Table of Contents
Today, we answer your questions about agency bonds, what to invest HSA money in, factor investing, and whether to pay off debt or invest. We also discuss if it is a good idea to invest in India’s stock market, answer a question about moonlighting and tax deductions, and more!
Should You Invest in India’s Stock Market?
“Hi, Dr. Dahle. This is Dr. Prashant Patel from North Carolina, an internist. Thanks for all you do. My question is, what do you think of investing in India’s stock market given its significant growth and projections and, in particularly, Nifty 50? I believe it’s India’s comprehensive mutual fund. And in particular with the currency exchange or Forex, I believe that in the long run it appears that the Indian rupee will at least stay where it is or get stronger than the US dollar, which can result in greater gains compared to US equities.”
There are a lot of things to talk about with this question. I don’t have anything against investing in India. I invest in India. If you own a total international stock market index fund, you are investing in India. If you own Vanguard’s Emerging Market Index Fund or ETF—the ETF is VWO—then 18% of that ETF is invested in India. Thirty-three percent is in China, 17% is in Taiwan, 7% is in Brazil, and 3.5% is in South Africa. That’s what emerging market stocks are. If you’re investing in emerging market stocks, you are investing in Indian stocks. I own all the Indian stocks that are publicly traded because I own that fund.
The question here is really, “Should you tilt your portfolio to India?” Meaning you should invest more than the market does in Indian stocks because you think Indian stocks are going to outperform the stocks in the rest of the world. The answer to that question is, I have no idea. I don’t know how well Indian stocks are going to do. My crystal ball is extremely cloudy in that respect. Just because a country has been growing very rapidly does not mean its stocks will outperform. Exhibit A, China. Lots of growth over there. Stock market not so good. In fact, right now it’s facing lots of problems, especially as they mark down some of the property that they thought was worth so much and it turns out it’s not worth that much. That sort of thing could happen in India too. Everyone expects it to boom because the country’s growing so rapidly. It’s now the largest democracy in the world and yet the stock may not grow nearly as fast. There’s some risk there.
If the rupee vs. the dollar were to increase in value, that would provide a significant tailwind to those Indian stocks. That would be great for you if you’re over-tilted to Indian stocks because it would give you an even better return. For instance, lots of people are looking at international stocks right now in the last 10 or 15 years, and they’re like, “Oh, returns are crappy.” The main reason the returns don’t look as good as the US stock market is because the dollar has strengthened so much over the last decade. That’s kind of muted the returns. The international stocks are actually doing fine in their own currency. It’s just when you put them into dollars that they don’t look like your performance is so awesome. That trend could reverse at any time. There’s no guarantee there.
You seem very sure that the rupee is going to outperform the dollar. I would question the clarity of your crystal ball, but you might be right. If you really have a strong conviction that is the case, that may be a case for you to over-tilt your portfolio toward Indian stocks. Another reason might be if you plan to retire to India or if you have a lot of spending in India. For example, if you’re supporting parents in India or something like that, you might want to tilt your portfolio a little bit more toward India. But otherwise, I don’t know why you’d bet on India any more than Mexico or Thailand or South Africa or Malaysia or whatever. I kind of favor a market approach. India is 18% of emerging markets. That’s probably about the percentage of my portfolio that I’d put into it. Whatever amount I’m going to put in emerging markets, 18% of that I’d put into India because I have no idea if India is going to do better than Taiwan or not. I hope that’s helpful.
By the way, I used to see this a lot, especially when interest rates were really low in the US and they were higher in India and people were like, “I can make 6% if I just put my money in an Indian bank.” What they failed to realize was that you have to account for the difference in the currencies. If the value of the rupee has fallen, if it fell 5% that year and you made 6% in the Indian savings account, well, you only made 1% when it comes to dollars. It was about the same as what you were making in a US bank at the time.
You have to keep that in mind. You have to know what inflation is over there. You have to know what the foreign exchange rates changing are going to do to those investments and realize that it all has an effect. It’s not a magic pill that you can just go invest in India and automatically have higher returns. There’s some risk there. You may not have higher returns.
More information here:
Why You Shouldn’t Bail Out on International Stocks
Can I Send Money to India?
What to Invest Your HSA Money in
“Hi, Dr. Dahle. Russ here from Ohio with a question on what to invest HSA money in. I currently invest all of my HSA money in the Vanguard Total Bond ETF fund at TD Ameritrade. Although I include HSA money in my overall stock bond allocation, I recognize that this money isn’t interchangeable for future healthcare expenses. I’ve chosen a bond fund to provide stability and some growth. However, a colleague of mine has a different approach. They invest in equities counting on future growth of the account, obviously exposing the HSA account to potential loss. My question is, how would you recommend investing HSA dollars?”
