← White Coat Investor Podcast
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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. Welcome back to the White Coat Investor Podcast. Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy. That's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month while you're still in residency. And if you're already out of residency, SoFi's got you covered there too. For more information, go to sofi.com whitecoatinvestor SoFi student loans originated by SoFi Bank, NA member FDIC. Additional items and conditions apply. NMLS 696891. You know, let me rant for just a minute. This is a rant and a promotion, okay? The promotion is for our tax strategist partners. You can find them@whitecoatinvestor.com taxes. This is the most frequent service that is requested from White Coat Investor as far as people send them emails or comments or whatever, right? People want help with taxes. And so we go out there and we find people that can help them with taxes. And over the years, we've recognized there's really two services being offered here. One is tax preparation. They just don't know how to fill out the forms, right? The forms are complicated. They don't want to do it. I get it. Right? My tax return last year, I think I filed in nine states. All right? Do we file a trust return? We've got a business return, Right? It's complicated. We spend thousands and thousands of dollars on. On tax preparation.
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Okay?
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So that is one service. People want. They just want help with their taxes. Everybody thinks it should be way cheaper than it is, right? Everyone thinks, oh, for 200 bucks, someone ought to prepare your taxes. I got news for you. It's not 200 bucks. Nobody's gonna do it for 200 bucks, all right? Unless you have the most simple tax return possible and you walk into the little H and R block booth at Walmart or something, maybe you get it for 200 bucks there. But if you've got a physician type tax return, even a really simple one, you're not gonna get it for 200 bucks. All right? And the interesting thing is people that want tax preparation for 200 bucks also expect this very high level of advice to go with it, right? And the truth is you're not gonna get that for 200 bucks. You're probably not even gonna get that for 2,000 bucks. That service, which we call tax strategizing is significantly more expensive. It's about like paying a financial advisor, a financial planner and an investment manager. That's about what you spend on a tax strategist. So recognize this, right? That this is not an inexpensive service. And so I've tried to include notes on the page where we recommend, where we have these partners listed@whitecoatinvestor.com taxes so people understand that this is not an inexpensive service. If you want a strategizer, it's a lot more inexpensive just to get a tax preparer. But if you want a tax strategizer that's actually going to work with you through the years and go through your business structure and is going to go through your tax situation and suggest some changes in how you live your financial life, that's going to cost you thousands, okay? So be aware of that. Yes, a lot of this can be done yourself. Just like everything else in personal finance and investing. You can learn to be your own financial planner. You can learn to be your own investment manager, you can learn to be your own tax preparer. I prepared my own taxes, including a corporate tax return for many years. It is possible to do this. You got to be kind of into it. You know, it's got to be a little bit of a hobby for you, but you can do it. And you can be your own tax strategist, right? The tax code is not secret. You don't have to get a cpa, you don't have to get some sort of license to be able to read the tax code. You can learn how to read the tax code. It's not that easy a reading. Maybe it'll help you go to sleep at night, but you can do it. You can learn a lot of this stuff yourself. But if you want some help with it, there are folks out there that'll help you with it and they may save you quite a bit of time. And it doesn't take if you have a complicated financial life, right? You're a self employed physician, you're getting a dozen K1s, you're filing in multiple states, you've got LLCs, you've got some complicated asset protection plan, right? It doesn't take that much for them to pay for themselves. So it's entirely possible that they might. Okay. Part of the issue is a lot of people out there, including a lot of physicians, including a lot of white coat investors, think the secret is just to get the right tax guy. If you just change the way you filed your taxes, you'd be saving tens of thousands of dollars. That's not the way it works. Okay? You're probably not mistakenly filing your returns in the wrong way and leaving thousands of dollars on the table. And the way you really reduce your tax bill is by living your financial life differently. Being self employed instead of employed.
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Right.
