Transcription – WCI – 362

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 362 – Recasting a mortgage and beating a non-compete.

Today's episode is brought to you by SoFi, helping medical professionals like us bank, borrow and invest to achieve financial wellness. SoFi offers up to 4.6% APY on their savings accounts, as well as an investment platform, financial planning and student loan refinancing, featuring an exclusive rate discount for med professionals and $100 a month payments for residents.

Check out all that SoFi offers at whitecoatinvestor.com/sofi. Loans are originated by SoFi Bank, N.A. NMLS 696891. Advisory services by SoFi Wealth LLC. The brokerage product is offered by SoFi Securities LLC, member FINRA/SIPC. Investing comes with risk, including risk of loss. Additional terms and conditions may apply.

All right, it's that time of year again. We're doing our Financial Educator Award. This goes to somebody who is a practicing doc, but is spending some time on the side educating their colleagues, trainees, and students about financial literacy

We want to encourage you to nominate them for the award. You can do that at whitecoatinvestor.com/educator, and we will bribe you to do it. Not only does the person who wins the award get a cash prize, but the best nomination for that person also gets a WCI online course of their choice. So please give us those people who are doing a great job out there educating. They can only win once. If you've won in past years, you can't win again.

But we want financial education to be accessible to everybody. I can't go out and talk at every medical school and residency in the country. So other people have got to do it, or it just won't happen. We want to reward that, and we want to incentivize that. That's what this award is for.

We also provide slides for those who are not aware. Slides for presentation to medical students. Slides for presentation to residents. Slides for presentation to attendings. You can find those at whitecoatinvestor.com/educator as well. So you can do your nomination. You can get the slides. All that happens on the same page.

HOW TO GET OUT OF A TIMESHARE

All right. Let's get into your questions. First one's all about a timeshare.

Roy:
Hi, Dr. Dahle. This is Roy. I'm a hospitalist in California. I'm calling about timeshares. We have a timeshare that was gifted to us, so we paid no money for it up front. However, as I'm sure you can guess, the annual fees are burdensome, and at this point, I would love to just get rid of it. I would be happy to sell it or even give it away to get it off our plate.

My questions are, first, how do you do that? Can you recommend any sites, businesses, or avenues for getting rid of the thing, even if I'm willing to give it away? Also, if I give it away or sell it for very little, is there any way to take any kind of cap loss on the transaction? Thank you so much.

Dr. Jim Dahle:
All right. Timeshares. Good times, right? Never buy a timeshare new. If you must buy a timeshare, buy them used. You can often buy them for $0.10 on the dollar, $0.25 on the dollar. People are giving them away for free. Why in the world would you pay retail for a timeshare? There's no reason to. So, if you're in some high-pressure sales presentation as part of your vacation somewhere and being sold a timeshare, don't buy one. No reason to ever buy these things new.

Second, people can't gift you things against your will. You can decline the gift, even if it's left to you as an inheritance. You can just disclaim it. So you don't have to take something that somebody wants to give to you or has left to you in their will or their trust or whatever. Now, if you're the executor, this becomes your problem if nobody wants this stupid thing. But if you're not the executor, the easiest thing to do if it's something you don't want is just disclaim it.

One of the best resources out there for timeshares is a forum, actually. It's the timeshare users group. And there's all kinds of people in there buying, selling, renting timeshares, exchanging timeshares. These are timeshare experts. I think that's a great place to go to get advice, talk about your specific timeshare, maybe even a place to sell your timeshare. So that's the resource I'd recommend you go take a look at.

But mainly, man, just keep this in mind. Don't get into these things if you're not actually wanting to have it. And if you actually want to have it, buy it used. I've met a few people. Dr. Cory Fawcett loves his timeshares. But most people don't. So make sure you know what you're getting into. Don't buy it new. And have a plan for getting rid of it when you're done with it.

Now, as far as it being a capital loss that you can use, when something is gifted to you, you inherit their basis. If you inherit it, though, they die and you get it, then you get to step up in basis. So it's worth whatever it was when they died. And if it's worth nothing now, it was worth nothing when they died. So there's no loss there.

But at any rate, you can only take capital losses for investments. And if no one else has ever rented this thing except you, it's a little hard to argue it's an investment. It's more of a consumption item. And you can't really take capital losses on your consumption items. Otherwise, we'd all be taking capital losses every time we sold our car. And you just can't do that. Okay, I hope that's helpful.

QUOTE OF THE DAY

Our quote of the day today comes from Albert Einstein. He said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” It's like what I tell my kids all the time. I tell them, do you want to earn interest or do you want to pay interest? And they get it right every time. I'm not sure why it's so hard once we become adults.

All right. Let's talk about buying versus renting in residency. Wow. Boy. The White Coat Investor subreddit, which skews young, the audience there skews young, lots of medical students and residents, young attendings there, has been overrun this month, ever since Match Day, with people asking, “Hey, should I buy a home as a new intern?” It's unbelievable. I mean, there must be a dozen or more threads of people that wonder if they're an exception to this general rule that buying is probably not the right move in residency. But I suspect Joe asking this question has a similar question.

