in your case, it sounds like you're still going to be working as a consulting engineer and contributing to your 401(k). So I don't think your 401(k) is as available as you might think it is, but your IRA should be if you've got some IRAs there. And I think you can make a good case, Rob, for saving in retirement accounts for your kids' college, because that's going to be accessible to you when you go to pay for college. And you're right. The tax breaks are a lot better.

I'm not a big fan of skipping out on a retirement account contribution in order to put more money in a 529. And I know there's separate goals and you save for them separately, but the 401(k) tax break is way better than the 529 tax break. And so I would max those out before I even thought about 529s, I think.

And as a general rule, you can help others best from a position of strength. You should always prioritize retirement before saving for college. Your kids can get loans for college. They can go to a cheaper school. You can't go to a cheaper retirement. You certainly can't get loans for retirement.

Not in the same way anyway. I guess somebody is going to write in and argue with me that you can get loans for college or that you can get loans for retirement and that you can have a cheaper retirement. But for the most part, that's true. You understand what I'm saying? Do retirement first and then do college. In your case, Rob, I think I would max out those retirement accounts and you'll figure out college. It's not that hard to pay for. It's not that big of a deal whether you're using a UTMA.

And of course, the downside there is it becomes a kid's money at age 21, but you get a few extra tax breaks compared to your taxable account. But you haven't even maxed out your available 401(k)s yet, especially with your wife now working for the business. It gives you another contribution. Yeah, I think you're barking up the right tree there.

All right. The next question comes from Nicole about selling a house.

SHOULD YOU PULL MONEY FROM YOUR TAXABLE ACCOUNT TO PAY CASH FOR A NEW HOUSE TO AVOID A MORTGAGE WITH A HIGH INTEREST RATE?

Nicole:
Hi, Dr. Dahle. Thank you so much for taking my question. We are thinking about selling our house here and moving out of state. We currently have a 2.25% interest rate on our 10-year fixed rate mortgage and the thought of losing that interest rate kills me, but that's the situation that we're in.

We max out all of our retirement accounts and we have about $400,000 in a taxable account. I'm wondering what your thought process would be on deciding if you would take out another mortgage at the higher interest rate or if you would just raid your taxable account to pay cash for a new house.

Just for some reference, our net worth is about $1.8 million. So, taking a couple hundred thousand out of taxable wouldn't be crazy. We have about $300,000 in equity in our current home and we're looking to spend total on our new home between $400,000 and $500,000. We'd probably have to take out a couple hundred thousand from our taxable account, which would put a significant dent in it, but then we'd be avoiding a higher interest rate. My husband is pretty debt averse, but I'd love to talk through the math if you could. Thank you so much.

Dr. Jim Dahle:
Okay. A lot of these payoff debt versus invest questions, and this is really the same thing, take out debt versus take out investments. It's just the same thing looking at it in a reverse way, are difficult. There's no right answer and it's not clear what to do and either option is probably fine.

In your case, I think it's pretty obvious. This is a no brainer in your situation. I think your husband, the debt averse one has probably got it right. You're only going to need a couple hundred thousand. You've got $1.8 million in net worth, you got a $400,000 taxable account. So it's only half of it that you're going to use. And then you're going to be totally debt-free, no mortgage at all.

I'll tell you what, we paid off our mortgage in 2017, I think. It’s been seven years, mortgage free. We do not miss it. We have had no urges to go out and borrow money on this house to get another mortgage, even when we could have gotten it at 2.25%. We did not go out and borrow on the house. We like being debt free. It's got a lot of nice, call them emotional benefits if you will, but the only way someone is going to get our house is if we don't pay property taxes and that's going to take several years of not paying property taxes to lose it for that purpose. I like the security. I like the simplicity, lots of things to like about it.

Now, in your case, unfortunately, you're leaving this super low rate mortgage. And I think you can make a pretty good case, mathematically at least, not always behaviorally, but mathematically, you can make a case to borrow money at 2.5%. You're probably going to do better than that with your investment portfolio. In fact, if you're not going to do better than on your investment portfolio, you got bigger problems.