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Being married instead of single. Having kids instead of not having kids. Giving money to charity instead of not giving money to charity. Saving for retirement instead of not saving for retirement. Becoming a professional real estate investor instead of not being a professional real estate investor. Right? Even within real estate, things like doing a cost segregation study to get more depreciation earlier in the life of the investment, right? You're doing something differently, not just filing your tax return differently. So these are the sorts of things that people talk to you about when you come into a tax strategist. They're like, well, you have this 1099 income. Do you have a second 401k besides the one at your job? Have you considered a personal defined benefit plan? Right. If you've got some real estate investors, how are you taking the depreciation? How are you using the depreciation? Okay, so the complaints we get about tax strategies, one's the cost. People are going in there thinking it costs 200 bucks and it doesn't, it costs thousands. So they're like, well, I don't feel like I got as much value as what I paid for. Well, okay, learn to do it yourself, right? This stuff is diyable. That's a relatively easy one to get over. But we're trying to make our partners be a little bit more transparent about pricing. So at least you know going in what it's going to cost. And then, you know, after a year or two, you might have to decide if the value's there for you or not. The second complaint we get is when people aren't matched up well with their level of aggressiveness. Okay? Some people want to be pretty aggressive with how they file their taxes, right? There's a fair amount of gray area in the tax return. And some people are like, well, if it's gray, I'm going to call it in my favor and they're okay with that. Well, there's a lot of Stuff that hasn't been nailed down exactly in tax court or in the tax code. Okay. And you get out there far enough, and it just becomes audit lottery. Right? You're just hoping you don't get audited, and most returns don't get audited, and so you kind of get away with it. You know, obviously, I'm not talking about just pure tax evasion and just lying on your tax return and that sort of thing. I'm talking about these fairly aggressive techniques. Other techniques are pretty standard ones, and you just didn't know about them, that all kinds of people are using all the time. Doing a backdoor Roth ira, for instance. Right. Even though it's called backdoor, this way to contribute to your Roth IRA indirectly is very standard. Congress has blessed it, the IRS has blessed it, et cetera. Millions of us are doing it every year. It's no big deal. It's not particularly aggressive. It's pretty conservative. But if you didn't know about it, well, it's a way you can save some taxes. And so you gotta match your level of aggressiveness with that tax strategist. And so you gotta have this discussion about their recommendations, Right? If they're like, well, you know, this is one thing you could do. You talk about it, well, how aggressive is that? How likely am I to be audited? How much would it bother me to be audited? How likely if I do get audited, is this to be disallowed? You know, what do the tax court cases say about this? And they think it's interesting, right? This is what they do. They love to have these discussions with you, but you gotta have these discussions with them and decide what you're comfortable taking and what you're not. So you're still in the control seat here. You don't just turn everything over to them and they hand you a tax return at the end of the year. But you got to engage with them anyway. If you want a tax strategist, if you want to try one of these firms, go to whitecoatinvestor.com taxes and check that out. Okay, let's have a discussion about an email I got recently. Here's the email. I wanted to share this story with you in the event you have any tips or wish to use it to dissuade others from making the same mistake. I put this in the category of lessons I did not learn. When our children were younger, on a trip to the Grand Canyon, we had occasion to stay at a large Las Vegas casino. The kids were in awe of the casino which we needed to pass through to get to our room. So I decided to show them the dangers of gambling by putting $5 in a slot machine while explaining the machine would simply take my money, confident that is what would happen. As the machine was spinning, I had the instant fear that if I should win anything, this would be the worst lesson and at their age I would likely have ended up with kids hooked on the promises of games of chance. Luckily, the spin was not a winner and the kids groaned at how foolish I was to waste my $5. Having escaped the potential negative consequences of my poor decision at that time, I proceeded to make a similar mistake a few years later when I entered into a competition with my son, then 10, to extol the virtues of using broad based indexing instead of selecting individual stocks. He had learned about individual stock sel school project and I wanted to show him the value of a broad based index fund. So we each invested $1,000 real money with his equally divided among four individual stocks of his choosing based on products he knew and used as a 10 year old apple, Procter and Gamble, Amazon and Walmart and mine all in a total market index fund. Eight years later and the index fund did well enough with a return over the eight years of 143.2%. But after years of explaining to my son that the index fund would eventually outperform his individual stocks, his four selections have a return of 419% over the same period. This time the slot machine paid out. I've been mostly avoiding the discussion at this point. The 275% difference is too large to explain as accounting for risk. At this rate, I'm not sure I'll live long enough to have my predictions come true. Is it possible my then 20 year old will be in the 10% of managers overperforming an index at the 10 year mark? Is this just a case of unknowingly sticking with blue chips and not overthinking it? Any tips on reversing the impression my son will have from this? The current plan is to delay the discussion until he is likely to have a better understanding of risk and the value of time not spent managing funds. Discussing this with an invincible teenager is unlikely to be productive. Perhaps the best that can come of it is a warning to others not to embark on such a poorly designed lesson with such an obvious chance that the wrong lesson is learned. Okay, yeah, I'm not a fan of the stock market game, right? This is a project that kids do in school in some sort of poorly Thought out personal finance class where at the beginning of the month or the beginning of the semester, they pick a bunch of stocks and then they follow in the paper throughout the semester. And at the end, whoever picked the best stocks that did the best gets a prize. Well, if you're doing that for some short period of time, the secret is to just gamble, right? Only one person's getting the prize and the person who does that is going to pick something that goes through the roof. So that's the secret is find the most volatile thing you can and hope you get lucky. And sometimes people do get lucky. That's really the only lesson here. There is no, I mean, even speaking about an index fund versus picking stocks, there is no guarantee that an index fund can't be beaten. It gets beaten all the time by professional managers. Okay, perhaps 40%, 45% of active managers beat an index fund in any given year. But over a long time period, that percentage drops to something like 5 to 10% before tax, but it's still 5 to 10%. There are people out there that beat index funds over relatively long periods of time. The data suggests that they're impossible to identify in advance. And even once they beat the index fund for quite a while, that, that persistence that, you know, outperformance does not persist. And so if you got to bet your life savings on it, the way to go of course is to just buy all the stocks to index. But there's no guarantee you're going to win over the long time period. By doing that, you're more likely to win, but there's no guarantee you will win. So of course you do worry that the worst thing that can happen to an investor is their first few stock picks pay off and they assume they're the next Warren Buffett. And who knows, maybe your kid is the next Warren Buffett, but it's probably just luck. The real question isn't what about Warren Buffett? The real question is where are all the other Warren Buffets? Because by statistical chance, there should be a lot more people that have outperformed the market over the long term than there actually are. So interesting discussion, interesting thing to think about. I don't know how much you can teach somebody by putting five bucks in a slot machine. I don't know how much you can teach them by playing the stock game with them. Sometimes you're not going to come out ahead. Now part of it, of course, is the last few years. 5, 10, 15 years, whatever, these well known stocks, blue chip stocks, whatever you want to call them, Large tech growth US stocks have outperformed the rest of the market. There's times that small value stocks outperform. There's times that mid caps outperform, there's times that real estate stocks outperform. And guess what, there's times these big tech companies, you know, right now the trend is these big AI companies do outperform the rest of the market, sometimes for relatively long periods of time. Now this particular experiment was run for eight years. Well, what's done well over those eight years? Well, these big companies that have all this tech and this AI now am I going to bet that they're going to be the winners over the next 30 years? I don't know that I'd bet that way, but I have no idea. My crystal ball is very cloudy. So congratulations to your son on winning the contest. But let's keep in mind what happened here, right? He gets 400%, you get 143%. So you turned your money, your thousand dollars into 2,500 and he turned his thousand dollars into $5,000.
