Dr. Jim Dahle:
This is White Coat Investor podcast number 327 – Send your kid to college.

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Very timely ad actually. At the end of this month, federal student loan payments restart and interest starts accruing again. A lot of you that have put off refinancing for a few years, now's the time. See if you can save some money there.

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All right. Well, it's the middle of summer. Actually, we're getting toward the end of summer by the time you listen to this. It's the middle of summer while I'm recording it. While you're listening to it, I'm probably off climbing in the Tetons with my son. It's his turn to go climb the Grand.

Summer is tough. Kids are out of school. You're running around trying to spend time with them, knowing you only have 18 summers, but you've also got your practice or whatever it is that you do pulling you away from family time and other interests you might have.

So, when it does that, recognize that it is a wonderful profession and it is a wonderful opportunity to help others. And if nobody thank you for it, let me do it. Thank you for what you do.

Hey, we want you to know about this email series we have. We call it the Financial Basics. And this is a little different from Boot Camp. If you've never signed up for the newsletter, go sign up for the newsletter, whitecoatinvestor.com/newsletter. Sign up for the newsletter.

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Yes, we have a business. Yes, we're trying to make money. Yes, we have to make payroll, but you know what? I'm not sitting in this chair because I need to make payroll.
I'm sitting in this chair because I care about you. I care about your finances, I care about your financial freedom. I care about what you can do better in your life when your financial ducks are in a row and you can be a better doctor, you can be a better parent, you can be a better partner.

Let's get into it. Let's talk about your questions today. This is the White Coat Investor podcast. It's driven by you, what you guys want to talk about. If we're not talking about the subjects you want to cover, you need to be leaving questions on the Speak Pipe, whitecoatinvestor.com/speakpipe or emailing them in to [email protected].

We talk about what you want to talk about. Apparently what people want to talk about today is saving for college. So let's get Brian on the line and take this first question.

SHOULD YOU HAVE A DIFFERENT 529 ACCOUNT FOR EACH OF YOUR CHILDREN QUESTION

Brian:
Hi Jim, this is Brian from the Northeast. My question is about 529 accounts. We currently have one child with a second on the way. We have a 529 account for child number one. My question is, should we create a second 529 account for child number two or would it be more efficient to just have the one 529 account and then change beneficiaries to child number two, when it comes time to pay for her college?

It seems like just having one account will minimize the risk of unused funds and therefore be more efficient. Any downside to just having the one account and changing beneficiaries?

For what it's worth, we do plan on funding both of our kids college expenses, but it's also not mandatory that we have 100% of expenses in the 529 accounts, as we'd be perfectly fine cash flowing college expenses at the time. I look forward to your answer. Thanks for all you do.

Dr. Jim Dahle:
All right, great question, Brian. This seems like you're trying to solve a problem that doesn't exist in my mind. I've got 34 529 accounts. 35 now. I've got one for each of my kids. I got one for each of my nieces and nephews. Right now I've got one, two, three, four. Four of them withdrawing from it right now. And I'm funding them all each year. Something's going into them. Some of them are getting their uncle match and others are withdrawing money and spending it on college.

It's not that big a deal to have more than one account. Trust me, I got 35 of them. No big deal. Open a second account for your other kid. What are you worried about? That you'll have two accounts on the page when you log in? I don't get what you're so concerned about.

It would be more of a pain to change the beneficiary than to manage a second account for 18 years. Just open a second account for the other kid. Now you can always if you feel like you're not treating them equally, you can move money from one to another by changing the beneficiary. You can change the beneficiary.

I guess if you had 13 kids, you could have one account and just change the beneficiary every time another one enrolled in college. But I don't know, it feels like you're trying to solve a problem that doesn't exist. Just open a second account. One account for each kid, I think is the best way to do it.

All right, next question is from Aaron also about 529s.

HOW MUCH SHOULD YOU INVEST IN A 529 FOR THE TAX BENEFIT FOR A TODDLER QUESTION

Aaron:
Hi Dr. Dahle. Thank you for all that you do. This is Aaron from the southeast. My question is, what is the maximum that you would consider contributing to a 529 plan for the tax benefit for a toddler? This would assume that the funds are available to pay for it. It's just a matter of putting it in there for tax benefit. This would be for K through 12 private school as well as for college tuition. Just having a hard time of where to top off the maximum amount allowing for growth given 16 plus years of time. I appreciate your input. Thank you.

Dr. Jim Dahle:
Well, you're looking for a simple answer to a complex question. There's not anywhere near enough data that you've given me in your 42 second question to actually run numbers and give you the answer to this because it's different for everybody. It varies by a lot of things.

One's what you're going to use the money for. Like in your case, you're talking about using it K through 12 as well as in college. My kids are in public school K through 12, so we don't have to put anything in there for K through 12. Obviously my kids need a smaller 529 than yours do.

Likewise, you got to think about, “Well, how bad of a thing is it if you end up overfunding it?” It’s not a big deal to me, I'm just going to change it to the grandkids. I'm going to change the beneficiary to the grandkids. Other people are like, “Well, I'm not going to pay for that. I want to spend the money that doesn't go toward college. I really don't want to overfund them.” So they got to be a little more careful how much they put in there.

You also have to look at, “Well, where are they likely to go to college?” or in your case, “Where are they likely to go to kindergarten and how much does that cost?” But if you're really talking about putting K through 12 and college expenses on it, you can put a lot of money into a 529. States all have their max of how much you can have in there, but there's nothing that keeps you from going to another state and put more in there.