There’s no right answer to this question. What you’re doing may very well be right for you. What your friend is doing may very well be right for that person. And what I’m doing might be right for me. I can tell you what I’m doing. I have a pretty good size HSA. I have a six-figure HSA, because we’ve been funding it since we were eligible for an HSA back in 2010, and we’ve maxed it out every year. We haven’t actually taken any money out of it. We’ve invested it 100% in equities the whole time. Obviously, equities did pretty well from 2010-2023. That’s why we now have a six-figure HSA. In fact, I’m starting to worry we may not be able to spend it all on healthcare during our lifetimes at the rate it’s going. I keep trying to get around to actually counting up what we’ve spent on healthcare so that we have that record.
There are a couple of schools of thought here. The first one is if you’re spending from your HSA as you go along, that money that you are likely to spend in the next year or two probably ought to be in cash. If your max out-of-pocket for your health insurance plan is $5,000, you probably ought to have at least $5,000 in your HSA in cash. That’s what it’s for. Maybe even a couple of years in case the market has a big downturn. Beyond that, I think you’re OK investing it a little bit more aggressively.
Is that dramatically different if somebody has some money in cash and some money in equities vs. your money all in bonds? Probably not. But that’s kind of the approach I would take. I would invest money that you don’t expect to spend for a long time in there aggressively. I’m talking equities for the most part. The reason why, of course, is that this is your only triple tax-free money. It’s an important account. It’s going to grow in a tax-protected way so it’ll grow a little faster than your taxable account because there isn’t any tax drag. I like the way you’re looking at it as part of your whole portfolio. That way you can just say, “Hey, if you decide to spend some of this money or if you need to rebalance into equities, you can also always sell some of this total bond market you have in there and buy some total stock market or total international stock market or whatever else you invest in in the HSA.” There’s nothing that keeps you from doing that.
You’re not stuck forever in whatever you choose to invest in today. There are no tax consequences to changing investments inside your HSA. You can swap them willy-nilly anytime you like without having to pay any capital gains taxes. But as a general rule, I think you ought to have enough in cash that you’re likely to spend soon and the rest ought to be invested pretty aggressively. I don’t think I’d be a big fan of a bond index fund in my HSA, but it’s not necessarily the wrong thing to do if you’re just looking at it as part of the rest of your portfolio. If you have your stocks elsewhere, that’s OK.
More information here:
The Best Ways to Use an HSA
7 Reasons an HSA Should Be Your Favorite Investing Account
ETFs vs. Mutual Funds and Tax Efficiency
“Hi Dr. Dahle, this is Sam from the Midwest. It’s my understanding ETFs are more tax-efficient than mutual funds. Is this mostly in reference to actively managed mutual funds with a higher turnover rate as opposed to broadly diversified indexed mutual funds? Is there much of a tax difference between VTSAX and VTI? Why would you choose one over the other?”
This is actually more than one question. Let’s talk about actively managed vs. passively managed when it comes to tax efficiency. A passively managed or index fund, whether that be a traditional mutual fund or an ETF, as a general rule will be more tax efficient than an actively managed one. The reason why is because the turnover is lower. The less you’re buying and selling stuff in there, the fewer capital gains, both short-term and long-term, that are being realized. When you look at something like the total stock market index fund, you see the turnover is 4%. It’s going to be really tax-efficient. These Vanguard funds, the Total Stock Market Index Fund, whether you’re looking at the mutual fund or the ETF or whatever, they haven’t distributed a capital gain in like 20-plus years.
If you have mutual funds in a taxable account, you’ll notice that they send dividends, but a lot of them also send a capital gain and it’s a pass-through capital gain. You didn’t sell anything but the fund was selling some of the stocks inside it, and you have to pay your share of those capital gains each year. That’s not very tax-efficient when you have to do that. It’s good to have a very low turnover mutual fund to minimize that. That’s the benefit of passive investing, particularly in a taxable account.
When it comes to a traditional mutual fund, an ETF, you have to understand how an ETF is made and how a share of an ETF is destroyed or broken down. Because what this ETF manager can do is when it’s time to get rid of a share of ETF, they don’t have to sell the stocks themselves. They can pay or give instead of cash, they can give shares of stock that the ETF owns to these companies, these authorized participants that put together ETF shares and break them apart. This is a mechanism in the market. They try to make a few cents in arbitrage doing it, but basically, their role is to form these. Because of the ability of this, the ETF can distribute capital gains in that way. That helps make the ETF more efficient.
A traditional mutual fund can’t do this. In that respect, the ETF wrapper, the ETF framework, and the ETF model are more tax-efficient than the mutual fund model. If given the choice in a taxable account between an index, low-cost, passive, low turnover, mutual fund vs. the equivalent in an ETF, the ETF is going to be a little bit more tax-efficient. At Vanguard, they have a special patent. It actually just expired. Hopefully, we see other companies doing this soon too. But their ETF is simply a share class of the mutual fund. VTSAX is the traditional mutual fund. VTI is the ETF share class. Just like they used to have investor share classes and admiral share classes and institutional share classes, ETF is another share class of that fund. They can use that ETF share class to flush the capital gains out of the entire fund.