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Right.
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$5,000 doesn't change anybody's life. And if this is really the way you're going to bet your life savings, maybe it works out well for you. I do know people for whom it has worked out well and they're convinced they're great stock pickers. But if you are a great stock picker, why in the world would you only be managing your own money? Do you have any idea how much the world will pay you for this skill you have? You should be managing billions and billions of dollars and getting paid 2 and 20 for it. Right. And that would be far more valuable than just investing your own money in these stocks. But people do it and it's not the way to bet. But that doesn't mean you can't win doing it. It is possible. So keep that in mind. I hope that's an interesting discussion for you. Let's move to a different topic. This is also coming from an email coming from one of you and let me just read it. I have a question I wanted to ask. It's something I'm having trouble finding much information online about. I'm finishing residency in 2027. I'm starting to look at jobs down the line. After a recent interview. I'm being offered a partnership track position. 3 year salary guarantee was an option to buy into both the practice and the real estate. Something I'm strongly considering. It's near the area I grew up in. Reputable practice seems to be doing well, etcetera But I have multiple questions as to how this works. I understand that every single structure in partnership is a little different. That's the key lesson here, by the way. But from the few people I've spoken to, there seem to be some general principles that are true with each partnership. For example, there is a separate LLC for the practice and another one for the real estate. I've commonly heard that the practice LLC rents from the real estate llc. I'm having trouble understanding the actual tax and income implications to this. I also understand that a schedule K is issued for the partnership income every year. But is that treated as overall practice business income or personal business income like a 1099? I'm also having trouble understanding how the different models of actually paying for the buy in take place. I believe the offer I'm being given involves me using my bonus distributions that are given quarterly as a partner to pay for the practice and the real estate buy in. But I've also heard of other models where you have to go out and get a loan. I've also heard of some high hybrid models. I'm just curious if you could possibly go over what general mechanisms like this may work. I'm also curious about how my finances will be after the three year base salary. Thanks in advance. Okay. So many docs in this situation. Not the majority anymore, though. The majority of docs now are employees. Something like 77% of docs are employees. They don't own their jobs, they're not partners, they're not sole practitioners, they're employees. And so they don't have to deal with these issues. And so I think they're talked about a little less commonly among docs than they used to. Just because it's a smaller percentage of docs doing this now. There have always been employee docs, they've always been self employed docs. It's just the numbers of them are different now than they were 10, 20, 30, 40 years ago. So here's the way it works. First of all, let's talk about having the Practice LLC and the real Estate llc. Yes, it's common to split that up for a few reasons. Asset protections. One reason, right, if just one of the LLCs gets sued, well, the other one can't lose their assets, right? So that's a good reason to separate things out. They're both toxic assets. The practice can be sued, the real estate can be sued. You know, somebody slips and falls on the property or whatever, you know, burns to the ground and somebody gets injured, who knows, right? There's all kinds of liability that can come from both those entities. So it's good to put them in something like an LLC and split them up. But the idea here is that you can control the LLC separately from the practice, which is helpful. You could sell the practice, but not the llc, for instance. Plus the practice now pays the LLC rent. So in this way, you're kind of turning active earned income into more passive, unearned income. And there's some advantages to passive income. For example, you don't pay payroll taxes on rent. Right. That income that comes in as rent can also be sheltered from taxes by depreciation. Right. So these are kind of the benefits. Now, even if the practice owns the real estate, you can still depreciate the real estate. You don't necessarily have to have it in a separate LLC just to do that. But that's kind of what they're trying to do here by separating these out. And it's very common. There's nothing untoward about doing this. It's a very common structure. And so I wouldn't worry about that whatsoever. They have good reasons to do that. And it's probably better to do it that way than to not do it that way. So I wouldn't worry about that. Okay. Yes. In a partnership and also including things like an S Corp, you get a K1, so you can be paid on a W2, meaning at the end of the year you get a W2 form from the employer. This means you're an employee. And when you get paid on a W2, the employer is responsible for paying for everything. Right. They got to pay for the place you work, they got to pay for the tools you use, they got to pay for your benefits, they got to pay the employer half of social, Social Security and Medicare taxes. You're an employee, you're W2. Okay. The next category is usually a 1099. You're paid on a 1099, meaning at the end of the year, you get a 1099 tax form from your client, not your employer, because you're the employer. You're self employed, so you get a 1099 from each of your clients. If you only have one client, you only get 11099. And that's the way a lot of doctors are set up. But you're in business for yourself. And you. You could have five different hospitals that are your clients, and they could all send you a 1099 at the end of the year. The simplest structure to use if you are self employed is a sole proprietorship, which