Remember the benefits of a 529. Some states, and you should know this for your state, we'll give you a deduction or a credit for a certain amount of money put into it. I would probably try to put in at least that much money. I think that's a pretty good tax benefit. It's not that much though. In my case, if I put $1,000 into it, I get $50 off my state taxes. That's the Utah benefit. Some states are better than that and I think we can put in a little over $4,000 and get that 5% credit on it in Utah. Some states don't give you squat though. So you need to know for your state.

The other benefit of course is that all the earnings come out tax free when you use them on approved educational expenses. That's both federal and state. Although it may not be the case in New Jersey and California, they tend to not play with things like that. But actually I think it's okay for 529s, I think they are state tax free. The withdrawals in those states. I think it's HSAs that they really get you on. I take that back, that's not a 529 thing, that's an HSA thing.

But that's the big tax benefit, is the tax free growth. And so, the way you get that is by leaving the money in there for a long time by investing it aggressively. So, it grows a lot. That's the real tax benefit you're going for, and obviously there's no limit on that. If you put money in there now and your kid doesn't use it and you change the beneficiary to your grandkid or a great grandkid, right now you've got 80 years of tax protective growth and that's a huge benefit. So, why not have more instead of less? There's really no cap on it in that respect.

But I think what you're really asking is how much should I save for college? How much should I put in the 529? And here's my recommendation. Number one, make sure retirement's done first. Your kid can get a loan for school, they can go to a cheaper school, they can work their way through school. You can help them with your current cash flow in school. None of that works very well in retirement.

You can help your kids best from a position of strength. Make sure they're not going to have to assist you first. After that, start considering the likely expenses. Where are they likely to go to school? Are they likely to go to Georgia Tech? Are they likely to go to BYU? Are they likely to try to go to someplace really expensive? Is your alma mater $60,000 a year? Well, you're going to need more in there than if you're trying to send your kid to the University of Utah.

It's just a very different cost of education. So, consider that and then you just work backwards. If you're starting when they're 15, you got to put a whole bunch in there. If you're starting when they're two, you don't have to put as much in there per year because you have more time for the compound interest to work.

If you're super funding it as soon as you get their social security card, you're putting five years worth in, well, you can probably get away with putting less in, but those tend to be the people that put more in anyway and have to deal with overfunding issues.

Remember there's a new thing with the Secure Act 2.0. There's this new thing coming out that you're going to be able to do some rollovers from the 529 to the beneficiary's Roth IRA, a total of $35,000. It's not really in place yet. But it does provide another relief valve if you end up saving a little too much in a 529 and don't want to just change the beneficiary. You actually want to get the money out. That is another option to get out without paying any penalties or taxes on the earnings.

WHAT IS A REASONBALE AMOUNT TO PUT IN A 529 QUESTION

All right, our next question comes via email. “I've been a big time fan and follower ever since residency. I'm an ortho surgeon who's two years into practice. Married to another high income professional. Our net worth is slightly over $2 million. There's no debt other than the remainder of our mortgage.” Wow, well done. Two years into practice and already a multimillionaire. That's pretty awesome.

“We've been very blessed, no doubt, but have also been very intentional in our earnings and spending thanks to you. We have a seven month old son. We will likely be expanding our family in the next year or two.

My question is, what do you think is a reasonable amount to have in a 529 given the exorbitant cost of college nowadays? A family member of ours recently got accepted to a prestigious college where the cost is around $100,000 a year. By the time my son is 18, do you think these colleges will cost more than $500,000 to $700,000 for four years?

So far I have $32,000 in his 529. $16,000 each year. But I also would prefer not to have a ridiculously overfunded 529 either if he ends up not using it. As you have kids of your own, what do you think is a reasonable price tag and expectation for funding a college education? I’m curious to know your thoughts on this.”

Well, I have one kid in college. Tuition is $6,000 a year. So my perspective is very different from someone who's sending their kid to $100,00 a year school. But if that's truly what you want to do, you want to send your kid to what's the equivalent of $100,000 a year now and you got to assume that's going to grow at 6%-ish a year, it's going to double in the time you're saving for college. That's now $200,000 a year. So we're now talking about $800,000 for a four year education. So, you better get going if you want to save that much in a 529 to pay for their entire education.

But wow, that's a lot of cash and maybe it's fine for your family. Shoot, you are multimillionaire two years out of practice. Maybe you can afford that. But I think most physician families are going to go, “We can't afford $800,000 per kid. We're going to have to do something else.” And they save what they can. You throw $3,000 or $4,000 or $5,000 in the 529 each year and you call it good. And what it grows to is what it grows to.

And everything else has got to be made up for with good school selection, with the kid working, getting scholarships, maybe something from your current cash flow, those sorts of things. And they piece it together, they cobble it together. And if the kid wants to go somewhere really expensive, they may end up with a little bit of student loans, but I don't think that's mandatory these days.

If you're a physician, there are enough less expensive schools that you do not have to borrow for an undergraduate education. But the key is selecting a place that doesn't cost $100,000 a year or in 15 or 18 years, maybe $200,000 a year.

The other thing to keep in mind is overfunding is not like this terrible tragedy. It's like all the people that complain about their huge tax bills or their huge required minimum distributions. These are great problems to have. “Eh, I got too much in a 529. There's still $100,000 left over after paying for my kids' college. What do I do now?”

Well, you got so many awesome options. I just mentioned the 529 to Roth IRA option for $35,000 of it. You can change the beneficiary to their kids or to another sibling, niece, nephew, whatever. You can pull the money out and spend it on a boat. Yes, you'll have to pay taxes on the earnings. Yes, you'll have to pay that 10% penalty, but it's not like the money's gone. You benefited from some tax protected growth for many years and that helps offset some of that penalty in those taxes.

