Doctors Are Concerned About Financial Mistakes
Investors often worry about the wrong things when it comes to their finances. We want to help you get a better idea when it comes to managing your money.
#1 Should I Pay Off Debt or Invest?
Most of the time, this question doesn’t mean much because it’s often a difficult decision. Should you pay a 6% mortgage or take out a Roth IRA, where you’ll hopefully earn 9-10% but with no guarantee? It doesn’t matter. Now, sometimes it does regardless of whether you are paying off debt or investing. If you have 29% credit card debt, you should definitely pay it off before investing. But if you have a 2.5% mortgage; have little savings for retirement; and you haven’t put anything into a 401(k), Roth IRA, or HSA this year, you’re probably better off investing than putting that debt first.
But most of the time, the answer to this common question doesn’t mean much—especially given how much time we all spend talking about it. You will have this problem until the day you are debt free. Get used to it.
Important Principle
Paying off debt and investing are both good things, but the total amount of income that goes into the balance of those two is what matters when it comes to building wealth.
#2 How and How Much Should I Pay for Shipping?
Doctors argue about car options and financing options. Most of the time, this is nonsense. It’s actually not stupid for low income earners. The reason most of them are not rich is because they are often sitting on the street. But what about attending physicians and those who earn like them ($250,000-$600,000+ per year)? Not so much. It doesn’t matter if you’re driving a $10,000 car, a $50,000 car, or a $100,000 car. You should have the ability to save enough money to retire comfortably like a multi-millionaire. It doesn’t matter whether you pay cash for that car, pay it off for a year or two, or lease it. Your income will “cover a multitude of sins,” and this is often one of them.
Now, it is still possible to evaporate a large amount of wealth on cars. If you earn $250,000 a year and own two Tesla Xs every three years, that may be holding you back from reaching your financial goals. However, the real problem is often not just cars; that many people who use Teslas also spend more money on housing, clothing, travel, food, and entertainment.
Important Principle
Habits and behavior matter. The more you spend, the less you can save. But if you want to buy a $15,000 car with a $7,000 six-month note instead of an $8,000 car with cash, you’ll still retire comfortably like most millionaires. If you want to buy a new $40,000 car every ten years instead of a $25,000 used car every seven years, it won’t break the bank.
More info here:
Don’t Be Car Poor
My 27 Year Old Car Will Make Me Millions
#3 Should I Add This Investment to My Portfolio?
Portfolio complexity is an ongoing problem. There will always be something new and shiny to invest in. Variety is important, of course, but most of it is unnecessary. In fact, I think there is little reason to have less than three asset classes or subclasses in your portfolio, and there may be real value in that fourth, fifth, sixth, and seventh category. There may be a slight advantage in classes 8-10, too. Except for 10, you are definitely playing with your money.
In our portfolio, we have four types of stocks, two types of bonds, and three types of real estate, and I’m concerned that that’s already more complicated than it should be.
Important Principle
There are no strikes called investing. You don’t need to invest in everything to be successful. Pick 3-10 legacy classes/subclasses that you like and stick with them for a long time. If you’re thinking of adding a new one, are you sure you’re not in a rush?
#4 How Should I Withdraw From My Portfolio When I Retire?
The amount of concern about this topic among retired people, and especially those who are about to retire, is unbelievable. Since it’s OK to invest in any rational way, you can also withdraw from a multi-million dollar portfolio in any rational way without worrying about whether you’ll eat Alpo in retirement. The reality is that many well-prepared retirees spend less than they could afford and still seem to pay for the lifestyle they love.
Important Principle
You can take about 4% of your original portfolio value, adjusted for inflation, and expect it to last 30 years at most. You are more likely to run out of time than to run out of money. Not if you’re running 7%-10%, though—especially if you’re maintaining a bad streak of returns.
More info here:
Real-Life Examples of How WCIers Live, Worry, and Cash Out in Retirement
Fear of the Retirement Crash Phase
#5 How and How Should I Balance My Portfolio?
Rebalancing doesn’t matter at all. From the reading, the correct measurement periods are much longer than many expected—in the 1-3 year range—and no superior method (time-based, performance-based, or whatever) has been found. How and when you do it doesn’t matter that much.