At Vanguard, you should expect the ETF to be about as efficient as the mutual fund. They’re pretty similar, but when you go to other companies, the ETFs are slightly more tax-efficient. So, you ought to consider that in a taxable account if you’re using non-Vanguard ETFs. I do tend to, but only because it’s a little bit more convenient to stick with one or the other. For some of our asset classes, I’ve gone to ETFs for almost all of our asset classes. I think our municipal bond fund is still a traditional mutual fund, but the rest are ETFs in our taxable account. But there’s nothing wrong with an ETF; there’s nothing wrong with the traditional index fund. You just have to realize that they’re slightly different. If you care about the differences, dive into them and understand them.
More information here:
ETFs vs. Mutual Funds: Pros and Cons
How Do You Evaluate and Compare Mutual Funds and Exchange Traded Funds?
If you want to learn more about the following topics, read the WCI podcast transcript below.
- Factor Investing
- Agency Bonds
- Pay Off Debt vs. Invest
- Tax-Managed Funds
- Moonlighting and Tax Deductions
Milestone to Millionaire
#136 — Cutting Back To Full Time
This pathologist is celebrating getting her financial ducks in a row and finally feeling ready to give up her side gigs and just work one job. She made some important steps that allowed them to feel confident that they were doing enough to secure their financial future. Some of those changes included selling their money pit house and going back to renting, shifting some child education costs for their special needs child, and not paying off her student loans right now because of the low interest rate. By not paying off the loans, they are able to save and invest more. We hope you enjoy this unique interview!
Finance 101: Home Buying
Today, we are talking about buying a home, particularly during residency. We know it is the dream to own your own home, but renting really should be the default choice for residents. The significant transaction costs associated with buying and selling homes can be as high as 15% of a home’s value. When you are in medical school or residency, you have too much instability with your future and where you are going to live to justify those costs. Everyone likes to say that renting is throwing money away and that is simply not true. Homeowners incur expenses like property taxes, insurance, mortgage interest, and repairs that renters just get to pass off to the owners.
It is important not to make decisions solely based on mortgage payment vs. rent payment. This is not an apples to apples comparison. Mortgages should naturally be lower than rent. Buying a home during residency can certainly work out in some cases, typically for longer residencies. Owning a home is wonderful, but it needs to be purchased at the right stage in your career and life, and you need to consider factors like mortgage rates, income percentage spent on housing, and mortgage amount relative to gross income. Doctor mortgages can be a great option for those of you with alternative financial priorities. Doctor mortgages allow you to put down less than 20% without paying private mortgage insurance.
To learn more about buying a home, read the Milestones to Millionaire transcript below.
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WCI Podcast Transcript
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.
This is White Coat Investor podcast number 333 – Investing in India’s stock market and more.
Thousands of doctors have trusted Pattern to help them understand and obtain disability insurance. They trust us because we know their time is valuable. The doctors have more important things to do than worry about insurance.
We gather quotes from the top five providers to deliver options unique to your situation. Here’s how we do it. One, request your quotes. Two, compare your options in a short meeting with one of our expert sales advisors. Three, buy risk-free. Request your quotes today at www.patternlife.com/wcipodcast.
All right, well, by the time you’re listening to this, it’s now September 21st. I promised you, I think last week that I would tell you about my trip to Half Dome. And I’m not going to do that, not because it was that traumatic, although it maybe it was that traumatic, but because it would take too long.
But for those of you who like adventure stories, want a particularly long read, and when I say long, I’m talking 15,000 or 20,000 words, you can check out the story at whitecoatinvestor.com/halfdome. It was a pretty remarkable experience, pretty tiring. And we found ourselves equal to the task, but just barely. And at one point I think I climbed for 24 hours straight, and I know I had my harness on for what it end up being I think about 44 hours straight during the main part of the climb.
So, it was a pretty exciting, epic, adventurous, terrifying, but very rewarding ascent of the Face of Half Dome in Yosemite. So we did make it, I’m still here making podcasts. So let’s get going.
One other thing you should know about, I think we mentioned last week, WCICON24 early bird registration is open. That only goes through October 12th though. You’ll be able to register after that, but it’s going to cost you more money. For now, it’s $300 less. So register now. Between now and October 12th, you’ll save yourself some money.
You can use your business money to do this. This is a business expense. You’re going to get CME for it. You can use your CME funds to pay for this. So it’s like paying with pre-tax dollars for most of you.
Last week I told you about one of the keynote speakers, Paula Pant of podcast Afford Anything fame. This week I want you to hear about Dr. Tarryn MacCarthy. She’s a happiness and transformational mindset coach that focuses entirely on docs, physicians and dentists.
She’s the host of the Business of Happiness podcast. She’s an orthodontist and author, a motivational speaker. She’s founded her own orthodontics firm up in Maine. She’s been there and done that.
She’s got a degree in psychology, she’s obviously got a DMD and she is also a certified life coach, a certified mastermind magic practitioner, and a rapid transformational therapist. She’s going to give this great talk on wellness and on really getting your life in the happy state that you want it to be in. So you’re going to love that.