So, it's not like this terrible thing. It's like these people that are worried that they're going to get prorated because they got made $5 in their traditional IRA before converting it to a Roth IRA. “Oh no, now I'm getting prorated.” Okay, well, now you owe a dollar in tax. It's just not that big of a deal.

Yeah, you try to get it right, you try to hit it on the nose with how much you put in your 529, but it's impossible to exactly calculate how much to have in there unless your goal is simply to have $100,000 no matter what. Maybe you can work toward that, but I think you're far better off just concentrating on “What am I going to put in there every year?” And maybe your goal is to put $5,000 in there or maybe your goal is to max it out and put whatever it is, $16,000, $17,000 a year in there and just have this huge 529 by the time they're 18.

But I would maybe set your goals more on how much you want to contribute than on how much you want there to be in the end because there's so much you can't control there.

Okay, let's take a question that's a little bit different.

IF YOU CANT MAX OUT ALL ACCOUNTS WHICH DO YOU SKIP QUESTION

Speaker:
Hi Dr. Dahle. Thanks for all you do. Me and my husband are pharmacists. We have a one year old and a two and a half year old. These past few years we've been contributing to the max limit on 401(k), Roth IRA and HSA accounts. We also contribute to each of their 529 plans and a little to our taxable account.

I'm planning to cut some hours at work to spend more time with the kids. So I was wondering if I have to choose from one of these buckets to cut down from that you would recommend cutting down from the taxable and 529 first or from one of the retirement accounts.

Our retirement accounts currently make up about 65% of our net worth, not including our house with 401(k) being the biggest bucket with 50% of our net worth. Any advice would be greatly appreciated. Thanks again for all you do.

Dr. Jim Dahle:
Well, this is an easy question in some ways and a hard question in other ways. The easy answer is almost always you want to be maxing out retirement accounts before you invest in taxable. That's even if you plan on retiring early.

And the only reason not to is if you have some investment with a super high expected return available to you in a taxable account that is not available to you in your retirement accounts. If you want to start some short-term rental business or you want to invest money into some new crypto asset or something, then maybe you have to do that in a taxable account. But for the most part you max out the retirement accounts before you invest for retirement in a taxable account.

Now the harder part of the question is your goals. How much you're putting toward retirement, how much you're putting toward college? These are two separate goals. And for example, let's say your plan was to put $50,000 toward retirement each year. And let's say you could only put $45,000 in your retirement accounts. Well, if the goal is $50,000, you need to put $5,000 into your taxable account before you move on to a less important goal, which is saving for college.

On the other hand, let's say you can put $60,000 into retirement accounts each year and your goal is to save $50,000 for retirement. Well, when you get $50,000 into those retirement accounts, you stop and you move on to the next goal even if the account's not maxed out. Yes, you're giving up a tax break there, but don't let taxes drive the investment vehicle. Don't let the tax tail wag the investment dog. You set your goals, work toward your goals. That's what should be driving this whole process.

I would turn the question around to you and say, “Well, which goal do you want to cut back on?” You might be saving more than you need to for your goals right now, which makes it easy. Cut back on both of them maybe.

But if you realize that one of these goals has to give because you don't have enough now to reach both of those goals and do this thing that's more important to you, which is to be home with them, then you've got to decide which goal is more important. And in general that's a retirement goal, not the college savings goal.

But I'll bet if you look at the numbers carefully, you'll realize that you'll probably still have enough saved to reach your goals and make it easy to decide which one of those two to cut back on. Probably going to be that taxable account I'm going to guess.

All right, let's talk about the daddy match Roth IRA.

DADDY MATCH ROTH IRA QUESTION

Terry:
Hi Dr. Dahle, this is Terry from Illinois. My question is about the daddy match Roth IRA. I would like some information about the nuts and bolts of opening one of these. If my child earns income on a W2 this year, I assume I should open a Roth IRA next year at Vanguard before April 15th and use my money to open it. I would fund it using the amount she earned on her W2 from this year. She would keep and use the actual money she earned. Does this sound correct? Thank you, I appreciate you.

Dr. Jim Dahle:
All right, great question. First of all, don't call up Vanguard and ask for a daddy match Roth IRA. They're not going to have any idea what you're talking about. These are custodial Roth IRAs is what they're. And here's the rule for retirement account. You must have earned income to contribute to a retirement account, but if your kid has earned income, they can contribute to a retirement account like a Roth IRA. They contribute the money they earned into the Roth IRA. If anybody asks, if Vanguard asks if the IRS asks, that's their money going in the Roth IRA. The money they made working, their earned income went in the Roth IRA.

Now if you happen to want to give them the equivalent amount of money out of your pocket, that is allowed up to $17,000 per year without any gift taxes being filed or anything like that. And they can spend your money while their money goes into the Roth IRA. I hope that's clear. Is it the same in the end? Yes, money is fungible but technically that's what's happened. The earned income is going into the Roth IRA.

HOW TO SET UP BENEFICIARIES FOR CHILDREN’S UTMA AND ROTH IRA ACCOUNTS QUESTION

Dr. Jim Dahle:
All right, another question via email. “I'm the custodian for my minor son's UTMA and Roth IRA accounts. How do I set up beneficiaries in the event that I or my son pass away?