is probably Fine. Honestly, for most 1099 doctors with no employees, everyone's always wondering, should I get an llc? No. When you're a doc and you have no employees, there's not a lot of business liability. Here, the only liability you have is malpractice. And an LLC or a corporation doesn't protect you from malpractice. So it's probably fine to be a sole proprietor. It keeps your business situation relatively simple. You still need a business bank account and a business credit card, and you need to keep the finances separate from your personal finances. Right? You run your business like a legitimate business, but you don't need to do some complicated structure. Now sometimes there are some benefits to form an S corporation and maybe saving, some Medicare tax, those sorts of things. But liability wise and tax wise, a lot of times it makes sense to just be a sole proprietor. So you file schedule C on your personal taxes every year. You put all your income for the business on there, you put all your expenses for the business on there and a certain amount of its profit. And guess what, you pay taxes on the profit. Okay, that's 1099. Now, if there's more than one owner, it's no longer a sole proprietorship. It is a partnership. And a partnership files a schedule K and distributes a part of that, the K1 to each of the partners. And so from your partnership, like my physician partnership sends me a K1 every March. I think they're supposed to have them distributed by March 15th. A lot of times they don't make it, but March 15th is when it's supposed to be distributed to Dubai. So you typically get your 1099s. You typically get your W2s at the end of January. The K1s, just these partnership returns take longer to prepare, so you typically get those in March. And it looks a little more complicated than the 1099. It looks a little more complicated than the W2. And it is. And so getting K1s for a lot of people is when they run to hire a tax preparer because they're just like, oh, this is over me now, I'm done with this. And they get a tax preparer. But, but the k1 income mostly functions the same as 1099 income. It's kind of self employed income that way. There are some differences. One of the big ones that sometimes gets docs confused is if you're in a partnership, you have to use the partnership retirement plans. You can't go out and open a Solo 401 and a personal defined benefit plan. And use your K1 income to fund those. Can't do that. Sorry. But otherwise, mostly it functions about like 1099 income. It's just a more complicated tax form that comes to you. A little more complicated return you end up having because of that. So I hope that explains how a K1 works. All right. But it's earned income still. You generally do still have to pay not only income taxes on it, but payroll taxes on that K1 income. That's why sometimes people elect to be taxed as an S corporation, maybe save a little bit of those payroll taxes. You got to decide whether the expense and hassle of forming the corporation is worth what you're saving, usually in Medicare tax. And, you know, typically if you're calling at least $100,000 distribution instead of salary, it makes sense to form that S corporation. But that is an option. Okay, so the last thing you brought up was the buy in. The partnership has some value. Even an emergency medicine partnership has some value. My emergency medicine partnership owns no real estate. We really don't have any assets. We don't own any of the equipment we use. That's all owned by the hospital. The accounts receivable is about the only asset, aside from maybe some goodwill or something. But there's not that much of that in emergency medicine anyway. There's lots of different ways that the buy in can be structured. The more valuable the practice, the more complicated and the more expensive the buy in generally. Right. So this is a, I don't know, ENT partnership. And there's all kinds of equipment in the clinic, and there's a building. Right. That the clinic has run out of. And maybe they have an or. Right. Then there's all these things that you're buying into. You might buy into the real estate separately. You might buy into the ambulatory surgical center differently. You might buy into the practice differently. But the nice thing about some sort of an ownership situation like that is you tend to get paid a little bit more. It's more work and a little more risk over the long term. But generally you get paid more than if you're an employee. But also there's some sort of buyout at the end. Right. Even in my emergency medicine partnership, there's a little bit of a buyout at the end as I kind of get my share of accounts receivable. And so you got to buy in to that. And the buy in can be structured a lot of different ways. Maybe the most simple is that you just got to bring a lump sum of cash and you're buying out the partner that's leaving or that cash is distributed among the current partners when this new partner comes on. And then when you leave, you get bought out by the remaining partners. And so you get a lump sum of cash when you leave. And so that's nice. So it can be a lump sum of cash. The problem is doctors at the beginning of their careers, when they're establishing a practice, they don't have any cash. We've got very little money and all kinds of good uses for our income, one of which might be a practice buy in. So they start structuring things in other ways because they recognize that early career docs don't have a lot of cash. For example, you might borrow the money. Well, docs are used to doing this, right? They've had student loans, now they got a mortgage. They're going to take some sort of practice loan and borrow the money from a bank or somebody else. Sometimes the practice itself loans you the money, right? So they act as the banker. Another option is that the practice just has you buy in as you go. Some type of sweat equity situation. Maybe it's your bonuses. Your quarterly bonuses go toward the buy in until you've paid for the buy in and you get paid a little bit less until then. That's the way my partnership worked, right? It was a sweat equity buy in. You got paid as an employee for two years. You made less money than the partners