SHOULD YOU USE LEFTOVER LOANS FOR A DOWN PAYMENT IF YOU ARE GOING FOR PSLF?

Joe:
Hey, Dr. Dahle, this is Joe. I'm a fourth year med student in the Midwest getting ready to match here in a few weeks. My wife and I are trying to decide if we're going to rent versus buy. And we have some student loans left over that we didn't spend. And we were originally planning on just paying the government back with that extra money. However, I read an article recently that it could be wise if you're going for PSLF to keep that money for other expenses.

My first question is, do you know if it's allowed, if it's legal, to keep that extra leftover student loan money for, say, a down payment on a house for residency? I can't find anywhere online to get this question answered. So I thought I'd ask you. And then also, do you think that's a wise financial decision considering that the interest on these loans is anywhere from 6% to 7%? Thank you.

Dr. Jim Dahle:
All right. Well, there's two issues we need to discuss here. The first one is the incredible moral hazard introduced by our extremely generous federal student loan system currently. There are so many people out there right now that look at what has happened with student loans over the last five years, i.e. PSLF becoming more generous, i.e. SAVE as the most generous IDR program ever invented, and are starting to go, “Man, maybe I shouldn't use my money to pay for medical school. I've got money. My parents have money. But I'm just going to borrow the money anyway because there's a very good chance it's going to be forgiven.” And student loans don't even grow during residency now. Thanks to the SAVE program, any unpaid interest is just waived.

And so there's a lot of students asking me these questions. I had a speaking gig not long ago, and there's a line of students afterward, and at least half of them basically asked this question, “What should I do with this money? Should I borrow more than I need, etc?” Wow, those are the unforeseen consequences of our current federal student loan policy, a little bit of a moral hazard there. Remember, moral hazard is an economic term, where people make different decisions based on policy. It's not a moral or religious term. So don't send me hate mail saying I'm saying medical students are immoral.

If I was offered this proposition, I don't know, I'd probably do the same thing. I'd probably borrow just as much as I could for my education and see if I can't get it paid for by the taxpayer. Can't blame them for taking advantage of it. How is that any different from backdoor Roth IRAs or any other tax breaks or the 199A deduction, you name it.

But let's talk about a few things. First of all, fraud. When you sign your promissory note for your student loans, you're saying, “I'm going to use this money for school.” That's the contract you're making. So if you're using it for something besides school, you're being fraudulent. If you're taking it out to invest, you're being fraudulent. If you're taking it out to use for a house down payment, you're being fraudulent. So I'm not going to recommend you do that. But if you want to take it out and use it for school and use your money for something else, I guess you have every right to do that.

The second issue is the rent versus buy question. And, boy, I've talked about this for years. I've been trying to talk medical students who are graduating from medical school out of buying houses now for at least 15 years. I'm not very successful at it. It doesn't work very often. It doesn't matter what I say, they still buy houses.

The good news is sometimes that works out fine. I figure on average about a third of the time it works out fine in a three-year residency and about half the time in a five-year residency. Lately, it's worked out for everybody. If you're in a house for a year and sold it, you came out ahead because appreciation has just been so high. But on average, historically, that doesn't happen. You need to be in the house long enough for it to appreciate enough to overcome your transaction costs. It just costs money to get into a house. It costs money to get out of a house. I think on average, I estimate it at about 15% of the value of the house round trip. That's just what it costs. If the house doesn't appreciate about 15% or more while you're in it, you're not going to come out ahead financially.

It's a lot more complex than “my mortgage payment is less than my rent payment.” That's just ignorant. That's just not understanding that there are a lot more expenses to being a homeowner than a renter. Your rent is the maximum you're ever going to pay for your housing. Your mortgage payment is the minimum you're ever going to pay for your housing. There are just so many other expenses. There's taxes. There's insurance. There's maintenance. You got to go get a lawnmower. You got to buy a snow shovel. Things break. And of course, most people who buy a house, they don't want to have it exactly the same as when they bought it. So they do some sort of renovation and that costs money. Well, you don't do that when you're renting a house.

Other people are like, “I'm sick of being in an apartment.” Guess what? You can rent a house. It's okay. You can rent a house. It's got a yard. It's got a driveway. It's got a garage. You can put your dog in the back. It doesn't have to be an apartment just because you're renting.

And then there's a lot of people that say, “Oh, you're throwing money away when you're renting.” Well, no, you're not. You're exchanging money for housing. Are you throwing money away when you buy groceries? That's just turning food into excrement. You're throwing it away. No, you're exchanging it for food, for necessary sustenance, just like you are putting a roof over your head when you pay rent.

Besides, if paying rent is throwing away money, so is paying property taxes and realtor fees and insurance on your house and all those other expenses associated with homeownership. So if you're going to be in the house for five years for residency and you know you're not going to leave that city afterward and you know you're going to be happy staying in the house for two or three more years afterward, then yeah, it probably makes sense to buy.

But for most residents, you're not going to be there longer than three or five years. And even if you are there longer than three to five years, you don't want to be in that house. And it's probably not going to make a great investment if you're buying it to live in it. So it doesn't really make sense to be buying it.