Obviously I’m going to be one of the speakers there. I’ve got a great talk planned on estate planning, which we’ve learned lots about over the last couple of years. I’m also going to be talking about the importance of having a base for your portfolio, which is index funds.
Seems boring. No one wants to talk about it. You wouldn’t believe how few people apply to talk at the conference about index funds. But I think we need at least one talk on what I invest 85% of my money into. So I’m going to talk about index funds this year and about why they’re so important and why you need to know about them and what you really need to know about them.
But there’s 30 plus other sessions at the conference. It’s going to be awesome. It’s at a great facility down in Florida. By the time it rolls around in the first week of February, you’re going to be ready to get out of wherever cold state you’re living in, whether that’s Washington state or Maine or Michigan or Pennsylvania or Minnesota or even Utah. You’re going to want to be down in Florida with us.
So sign up now, get it at the cheapest price and come spend some time with us at WCICON24. It will be fun, it will be informative. For many of you it’ll be life changing. Truly, it will help you get back to loving your career, to building your career into what you want, to aligning your ideal life with your current life. So you can get more information wcievents.com for that.
AGENCY BONDS QUESTION
All right, our first question, this one by email. “I’ve been seeing a lot about agency bonds on the news lately. I was wondering if you would be able to do a post on these bonds as I’d like to learn more about them.”
Well, I didn’t think there was really enough for me to do a whole blog post about it, much less a whole episode of a podcast about it. But the best way to think about agency bonds is that they’re slightly higher risk than treasury bonds and have slightly higher expected returns. In fact, when you invest in the federal money market fund at Vanguard, like most of us are, instead of the treasury money market fund at Vanguard, you’re getting very short-term bonds from the agencies. You’re also getting treasury bonds in that particular money market fund.
But today they’re basically yielding about the same. And so, that tells you that the market basically treats them the same. Almost exactly the same risk as treasuries. Almost the same return from them. And that’s really what you need to know about agency bonds. There’s a number of government agencies that issue them.
And if you really want just pure government bonds, just pure treasury bonds, you can get that. There are treasury money market funds, there are treasury bond funds and obviously you can go to TreasuryDirect and just buy straight treasury bonds. But I wouldn’t spend a lot of time worrying about default risk from an agency bond. The risk is not very high.
All right. Those of you who are on social media, like social media, we have a new social media platform, just like Mark Zuckerberg, it’s called Threads at the White Coat Investor. That’s us on there. If you follow us on Instagram, you probably have had the chance to now follow us on Threads. But if you’re just checking out Threads, follow us and our community there is growing rapidly, like all communities on Threads.
QUOTE OF THE DAY
Our quote of the day today is from Warren Buffett. “Do not save what is left after spending. Instead spend what is left after saving.” It’s funny to hear this person who is worth so much money giving very practical, basic personal finance advice, but it’s good advice. So, most of what Warren Buffett says is very, very good advice. I would take his advice there as well.
Let’s do our first Speak Pipe. We’re going to talk about HSA money.
WHAT TO INVEST HSA MONEY IN QUESITON
Hi, Dr. Dahle. Russ here from Ohio with a question on what to invest HSA money in. I currently invest all of my HSA money in the Vanguard Total Bond ETF fund at TD Ameritrade. Although I include HSA money in my overall stock bond allocation, I recognize that this money isn’t interchangeable for future healthcare expenses. I’ve chosen a bond fund to provide stability and some growth.
However, a colleague of mine has a different approach. They invest in equities counting on future growth of the account, obviously exposing the HSA account to potential loss. So my question is, how would you recommend investing HSA dollars? Thank you for your answer in helping guide my DIY investing since 2013.
Dr. Jim Dahle:
Great question, Russ. There’s no right answer to this question. What’s you’re doing may very well be right for you. What your friend is doing may very well be right for that person. And what I’m doing might be right for me.
I can tell you what I’m doing. I have a pretty good size HSA. I have a six figure HSA, because we’ve been funding it since we were eligible for an HSA back in 2010 and we’ve maxed it out every year and we haven’t actually taken any money out of it. And we’ve invested it 100% in equities the whole time. And obviously equities did pretty well from 2010 to 2023.
And that’s why we now have a six figure HSA. In fact, I’m starting to worry we may not be able to spend it all on healthcare during our lifetimes at the rate it’s going. I keep trying to get around to actually counting up what we’ve actually spent on healthcare so that we actually have that record.
There’s a couple of schools of thought here. The first one is if you’re spending from your HSA as you go along, that money that you are likely to spend in the next year or two probably ought to be in cash.
And so, if your max out of pocket for your health insurance plan is $5,000, you probably ought to have at least $5,000 in your HSA in cash. That’s what it’s for. So you can meet the deductible and the out of pocket expenses. Maybe even a couple of years in case the market has a big downturn. Beyond that, I think you’re okay investing it a little bit more aggressively.
Now, is that dramatically different if somebody has some money in cash and some money in equities versus your money all in bonds? Probably not. But that’s kind of the approach I would take. I would invest money that you don’t expect to spend for a long time in there aggressively. I’m talking equities for the most part.