do. Then once you make partner, you get paid the same as everybody else does. And that's a common setup as well. So lots of different ways that can be set up, but that's the basic way it works. It's just new to you as a doc because you've never done it. It's really not that complicated. Probably the most important thing when going into a situation, whether it's an employment situation or whether it's a partnership situation, is get the contract reviewed. Okay, we have folks that we recommend review your contracts. If you go to whitecoatinvestor.com under our recommended T, you'll see contract review. And those folks will even help you negotiate your contracts if you want. Because a lot of times people sign bad employment contracts, they sign bad partnership contracts. If nothing else, this discussion for a few hundred dollars will at least help you understand what you're signing. But oftentimes they can help keep you from making a mistake that might cost you hundreds of thousands of dollars down the road. And if nothing else, they will suggest you change this, negotiate this, and maybe get a little bit better contract than you would have other. It's very easy for them to pay for themselves. They generally charge you a few hundred bucks is all. And with a physician employment or partnership contract, it's very easy to provide a few hundred dollars of value. So it's pretty much a no brainer that everybody, especially if this is your first physician job, should get your contract reviewed. All right, let's get into some speak pipe questions. This first one comes from David. Hey, Dr. Dali, thanks for all you do. I wanted to hear your opinion on what you think about when hospitals or healthcare groups opt to hire locums or temporary workers at a significantly increased cost in lieu of negotiating with their current employers for a raise that is a fraction of the cost compared to what they're paying the locums or temporary workers. Just seems to be a phenomenon. I know, I'm noticing in healthcare and didn't know if you had any perspective on that. You are helped run a private practice and have been in healthcare for long enough to kind of witness some of this stuff happening.
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Thank you.
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Okay, good question. Yes, it does happen. It happens surprisingly frequently. Maybe the most common example, one of the more egregious examples I noticed during COVID you know, we had this need for nurses, right? And so hospitals started hiring traveling nurses to come in and augment their current staff. So what happened? Well, here in Utah, all the Utah nurses realized you could get paid quite a bit more as a travel nurse. And so they went to Idaho and worked as a travel nurse. First they just, just went up there for a weekend. And then after a while they're like, well, I could just do this kind of full time. And so they all went to Idaho and worked as travel nurses. And our hospital started getting short as well. And so we hired travel nurses and they came down from Idaho to work in our hospital. So now all the Utah nurses are working in Idaho, all the Idaho nurses are working in Utah and all the nurses got paid more. And yes, it's very short sighted. The employers ought to just pay the current nurses. They have a little bit more to keep them around but. But they often don't do that because maybe they're not that good at business or whatever. Sometimes the locum's money comes out of a separate pot of money. But usually it's just shortsightedness. They're not planning well and they end up spending a lot more for their labor than they otherwise would. And this happens with docs as well. Sometimes they just do calculations and realize, okay, we're going to come out ahead this way by paying the guy who's willing to live in this small town less. And since we need two docks, we'll pay the Locums more. But we're better off doing that than paying this guy who's willing to work for less in our small town than paying him more and trying to recruit somebody else to come to the small town. That's not going to come until we're paying Locums type of prices. Now we're paying Locums type prices for two docs rather than just one doc. And so sometimes it's up to the individual doc or nurse or whoever to recognize that they're worth more than they're currently being paid. And yeah, if you look around and the people you're working with, your peers in the hospital are getting paid 50% more than you, that's on you. Get out there and negotiate and get a better deal. I think that's really all there is to it. Our quote of the day today comes from Peter lynch who said know what you own and know why you own it. I think that's so true. Be careful not becoming a collector of investments. All right, let's take another question off the speak pipe here.
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Hi Dr. Dali, I'm a 30 year old dentist in Texas just under two years out of residency. I plan to get married next year and will likely need to purchase a home within the next three to four years. I may also want to purchase or start in dental practice in the future. Currently I have a six month emergency fund in a high yield savings account and I'm maxing out my 401k, my HSA and Roth IRA. I'm also approximately paying down about 4,000 per month towards my student loans. I have paid off about 60,000 so far but still have just under 300,000 remaining. My challenge is that after living expenses, car payment, retirement contributions and student loan payments, I have very little leftover to save for a home down payment or a future practice ownership. I understand that investing money needed within a few years in a broad market index fund carries risk. However, I'm also concerned that keeping these funds in cash in a high yield savings account may not provide enough growth to help me reach those goals. On the above timeline. Given a three to four year horizon, would it be reasonable to invest some of my home or practice savings in a broad market index fund rather than keeping everything in cash? Or do you recommend keeping these funds in a high yield savings account? Please provide your insight. Thank you.
