When is it OK to carry debt (and how to feel fulfilled by it)?

By Bill Jackson September 1, 2023 12 mins read 127 Views

By Dr. A.P., Anonymous Guest Writer

As an avid reader of The White Coat Investor since 2016, I’ve always held myself financially accountable and have been interested in investing for the future. WCI was pivotal in emphasizing that not every doctor is wealthy and, very simply, that you must advocate for yourself to achieve financial freedom. This was a message that especially resonated with me since my parents are first-generation immigrants who never had the means to invest in the stock market or own a home. Through my professional path over the past eight years, I have been fortunate to make solid financial progress with my wife.

When is it OK to carry debt (and how to feel fulfilled by it)?

However, the surprising aspect of this journey wasn’t that progress, but rather how the mindset has changed on our spending habits and its implications on our happiness.

Our Financial Journey

I graduated from medical school in 2015 with $232,000 of student loan debt and very little financial know-how. My wife joked that, when we were dating, I didn't know how to write a check. I commuted to medical school from home and spent as little as I could since even my gas money was coming from student loans.

My wife and I met in medical school, and we are currently practicing as a hematologist/oncologist and an interventional pain physician, respectively, in large multispecialty physician-owned groups in the Midwest. Since I made full interest payments during residency (not income based repayment), refinanced when I graduated medical school to a 3.9% APR, and continued to make large monthly payments as an attending, I paid off my student loans in approximately 2.5 years after finishing training with a recent $74,000 lump sum payment. My wife’s medical school education was fully funded by her parents.

We have both bought into partnerships in our practices, and we each have stakes in our respective ancillary revenue streams as well. In terms of real estate, we have property shares in my practice, a 15-year mortgage on a $650,000 home, and a $400,000 apartment in Chicago that generates a rental income equivalent to its monthly mortgage and HOA fees. We have no credit card debt, own our cars outright, live on 20% of our annual combined net pay, and have approximately 10 months’ worth of expenses in cash reserves.

We each maximize our 401(k) profit-sharing plans, post-tax IRA contributions, and combined HSAs, and we invest the remaining post-tax income into a myriad of Vanguard index funds with equity-heavy allocations. I am a firm believer in an equity-heavy portfolio as our high savings rate and low debt obligation reward us with higher risk tolerance, and likely higher long-term gains.

Triaging Debt

If you’ve read the WCI book as many times as I have, you’ve probably memorized the priority list of debt that should be paid down after pre-tax allocations have been maximized. When you couple that recommendation with my financial snapshot above, it seems paradoxical for me to delay paying off student loans until after purchasing multiple properties.

During residency, we purchased the apartment with the intention of building equity and having a monthly mortgage burden that was less than a comparable apartment’s rent. This allowed us to fix our living expenses, engage in DIY projects, and entertain family and friends in a home that embodied our vision. We mandated making full interest payments to my student loans so the balance would not increase during training. We spent our moonlighting funds on elective expenditures to create anticipation toward doing more shifts and further supplementing our income.

By the time we purchased our forever home in 2021, my student loan balance had decreased to a point where my monthly interest was much less damaging, and this burden only decreased with each payment. When I first started following WCI, the straight-line strategy of paying down debt to increase one’s net worth served as my manifesto. However, as we accumulated wealth, we realized that our debt was manageable and that we could allocate funds to strategically complete elective purchases.

In my opinion, it is acceptable to carry debt to complete what I'm calling an inevitable elective expenditure (IEE) as long as two criteria are met:

A baseline attempt to pay down that debt is being made monthly at a respectable proportion to your income;
Completing the IEE is not dependent on future cash flow.

More information here:

Should You Pay Off Debt or Invest?

Inevitable Elective Expenditure (IEE)

The final and more contrarian reason for us to delay paying off student loans is that we chose to complete a myriad of elective purchases—including undergoing a large-scale home renovation, upgrading my wife’s car, and buying high-end furniture for our home. All of that came after my wife and I had comfortably settled into our attending jobs.