The default option ought to be rent. Now, I know I'm not going to talk you out of buying it. And that's fine. Maybe you'll still make money. I think it's less than a 50% chance, but you could make money. People certainly have made money in the past buying during residency.

But even if you don't make money, even if the worst happens, the house drops like crazy, like the house I bought in 2006, you can't sell it at all four years later. You got to put a renter in there. You're renting it for cash flow negative situation. It's not the end of the world. You know why? Because you get saved. You get saved by this bump in your attending income. At the end of residency, your income goes up 3-5X. And you know what? There's enough income there that you can make up for this mistake.

So it's not the end of the world, but I still wouldn't recommend it. If I was starting residency today, I wouldn't buy a house. I would go rent something. Okay. I hope that's helpful. Lots to talk about with that one.

PAYING YOUR MORTGAGE OFF EARLY

Here's another one about mortgages.

Speaker:
Hi, Dr. Dahle. I have a question on paying off a mortgage early. If the interest rate on the mortgage is 6% and you pay off the house early, you're basically getting 6% return on paying off the house early, which functions as a negative bond. Now, once the house is completely paid off, there is equity in the house that is not working. It's not invested, but that equity would be paying you a dividend, which is rent that you would have paid elsewhere if you didn't own the house.

If I understand this correctly, paying off the mortgage early gets you two returns. The first return is the 6% by paying off the mortgage early. And the second return is that dividend you're receiving from the equity. Did I understand this correctly? Am I missing something? Or is it just one return, which is by paying off the 6% mortgage early? I appreciate your thoughts on this. Thank you.

Dr. Jim Dahle:
All right. A few subjects in there to talk about. Mostly you have it right. Let's just clarify things a little bit. First of all, debt is like a negative bond. Paying off debt is like investing in a bond. The bond pays you 5%. That's like paying off a 5% debt. That's the nice thing about paying down debt is it provides a guaranteed return. And if it's high interest rate debt, then you get a very high guaranteed return. If you got a credit card at 29%, you're literally getting a 29% investment return by paying that down. Whether you pay it off or not, that's what you're getting.

So yeah, I'm a big fan, especially for high interest debt, of paying it off. I think it's a great thing to do. I think it develops lots of good financial muscles that will help you to be successful saving later. And I think it's generally a good thing.

I also wouldn't want to be making mortgage payments on a house for 30 years. So if you don't put anything extra toward a 30-year mortgage, you're going to have it for 30 years. So if you want to be debt-free before then, you're going to have to pay something extra.

However, I think you're a little confused because you're conflating a house with the mortgage. Once you buy the house, these are totally separate things. Whether the house appreciates or not has nothing to do with the mortgage. The return you get by paying down that mortgage has nothing to do with the house. So you can pay down the mortgage, the 6% mortgage, you get 6% guaranteed return. So that's cool.

The saved rent dividends come from buying the house, though. They don't come from paying off the mortgage. You're saving the rent, whether you have a huge mortgage, whether you have a tiny mortgage, whether you have no mortgage at all. That has nothing to do with the mortgage. That's because you bought a house.

Now a house is mostly a consumption item. You pay it, it doesn't pay you, but it's probably the best consumption item out there. It generally appreciates over time, at least the land on which it sits. And it pays you those “dividends” of saved rent.

I'm a big fan of owning houses. People think I say you shouldn't own a house. Well, I don't think you should buy it for your three-year residency, but I'm a big fan of buying one. I own my house. I think it's generally been a good thing in my financial life. Certainly going forward, I expect it to be better and better and better and better.

Now, the wonderful thing about paying off your mortgage is it improves your cash flow. If you're paying $3,000 a month for a mortgage, you pay off the mortgage, all of a sudden you got a $3,000 raise to do whatever you want. You can spend it, save it, give it, whatever you want. I think that's a really cool thing about paying off your mortgage or really any debt, but you need to separate these two things in your mind. And I think that's why you're confused is because you're trying to put them into the same bucket.

All right. Thanks by the way, for those of you out there, whatever you're doing. Our survey tells us that you guys are driving to work, driving home, working out, walking the dog, or just doing chores around the house.

Whatever you're doing right now, thanks for doing it. It's not what you do for a living. I'm sure nobody's listening to this while they're seeing patients or seeing clients or whatever, but thanks for what you're doing. It's not an easy job. That's why you get paid well. And here at the White Coat Investor, we want to help you convert that high income into a high level of wealth so that you can have the freedom that you deserve.

We believe quite sincerely that a doctor who has their financial ducks in a row is a better doctor. We think they're a better parent, a better partner, a better physician, because they're not worried about money. They're making their decisions without regard to the financial consequences of them, because finances have ceased to matter to them in their lives. And I think that's a beautiful thing. So thanks for what you're doing. It's important work, and it's often unthanked work.

RECASTING A MORTGAGE

All right, let's talk about recasting a mortgage. First, a question.

Speaker 2:
Good morning. I was wondering if you could speak to recasting a mortgage. My brother has done this a few times, and it seems like a legitimate option where you could put a lump sum and then decrease your monthly payments on your mortgage without having to go through the whole refinancing process. I've never heard of this prior to him, and I looked into it, and it seems legit, but it almost seems like I might be missing something. So I'd appreciate you speaking on this.