For the UTMA, I'm able to list a custodian successor, which will be my spouse. For the Roth IRA, I was told that you cannot list a custodian successor. I plan to list his father as the first beneficiary and our trust as a secondary beneficiary like I would for any of my own retirement accounts. Is this correct?”

Sure, that's fine. That's a reasonable beneficiary designation. I can tell you what mine is for my kids' Roth IRAs. Number one is their spouse to whom they're married at the time of their death. Obviously none of them are married so none of it's going to go there. And secondly is the trust. So, those are our beneficiaries. Then I don't have to remember to change it when they get married.

But you can set your beneficiaries however you like. There isn't a correct beneficiary. You just got to ask yourself where do you want the money to go if they're going somewhere. But in general, if there's still a minor, there's still going to be a custodian. And so, that can be set up after death. That's not a big deal. It's not like somebody's going to run off with the money because you haven't specified that. The money is theirs. It has to be used for their benefit. It'll be pretty easy to sort out who the custodian is in the event of death.

The second part of that question. “Finally, if he has a very low amount of earned income, less than $200 to start, I cannot even buy a share of VTI with that. And a 2070 target date retirement fund would require at least $1,000. Is there anything I can invest in for him with such a small amount in a Roth?”

Well, yeah, you can buy a share of a stock or you can find a different ETF with a lower share value if you wanted to. But if we're really talking about $200, forget it. It's $200. It's not going to move the needle. You can buy it in a UTMA if you want or just give them the $200 and put it in a savings account. It's $200.

If that's really all we're talking about, I would not bother with this hassle. This hassle will not be worth the earnings on $200. I assure you. Maybe you could go buy a share of McDonald's stock or something. Let's see what McDonald's is. McDonald's is trading today. Nope, that's almost $300. You can't buy McDonald's. Maybe Disney stock. Can you buy Disney stock? Disney stock, it's $89.53 today. So you could buy two shares of Disney and every time they watch a Disney movie you can tell them they own it.

GIFTING FUNDS AND UTMA AND TAXES QUESTION

Dr. Jim Dahle:
All right, another question on UTMAs.

Speaker 2:
Good morning Dr. Dahle and thank you for taking my questions. My first question is regarding UTMAs. When this money is spent on their behalf for cars or camps during their teenage years, how is this tax assuming that they have no real income?

My second question is, I understand that the rest of the UTMA will get handed over to my children when they turn of age in Texas and that they could realistically spend this money on anything.

I feel a strategy to help mitigate some of the risk for inappropriate spending would be to continue to earmark funds for them in my own brokerage account. And when they come up with a good need for this money, say a down payment on a house or a wedding, then I can transfer appreciated funds from my account to them. Thus I avoid the taxes of those appreciated shares and they will get to take that money out at their tax bracket, which will almost certainly be less than mine at that time.

Is there anything that I've not considered regarding these two strategies for the UTMA and gifting funds? I don't feel like I will have too much money in their UTMAs to go over the kiddie tax, nor will I ever hit the gift tax ceiling. Thank you.

Dr. Jim Dahle:
Okay, that last line was really important actually. You included a lot of information in your last line that now I don't have to necessarily specify, but I think I better outline it for the benefit of others that are listening to this.

A UTMA, Uniform Transfers to Minors Account or UGMA, Uniform Gift to Minors Account is essentially a custodial taxable account you have for your kids. It's a gift to your kids. Once you give it to them, it's their money. It can only be used on their behalf. And once they hit the age of majority in that state, which in Texas is 21, it's 21 in most states, it's their money to do whatever they want with it.

If they want to go use it on cocaine, they can do that. If they want to buy a Tesla with it, they can do that. If they want to give it away to charity or their girlfriend or whatever. They can do that. It's their money. If you don't want it to be their money, don't give it to them. Keep it yourself. And yes, you can do that in your taxable account.

Now can you later give them money because you like the choices they're making in their life? Absolutely. The only issue is gift taxes. You can give $17,000 a year, that goes up every few years, $17,000 a year to anybody you like without having to file a gift tax return. And your spouse can also give $17,000. You can give it to your son-in-law or daughter-in-law as well. $17,000, totally separate limit.

And so, you can give a fair amount of money without any gift tax consequences. And even if you do have to file a gift tax return, which I've done once as we did some of our estate planning, it's not that big of a deal, but it is kind of a pain to file an extra tax return. But you don't actually pay gift taxes until you've used up your entire estate tax exemption, which for a married couples like $26,000 right now. It's a lot.

All right. The point of using a UTMA is to try to save some money on investment related income taxes. Because it's their money, it gets taxed at their tax rates. But the IRS is no dummy. They're like, “Well, what if people put a whole bunch of money in there so it just gets taxed at the kid's rate and saves the parents a whole bunch of money.” They put in what we call informally the kiddie tax.

Basically the way this works in 2023, the amount is $1,250. The first $1,250 of income in that account is tax free. The second $1,250 gets taxed at the kids' tax rate, which is generally 10%. I suppose if it was qualified dividends it could be 0%. But that gets taxed at the kids' rate. After that it gets taxed at the parents' rate, not the custodian's rate as I learned recently, at the parents' tax rate. So, that keeps you from putting too much in there.

If you invest it very tax efficiently, you could probably have up to about $100,000 in a UGMA without having to pay kiddie tax on it. Kiddie tax is what the parent pays at their tax rate now with the kids paying despite its name.

All right, you also mentioned at the beginning how would this work if you used the money for them to get a mountain bike when they're 16 or something. Well, that would generate some capital gains. And those capital gains up to $1,250 per year or up to $2,500 per year would be taxed at 0% or at the kids' rate.