I am not proposing that readers delay paying off their student loans to buy whatever they please. I am proposing that every reader add their own extra layer of IEEs to the WCI recipe for debt management so they can minimize their opportunity cost for strategic purchases that bring immense fulfillment and happiness while also saving for retirement. When I graduated from medical school, I wrote down a list of things I wanted when I became financially independent. I would revisit that list every year to see how passionately I felt about those items long before I could afford them. Over time, I started deleting items off the list when I realized how much clinical effort and responsibility it took to sustain my income.

It’s important to track your desires over time because when you’re bogged down by the daily stressors of your job, your priorities and what you want from life change simply because you realize that your current path may not be sustainable for as long as you’d like.

Today, my list has been watered down to a few items, but the architecturally relevant house with high-end furniture was the cornerstone. I am discussing this example because this was an inevitable purchase for us and one that makes us immensely happy and proud when we come home. IEEs are a purchase goal that you have preemptively set for yourself. They are independent of what your colleagues, family, and friends are purchasing, and no matter how many times you try, you can’t cancel them off your list. That is how you know you truly want something.

We started looking at homes in 2021 with the simple mindset that we did not want to be house-poor. We would either venture into a large renovation immediately with a house at a lower price point or buy something that was our standard of move-in ready at the highest price point in our budget. Building was out of the question due to the time commitment, increased labor costs, and supply chain disruptions post-COVID. We ended up buying our home for $25,000 less than asking, and we will have renovated nearly the entire home with high-end finishes and upgrades for approximately $100 per square foot without any DIY projects. This is significantly less than the average $300 per square foot we were quoted to build. Our goal was to have our all-in cost be less than the cost to build an equivalent home today with land, and we have accomplished that goal emphatically. We depleted a significant amount of our savings at that time despite a much lower net worth so we could pay the entire cost of the project upfront and not increase our fixed monthly expenses by taking out a construction loan or a HELOC.

when is it ok to carry debt

The most important aspect of any IEE is that it must be implemented and completed in a practical way that does not compromise your current net worth and future retirement planning goals.

In our case study, we chose to buy an architecturally appealing home in a modest neighborhood that would likely not appeal to most high-income households and country club members. We bought a home that already had enough square footage to avoid the need for an external addition that could exponentially increase renovation costs and involve landscape grading changes. Our home came with a very rigorous service history, and we knew most of the home’s faults coming into the purchase with budget allocations to fix those issues promptly. Having taken these precautions, we are now able to live in a high-end home with a property tax burden that is a fraction of that of homes of comparable size in luxury neighborhoods.

Since our renovation was paid for in cash, our bi-weekly 15-year mortgage payment is only 15% of our monthly cash flow. New construction homes are inherently a raw deal because a builder’s sole goal is to build a neighborhood of homes with low to mid-grade spec finishes with just enough build quality to be passable from a construction safety standpoint. This mindset maximizes profits for their business while making you pay a premium to have a turnkey home without the hassles of having to deal with a contractor yourself. In other words, the builder is betting that you don’t have the knowledge base, motivation, and courage to renovate on your own.

In most cases, buying an older home with potential will most definitely be cheaper, allow you to pursue renovations when prices are lower, ensure that you are only paying for upgrades you value, produce a product that is more aesthetically unique, and ultimately allow you to build equity more efficiently with a manageable monthly mortgage cost ratio.

More information here:

How Expensive of a House Can I Afford?

Opportunity Cost

Opportunity cost is always discussed in the context of investing but seldom in the context of personal expenditures. For an inevitable expense like our home, if it’s going to end up on your budget at some point, you should attempt to maximize the rate of return in the most cost-effective way possible. My wife and I concluded that skipping the starter home and going straight to the forever home would allow us to enjoy and entertain in the house longer as well as hedge against future increases in labor and supply costs, market volatility, and closing costs.

Inflation has a lopsided effect on a variety of industries. Just as physicians need to increase patient volumes or cut practice costs to maintain consistent compensation in a decreasing reimbursement landscape, businesses need to offset their cost increases onto customers to maintain their margins and appropriately compensate employees. It is not implausible to believe that the cost of renovating 10-15 years from now will be significantly higher than it is now.

Another way to think about an essential expenditure is that completing it now is the form of locking in a gain and making yourself immune to that piece of consumer market inflation for years to come.