Important Principle
Re-evaluate your portfolio every time you come to it, especially if it’s been more than three years since you last did it. Of course, it will malfunction again the next day, but that’s okay.
#6 How Can I Lower My Taxes?
From the way some doctors talk, you would think there is nothing worse than paying taxes. Do you know the best way to reduce taxes? Stop working. Stop leading. You have no investment. As a general rule, those with higher tax liabilities are in a better financial position than those with lower tax liabilities.
Important Principle
It doesn’t matter how much you pay in taxes. What matters is how much you have left after paying taxes. Earn, invest, and live tax-efficiently, but don’t let the tax tail wag the investment dog, let alone the life dog. At least be a little grateful to have a six or seven figure tax bill. Most people would rather have your financial problems than theirs.
More info here:
3 Major Tax Deductions for Physicians
1 (weird) Tax Trick the IRS Hates
#7 When Should I Deposit This Money?
Everyone knows that you cannot time the market successfully in the long term, but many still try to do it. Should I invest after the election? What about the job report? Is the market about to go up or down? Will I regret the high purchase? Are we in a bubble? What about this historically high rating? Give me a break.
Timing the market is more important than timing the market, and you often invest at or near the highs of the market. Do you really think the market will go down between the time you invest this money and when you spend it in 10, 20, 30, or 50 years? No? Then, why bother about it?
Important Principle
Invest if you have money. Then forget about it for a few years.
#8 Average Dollar Cost or Net Amount?
It gets worse when there is wind from an inheritance, the sale of a house or business, or winning the lottery. Now, people are wondering if they should dollar cost average (DCA) that money or just invest it. “Should I be DCA this next week, month, quarter, or year?” Take them out. No one cares. Data shows that you get more time in the market by investing faster. Since the market tends to go up, that tends to work well. But a third of the time it doesn’t. The truth is that at the end of your DCA period, whether that’s one week or one year, all that money will be fully exposed to the market. Does it matter if that day is today or in one year? Not so much. And over the next 40 years, even the money you held for three months to invest was in the market for 39 3/4 years, basically the same length of time.
Important Principle
You should invest when you get money, but if you wait a while to invest, it doesn’t matter much. Maybe it makes you feel smart or safe or something, and that may cost you what it may.
More info here:
What to Do With $900,000 in Cash
I have $150,000; Should I Be Afraid to Invest When the Stock Market is at an All-Time High?
#9 Should I Buy a House as a Resident?
On average, it takes five years to break even because you need to enjoy the house enough while you own it to overcome the transaction costs (usually 15% of the round trip price). First-time home buyers are often surprised at how much time and money it costs to furnish and maintain a home. In a three-, four-, or five-year stay, you’ll come out behind financially most of the time by owning instead of renting.
However, a good thing happens at the end of many doctors’ stays. Their income is quadrupled or octuples. Want to know why you don’t hear about so many doctors getting burned by shopping during residency? Because when they leave, they start making enough money to pay off two mortgages or even lose a few tens of thousands of dollars without buying their clothes at Goodwill or getting their food at a local restaurant.
Important Principle
Residents should still consider renting as the default residential option, but they still won’t. It will probably always work out, sometimes because they are making money from the house but more often because their future highs are kicking them out.
What Matters?
Now that we’ve discussed what doesn’t matter so much, let’s talk briefly about what’s involved. Financially successful people do all of the following:
- Learn about finance to reduce stupid mistakes.
- Be well insured against financial disasters.
- Earn as much money as possible without compromising their desired lifestyle or moral values.
- Prepare their work so that they can live longer.
- Save a large portion of your income and put it towards building wealth.
- View their investment costs and taxes and take simple steps to reduce them.
- Create a sound investment plan and follow it for decades.
- Prepare their financial affairs for flexibility.
- Withdraw a reasonable amount from their portfolio each year during retirement.
This financial thing is not that difficult. Fix big things and don’t beat yourself up if you make small mistakes in small things.
WHAT DO YOU THINK? What else are physician investors most concerned about? What should they be most concerned about?