And the reason why, of course, is that this is your only triple tax-free money. It’s really an important account. It’s going to grow in a tax protected way so it’ll grow a little faster than your taxable account because there isn’t any tax drag.
I like the way you’re looking at it as part of your whole portfolio. And that way you can just say, “Hey, if you decide to spend some of this money or if you need to rebalance into equities, you can also always sell some of this total bond market you have in there and buy some total stock market or total international stock market or whatever else you invest in in the HSA.”
There’s nothing that keeps you from doing that. So you’re not stuck forever in whatever you choose to invest in today. There are no tax consequences to changing investments inside your HSA. You can swap them willy-nilly anytime you like without having to pay any capital gains taxes.
But as a general rule, I think you ought to have enough in cash that you’re likely to spend soon and the rest ought to be invested pretty aggressively. I don’t think I’d be a big fan of a bond index fund in my HSA, but it’s not necessarily the wrong thing to do if you’re just looking at it as part of the rest of your portfolio. If you got your stocks elsewhere, that’s okay.
All right, the next question is from Greg.
FACTOR INVESTING QUESTION
Hi, Dr. Dahle, this is Greg from Oklahoma. I’ve got a question regarding factor investing. Currently I have a simple three fund portfolio. Lately I’ve been reading the arguments for and against the small cap value tilts. During my research I’ve come across DFA funds and advance funds and I’m not sure what to think about them.
My question is this. What is the difference in strategies between ETFs VB, AVUV and DFSV? I understand that dimensional and Avantis funds are more small and more value, but I also know that these are not index funds as they do not track an index, but many commentators online have stated that these are not traditional actively managed funds. I was hoping you could help me understand the investing strategy of these funds. Thanks.
Dr. Jim Dahle:
All right, that’s a great question Greg, and I don’t know if we have enough time to get into that on the podcast honestly. I’ve written a couple of blog recently on Avantis and DFA. Many, many years ago I wrote a blog post about DFA.
And for those who aren’t aware of what DFA is, this is Dimensional Fund Analysts or something, I don’t remember even what the “A” stands for, but basically these are folks who said we can do better than index funds. We get the reason why passive is so important.
So we’re going to start with an index fund base, but then we’re going to try to do a few things that make them a little bit better. For example, they say they’re a little bit more patient in how they trade. They don’t have to follow the index exactly. So if it doesn’t make sense to make a trade right when something comes out of the index or add it right when it comes into the index, they’re not going to do that. And another thing they try to do is they tend to have factor tilts.
Now, DFA grew out of this faculty at the University of Chicago where they did all this research on the small factor and the value factor. And so, they’re big believers in this. And if you go and pick up one of these small value funds or ETFs from DFA or Avantis, you will see that they’re very small and very valuey, especially compared to the Vanguard Small Value Index fund. And so, you get a little bit more of a factor tilt. So when those factors do well, the DFA and now the Avantis funds, tend to do a little bit better than the Vanguard tilted funds toward that factor because they’re a little bit more tilted.
On the downside, they technically are actively managed. Now if you ask them, they’ll say, “Well, our philosophy is passive, but our implementation is active.” But it’s active, you’re not truly getting an index fund there. And you’re also paying a little bit more for that.
You’ll see if you look at their funds, the expense ratios tend to be low, yes, way less than the average of 1%. But at 0.25 or 0.35, that’s quite a bit higher than what you’re looking at Vanguard where it’s essentially free. When you get down below 10 basis points of expense ratio, you’re basically investing for free. And these are not free. There is an expense there. And if there are methods and their factor tilts are not enough to overcome the expense, well, you’ll come out behind.
Now I like both of these. I like the fact that basically Avantis is a bunch of people that left DFA because DFA wouldn’t implement ETFs. They went and started their own firm and basically have what are the equivalent of DFA ETFs. And then of course DFA had to react to that and now they’ve come out with their own ETFs. So, this has eliminated one of the biggest problems with DFA, which is that you had to go hire an advisor to invest in their funds and pay them a 1% AUM fee. Well, you no longer have to do that because you can invest in the DFA and the Avantis ETFs and basically get the same sort of investment without the investment advisor. I like that aspect.
Now there are some very subtle differences between DFA and Avantis and how they tilt to the factors. And you can look into those. As you look at the prospectuses for each of the ETFs, as you look at Morningstar and see what’s actually under the hood, what they’re actually investing in, you’ll see that one has a little more of a small tilt, one has a little more of a value tilt.
They also tend to use some other factors to a certain extent like profitability and quality. So you can do a little bit of research about those factors and how much you believe they’re actually real. Keep in mind that these funds used to use other factors like momentum. DFA used to use momentum. Well, they’ve kind of quietly dropped that factor because it turned out to be very difficult to capture that premium in a practical way.
And so, factor investing does not have the track record that you’d love for it to have. There are some risks there. These factors underperform inevitably for long periods of time. Some of them may not even be real. Once you have more data, it may be obvious they’re not really real.