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Okay, great question. Wow, everybody out there. Thanks for what you're doing this work is not easy. That's why you get paid. Well, I've said it many times. I'm going to say it again. No one's told you. Thanks for what you're doing today, and thanks for dealing with the financial life you have. I'm talking mostly to students, residents, new attending level type physicians, dentists, et cetera. Thanks for doing that. It matters. You're doing important work and we appreciate you dealing with that. Okay, this is the classic issue where people come out of residency and you have a dozen good uses for money and not enough money to do them. All. Right, you want to do it all. I get it. You want to buy the big fancy doctor house, or any house at all these days. You want to buy a practice, you want to pay off your student loans, you want to save for retirement, you want to have an emergency fund. Maybe you want to do a Roth conversion from money from residency or something. And you got to beef up the emergency fund and you got to replace the beater car, and you want to get married and you want to go on a honeymoon. You have all these things and you can't afford them all. You can afford anything you want, but not everything you want. And so what happens in these first few years out of training is that you slowly start working down that list of 12 things until there's two things on it. But it takes time, it literally takes years to knock some of those things off the list. And it's cool. You get a sense of accomplishment as you go along, but, man, you've already been in school forever. Eight years of school and a year of residency, and now you've been out for a couple of years and you still feel like you're not making progress. Well, I mean, I don't want to say my condolences, but I have empathy for you because I've been there. Right. I came out of residency, I was making $120,000 a year as a military doc, and we didn't have money for everything. We got a place. Yeah, it wasn't nice. You know, there was a shooting out front. There was a drug dealer two doors down. It wasn't a great place. The car I was driving cost $1,800. I bought it at an auction and then realized, ah, I didn't check the AC before I bought it. The AC doesn't work. And I didn't fix the AC. Right. I drove to work without AC. Well, I had AC. I had 440 AC. Right. Roll down the four windows and drive 40 miles an hour. That was the AC I had in southeast Virginia driving to work for four years. And that car before we sold it for like 1500 bucks. I get it. Those first few years, the money is tight, okay? So a few things to address and will include answering the question you actually asked. But the most important thing to do at this stage of life is prioritize, okay? You're making what we call around here a waterfall, okay? And you're basically prioritizing your financial goals, your financial priorities. And this list looks different for everybody, okay? Maybe at the top of the list, maybe when you were in residency or just before you got into residency or when you're moving to your job or something, maybe you racked up some credit card debt, okay? It's a 20, 25%. It's really a high priority. It's truly a debt emergency, right? So maybe that's your first pool in your waterfall, right? So your money goes toward that until that's paid off, right? And maybe it's $6,000. And so it gets paid off in a month or two. Great. It's wonderful, right? That thing's gone, that pool's full, okay? And then the water flows over. What's the next priority? Well, maybe you only had a one month emergency fund and you wanted a three month or four month or six month emergency fund. So money flows over until that's full. It doesn't go anywhere else until then. It doesn't go into the 401k or the 403b or the, you know, it doesn't go toward a house down payment fund, it doesn't go toward buying a practice, it doesn't go toward any of this other stuff until that pool is full. And maybe you say, well, I'm going to pay off $2,000 a month on that. And so once it hits 2,000, your money flows over into the next pool, right? And maybe the next pool is maxing out your Roth IRA, or maybe the next pool is maxing out your 401k, or maybe your next pool is, you know, $1,000 a month toward your 401k. You get to define each of these pools, you know, and of course you made the minimum payment on your student loans, but Maybe pool number four is putting $3,000 a month extra toward the student loan. So once you hit that $3,000, then you go to the next thing. Well, the bottom line is you got 12 pools in a row you've set up and you run out of water in pool six. That's it. You Go to next month. Month. And the next month you start over at pool one, or maybe pool one's done, and you start at pool two that month, right? And your money flows down. And that month you also only got to pool six. Well, the next month maybe you've paid off another pool or you made a little more money or whatever and you got to pool seven. Now you're only four months out of residency and you're already working on Pool 7, but you haven't touched 8, 9, 10, 11 or 12. Right? And you just have to prioritize and try to be patient with yourself and recognize that, that this is the way it is for everybody. You can't do it all at once. You have to prioritize where your money is going to go. Okay. And for some people, you know, getting the house is going to be a real big priority. So other people, getting the practice is a really big priority. Other people, you know what, you got an $1,800 car and it's about to die. Replacing that's a big priority. You know, I'm not going to judge your priorities. Maybe one of your priorities is a well deserved vacation to Mexico, I don't know. But make the list. Be intentional and work your way down and don't get frustrated when it takes a while to get there. Okay? So that's probably the biggest thing I can talk about when I'm talking to a brand new dentist doing this. Okay. The second thing I want to talk about, particularly with dentists, is I want you to give very serious consideration to owning your job, to actually getting a practice. Right? And I would encourage you to put this thing relatively high in your waterfall because the benefit of a new practice, unlike getting a house or unlike paying off your student loans or whatever is it increases your income. Okay? There's more water flowing down your waterfall. So this is a good thing. So, you know, obviously you need to watch your cash flow and it needs to work. Getting into owning a practice, and obviously if you don't run the practice well, you would have been better off being an employee. But as a general rule, getting a practice, owning a practice, being in business for yourself, being self employed is a good thing. I suspect if we look at averages, the average dentist that owns their practice is getting paid 50 to 150% more than a doc that is an employee. And yes, they had put some money down. Yes, there's some additional hassle, yes, there's some additional risk. Yeah, you had to borrow some money, but when you double your income, it's well worth it because you can do so much more. Even after paying the additional taxes and even after the additional hassle and work and risk and all the additional expenses, it's still worth it because you end up making more money. And it's just way easier to pay off debt and invest and buy a house and have the financial life you want and you deserve when you make more money, when you're getting paid fairly. If you're a dentist associate and you're getting paid $160,000 a year, and you've got $400,000 in student loans and you need an $800,000 practice loan and you can't find a house in your town for less than 1.2 million, this does not work out well, right? You just can't do those sorts of numbers with that ratio of income to debt or income toward what you want to buy. You've got to get your income up. So prioritize the practice purchase. In fact, there's three big debts for most new dentists, right? Student loans, mortgage, and the practice loan.