After that it'd get taxed at your capital gains rate. So, that's how it would work. But you could choose to sell, just like any taxable account, you could choose to sell the least appreciated shares, the highest basis shares. And you would do that to try to maintain tax efficiency. So, no big deal if you want to use it before 18 or 21 or whatever, it just has to be used for their benefit. You can't use it to pay your rent.

QUOTE OF THE DAY

The quote of the day today comes from Steven Covey who said “The key is not to prioritize what's on your schedule but to schedule your priorities.” Good advice there.

All right, let's take a question from Luke also related to kids and kids’ savings accounts.

BROKERAGE ACCOUNT IN YOUR NAME WITH YOUR CHILD AS THE BENEFICIARY QUESTION

Luke:
Hi Jim, this is Luke, a physician spouse from Northern California. My wife and I recently had our first child. We have opened and begun funding their 529. However, for flexible spending for our child's future, I have heard an alternative to the UTMA, UGMA 20s fund you chose for your children.

The idea is to instead open a brokerage account in my own name with my child listed as a beneficiary. This account could serve as the source for gifts to the child during their 20s and 30s. This option also preserves flexibility should we the parents need funds for an alternative goal or should our future 18 year old prove to be a poor steward of financial resources.

We currently do not have a brokerage account as we can meet our retirement savings goals entirely in tax protected accounts. Would you still opt for the UTMA, UGMA given the tax efficiency of the strategy? Thank you for your thoughts.

Dr. Jim Dahle:
As I said earlier, if you do not want them to have the money, do not put it in a UTMA, UGMA because it will eventually be their money. Now there is one benefit you might not have thought about of giving them money at that age. You could see what they do with it and that could determine what you do with later inheritances, etc.

The amount of money our kids are getting in their 20s fund, this inheritance is a tiny fraction of what they are currently scheduled to get later at 40, 50 and 60. And so, if it turns out they suck at money, we're going to learn on a relatively small percentage of the money in their 20s.

And so, there is that benefits, just keep that in mind. But you don't have to do that. You can keep it in your account and you can just give it, dole it out as you see fit. Don't forget how the taxes work on that. When you give something away, the kid gets your basis. It's not like when you die and they get it and they get a reset basis. They get your basis.

That's not necessarily a bad thing because they might be in a lower tax bracket. Instead of you having to pay a 23.8% on long-term capital gains, maybe they're paying a 0% or 15%. There's some savings there. That's not necessarily a bad thing, but you are limited by the gift tax limit. $17,000 a year.

If you want to turn around and give them $80,000, that becomes a little bit tricky unless you and your spouse each give them $17,000 and you give $17,000 each to their spouse and you try to cobble it together that way or you file a gift tax return. You have that to deal with. Whereas you don't have that to deal with a UTMA.

But yeah, a lot of people feel a little bit angst about putting that money out there into their kid's name when they don't really know what the kid's going to be like. And if that's the case with you, don't put very much in there or keeping it in your own taxable account. You can always give it out later and obviously spend it yourself if you want.

And there is no limit to how much you can put in your taxable account. There just is limit on how much of it you can give away each year unless you're given it to charity. No limits on that.

SPONSOR

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Don't forget to sign up for the financial basics email series, whitecoatinvestor.com/basics. It's free and you can unsubscribe at any time like everything else we send you. Check it out. If you're having trouble following what we're talking about on this podcast, you probably ought to read those for a few months.

All right, thanks for those leaving us five star reviews. We had one that came in from Jumping with Jess who said, “Great podcast. I’ve learned so much valuable knowledge over the course of listening to this podcast. I wish I had tuned in while I was a med student and resident but really enjoying all the content and trying to apply it so that my partner and I can achieve financial freedom in the future.” Five stars.

Thanks for that review, Jess. That one's actually a little bit older. It's a couple years old. So I hope you are achieving that financial freedom at this point and that the podcast continues to be helpful.

For the rest of you, keep your head up, shoulders back, you've got this, and we can help. Have a great summer. Have a great fall. I guess we're getting close to the end of the summer by the time you listen to this. I think it runs August 10th. Kids are going to be going back to school soon. But you've got this man, this finance stuff is not that hard. It's easier than what you do day to day. See you next time.

DISCLAIIMER

The hosts of the White Coat Investor podcast 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.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 130 – Family medicine doc gets back to broke.

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They are real estate backed investments that build wealth and prosperity for all of their members, investors, clients and partners. Plus their funds have historically had zero losses. Find out more at whitecoatinvestor.com/dlp. If you're thinking of getting into investment housing, they should definitely be on your radar.

All right, welcome back to the Milestone and Millionaire podcast. The podcast where we feature you and your successes and your challenges and use them to inspire others to do the same.

This is a community. We're the White Coat Investors and we want everyone to be successful. The fun thing about this game we're playing though, is it's a one player game. It's just you against your goals. You don't have to beat anybody else. So, define your goals, start working toward them. Share with us your successes by coming on the podcast. You can apply at whitecoatinvestor.com/milestones and we'll bring you on.

Today we have a great interview with a family doc who has accomplished one of my favorite milestones. We'll bring her on in just a minute, but afterwards, stick around. We're going to talk for a few minutes about tenant contracts, landlord contracts that you have for rental properties, for investment properties, and we'll go over some important things to have there.

INTERVIEW 
All right, our guest on the Milestones to Millionaire podcast today is Mandy. Mandy, welcome to the podcast.

Mandy:
Thank you so much.

Dr. Jim Dahle:
All right. We are celebrating one of my favorite milestones today. You are back to broke. Congratulations.