My wife and I were discussing a purchase once, and she said, “There’s no point in going halfway now when you can afford to go all the way later.” The thought process really resonated with me because this method of thinking can be cost-effective in the long run. As a physician, you have the unique advantage of having relatively stable employment with a high percentile salary due to a skillset that requires extensive training and clinical experience. If you implement good financial habits monthly and stay deeply committed to saving for your inevitable expenditures, it makes the most sense to wait and buy the highest tier of what you want during the first go instead of spending on intermediary purchases that won’t make the cut quality-wise later.

Power of Liquidity

The one recurring theme that I have appreciated from WCI is that having funds readily available through savings and regimented debt control gives you the ability to take advantage of market trends—not only for investing but also for purchasing.

We purchased our forever home during a lower interest rate and real estate value climate since we had funds for a sizable down payment and the renovation expense upfront. We sold my wife’s car during the chip-shortage-fueled-used-car bubble because we had the funds to buy out her lease and then subsequently order a new car with minimal dealer markup when the demand for luxury vehicles was starkly low. We purchased real estate shares at a discount during a loan restructuring year in my practice because our house cost less than our combined annual gross income. These examples emphasize the power of liquidity and a strong positive monthly cash flow.

We treat our monthly cash flow as the only reliable source of income in the entire scope of our finances. Our monthly salary draws total only 40% of our annual gross pay, and all our monthly expenses are set relative to this baseline with a built-in monthly savings target. Maintaining this strategy allows us to allocate higher percentages for tax withholding with our remaining quarterly adjustments, serves as a buffer for unpaid vacation time, and mandatorily creates future income that has not been allocated to any kind of expense (and is prime for investing). Mentally, when I look at my monthly balance sheet at work, it is also much more satisfying to see my net income deep in the black due to lower overhead from a lower draw.

More information here:

How My Recent Brain Tumor Diagnosis Made Me Reevaluate My Finances

The Bottom Line

With an increase in income comes an opportunity for personal growth. Since graduating medical school, I have learned that I value the ability to live life on my terms above all else. I have realized that I never want to feel nauseous the way I did when I received a call informing me that my first job contract was terminated during the peak of the COVID lockdown with two months to fellowship graduation and only $5,000 in savings.

Formulating and committing to an IEE list allows you to engage in competition with yourself, not others. Accepting this concept can be tremendously impactful toward your long-term mental health and overall job satisfaction as it decreases the pressure to perpetually earn more money to purchase items you never really sought in the first place. It will teach you to savor each purchase and take pride in maximizing the return from that expense. You will hang on to items longer and avoid the financial deathtrap of constantly turning over items around you, as has become commonplace in today’s consumer culture.

It will help eliminate impulse purchases and make you overly critical of any purchase that results in a fixed increase in your monthly budget. I am not preaching frugality but rather a call for targeted goal-oriented spending that eliminates the background noise and focuses on the underlying beat. Saying no to additional call or a satellite clinic because you don’t need the money is a better flex than financing a Porsche.

I try my hardest to live my professional life with two coexisting principles: 1) To work as hard and efficiently as possible to optimize patient care and show my practice/employer that I am an invaluable asset; 2) To limit my monthly living expenses and save with discipline to decrease my reliance on my practice/employer.

As cynical as this concept may seem, it is a foolproof method of not feeling vulnerable and achieving security—the root of almost anything that motivates us as human beings.

[Founder's Note from Dr. Jim Dahle: I have no criticism at all about how debt was managed when student loans were paid off 2 1/2 years after training. I think most people not going for forgiveness should aim to be rid of student loans within five years of completing training, but I certainly think it is reasonable to do things such as invest and buy a home while doing that. That is a position I have held in blog posts and books ever since this blog was started.]

What do you think about the debate of paying off debt vs. investing in your future? Do you have your own IEEs? Did those supersede other aspects of your financial life? Comment below!

[Editor's Note: The author is an interventional pain physician in a multispecialty physician-owned group in the Midwest, and he's been an avid follower of WCI since 2016. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]

The post When Is It OK to Carry Debt (and How to Feel Fulfilled by It)? appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

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By: Lauren O'Brien
Title: When Is It OK to Carry Debt (and How to Feel Fulfilled by It)?
Sourced From: www.whitecoatinvestor.com/when-is-it-ok-to-carry-debt/
Published Date: Fri, 01 Sep 2023 06:30:39 +0000

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