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And way too often people, and particularly their partners or spouses, they prioritize that mortgage more than the practice loan. I'd rather see you go live in an apartment, okay? You got to live in an apartment for a couple of years while you save up money for the practice loan and get into the practice and try to get the practice underneath you. But you know what? Then you move into a really awesome doctor house rather than a place like the one I owned as a brand new attending with a shooting out front. Right? Ownership is good, but owning anything is not necessarily the goal, Right? You want to make progress toward what your actual financial goals are. Okay? Now the question you actually asked was, can I have my money? Do some of the heavy lifting here. Should I put it in index funds? It's hard to watch. I know if I Google VTI right now as I'm sitting here, I see that it's up 10% year to date, not even counting dividends. Two dividends have been paid out already. So it's probably 10.5% year to date. And the money market fund is paying like 3.5%. So you're up 1.75% per year. And if you were up 10.5% instead of 1.75%, you'd obviously have more money. I get it, I get it. And if you knew the future, if you knew what was going to provide the best returns in the next two, three, four years, you just put all your money in that Right. Maybe it's Bitcoin, maybe it's Nvidia, maybe it's small value stocks, maybe it's real estate. I don't know if you knew that. You just put your money there, but you don't know that. And so you have to consider risk. And the truth is risk is two things. The first is the likelihood of you doing well. And the likelihood of getting more money in stocks than in a money market fund is significant. You're probably going to make more money in stocks. But about one out of three years stocks have a negative return. And sometimes it's really negative. And so you also have to consider not just the likely outcome, but the consequences of the less likely outcomes. Okay, for example, let's say you need exactly $150,000 three years from now. And it's a big deal if you don't have that $150,000. Well, if you put that money in stocks and let your money do more of the heavy lifting than your brute force savings does, there's a chance at the end of those three years that there's a 40% drop in the stock market. And now instead of having that 150 you thought you were going to have, you have 70,000 or 80,000 or whatever it is right now. It's like you can't buy that practice or you can't buy that house or whatever you were going to buy with it. Now you got to save up for another year and a half. And if that's a big deal to you for that particular gold, then you should be taking less risk with the money. So as a general rule, when you're saving up money for a year or two, cash is the place to have. If you're going to be saving up for two to five or six or eight years, well, you can start taking a little bit of risk for that money. Maybe use some short term bonds or some intermediate term bonds, or maybe you put 80% of the money into bonds and 20% into stocks. You know, you can start inching up the risk a little bit, but when you only inch the risk up a little bit, you're only boosting the return a little bit. The truth is, if you need a bunch of money in three years, almost all of it's going to come from brute force savings. And the way you get the money is by earning more money and spending less money. There's no other way around it. Right? I mean, even if you, you know, if you're trying to save $150,000 in three years, if you got no return, you'd have to save $50,000 a year. All right, if you can make 3% off it, you still gotta save whatever, $45,000 a year. And maybe if you got 10% return off it, you only have to save, you know, $42,000 a year. You still have to save almost all of it anyway. It's only helping a little bit. So keep in mind, especially in the beginning, compound interest just doesn't contribute that much. A lot of it's a brute force savings. Don't look for a shortcut here. Make your priorities. Put your plan together. Work your plan, try to boost your income. Try to make sure you're spending very intentionally on the things that matter most to you and not just leaking money out of your budget. Be on a real written spending plan, a real financial plan, and you're much more likely to reach your financial goals. Be patient out there. This is going to work out fine. But you got to work the plan for a few years. You made that commitment when you enrolled in dental school, and now you're just, you know, following up on that commitment, working it out. This is the way it works when you've decided to be a high income professional because you got to deal with this kind of early career stuff. All right, let's take on our next question. This one's from Taylor. Hey, I am graduating orthopedic surgery residency later this week. We bought a house during residency and we will be able to make about $100,000 after closing fees. My question is, what should I do with the money? I will be doing a one year fellowship and then plan on renting a house for at least a year once I start my attending job. I have $250,000 in student loans, three kids, a wife who works, but just kind of wondering what your strategy would be with that amount of money. I always find these questions interesting, you know, and sometimes you see it on Reddit or you see it on the WCI forum or Facebook group. Have $400,000, what should I do with it? As though the amount of money, like, changes something, right? Like, the answer would be different if it was 50,000, or the answer would be different if it was 700,000 versus 