Mandy:
Thank you so much.

Dr. Jim Dahle:
Yeah, that's a pretty awesome feeling. All right. Tell us a little bit about yourself. Tell us what you do for a living, how far you are out of school or training, and what part of the country you live in.

Mandy:
I am a family medicine and a sports medicine doc. So I'm dual board certified. I practice both, and I am three years out of fellowship this month.

Dr. Jim Dahle:
Awesome. And what part of the country?

Mandy:
And I practice down in the Southeast.

Dr. Jim Dahle:
Southeast. Okay. Very cool. Well, congratulations to you on that. Perhaps the most important milestone in the long list of milestones we celebrate right back here. Tell us about how you started out. Let's say coming out of fellowship, what was your net worth? Do you remember?

Mandy:
I remember very clearly, and it hurts a little bit to say this, we were negative $440,000.

Dr. Jim Dahle:
$440,000?

Mandy:
Yeah.

Dr. Jim Dahle:
Holy smokes. What was that from?

Mandy:
A lot is from med school debt. I also did a master's degree before I went to medical school. I really wanted to make sure that medicine was what I wanted to dedicate things to. And so, I did a master's degree out of state. That was a lot of the debt as well.

My husband had like $15,000 in loans, very minimal compared to what I had. And then we had $25,000 in car loans at the time as well. So yeah, it was negative $440,000. It was a lot.

Dr. Jim Dahle:
Other than the car, did you have any assets at all? Did you have a bunch of savings or investments or anything?

Mandy:
No, we were not good savers.

Dr. Jim Dahle:
I love it.

Mandy:
We did not. No, we didn't have any of that. And so, it was a very solid negative number for us and it was a strong negative number. And one hand I think it kind of motivated us to be strong earners and really negotiate for things and work for promotions and kind of negotiate on our behalf. But it was also something that kind of loomed over us a little bit too.

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

Mandy:
He does healthcare IT. He worked all throughout my med school and so we had some income there. It doesn't mean that we didn't max out what we could take from for loans. And I went to a private university for my medical school. And so, that racked up very quickly. And that's one thing that when we look back at things we could have done differently or would've liked to have done differently, that's one of the big ones for us is actually having a budget while we were in medical school and considering his income in the budget and really taking out less than we needed to.

Dr. Jim Dahle:
Was there some point at which there was a financial awakening?

Mandy:
Yeah, that's a nice way to put it, an awakening. I think it honestly was just an acknowledgement. I think when you get into these six figure negative numbers, it just kind of becomes, I think to actually get through it, you just become numb to it and just pretend it's not there.

We had a great financial advisor actually at our school, at my med school. And so, she would give us lectures all the time about, “Listen, that $5 coffee that you're getting at Starbucks is actually going to be $15 or $20 because it's the interest that you're accruing because you're buying it with 7% loans.” It went in one ear and went out the other.

Dr. Jim Dahle:
You got the information, you just didn't do anything with it, huh?

Mandy:
Yeah, it was there and I was like I just have a lot on my plate. I'm not ready to acknowledge what we're going to have to do. And before you graduated you had to sit down with your partner or your spouse and go through everything and I remember her sitting us down and saying, “Hey, you're going to have to pay $5,000 a month to pay this off in 20 years with the way you're going.” And I just remember the look on my husband's face in that room of just like, “What? $5,000 to pay this off?”

And I think that was like “Okay, yeah, we'll deal with it down the road.” And you hear people talk about it all the time on podcasts like this, like the arrival fallacy, “Oh, we'll take care of it when it's residency or we'll take care of it when it's fellowship or when we get to making the big bucks, we'll take care of it then.”

And we kept doing that until probably fellowship was about the time that I started looking at things and being like, “We really need to turn this around and if we don't turn it around now, we may not ever.”

Dr. Jim Dahle:
Was that scary? To think that maybe you would never turn around?

Mandy:
It was not an option. I think I had decided at that point it wasn't going to be an option for us to keep going down the path that we were going. We got into credit card debt early. I grew up, and I'm sure you're going to ask this later, but my parents, I've come from very hardworking blue collared people who traded their time for money. My sister has a birth defect and so there were medical bills and my parents relied on credit cards for emergencies. There wasn't an emergency fund. They relied on credit cards for their emergencies. And so, I thought that that was what you did. You relied on your credit cards for your emergencies.

And so, we got into that a little bit. And I think not even using it for emergencies, but I think that hidden cost of going to a private medical school, part of it is all of your classmates either have a lot of money and are going to that school or are in the similar thing. So you're going and doing things with them. Maybe instead of doing a potluck on Thursday night where everybody brings their own thing, you're going out to dinner and it's more expensive.

And so, we racked up a decent amount of credit card debt that way as well. And I think that that was definitely something that was like, “Okay, we have to stop the bleeding on this.”

Dr. Jim Dahle:
Okay. By the time you're coming out of fellowship, you're awake now. Financially, you know what's going on, your spouse is working, you are now starting to look for jobs. You mentioned that you got really aggressive about income. Tell me what you guys did to boost your income so you'd be able to take care of this problem.

Mandy:
I negotiated like crazy on my first contract coming out of training. I worked really, really hard. I negotiated a lot. I knew what I was worth. I knew what I was bringing in. There's not a lot of us female sports medicine docs out there. And so, just kind of working and negotiating that, learning what the worth was in the area, what I could contribute to an organization and requiring that in the contract.

I did a lot of moonlighting in residency and in fellowship as well. So I think that that helped. We were good earners. We just weren't good spenders or savers or investors.