But even right now, you can borrow at 2.5% and you can put it in a money market fund and make 5.25% today, or a high yield savings account. Now, there's pretty good arbitrage, but that's not what you're going to get. You're going to a new state, you're getting a new mortgage. Your mortgage rate is going to be 6%, 6.5%, 7%. At best in cash, you're going to make 5.25%. That's before tax. So you're going to have to take on risk if you're going to beat 6%, 7%. Maybe you can do it. Maybe you can't.

But I still find 7% to be a very attractive guaranteed return. Bonds aren't paying 7% right now. Cash isn't paying 7% right now, but avoiding this mortgage, you're making 7% guaranteed. There's a lot of people out there that don't expect any higher returns than that on stocks in the long run. 7% is a pretty good return. And you can get that just by paying cash for this mortgage.

It's one thing to take out a mortgage when you're coming out of residency, you don't have any money, your net worth is minus $300,000. You just had twins. You're sick of living in an apartment. Your job is not stable. It's time to buy a house, but you don't really have any money. Fine, get a mortgage. Go get a doctor mortgage. Put 2% down, whatever. No big deal. That is not where you're at in life.

You're almost a multimillionaire and you're buying a very reasonably priced house. You've already got three-fifths of its value in your current house's equity. You only got to come up with a couple hundred thousand dollars and you get to skip the whole mortgage process altogether. You'll probably even get a better deal on the house for offering cash.

I think in this case, if I were you guys, I would not borrow against this house. If you do borrow against this house, you're borrowing 6.5%, 7%, and you've got to out-invest that. Not impossible, but once you adjust for risk, I just don't think you're coming out ahead there.

Mortgages are for people who don't have money to buy their house. You have money to buy your house, so I don't think mortgages are really for you. Same thing I tell someone who's buying a car. “I got $40,000 and I want to buy a $30,000 car. Should I get a car loan?” No, just go buy the car. It's okay not to borrow for stuff.

All right. I hope you guys are enjoying this podcast. If you don't like it, let us know. We'll see if we can fix it so you do like it. Maybe we can, maybe we can't. Shoot us emails, [email protected], and we'll try to fix the things that annoy you and do more of what you enjoy.

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All right. Don't forget tonight, 06:00 P.M., Financially Empowered Women. It's a virtual event featuring Johanna Turner. It's all about taxes. Sign up at whitecoatinvestor.com/few. I think there's more than 2,000 ladies in that group now, Megan. It's getting to be really big, and they have some great discussions. I'm sure they don't actually let me come, but I think it's great, and a lot of people really enjoy them. We're getting great feedback on them.

Don't forget about the Financial Educator Award. Please, please, please, if someone gave lectures at your med school or your dental school or in your residency or is going the extra mile to really help you be financially literate, nominate them for the White Coat Investor Financial Educator Award. You can do that at whitecodeinvestor.com/educator. If they win, they get $1,000. If they win and you gave them the best nomination, you get a free WCI course. Sign up for that, whitecoatinvestor.com/educator.

That's also the page you can get the slides to give presentations. There's a set of slides for students, one for residents, one for attending physicians and other professionals that you can give yourself. Modify them as you need them, whatever, or just put them together for you to make it easier for you to do this stuff for your peers. Let's work together, make financial literacy a priority in your community.

Thanks for those of you telling your friends about the podcast. We really appreciate that. And thanks for those of you who are leaving five-star reviews. A recent one came in from grtsho. He said, “Excellent and thorough. This podcast is an example of a motivated physician gaining substantial knowledge on a non-medical topic and sharing it with everyone. He is altruistic and thoroughly engaged in this material. I find when he lacks information on a topic he is not afraid to admit it and research it thoroughly to provide an accurate and actionable answer.

His staff should be given significant credit for the success of this podcast as it clearly must take more effort than just one man can muster. A great combination for a podcast, knowledgable, altruistic host who surrounds himself with intelligent guests and a hard working staff. All, keep it up the great work.”