400,000 or 100,000. It's not any different, right? When you have a written financial plan, it tells you what to do with money, whether that money comes from money you earned or an inheritance you receive or money from the sale of a house, et cetera. You put it into your waterfall, basically, and it starts flowing down through the pools like we mentioned earlier, and you start ticking off these financial goals, you know, and I know almost nothing about your financial life, Taylor, and I know none of your financial goals. So it's kind of impossible for me to tell you what to do with $100,000. But let me give you a few options. Okay? Maybe you don't have an emergency fund. Well, it's probably a good idea to have something like three months worth of your spending sitting in cash in a money market fund paying you 3 or 4%. So if you don't have that, maybe you spend, I don't know, $8,000 a month. So put $24,000 into a money market fund and you've just filled that pool, you're done with that goal. Okay, I don't know, maybe you have student loans at 6% or 7%, maybe that's your next pool. So you just take the other $76,000 of your $100,000 and you put it towards your student loans. And now your student loans are somewhat paid off. Now obviously if you're going for public service loan forgiveness or something, that's not going to be your goal number two in your waterfall. Maybe you've really checked off a whole bunch of your goals and you're relatively low on there and the only thing to put this toward is your retirement. Well, then you start going, did I already max out every available tax protected retirement account that is available to me? You know, I've already maxed out a Roth IRA for myself and my spouse. I've already maxed out my 401, my wife's 403. Well, now you just got invested in a taxable account, right? I think for a lot of people that got money out of the sale of a home, they're just moving that money to their next home. Right? You mentioned that you're planning to not have a home during this one year fellowship and probably rent for a while as an attending, which maybe that's because at some point in the last year or two you realized, hey, maybe it's not a great idea to own a home for just a few years. Well, that's usually the case. That's true. You made out well because you owned a home during a period of time when home prices just went through the roof. And that's great for you. You got an extra $100,000 you wouldn't have had otherwise that you can use toward these other financial goals. But chances are you're probably going to need that money for a down payment in a couple of years. So again, like the last question, two years away, what are you going to do with it? I'm probably leaving it in cash. Maybe I'll buy a two year CD and I'll make 4% instead of 3.5%. Maybe. If you're not exactly sure when you're going to buy the home, maybe you can take the risk that you'd see in a short term or even intermediate term bond fund or even a balanced fund with 20% or 40% stocks in it. You can take that sort of risk if you're okay maybe not having the money in two years when you need need it, but to put it all in Nvidia or put it all in Bitcoin or even just put it all in 100% stocks. I know of pretty much no informed financial planner or do it yourself investor that would recommend that approach. So you got to start any financial plan with a list of your goals. And if you've never written down any financial goals, I guess I'd take that $100,000 and I'd stick it in the Vanguard Federal Money Market Fund and I'd start working on a written financial plan. That's what I'd do. As I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.comwhitecoatinvestor to see all the promotions and offers they've got waiting for you. One more time, that's sofi.com whitecoatinvestor Sofi student loans are originated by Sofi Bank NA member FDIC. Additional terms and conditions apply. NMLS 696891 all right, I mentioned at the beginning if you need some help with your taxes, whether that's preparation or the more expensive but more comprehensive service strategizing, go to whitecoatinvestor.com taxes to check out those resources. Thanks. For those of you leaving us a five star review. It's a weird thing, but this is how podcasts work, right? To spread the word about your podcast you need lots of five star reviews. So a recent one came in. I was titled Advice that Pays. I found WCI as a resident and followed Dr. Dali's advice to live like a resident. After graduating from fellowship, we made a written financial plan with the help of Fire your financial advisor course. After three years I was able to pay off my student loans. Now that our finances are in order, I've cut back to 0.8 FTEs to have more time with my wife and kids. Thank you, Dr. Dali and team. Five stars. That comes from jrockdoc. Thanks for that great review. And more importantly, thanks for actually drinking. You can lead a horse to water, but you can't make them drink, right? You actually drank. You did it. You went out there, you put a plan together, used whatever resources from WCI that were helpful to you, and now you're living this awesome financial Life. You're working 0.8 FTE, you've got no financial worries. It's great for you. Thanks for leaving that review. All right, everybody else, keep your head up and shoulders back. Zach, you've got this. The whole White Coat Investor community is standing behind you to help you achieve the success in your life you're looking for, both in your career and in your finances and with your family and with everything else you're pursuing. Thanks for what you're doing. See you next time on the podcast. The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.