Dr. Jim Dahle:
Household income for the last three years altogether between you and your spouse?

Mandy:
Last three years, between $345,000 to $415,000.

Dr. Jim Dahle:
Okay. And that came with a pretty significant tax bill. How'd that feel to pay taxes knowing that you had all these student loans to pay off?

Mandy:
Listen, honestly, the tax bill, I kind of am like, yeah, that's fine. I'll make the money. I didn't have that much of a problem with it to be honest. We paid a very high five figure amount in our taxes, almost six figures. I think that's just par for the course. I was okay with that. I guess I don't know that I would've taken the tax money and put it straight to my student's loans, so it didn't matter. That was an equitable trade of my mind.

Dr. Jim Dahle:
Yeah, for sure. Okay, you're making money now. It's a pretty good income and you're trying to decide what do you put it toward? How'd you decide how much went toward loans? How much went toward retirement accounts? How much went toward savings? How much went toward credit cards? How much went toward car loans? How'd you decide?

Mandy:
Yeah, we did a modified debt snowball. I had our first daughter at the end of chief year and I really sat down and read as much as possible at that point. Lots of Dave Ramsey and we went through your Financial Boot Camp book at that point.

We did a modified debt snowball. We listed everything out from least amount to highest amount and then put the interest rate with it because I just could not justify doing a lower amount with no interest on it before we paid off some of the other things like a higher interest rate.

I remember listening to one of your podcasts at one point and you said somebody had called in and was having this question about pay off the debt or invest and their debt was over 9%. And you could hear it in your voice that you had very strong opinions about where that money should be going and you called it a debt emergency.

And I'll tell you, at that time, our credit cards were definitely over 9% and we had a consolidation loan that we had taken some of this debt in and consolidated it down, and that was over 9%. And I was looking at it and I was like, I have 10 digits worth of 9% plus debt right now. And so, we just went after that. Anything we could to get it down.

Obviously as you pay things down, as you make more money, people want to offer you better rates, better loans, no interest. And so, we just started attacking it and going at it with the modified debt snowball and we're still working with that.

Dr. Jim Dahle:
Yeah. So what's your net worth today?

Mandy:
$175,000.

Dr. Jim Dahle:
Okay. It took us a little while to get you on it sounds like.

Mandy:
Well, it was one of those things. We got to the zero and I was like, “Okay, yeah, I'm going to apply for it.” And then I was like, “Well, let's just make sure that we're actually at that broke before I hit the submit button.” Once I had over $100,000 in my retirement account, I was like, “Okay, even if I run the numbers and it's still a little off, I have something good to celebrate.”

Dr. Jim Dahle:
Okay. Very cool. Very cool. So, what debts do you still have?

Mandy:
We still have a mortgage. We're still paying on the mortgage and we still have a decent amount of student loans still. One of the things that I think I learned about investing in a way that hopefully not everybody has to learn it, is compound interest in the opposite direction.

It was a $50,000 loan for my master's degree and that was 12 years ago now. And that was at what? 7% or 8%. And that had ballooned up to over $115,000 before I got out of training. It had more than doubled. And I just could not wrap my head around that math. Like, how does that happen? And so, then you learn about compound interest and what that looks like and how to maybe help it or make it work for you instead of against you.

And so, we're working on that now. We max out our 403(b)s and my 401(k) because we consider that part of our total compensation. So we've done that. We have not been putting any extra into Roths or anything like that just because we have been prioritizing our debt and getting that down.

There was a point where almost 78% of our total after tax income was going towards wealth accumulation. Whether it was like savings, and that was too tight for us. 78% was uncomfortable. I don't recommend that, that was the pendulum went too far in the wrong direction.

But I do think we're very comfortable putting a lot of our money now towards debt or towards wealth accumulation. Just because we've tried to keep things where we're prioritizing paying down that debt.

So, what did I say? Mortgage, student loan. We still have student loans. I still have like $265,000 of student loans. It's still not an insignificant amount, but we pay more on that every month than we pay on a mortgage. What else do we have? We've completely paid off the cars. We have about $10,000 left in credit card debt, but it is 0% balance transfer. We're just putting a flat rate down on that every month so that feels good to not have any. We don't have any debt that is more than 4% interest right now.

Dr. Jim Dahle:
Feels pretty good when inflation is at 4%.

Mandy:
Yeah, you can stomach it. You can stomach it.

Dr. Jim Dahle:
Very cool.

Mandy:
Yeah, yeah, yeah.

Dr. Jim Dahle:
Well, okay. There's somebody out there like you that's been saying, “I'm going to take care of this when I make the big bucks.” Maybe they're halfway through residency or med school or whatever. What advice do you have for them?

Mandy:
Come up with a plan for your money. Your money is not monopoly money and it is going to impact a lot of the decisions in your life. And so, come up with a plan for it. And it doesn't matter how you do it. We have kind of done it a couple of different ways. We did your Financial Boot Camp, the book that I liked a lot. I kept wanting to skip chapters, and at the bottom it'd say, “You can skip this chapter if blah, blah, blah, blah, blah.” I couldn't skip the chapter, so I had to go through and do it. Just having that accountability, it was actually really nice.

We're about 40% of the way through your Fire Your Financial Advisor course. I would say get an awareness of where you are and look at where your money is going. It's unbelievable how much money can leak out if you're not paying attention to it.

And so, the first thing I would just say is get a plan for your money and know where it's going. And then acknowledge your strengths and your weaknesses. Like I said, we were great earners. I busted tail, I moonlighted my tail off. I got new moonlighting opportunities in training that nobody else had had before just because it made me more money and it got me better experiences.