Dr. Jim Dahle:
Okay, recasting a mortgage is legit. It's not some sort of a scam or anything. It's an option that you can do. When would you recast a mortgage? Well, you would recast a mortgage when you had a lump sum of money you wanted to put toward the mortgage, but not necessarily shorten the term of the mortgage. You don't want to lengthen it either, but you don't want to shorten how long you're paying on it. You just want to have lower mortgage payments.

Some people put additional money toward a mortgage because they want to be free of their mortgage sooner. That's not what you're doing when you're recasting a mortgage. You're putting money toward a mortgage because you want a lower payment.

But the cool thing about recasting, and that's why people are more interested in it now that interest rates have gone up, because people have these 2.5, 3, or 4 or 5% mortgages, and new mortgages are 6 and 7 and 8% right now. And so, they want to keep the old mortgage. They want to keep the interest rate. They want to keep the terms. And when you recast it, you can do that. All you're doing is putting money in, and then the lender is making a new amortization table. So your payments go down because you don't have as much of a principal balance. That's what recasting is.

Now your alternatives are to refinance it. Now there's fees for recasting. They're probably bigger for refinancing, but you're going to pay fees either way. But when you refinance, you generally start over with the mortgage. You go back out to 30 years. So you do get a lower payment, but you've lengthened how long you're going to be paying on the mortgage. When you recast it, you're keeping the same length you have left. If you got 20 years left on the mortgage, you recast it. You still got 20 years left. You just have a lower payment because you put a bunch of money into the mortgage.

I hope that's helpful as far as what recasting a mortgage is. If you actually want to pay the thing off sooner, just put extra money toward the principal on it. You don't have to recast it. Recasting is all about getting lower payments. By the way, you can't recast VA or FHA mortgages, but a lot of other lenders will work with you, including some jumbo mortgage lenders.

CAN FINES FROM BREAKING A NON-COMPETE BE WRITTEN OFF AS A BUSINESS EXPENSE?

All right, let's talk about non-compete clauses.

Speaker 3:
Hey, Dr. Dahle. Thank you for all you do. I wanted to ask you a question about non-compete clauses. If you end up violating your clause and have to pay a penalty, is the money that you paid for the penalty, is that tax deductible or is that something that you can write off as a business expense? Thank you.

Dr. Jim Dahle:
All right, the same caller has another question. Let's listen to this one before we start talking.

DO YOU HAVE TO TELL YOUR PREVIOUS EMPLOYER IF YOU PLAN TO BREAK THE NON-COMPETE?

Speaker 3:
Hey, Dr. Dahle. I have another question on non-compete clauses for you. If you end up signing a non-compete clause and then later decide that you're going to violate that, would you suggest being upfront with your employer and notifying them of that? Or is that viewed as their duty to find out that you have violated that? Or how would you go about addressing that situation if you found yourself violating the non-compete?

Dr. Jim Dahle:
Okay, let's talk in general about non-competes and then we'll get to these two specific questions. A non-compete agreement, also known as a restrictive covenant, is something that keeps you from working near your old employment for a certain period of time.

And the reason for these is to protect the employer's investment in you. Imagine you've got a practice in a small town and it's getting really busy and you could use some help. You pay for a new doc to come out and join the practice. You pay that doc's moving expenses. You pay that doc a signing bonus. You bring that doc out and you teach them how to run an efficient practice. You introduce them to the community and all your patients. And then two months later, the doc leaves your employment, quits the job, goes across the street, opens their own practice.

How would you feel? Well, not so great. And so, a non-compete is designed to try to protect you from that sort of a situation. And you put a radius around the practice. You say, “Well, you can't start a practice within five miles of this practice. And you can't do that for a year.” Now that's a relatively reasonable non-compete. Few would argue that is not reasonable.

Now, if you tried to make the non-compete a hundred miles and five years, that's not a very reasonable non-compete. You might have some trouble enforcing that. And so the important thing about a non-compete, if you want to actually be able to enforce it as an employer, is that it'd be reasonable and allowed in your state. Because there's a few states that don't allow non-competes. California, Colorado, Oklahoma, North Dakota, and Minnesota. They're fully banned in those states. You can't have a non-compete agreement. There are no restrictive covenants in those states.

The second point about a non-compete from the employee perspective, docs hate these. I've done surveys, 90% plus docs think non-competes should just be totally outlawed, that they're terrible, etc, etc. Well, I don't necessarily completely agree because of that situation, like I mentioned earlier, that's really not fair to an employer.

But having a non-compete for a lot of specialties is kind of silly. Think emergency medicine, anesthesiology, radiology. These sort of hospital-based specialties, pediatric ICU, those sorts of things. To say you got to go somewhere else because you're going to hurt our business. No, you're not going to hurt their business. Nobody comes to my emergency department to see me. They're coming there because they're having an emergency. And they're picking the emergency department not based on who the docs are.