But I like what DFA and Avantis are doing there and if you want to tilt your portfolio to factors, I think they’re great ways to do it. You can also do it just going straight to Vanguard but these guys are kind of specialists in factors, and it’s not unreasonable to have one of these funds or two of these funds in your portfolio in order to tilt your portfolio toward those factors.
I think that’s probably about as much as I can say on the podcast about it. Watch for some blog posts on the blog. I’ve written a couple blog posts recently about these two companies and their ETFs and why I’m considering them for a portion of my portfolio and that’ll give you some more information.
All right, we got a really nice note from a White Coat Investor recently. I thought I’d share it with you because I hope some of you find it inspiring. This person wrote in and said, “I just broke into the $2 million plus net worth. Found your blog in 2012 or 2013. Graduated residency in 2016. My spouse is also a doc. We had a net worth in 2016 of minus $650,000. In 2023 we are now multimillionaires. I can’t thank you enough for your guidance and info on your blog. Probably one of, if not the most influential person in my life and we’ve never met. Sincerely, thank you for what you do. Keep up the awesome work.”
I think this came in as an Instagram message. I don’t even check the Instagram messages, it’s one of my staff members that checked it. But they were pretty excited to see that because this information becoming financially literate, becoming financially disciplined, when you apply that to a doctor income or a two doctor income, it can do some pretty awesome stuff pretty quickly. So, congratulations to this person and I hope there’s a whole bunch more of you out there that have had the same experience.
All right, let’s talk about paying off debt versus investing. This is a question from Joe on the Speak Pipe.
PAY OFF DEBT VS INVESTING QUESTION
Hi Dr. Dahle. I have a pay off debt versus invest question regarding non-governmental 457(b) versus paying off my mortgage. Our written financial plan states that my wife and I will be debt averse, retiring in 20 years with three and half million in retirement savings and buy a $2 million doctor home in seven years. Our retirement goal will require $100,000 per year in retirement savings. We currently max out our 403(b)s with employer match and backdoor Roth IRAs. If I were to max out my non-governmental 457(b), it will allow us to hit our $100,000 per year goal in completely protected retirement accounts. I have student loans, which should be forgiven in two and half years with PSLF. Our only debt is our 30 year fixed mortgage of $450,000 with 2.99% interest rate.
My current plan is to max out the non-governmental 457(b) and when our student loans are forgiven, reallocate our monthly student loan payments to extra mortgage payments, putting us on track to pay off mortgage in 15 years.
457(b) has good investments options and my employer is on solid financial footing. Upon severance from my employer, I have no plans to leave, but you never know. 457(b) distributions must begin at 70 and half or at a date that I determine within 60 days of severance.
Alternatively, if I redirect money currently allocated to my 457(b) and the money going to our student loans after they have forgiven towards our mortgage, we’ll pay it off in five years. Should I contribute to the 457(b) or redirect these funds directly to paying off our mortgage?
Dr. Jim Dahle:
Great question. There’s no right answer. There’s no wrong answer here. I’m going to go to your financial plan to answer your question. You’re saying you need to invest $100,000 a year to meet your retirement goal. And in order to get to $100,000, you got to use the non-governmental 457(b). I guess you don’t have to, you could always invest in taxable, but you can use the non-governmental 457(b).
It’s a good 457(b). I don’t hear an issue with the distributions. I don’t hear an issue with the fees or the expenses or the employer. I think that’s what I would do. Right now you can make 5.2% in the money market fund of Vanguard and your mortgage is at 2.99%. It’s hard to argue that that’s the right move right now, especially when your plan says you need to invest more money to get to your retirement goal.
I like your idea for now putting the money in a 457(b) and once the student loans disappear in two and a half years, reallocating that to paying off the mortgage that you want to be rid of because you’re relatively debt averse. And that’s fine. I paid off my mortgage, I totally get it. Mine was 2.75% when I paid it off. Totally understand the mindset there and I think that’s fine.
But you want to make sure you reach your goals as well, that this being debt averse doesn’t keep you from reaching your goals. And I’m afraid if you invest less than your $100,000 in order to pay off the mortgage faster, then it’s going to keep you from reaching a goal that I sense is more important to you than having a paid off mortgage in five years.
I think that’s what I would do, but like I said, there is no wrong answer here. You and your partner ought to talk about it and decide what you want to do and either one of those is totally reasonable.
All right, let’s take a question from Prashant. And this is the one that we’ve named the podcast after because I think it’s the most unique question we got for this episode.
SHOULD YOU INVEST IN INDIA’S STOCK MARKET QUESTION
Dr. Prashant Patel:
Hi, Dr. Dahle. This is Dr. Prashant Patel from North Carolina, an internist. Thanks for all you do. My question is, what do you think of investing in India’s stock market given its significant growth and projections and in particularly Nifty 50? I believe it’s India’s comprehensive mutual fund.
And in particular with the currency exchange or Forex, I believe that in the long run it appears that the Indian rupee will at least stay where it is or get stronger than the US dollar, which can result in greater gains compared to US equities. Thank you so much and thanks for all you do.