Wow, that was a really nice review. We should put that on the website or something. But thank you for that. These five-star reviews really help get the word out. We appreciate you doing those.

Keep your head up, shoulders back. You've got this and we can help. As we prepare to move into summer in the next month or so, let's get your finances set up and have it not be something you have to worry about anymore.

Practicing medicine is way more fun when you don't have to do it or when you don't have financial pressure hanging over you making you do it. I promise you, getting your financial ducks in a row is well worth it.

Whatever the next step is for you, whether it's going and buying disability insurance or buying term life insurance, not whole life for almost all of you, whether it's doing your estate planning or whether it's finally figuring out those investments or reading up on your 401(k) plan document, go do it. You can do this. We're here to help.

We've got a whole community. We mentioned the FEW earlier. We've got the WCI subreddit if you're on the Reddit. We've got a Facebook group if you're into Facebook. We've got the WCI forum if you're a boomer. Just kidding, everybody's welcome on the forum. But you can ask these questions and people will answer your questions. They're high quality answers you're getting most of the time. Certainly, if you sift through all the answers, the quality is in there somewhere.

And you can save tons of money on paying professionals. We're not against professionals. Pay professionals too if you want to. Just make sure you're getting good advice at a fair price. Check out our recommended pages if you're not sure what a fair price looks like or if you're not sure what good advice looks like. And we'll try to get you connected with the good guys and the good girls in the business.

All right. See you next time. Have a great week.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
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All right, for those who aren't aware, we have a partnership with NewRetirement. And from now through April 30th, we've got a special deal for those who are interested in that. Now, they have a free version for this really powerful retirement planning software. So you can still do that.

But the deal is for the next step up. They're Planner Plus, which is $96 per year for the whole year until April 30th. That goes up to $120 starting on May 1st. But until then, we'll be at the discounted price. You can get that at whitecoatinvestor.com/newretirement.

INTERVIEW

All right, we've got a great guest today for the Milestones podcast. And he's done just fantastically well. Tons of their income has gone toward building wealth the last three years. And they're really doing fantastic or clearly have what I call the X factor and are going to continue to build wealth rapidly.

We're going to talk afterwards, so stick around, we're going to talk about cars. Something that I don't talk about nearly as often as I feel like talking about it. It's one of my soapboxes I like to get on and rant for a while. Because I'm not a car guy. Chris, it turns out, is a car guy. So we're going to hear more about his perspective on cars. But stick around afterward and you'll get to hear more about mine.

Our guest today on the Milestones Millionaire podcast is Chris. Chris, welcome to the podcast.

Chris:
Thanks for having me. It's a pleasure to be here.

Dr. Jim Dahle:
Tell the audience what you do for a living and how far you are out of training.

Chris:
I am a general surgeon and I'll be three years out of training in about three more months.

Dr. Jim Dahle:
Less than three years out of training. That's going to make this milestone all the more impressive. Tell the audience what milestone we're celebrating today.

Chris:
The big milestone is my wife and I just achieved a net worth of one million dollars. We also have paid off our student loans.

Dr. Jim Dahle:
Wow. Millionaires. Less than three years out of residency. That’s more than twice as fast as Katie and I were able to do it. That's pretty awesome. You should be very proud of yourself.

Chris:
Thank you.

Dr. Jim Dahle:
All right, let's break down the numbers. What's been your average household income over the last three years?

Chris:
Between the two of us, we're right at $500,000. My salary is $440,000 and hers is about $60,000 as a teacher.

Dr. Jim Dahle:
Well, what that suggests to me is that you probably put about two thirds of your income toward building wealth over the last three years, which is a heck of a percentage once you pay the income taxes on $500,000 worth of income. What was your net worth coming out of training?