When I came to my group, they had a non-compete. And I'm like, “Well, this is silly. Is your goal that I can't stay in town if you fire me or if I decide to quit?” They said, “No, that's not our goal. We just don't want you to steal the contract.” We rewrote the non-compete to said I couldn't steal the contract. And I think that's really all you ought to be signing as any sort of a hospital-based employee. It's just silly for a hospitalist to be signing a non-compete agreement. That just hurts the doc and doesn't help the employer. If there's no benefit to the employer, that seems kind of silly to me.

Now, if you're worried about your investment or something, your expenses that you paid for them to come out or anything like that, well, you can just require them to pay that back if they don't stay a certain length of time. You can put that as a separate clause in the contract rather than have a restrictive covenant to try to deal with that.

All right. Those are my general thoughts on non-competes. By the way, the FTC is trying to pass a rule that bans non-competes. The final ruling on that is expected here anytime. Those in the know are saying it should come out like April, this month. It's a problem though, because it's really broad. And so those in the know also think this headed to litigation, which means it's probably not really going to be final for another year or two.

If you're counting on this FTC ruling to go through in its current form, or you're counting on it to happen relatively quickly, I think you're naive and short-sighted. It's going to take a while. I think it's going to pass in some form, but it's probably not really going to be applicable to the lives of doctors for another year or two, would be my guess.

All right. Now your two questions. Oh, one more thing I ought to say. The time to deal with a non-compete is when you're signing the contract. Don't come back later and go, “Oh, I want to violate this non-compete.” Don't sign a non-compete that you have any sort of possibility that you're going to need to violate. If you cannot get a job in your town, if you quit and it's going to force you to move to another city, don't sign that non-compete.

If you're not okay commuting as far as you need commute to get around that non-compete for a year, however long the non-compete is, don't sign it. Negotiate it upfront. Get your contract reviewed. We've got a recommended page for contract review firms. If you don't understand what the contract is saying, pay them to tell you what it's saying. And if it is not okay with you to have this non-compete, don't sign the contract. You're in the driver's seat most of the time as a fully trained doc. They need you more than you need them. So, don't be signing non-competes that you're not willing to abide by.

All right. Now, the first question, is it deductible if you end up having to pay the non-compete? Well, if you're going from one employee job to another employee job, probably not. Starting in 2018, the Tax Cuts and Jobs Act made it so unreimbursed employee expenses are no longer deductible. You used to deduct those on Schedule A. Can't do it anymore. So, if you're just going to be an employee and this is an unreimbursed employee expense, you can't deduct that.

However, your new employer could pay it for you. And that would be a business deduction for them and take it on Schedule C or whatever's applicable for their form of business. And if the new business is you being a sole proprietorship or an LLC or whatever, then it's a business expense for your new business. And you could take it on Schedule C as a business expense or whatever. I wouldn't be afraid to take that. I think that's a legitimate business expense if you've got to pay liquidated damages or some other sort of price to the new employer.

That's not always what they require, though. It's not always you can pay your way out of this. Sometimes, they get a court judgment that keeps you from practicing. No matter how much you pay, you might be willing to pay $10 million. And they're not willing to take it because they're mad at you and they're going to enforce it. And dang it, you are not going to work within five miles of them for the next year. And they don't care that you bought a building and opened a practice and all that. The court is going to force you to close it.

So, this brings us to the second question. What should you do if you want to violate your non-compete? Well, there are legal things and there are ethical things. Legally, I don't think there's any obligation for you to tell them. I guess if they never find out, they're never going to come after you for it. But the likelihood of that happening seems awfully low to me. It's just not that hard to figure out where you're practicing. Go Google your name and it'll pop right up and they can figure out that you're not 10 miles away or whatever the non-compete said you had to be.

And now, this puts you into a situation of uncertainty. You don't know what's going to happen. You don't know if they're going to take you to court or just forget about it. You don't know what they're going to ask for when they get to court. You don't know if you're going to win or they're going to win. There's a lot of uncertainty.

I think from that perspective, as well as an ethical perspective, it's probably best to go and talk to them. Maybe they just let you out of it. Maybe they don't. Maybe you can work something out that you can pay them a certain amount of money and they'll let you out of it. “Here's $100,000. Let me out of my non-compete.”

And if nothing else, at least you'll be crystal clear on what's going to happen if you go ahead and violate it anyway. And I think that's a good thing just to get rid of that uncertainty will probably reduce your legal fees. But like I said, the time to deal with this is before you sign, not after you sign, not when it's time to get out of the non-compete. That's going to be messy.

It's probably worthwhile talking to a healthcare contract attorney in your state as well before doing something like this so you have a good idea of what's going to happen if you actually do have to go to court about your restrictive covenant.

All right, I hope that's helpful and I answered your questions about non-competes.

SPONSOR

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Don't forget about our Financial Educator Award. There's an award both for those who get selected to win the award as well as the nominator of the award. You have until the 26th to submit that. It's at whitecoatinvestor.com/educator. That's also where you can find the slides we give away to help you give presentations to those you care about.

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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.

Transcription – MtoM – 165

INTRODUCTION

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

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 165 – Pediatric resident gets back to broke.