Dr. Jim Dahle:
Okay, great question. Lot of things to talk about with this question. First of all, I cannot believe that they have named their index over there, the Nifty 50, and with no historical reference whatsoever to the Nifty 50 of the 1960s in the United States, which ended up being not a great investment.
It doesn’t mean this Nifty 50 is not going to be a great investment, but you’d think you would name it something else based on what happened to the Nifty 50 in the 1960s. Very interesting choice they’ve chosen there.
But that’s what it is. The Nifty 50 index is a benchmark market index of the National Stock Exchange in India. Whereas it was these 50 stocks that couldn’t lose in the 1960s and turned out you could lose when you got to the stagflation of the 1970s. And the historical record on the Nifty 50 is not so awesome, when you look at that.
But anyway, I don’t have anything against investing in India. I invest in India. If you own a total International Stock Market Index Fund, you are investing in India. If you own Vanguard’s emerging market index fund or ETF, the ETF is VWO, then 18% of that ETF is invested in India. 33% is in China, 17% is in Taiwan, 7% is in Brazil, 3.5% is in South Africa. That’s what emerging market stocks are. If you’re investing in emerging market stocks, you are investing in Indian stocks. I own all the Indian stocks that are publicly traded because I own that fund.
And so, the question here is really “Should you tilt your portfolio to India?” Meaning you should invest more than the market does in Indian stocks because you think Indian stocks are going to outperform the stocks in the rest of the world. And an answer to that question, I have no idea. I don’t know how well Indian stocks are going to do. My crystal ball is extremely cloudy in that respect.
Just because a country has been growing very rapidly does not mean its stocks will outperform. Exhibit A, China. Lots of growth over there. Stock market not so good. In fact, right now it’s facing lots of problems, especially as they mark down some of the property that they thought was worth so much and it turns out it’s not worth that much.
Well, that sort of thing could happen in India too. Everyone expects it to boom because the country’s growing so rapidly. It’s now the largest democracy in the world and yet the stock may not grow nearly as fast. And so, there’s some risk there.
Now, if the rupee versus the dollar were to increase in value that would provide a significant tailwind to those Indian stocks. That would be great for you if you’re over tilted to Indian stocks because it would give you an even better return.
For instance, like lots of people looking at international stocks right now in the last 10 or 15 years, and they’re like, “Oh, returns are crappy.” Well, the main reason the returns don’t look as good as the US stock market is because the dollar has strengthened so much over the last decade.
And so, that’s kind of muted the returns. The international stocks are actually doing fine in their own currency. It’s just when you put them into dollars that they don’t look like your performance is so awesome. That trend could reverse at any time. There’s no guarantee there.
Now you seem very sure that the rupee is going to outperform the dollar. I would question the clarity of your crystal ball, but you might be right. And if you really have a strong conviction that is the case, that may be a case for you to over tilt your portfolio toward Indian stocks.
Another reason might be if you plan to retire to India or if you have a lot of spending in India. For example, you’re supporting parents in India or something like that, you might want to tilt your portfolio a little bit more toward India. But otherwise, I don’t know why you’d bet on India any more than Mexico or Thailand or South Africa or Malaysia or whatever.
And so, I kind of favor a market approach. India is 18% of emerging markets. That’s probably about the percentage of my portfolio that I’d put into it. Whatever amount I’m going to put in emerging markets, 18% of that I’d put into India because I have no idea if India is going to do better than Taiwan or not. I hope that’s helpful.
By the way, I used to see this a lot, especially when interest rates were really low in the US and they were higher in India and people were like, “I can make 6% if I just put my money in an Indian bank.”
What they failed to realize was that you have to account for the difference in the currencies. And so, if the value of the rupee has fallen, if it fell 5% that year and you made 6% in the Indian savings account, well, you only made 1% when it comes to dollars. And it was about the same as what you were making in the US Bank at the time.
And so, you got to keep that in mind. You got to know what inflation is over there. You got to know what the foreign exchange rates changing are going to do to those investments and realize that it all has an effect. It’s not a magic pill that you can just go invest in India and automatically have higher returns. There’s some risk there. You may not have higher returns.
All right. Time has come for me to say thanks to you guys. We get feedback sometimes people hate that I do this. They’re like, “Why are you thanking us? Our jobs are not that hard.” I got an email from someone saying, “Hey, the bricklayers, they’re working hard too.” Okay, well, that may be true, but the bricklayers are not necessarily the target audience for this podcast. It’s for high income professionals. And while I appreciate what bricklayers do, I particularly appreciate what docs, attorneys, you other high income professionals out there do.
And it’s often unsung work. People assume that because you’re paid highly, that you’re being thanked enough and don’t deserve thank you for the hard work you’re doing. Well, I see people doing a lot of stuff out of the goodness of their heart just to do the right thing. I think you deserve a special thank you. If no one’s ever said that to you today, let me be the first.