Chris:
We were negative. Coming out of residency, we had about $270,000 of student loans between the two of us. I was able to pay those off very quickly. I had a substantial signing bonus with my job. I put basically $180,000 of signing bonus towards student loans day one. And then that left $90,000 left, which we paid off in about seven months. And then we just focused all of our energy on future retirement after the student loans were dealt with.

And then I will say we did have a little bit of an unexpected inheritance of about $200,000 over the last year, which kind of put us ahead of schedule as well.

Dr. Jim Dahle:
Yeah. What does your wife do for a living?

Chris:
She's a teacher.

Dr. Jim Dahle:
So a teacher and a surgeon making $500,000. You started almost $300,000 in the hole when you came out of training.

Chris:
Correct.

Dr. Jim Dahle:
So really your net worth swing is like $1.3 million.

Chris:
Yes.

Dr. Jim Dahle:
You made about $1.5 million. You got a couple hundred thousand dollars in inheritance. It sounds like you got $180,000 in addition to that $500,000 as a signing bonus. Or do you count that?

Chris:
Yeah, we got $180,000 as a signing bonus initially. That went all towards student loans immediately. And then we also got $200,000 in inheritance this year.

Dr. Jim Dahle:
Did you make $500,000 that first year in addition to the $180,000?

Chris:
Correct.

Dr. Jim Dahle:
Okay. So really you've made close to $1.9 million. And your wealth swing has been like $1.3 million in less than three years.

Chris:
Yeah.

Dr. Jim Dahle:
What do you guys eat?

Chris:
I feel like we eat good food and we do the things that we want to do. It's interesting. By definition, our total net worth is just over a million dollars. I say our real net worth is about $730,000 because that's what we have in money. Some of this net worth is equity in our home.

And then this isn't the White Coat Investor way, I realize, but one of my passions in life is cars. And we don't have an insignificant amount of equity in cars, just because I have a couple of nice cars that we don't really owe much money on. So that factors in part of it. I know most people don't factor in cars in their net worth because it's a depreciating asset. But in our case, it is not insignificant.

Dr. Jim Dahle:
What do you mean by a nice car? Are we talking about a Lamborghini or are we talking about a Tesla S?

Chris:
I have a truck. My wife has a Blazer. And then the nice car that I'm referring to, I do have a new Corvette Z06, which is about a $150,000 car.

Dr. Jim Dahle:
Okay. And you're counting the equity in that as well. When did you buy these cars?

Chris:
I just bought this car last November. And then we've had my wife's Blazer since residency. The truck that I drive now, I bought last summer, which was unexpected. It's a weird story. I was out of town. My car broke down. I needed to get back for a call and surgeries in the next 12 hours. And so I bought a different truck off the lot in a different city and drove home.

Dr. Jim Dahle:
It's fun to have the finances to be able to do that.

Chris:
It is. It was kind of a crazy scenario that could have been very stressful. But in our current situation, I was able to do that.

Dr. Jim Dahle:
There are problems in life that can be solved by money. And when you have money, you can solve those. And sometimes it just means, “I'm going to buy my car a little sooner than I thought I was going to. I'm going to buy it a little faster than I thought I was going to. I'm going to buy it in a different state than I thought I was going to.”

Chris:
Exactly.

Dr. Jim Dahle:
But it's no big deal because it's a problem you can solve with money.

Chris:
Exactly.

Dr. Jim Dahle:
All right. Well, you paid off your student loans. A big chunk of it was the signing bonus. How come you decided to use your signing bonus for student loans instead of something else, instead of buying a Corvette? You didn't buy the Corvette when you got the signing bonus. You put it toward your student loans. Why?

Chris:
Correct. Yeah. I knew in residency, the number one goal of mine was get out of debt. And my wife was very much on the same page. And I had this rule that I wasn't going to allow myself to buy nice things until we were out of debt.

My number one goal was to get rid of those student loans. And so I knew the big chunk of change that I was getting from the signing bonus was just going to go straight towards that and help create a huge dent in that.

Dr. Jim Dahle:
Now, none of these cars have debt on them, I assume.