But that wasn't enough because we weren't good savers and we weren't good spenders. We weren't spending our money on meaningful experiences. We were spending it on… It was just flying out. I couldn't even tell you really what it was spending on. And that wasn't a good idea.

And then I say too, just like in medicine, first do no harm. Prevention is really imperative. I’m a family medicine docs so I believe wholeheartedly in prevention. I've experienced compound interest work against me and I would say do everything you can to not let that happen. And do as much as you can to put yourself on a good foot today and hopefully tomorrow.

Dr. Jim Dahle:
Awesome. Good advice. All right. Well, Mandy, congratulations. This is pretty awesome. You have done something incredible, raising that net worth by $440,000, actually more than that, closer to $600,000 in just three years. At the trajectory you are on, you're going to retire a multi multimillionaire. And that's pretty awesome to go from broke to there in just a few more years. So congratulations to you. Thank you so much for coming on the podcast and inspiring others to do the same.

Mandy:
Thank you so much. I appreciate it.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview. It went a little longer than some of our interviews, but we went really quickly because it was such a fascinating story to listen to someone who has really just turned things around, had immense success right at the beginning of her career, despite not starting in an awesome place. There's a lot of you out there, $200,000, $300,000, $400,000, $500,000 in student loans that aren't starting in an awesome place. But I hope podcasts like this give you a great deal of hope.

Yes, she's still in the middle of the process. There's still a whole bunch of student loans to pay off but look what's been accomplished. A swing of $600,000 in net worth in just three years. And you know what? It's probably never going to go slower than that. They're probably going to build their net worth by at least that much every year for the rest of their careers and maybe even into retirement. It's hard as the beginning. And if you can just get started, get a plan in place and start following it, great things happen.

FINANCE 101: TENANT CONTRACTS

All right. I promised you at the beginning we're going to talk a little bit about tenant landlord contracts. And a lot of people are just starting out in real estate investing and they don't pay as much attention to this as they should. For the most part, most contracts by mom and pop investors are not detailed enough.

That contract needs to take into account all of the laws in your local area. You can't just use a generic one that you printed out of a book or you print it off online or whatever that applies to another state. You need to have a contract that applies to your state and local area because landlord law is very local and you have to follow it.

Your contract needs to follow every bit of landlord law. If you're required to give somebody 60 days after they stop paying before you can evict them, you need to give them 60 days. If you're required to give them written notice, you need to make sure you give them written notice.

So what the contract is, is it spells out exactly how this relationship is going to work and what is going to happen in the event that they don't pay. In the event that something in the house breaks, in the event that whatever happens.

It needs to spell all those things out and say exactly what is going to happen, what your responsibilities are as a landlord, what their responsibilities are as the tenant. And you need to explain this contract to them when you rent out the place in the beginning that this is the way things are going to work. Very clear, fair but clear.

And then once you have this fair contract in place, you enforce it strictly. If the contract says if they haven't paid their rent by the 10th of the month, you're going to begin an eviction proceedings on the 10th of the month and give them the written notice and start those proceedings.

Whatever the contract says, that's what you need to follow. That is fair, that is treating them well. You are not being a slumlord by enforcing the contract that they signed voluntarily. That is a fair contract that follows all applicable laws.

But if you do not put these sorts of contracts into place, you're going to have a miserable time as a landlord. You're not going to be successful in your real estate investing. It's going to be a curse in your life and not a blessing. It's going to make you miserable. And so, you need to have strong contracts in place that are legal, that are very clear and that have been well explained to the tenant.

And then you need to keep up your part. If the tenant calls you and the dishwasher is not working, you need to get somebody in there to fix the dishwasher in the next couple days. It's not okay to leave a mold all up and down the bathroom, just like it's not okay for them to not clean the lint out of the dryer and cause a dryer fire or cause a machine to wear out early. Just like whoever's responsibility it is to take care of the landscaping. It needs to be taken care of, right?

So, work all those things out in the contract and then follow it strictly and expect them to do the same. If they won't, get them out of there. There are plenty of great tenants out there. You don't need to deal with a crummy one.

Charge market rents and you will get a good tenant in there when you have to evict somebody. Charging more than the market rent, it may sit empty for a long time. So charge market rents. Raise your rents if they're too low, lower your rents if they're too high. Charge the fair price that's going in your area.

All right. If you don't want to do that and you want to be a passive investor, listen to this bit from our sponsor for this episode, DLP. If you want to invest with a high growth impact investor that believes in doing well while doing good, we encourage you to check out DLP Capital.

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All right, enough about real estate. This is the Milestones podcast. We enjoy having you here. We are trying to help you. We want you to be successful. We want you to be able to not worry about money as you practice medicine, as you practice laws, as you build your business.

We want you to be able to concentrate on your patients and on your coworkers, and on your family, on your partner, on your own wellness. And the way you do that is by having a financial plan in place. So, get a plan in place. If you need help, hire help. If you need more education, read our books, take our courses, listen to more podcasts, read the blog, read the newsletters.

98% of what we're producing here at the White Coat Investor is totally free to you, and a good part of the rest of it is very inexpensive. So, get out there, get yourself educated, develop some financial discipline, be successful. You can be financially successful and still be a good doc or a good dentist or a good attorney or whatever and be successful. So, get out there and do it.

Keep your head up, shoulders back. You've got this. We'll see you next time on the Milestones podcast.

DISCLAIMER

The hosts of the White Coat Investor podcast 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.