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All right, a couple of things you need to know. One is we are doing our Financial Educator Award. The application is only open until April 26th. So if you know someone who's passionate about improving financial literacy among their colleagues, trainees, and students, please nominate them for the highly coveted 2024 Financial Educator of the Year Award. The winner of the award will get 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. Something like Fire Your Financial Advisor, or No Hype Real Estate Investing, or Continuing Financial Education 2024. Whatever you like, if you win, you get it. If you'd like to nominate someone, visit www.whitecoatinvestor.com/educator, and you got to do it by April 26th.

We believe in making financial education accessible to everyone, and so we offer free presentations. People are always emailing me going, “Hey, I need some slides”, whatever. We provide these. They're on various financial topics. They're geared toward medical students, toward residents, or toward attendings. You can download those presentations today. You can find them at whitecoatinvestor.com/educator.

They are free. Like 98% of what we do here with the White Coat Investor, it's totally free to you. So go get some slides or give some presentations for your colleagues and trainees, whether it's informally on rounds, whether it's a formal grand round style presentation, whatever. Let's get this information out there and help us all to work together to make financial literacy a priority in the medical community.

All right, we got a great guest today with a pretty unique milestone. I'm looking forward to it, but stick around afterward. We're going to talk for a few minutes about mutual funds. Sometimes I get criticism that I spend too much time talking about real estate, which seems like a shame given that 85% of my portfolio is in mutual funds, but we're going to talk about those and why I think there's such great ways for people to invest.

INTERVIEW

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

Brad:
Hey, thanks so much for having me, Jim. I’m happy to be here.

Dr. Jim Dahle:
Thanks so much for being on here. We love having people on this podcast. This is the one where we try to use your cool accomplishments to inspire others to do similar things. But before we get into what you've accomplished, let's introduce you a little bit to the audience. Tell us where you're at in your career and what part of country you're in.

Brad:
Yeah, I am a PGY2 in a categorical pediatrics residency, and I am in the Intermountain West.

Dr. Jim Dahle:
Very cool. Okay, tell us what we're celebrating today.

Brad:
Today for me, we are celebrating being back to broke as a second-year resident.

Dr. Jim Dahle:
Awesome, that's pretty exciting. And you got there in a little bit different way, I think, than most people do. I would say most people probably don't make it back as residents, but you were fortunately able to do so. But talk to us about these kind of unique circumstances that you're in.

Brad:
Yeah. In my case, I was able to get back to broke because of good family circumstances that I was able to, I suppose, take advantage of. There was a family real estate business that started a couple of generations back, and then as generations have continued to move forward, the assets were distributed in such a way that all the kids, grandkids were shareholders in the business. And now as we're all adults, we got voting privileges within the company.

And so, as there are now, at last I counted, 32 voting members in the business, it got really, really difficult to get everyone on the same page to really do anything. And an opportunity came forward for me to be bought out by some of the other family members. And my wife and I took a look at our financial plan that we were able to put together thanks to the Fire Your Financial Advisor course. And boy howdy, did it tell us that this was the time to do it. And so, we were able to be bought out and then take that cash we were able to get from that and deploy it in such a way that we're now positive on our net worth.

Dr. Jim Dahle:
Pretty awesome. And there are a few times in your career when money would be more useful than right now, I imagine. You've got lots of uses for money and probably not that much income. About what do you make as a resident, as a PGY2 in your program?

Brad:
For me right now, it's just about $70,000.

Dr. Jim Dahle:
And are you doing any moonlighting, any other sort of income?

Brad:
I'm working on getting that going. It's somewhat limited of my program.

Dr. Jim Dahle:
Yeah. And does your spouse work?

Brad:
She is a stay-at-home mom, but she does do some sports coaching on the side.

Dr. Jim Dahle:
Okay. So a little bit of extra income there, but mostly, you're living on a five-figure income.

Brad:
Yeah.

Dr. Jim Dahle:
About how much was this windfall that came your way as your share of this real estate company?

Brad:
Total, it was about $130,000 and it was distributed to us over a period of two years.

Dr. Jim Dahle:
Okay. Tell us about what you did with it.

Brad:
Yeah. We rather aggressively started paying down on some of the debts that we have that we wish that we didn't. So we had a couple of car loans we were able to get rid of. We are not going to say made the mistake, but made the mistake of buying a house at the start of medical school. So we were able to pay down a significant portion of our mortgage. And then also just maxing out Roth IRAs, maxing out our HSA, and now working on maxing out my 403(b) for the year.

Dr. Jim Dahle:
Very cool. So do you have a bunch of student loans?

Brad:
I do. Yeah. Right now we're at $266,000.

Dr. Jim Dahle:
Wow. Okay. And what's your plan for student loans?

Brad:
I'll be pursuing PSLF. I am a resident now planning on doing a fellowship. So that'll get me six years on the PSLF route and then planning on finishing out the four years as an attending.

Dr. Jim Dahle:
Okay. That explains why none of it went toward your student loans.

Brad:
Yes, absolutely. Because there's already a plan for that and that's going to be taken care of later.

Dr. Jim Dahle:
Cool. Okay. So, you're back to broke. Let's run through your balance sheet. Tell us about your assets and then about your liabilities.