Chris:
The Corvette has a tiny amount of debt on it because the truck purchase was unexpected. I had saved enough money to buy the Corvette. I knew it was coming down the pipeline. And then when the truck broke down and I was kind of forced to buy a different vehicle around the same time that I was buying the Corvette, it was on its way. I did finance a very small portion of the Corvette, but not much.

Dr. Jim Dahle:
And have since paid it off?

Chris:
I have about $30,000 of the $150,000. It was $150,000 of the car, $30,000 of it is not paid off yet.

Dr. Jim Dahle:
$30,000 car debt. You've got a mortgage, I presume. How expensive is this house of yours?

Chris:
Yeah. We bought our house for $430,000 and we moved here and we owe $380,000 on it right now.

Dr. Jim Dahle:
Okay. As an attending, you bought it?

Chris:
Correct.

Dr. Jim Dahle:
And what part of the country do you live in?

Chris:
In the Midwest.

Dr. Jim Dahle:
Midwest. Okay. So that's a pretty nice house in the Midwest. I was just in Kentucky this last week and the average house there is $292,000. In an area like that, $430,000 is well above average.

Chris:
Yeah.

Dr. Jim Dahle:
Okay. Very cool. Are you from that area or did you deliberately go to an area that's a little bit lower cost of living? How did that decision happen?

Chris:
My wife and I are both from the area.

Dr. Jim Dahle:
All right. So let's break down your net worth. How much of it is home equity? How much of it is cars? How much is retirement accounts, other investments, et cetera?

Chris:
We have about $670,000 in retirement accounts and our brokerage account. I currently have about $60,000 in cash, $135,000 in home equity based on what it was currently valued at and worked. And then about $170,000 in car equity.

Dr. Jim Dahle:
Very cool. What do you invest in?

Chris:
Right now, we're pretty much 100% in the S&P 500.

Dr. Jim Dahle:
Okay. Stock, stock index funds.

Chris:
Yes.

Dr. Jim Dahle:
Well, this is pretty remarkable what you've accomplished. A huge chunk of your income has gone toward building wealth. You haven't impoverished yourself. You have a pretty darn nice house for the area you live in. You obviously have bought a pretty expensive toy.

But most of your income is clearly going toward building wealth. Why? Why is so much of your income going toward building wealth? Why did you decide to kind of front load your wealth building activities rather than enjoying a little bit more of the income now to do whatever you want to do?

Chris:
I guess a couple of things. It's really important to me to achieve a number that gives me freedom at a younger age later in life. I don't know what that means for me yet. I'm not saying that I want to retire when I'm 48 or when I'm 50. But I know that I want to have options when I'm around that age. If I want to make a career choice, I want to slow down, if I want to keep doing what I'm doing, I just want to have options with my finances at that time.

And then the other thing is, I do have a passion with cars. But outside of that, we just don't spend a lot of money. We don't spend an extravagant amount of money on food. We don't need the big, fancy surgeon house. And so, there's just a lot of leftover money. And for me, it just makes sense to put that money to use and invest it. And it kind of turns into a net worth fairly quickly when you do that.

Dr. Jim Dahle:
Do you guys use a written budget you follow each month or some sort of spending plan?

Chris:
We don't really have a spending plan. What we do is we use the pay your future self first. I have a set amount of dollars that I know I want to save and invest every single month. And then the leftover money is kind of the money we can use to have fun with. Now, we don't spend that money as fast as it builds up. So even though we're hitting our monthly goal every month, by the end of the year, there's more money than I want in my checking account. We end up putting more into our retirement and investments above and beyond our goal. But we use the pay yourself first or your future self first and then spend what's left over.

Dr. Jim Dahle:
How much do you guys think you spend in a given month?

Chris:
On average, about $10,000 a month, probably.

Dr. Jim Dahle:
What did you think about your tax return that first year you became an attendee?

Chris:
Tax season is no longer a fun part of it. It's getting ready to make that payment.

Dr. Jim Dahle:
Pretty shocking to pay more in taxes than you were making as a resident?

Chris:
Yes, yes. Tax season is not a fun time of the year.

Dr. Jim Dahle:
Yeah. What's the biggest money fight the two of you ever had?

Chris:
Biggest money fight. That would have been in residency. We're very much aligned on our goals. And we don't like to spend on the day-to-day too much. But I also am very crazy about having an emergency fund or a stash of money if something would ever happen. And in residency, there was around the holidays, I thought my wife maybe spent a little bit more than we should have. And my checking account dipped below what I want our emergency fund to be. And it turned into a little bit of an argument. But really beyond that, we're pretty well aligned on things.

Dr. Jim Dahle:
What did you guys take away from that disagreement?

Chris:
I think when we started making real attending money, my wife was just scared to spend too much money every month. And so she sweats the small stuff now. And I have to tell her, if you want a pair of shoes, go buy a pair of shoes. Don't sweat the small stuff as much. But I don't know, kind of reinforce that we don't like to spend on a day-to-day that much, I guess.

Dr. Jim Dahle:
Who do you think's the bigger cheapskate, you or her?

Chris:
Right now, it's probably her.

Dr. Jim Dahle:
Has that changed as time went on?

Chris:
No, I don't think it's changed.

Dr. Jim Dahle:
Okay, so there's some people out there, they're listening to this. They're like, “Man, that sounds awesome. That's where I want to be.” What advice do you have for that person? Maybe they're a resident, maybe they're a fellow, maybe they're still in med school, or maybe they're a new attending. And they're like, “Wow, they really just crushed it the first few years.” What advice do you have for somebody who wants to do what you've done?

Chris:
I guess the advice that I have, number one, is surround yourself by resources and people where you can slowly learn this stuff. Whether that's listening to one of your podcasts on the way to work, or just talk to people with similar goals as you. I don't think you have to become an expert in everything. But if you do these things slowly, you learn enough that you can set yourself up for success.

For me, what was very, very helpful was I'm a very much a checklist person. I mentioned, I wouldn't allow myself to buy any fun toy until I was out of debt. And so, those first seven months, we didn't invest in retirement yet. We paid off all of our loans, we got everything done. And then we focused our attention onto the next thing. For me, that's been very helpful.

And then something to remind yourself, I think it's important to allow yourself permission to enjoy the fun things in life too. I'm currently reading the book “Taking Stock.” And I know you had that author on your podcast over the Christmas time area. And he stresses that don't make your financial goals, your primary goal in life. Figure out what's important to you in life, your passions and things. And then use your success with finances to allow you to do those things and pursue those goals. You certainly need to save and invest, but use that money, your success as a tool to do what's important for you. And I think you have to do that along the way, which we've been able to do.

Dr. Jim Dahle:
Yeah, that's good advice. All right, speaking of those financial goals, what's the next one you're working on?

Chris:
The next, it's funny. Coming out of residency, I had a target age that I wanted to become a millionaire. And we are a little bit ahead of schedule. The next goal that I had for myself was my number of financial independence. That's a long ways down the road.

Between now and then, I want to figure out what's important to me, what my goal is in life. Once I hit my number that I can start to pursue those other things. And I don't know what that is yet. But I think if we stay on this trajectory of what we save every month, I think we're going to hit that number at a good age and then figure out what we want to do with our life after that.

Dr. Jim Dahle:
Very cool. Well, congratulations on your success, Chris. It's awesome. It's amazing when you put everything together, you go to a place with a very reasonable cost of living, you make good money, you prioritize building wealth early on in your career and bam, less than three years out, you're a millionaire. You don't have any student loans, got a little piddly car loan that I suspect you may be wiping out soon and you're well on your way.

You say your FI number is way out there in the distance. I'm not sure that's true. It wouldn't surprise me if you hit that far sooner than you think you're going to given your habits. So congratulations to you and your wife and thank you for coming on the Milestones podcast to inspire others to do the same.