Brad:
Yeah. Right now the biggest liabilities are the mortgage that we have. It's just over $200,000. And then the student loans, as I said before. And our assets primarily are in the retirement accounts that I discussed before and then also tied up in our home still. So home equity is definitely one of our big ones.

Dr. Jim Dahle:
Okay. So you bought this home at the beginning of medical school?

Brad:
Yeah. 2018.

Dr. Jim Dahle:
Okay. And you're obviously in the same place doing a residency. Tell us about your thought process there as you were applying to residencies, knew you had this home, knew that would certainly help that you already had a home in that location. How did that affect how you applied to residency?

Brad:
Having the house really didn't. It was just something that if we happened to match where we wanted to, great, we were able to stay. But if not, we already had plans that we were going to sell the house is what we decided when we were making our financial plan. We don't like the idea of being a long distance landlord. So it was definitely going to be a sell the house almost regardless of what the market was like at the time.

Dr. Jim Dahle:
Very nice. It's worked out pretty well for most people in the last five or six years, especially if you can stay in the house for five years, which you're going to be able to. Between four years of med school and three years of residency, you'll be in there seven years and hopefully do quite well with it.

Brad:
Yeah, that's the hope. Right now things are looking up for it, but my crystal ball is cloudy. I have no idea what the market is going to look like in a year and a half when we're looking to move for fellowship.

Dr. Jim Dahle:
Yeah. Okay. Let's talk about this discussion you and your spouse had about what to do with the cash. How'd you decide between paying down debt and investing and putting it in various accounts? How did you prioritize those?

Brad:
It was actually really simple. We opened up our financial plan and there is a section in there that we listed out. This is what we will do in the case of a windfall. This is the amount that we will put towards debt.

Dr. Jim Dahle:
Wow. You had a windfall section in your financial plan.

Brad:
We have a windfall section in our financial plan.

Dr. Jim Dahle:
Awesome.

Brad:
Yeah. It really was as simple as opening up the plan, looking at it and doing what the plan said. And it's worked out really well for us.

Dr. Jim Dahle:
Very cool. Your cars are all paid for now. You've got money in accounts. It's growing. You're investing. You've got a plan for your student loans. You've got a plan for the house. How does it feel to know you're kind of on the way?

Brad:
So much better than it did before when we were staring down a half a million in debt total. And prior to having our financial plan in place, we really felt lost. Being able to look at that, be on the same page and actually see our plan move us in the direction that we want to is really comforting and reassuring.

Dr. Jim Dahle:
Now we just did our annual survey for the White Coat Investor. And we asked our audience, do you have a written financial plan? And it was about 50-50. 50% of White Coat Investors do not. What do you say to those people?

Brad:
I say that looking at where I am at now, I am only where I am because of our financial plan. It made it so that we were able to make the difficult decisions when there wasn't actually any money on the line. We were able to sit down and have, “Well, do we stay in business with family? What do we do if this kind of thing happens?” It wasn’t the “We have the next 72 hours to make a decision” and it's a six figure decision. And that by itself just makes it so much easier. If, and in my case, when those things do come along, that can potentially be really, really tough conversations to have it beforehand when there's no money, the emotions are low. I can't recommend enough having a financial plan just for that aspect of things.

Dr. Jim Dahle:
Yeah. Let's turn the page just a little bit. We've got a lot of White Coat Investors that are very successful. Some of them have a significant real estate empire and they're thinking about their legacy. They're thinking about their estate planning and they hear your story and they're like, “Huh, I wonder what my third generation will be doing with what I'm building now.” What advice do you have as someone in that third generation that you would give to the person in the first generation about how they set things up?

Brad:
The biggest advice that I would have is that it can be great from a tax planning standpoint to be able to pass off some of that income to others, but setting things up in a way that makes it fair and advantageous for them not to get too deep into the weeds. But there were times as an undergrad that I would get a four figure tax bill that I didn't have any income from or the ability to pay. And it was just because of the way that things were set up.

So making sure that those things are also taken into account when you're planning and then also being okay with the fact that your posterity might not want to do the same things with their money that you wanted to do and recognizing that is a distinct possibility.

Dr. Jim Dahle:
Very cool. Good advice. All right. Well, there's somebody else out there that is in your situation. Maybe they're a med student, maybe they're a resident, maybe they're an attending and they're like, “Oh man, I really ought to get a financial plan. I've been putting it off for whatever reason or I'm scared to see what bad a shape my finances are in.” What advice do you have for that person as far as steps to take to get to where you're at?

Brad:
Well, number one, you do have to actually look at things. Putting your head in the sand is not going to get you where you want to be. I do recommend the Fire Your Financial Advisor course. That is how my wife and I were able to put together our plan. I recommend that to co-residents, medical students that I talk to all the time.

But the biggest thing is getting a plan in place really as soon as you can. If you're a medical student, having it in place before you graduate, because there are tasks that you will need to do almost immediately your intern year to set yourself up well. If you're a resident about to graduate, you really need to know what you're going to be doing with that first paycheck. If you're a new attending or a mid-career attending and you're still not where you want to be financially, having that written plan is really going to be, in my opinion, one of the best things to get you there.