Chris:
Thank you so much for having me and thank you so much for everything that you do. You've certainly played a big part in our success.

Dr. Jim Dahle:
It's our pleasure.

All right. I thought that was a great interview with somebody who's just doing very great. It's funny, life comes up. Sometimes you do things that others might say, “Eh, it's a financial mistake to take out a $30,000 car loan.” But compared to everything being done right, it just doesn't matter in this case. When you're building wealth at $300,000 or $400,000 or $500,000 a year, it doesn't matter if you have a $30,000 car loan. Let's be honest.

FINANCE 101: CARS

I'm going to rant for a little bit here about cars, but I'll tell you what, if you can become a millionaire in three years, much of this discussion may not apply all that much to you. Let's be honest with you, but let's do it anyway.

So let's talk about cars for a minute. Because I truly believe that the reason most middle class families in this country do not become millionaires is sitting in their driveway. Americans like to drive expensive cars. It's fun. Expensive cars are nice. I get it. I've got an expensive platinum F-250. People wonder why a blogger needs it. A blogger doesn't need it. I think we talked about that on a separate podcast. I don't know if it runs before or after this one, but you can see that for details. But the bottom line is we like having nice stuff. But sometimes if you let it, that nice stuff keeps you from reaching your financial goals.

The difference between the annual expense, counting depreciation, insurance and maintenance and all that stuff, between a really nice car, especially if you're buying them new and insuring them every three years or so, and a not so nice car, an economy car that you hold on to for 10 or 15 or 20 years can be about $5,000 per year. That's the difference in operating costs. And a lot of families have more than one of those.

Well, $5,000 per year invested at 8% over 40 years is $1.3 million. Thus, if most families would drive maybe not a beater, but an economy car that you hold on to for a long time, they would be millionaires. Instead, they spend too much on a car.

So, here's some guidelines to help you not have this problem. Now, I got to put a caveat on this, though. Most doctors make enough money that they can afford to throw some money away on cars and still be okay, still reach their financial goals.

People like to say that, “Oh, White Coat Investor says you got to drive a 20-year-old Honda Civic to be successful.” Well, obviously that's not true. If you make $200,000 or $300,000 or $400,000 per year, you've got a halfway decent savings rate. You control your spending. You don't have debt coming out your ears. You can probably spend a little bit more on a car and still be okay.

But here's some guidelines for cars because people need these. People spend way too much on cars if you don't pay any attention to it. Some of these guidelines I stole from Dave Ramsey. I don't agree with everything Dave Ramsey says, but I think his guidelines on vehicles are pretty good. So we're going to use some of those and then I've got a few of my own.

The first one is that you shouldn't spend more than 50% of your gross income on all the things you own with motors. We're talking about cars. We're talking about motorcycles. We're talking about dirt bikes. We're talking about boats. We're talking about planes. 50% of gross income.

If you're a resident making $60,000 a year and you have a $45,000 car, you have broken this rule. If you are a physician family and you make $250,000 a year and you've got a brand new F-250 that cost you $90,000 and you've got a $60,000 Suburban, you've broken this rule.

On the other hand, if you're making $400,000 a year and you've got a 15-year-old Honda Civic and you've got a three-year-old Toyota Sequoia, you're well within this rule. So, just do the math. 50% of gross income for all things with motors.

Now, at certain levels of wealth, the income doesn't matter as much, obviously. If you're a financially independent multimillionaire, this guideline is maybe not for you, but for those of us still trying to build wealth, this is a pretty good rule of thumb. 50% of gross income is the max. You spend less, you can use more of it to build wealth, but you certainly shouldn't feel guilty if you've got $80,000 worth of cars and you make $250,000 a year.

All right, here's another one. Don't buy your cars new until you're a millionaire. I think this is a pretty good rule of thumb. You've got a better use for your money if you're not a millionaire yet than a brand new car. Yes, the brand new car is cool. You got a warranty on it. You get a few more years with minimal maintenance hassles, minimal repair hassles, and I guess you have the same maintenance either way. You don't have to buy anybody else's problems. You can order it exactly like you like it.

I bought new cars. I understand the draw. I just think it's probably wise to build wealth first. You can get a nice used car. You can buy something that's two or three years old. It's already had a big chunk of the depreciation taken off it. You can drive it for 10 or 15 years, and that's fine.

But I'd encourage you not to really start buying new until you become a millionaire. Now, for most docs, that's probably five to 10 years out of training. It's probably about the time that most docs taking care of their finances can become a millionaire. So it's not forever. Certainly by the time you're 40, you ought to be able to be buying all your cars new. So don't feel like you're having to live some deprived life for 50 or 60 or 70% of your life. You're going to be able to drive brand new cars. You're not totally deprived, but I'd encourage you to become a millionaire first.

All right, here's another guideline. You should never have a five-figure car loan. If you need a car loan, this is a consumer good. This is consumer debt. It depreciates. It's going down in value. I understand that some people need a car. But if you need a car, what you need is a $5,000 car. Maybe you can stretch it up to $10,000. If the need is $5,000 or $10,000, you should never have a car loan for more than what you need. And so, no one should ever really have a five-figure car loan. If you have a car loan, it should be a few thousand dollars and you should be paying it off very, very rapidly. This isn't something to keep around for years and years and years.

Now, I know it seems normal to have a car loan that people talk about what they pay rather than what it costs. This is like finance 101. Actually, finance 101 is don't carry a balance on your credit cards. If you haven't learned that, that's personal finance 101. Don't carry a balance on your credit card. But personal finance 201 is you don't buy cars on credit. You need to pay more attention to what the cost of the thing is than what the cost per month is, because they can make the cost per month anything they want just by stretching out the number of months that you pay for it.

The average car loan right now is $36,000 on used cars. That's the average car loan on a used car, $36,000 stretched over 68 months. That's the average. Half of them are more or longer than that. That's ridiculous. There's no reason you need a car loan that long.

Five-figure car loan is the max. And you should never have a second car loan. This is something you only do one time in your life. If you don't have any money, you are a resident, your car is dead, you need a new car, great. Go borrow $8,000 and buy yourself an $8,000 car.

As soon as you pay it off, you keep making those payments, but you make them to yourself. And in essence, you're using those payments to save up for your next car. And when you've hit $20,000 or $30,000 or $40,000 or whatever it is that you want to spend on your next car, you take that money, you go buy the new car, you sell the old car and you start the process again. One car loan in your life, zero to one, I'd rather have zero car loans, but one in your life, it's five figures or less.

Here's the other thing to keep in mind about cars. Safety. You care about your family. You care about yourself. You don't want to be disabled, you have this great earning ability.

Don't forget safety can be used to justify anything. You can justify bulletproof windows with safety. You can justify a dramatically more expensive car than you need with safety. Every year there's new safety features on cars. My new F-250, it practically drives itself. You just got to jiggle the steering wheel every now and then, and it'll track the distance between you and the car in front of you. It'll slam on the brakes if it needs to. It'll keep you in your lane. It's got all kinds of cool safety features that cars have on them these days. It's got cameras all the way around it so I can see if I'm running over anybody or anything. It's really pretty remarkable.

But there'll be something new next year that'll be even nicer. And if you're just going to go for maximum safety all the time, you're going to spend an awful lot of money on cars. So yes, you're going to get a significant upgrade in your safety going from a 20-year-old car to a five-year-old car. No doubt about it. And if you can afford that, go ahead and do it. But keep in mind that five years ago, the ultra-safe car is now a five-year-old car. It's okay to drive a car that's five or 10 years old. It does not show that you don't care about your family. It's still got lots of cool safety features on it, even if it doesn't have every single one of them. So be careful what you justify with the safety justification.

All right, enough ranting about cars.

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Until our next one next week, keep your head up, shoulders back. You've got this. The White Coat Investor community is here to help you do so. See you next time.

DISCLAIMER

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.