Dr. Jim Dahle:
Well said. Well, Brad, congratulations on your success. You guys are off to a fantastic start. That's going to allow you to build wealth and manage your debt well and allow you to concentrate on those things that really matter. Your own wellness, your patients, your family, et cetera. Congratulations on your wonderful family and kid. I'm excited for you and your career and everything you're going to see going ahead. I'm glad you've got your financial ducks in a row. I think it's going to pay a lot of dividends for you.

Brad:
Well, thank you so much. I appreciate it.

Dr. Jim Dahle:
All right. Man, I couldn't have asked for somebody to plug Fire Your Financial Advisor any better, could I? If you're interested in that course, by the way, you can go to wcicourses.com and you too can get fire your financial advisor.

Yes, there's a charge for it. I mentioned earlier in the podcast that 98% of what we do at WCI is free. That is not in that 98%. That's part of the 2% that is not free, but it comes with a guarantee. Basically, no questions asked, money back, one week guarantee. If you've taken less than 25% of the course, just say, I want my money back and we send your money back.

It doesn't happen very often, maybe 3% of the people that buy it, 1% of the people that buy it maybe. Everyone else is thrilled with it because it really does save you a ton of money versus the alternative of going to hire a financial advisor to do this for you. Check that out at wcicourses.com.

FINANCE 101: MUTUAL FUNDS

All right. I promised you we were going to talk about mutual funds. What is a mutual fund? A mutual fund is just a bunch of investors pooling their money together to invest. What do they get for doing that? Well, they get a few things. They get professional management. You're not going to be able to hire somebody for what you pay for management fees. You're not going to be able to hire an individual to just manage your money because it's practically free if you're investing in the right mutual fund.

You get professional management. You get economies of scale. You band it together with thousands or millions of other investors. You get these economies of scale. You get better prices when you're going to buy things.

You get diversification. There are rules. Mutual funds can't put all their money into one investment. A mutual fund cannot be the Tesla mutual fund and just invest in Tesla stock. You can't do that. It's required to not put more than a certain amount into any given stock or whatever the mutual fund invests in. You got to have a certain number of investments in the fund. There's regulations on this stuff. That's a benefit, that diversification as well as that regulation.

You also get liquidity. You can sell this investment any day that the markets are open. In fact, if you buy an exchange-traded fund with type of mutual fund, you can sell it any minute the market is open, completely liquid. By the time it settles within a day or two, you've got cash.

So, it's a very liquid investment. It's easy to diversify. It's easy to build a portfolio. It's just a great way for people to invest, especially in the beginning. As you can tell, I've been investing for 20 years and it's still the lion's share of my portfolio is in mutual funds.

Now, there are two basic types of mutual funds. The first type is what's called an actively managed mutual fund. In that type of a fund, that professional manager is trying to, we'll use stocks as an example, although mutual funds can invest in stocks or bonds or a real estate investment trust or all kinds of different assets a mutual fund can invest in. We'll just pretend they're all in stocks at this point.

In an actively managed stock mutual fund, that professional manager is trying to pick the good stocks, the ones that are going to outperform the market and avoid the bad stocks. It turns out that's a really hard thing to do, especially after the cost of doing so, and especially, especially after the tax cost to you of somebody trying to do so.

So, what's the alternative to active management? Well, passive management, a.k.a index funds. These are funds whose goal is not to beat the market, but to match the market. Beating the market is very difficult. In fact, you'll see long-term numbers, even before tax, that only something like 10 to maybe as high as 20% of funds will beat the market over time. After tax, it's lower than that. And in some asset classes, it's dramatically lower than that, but that's about what you see.

The truth is, it's really easy to match the market. Simple. You don't have to have an army of analysts going out and talking to all these people running companies. There's hardly any turnover in the fund. You just buy all the stocks in the index, and that's it. It's pretty easy. And it's basically free.

If you go to Fidelity, they have 0% expense ratios. That's the percentage of the fund that's used for the fund's expenses every year. At iShares and Vanguard, a lot of these funds are two basis points, three basis points, four basis points, seven basis points. That's basically 0.02% per year or 0.07% per year. It's nothing. It's free. It's free compared to paying for anything else in financial services. It's a pretty awesome benefit that you can own all of the stocks in the world, essentially for free.

These are the most profitable companies in the history of the world. In the last two or three plus millennia, these companies make more money than any other companies ever founded. And you can be an owner of those companies all in 30 seconds just by going to Vanguard or your favorite brokerage and buying the iShares or a Vanguard or Schwab ETF that invests in these companies.

So, it's a pretty powerful way to invest. Just keep buying. Stocks go up, stocks go down. Just keep buying, keep your expenses low, and you'll be amazed what a mutual fund portfolio can grow to over time.

SPONSOR

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A physician contract lawyer is included and can even negotiate on your behalf, alleviating the stress that can go along with reviewing complex legal terms. They have flat rate pricing and flexible schedules that work for your schedule. Use code WHITECOAT10 for 10% off.

All right, this is the end of another great Milestones to Millionaire podcast episode. We hope you enjoyed that interview with Brad. We hope it inspires you to get a financial plan in place that will lead you to financial success.

Until next time, keep your head up, shoulders back. You've got this.

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.