All right. You are probably aware we have a number of White Coat Investor communities. We have a Facebook group, we have the White Coat Investor forum which is hosted right on our website. We have the Reddit, which is growing like crazy by the way. If you love Reddit, come by the White Coat Investor subreddit. It’s growing like mad.
But we are starting a new WCI community. And so, I’m going to have our podcast producer for the first time ever on this podcast step in and tell you a little bit about our new WCI community. Welcome Megan.
NEW WCI COMMUNITY – THE FEW
If you listened to the podcast last week, you heard our announcement about our new fabulous community for women, the Financially Empowered Women, or the FEW. Our first event is next week. It’s on Tuesday, September 26th at 6:00 PM Mountain Time.
I will be hosting our first live virtual event and our presenter will be our very own Katie Dahle. She’s going to talk to us about building an intentional financial life. After Katie’s presentation, we will break into small groups to answer your questions and have continued conversations.
It’s going to be a great evening and we would love to see all of our White Coat investor women there. Please go to whitecoatinvestor.com/few to sign up. Again, that is whitecoatinvestor.com/few.
Dr. Jim Dahle:
All right, I hope you are excited about this new group. I hope you sign up for that. Some great things are going to come out of that. We have some awesome guests being lined up. I can’t reveal them all because they’re not all a hundred percent lined up, but there’s going to be some awesome events for the FEW and I hope those of you eligible to join, will join and enjoy that experience.
Our next question is coming off the Speak Pipe.
ETFs VS MUTUAL FUNDS AND TAX EFFICIENCY QUESTION
Hi Dr. Dahle, this is Sam from the Midwest. It’s my understanding ETFs are more tax efficient than mutual funds. Is this mostly in reference to actively managed mutual funds with a higher turnover rate as opposed to broadly diversified indexed mutual funds? Is there much of a tax difference between VTSAX and VTI? Why would you choose one over the other? Thanks for all you do.
Dr. Jim Dahle:
Okay, great question. It’s actually more than one question. Let’s talk about actively managed versus passively managed when it comes to tax efficiency. A passively managed or index fund, whether that be a traditional mutual fund or an ETF as a general rule will be more tax efficient than an actively managed one. And the reason why is because the turnover is lower. The less you’re buying and selling stuff in there, the fewer capital gains, both short-term and long-term that are being realized.
And so, when you look at something like the total stock market index fund, you see the turnover is 4%, it’s going to be really tax efficient. These Vanguard funds, the total stock market index fund, whether you’re looking at the mutual fund or the ETF or whatever, they haven’t distributed a capital gain in like 20 plus years.
If you have mutual funds in a taxable account, you’ll notice that they send dividends, but a lot of them also send a capital gain and it’s a pass through capital gain. You didn’t sell anything but the fund was selling some of the stocks inside it, and you got to pay your share of those capital gains each year. And that’s not very tax efficient when you have to do that. And so, it’s good to have a very low turnover mutual fund to minimize that. That’s the benefit of passive investing, particularly in a taxable account.
Now, when it comes to a traditional mutual fund, an ETF, you got to understand how an ETF is made and how a share of an ETF is destroyed or broken down. Because what this ETF manager can do is when it’s time to get rid of a share of ETF, they don’t have to sell the stocks themselves. They can pay or give instead of cash, they can give shares of stock that the ETF owns to these companies, these authorized participants that put together ETF shares and break them apart.
This is a mechanism in the market. They try to make a few cents in arbitrage doing it, but basically that’s their role is to form these. And because of the ability of this ETF to distribute capital gains in that way, it gives the appreciated stock shares, not the high basis ones, it gives the low basis ones. And so, that helps make the ETF more efficient.
A traditional mutual fund can’t do this. And so, in that respect, the ETF wrapper, the ETF framework, the ETF model is more tax efficient than the mutual fund model. If given the choice in a taxable account between even an index, low cost, passive, low turnover, mutual fund versus the equivalent in an ETF, the ETF is going to be a little bit more tax efficient.
At Vanguard, they have a special patent. It actually just expired. So hopefully we see other companies doing this soon now too. But their ETF is simply a share class of the mutual fund. VTSAX is the traditional mutual fund. VTI is the ETF share class. Just like they used to have investor share classes and admiral share classes and institutional share classes, ETF is another share class of that fund. And they can use that ETF share class to flush the capital gains out of the entire fund.
At Vanguard, you should expect the ETF to be about as efficient as the mutual fund. They’re pretty similar, but when you go to other companies, the ETFs are slightly more tax efficient. So, you ought to consider that in a taxable account if you’re using non Vanguard ETFs. I do tend to, but only because it’s a little bit more convenient to stick with one or the other. For some of our asset classes, I’ve gone to ETFs for almost all of our asset classes. I think our municipal bond fund is still a traditional mutual fund, but the rest are ETFs in our taxable account.
But there’s nothing wrong with an ETF, there’s nothing wrong with the traditional index fund. You just got to realize that they’re slightly different. And if you care about the differences, dive into them and understand them.
TAX MANAGED FUNDS QUESTION
Okay, this next question comes in by email. “I was wondering your thoughts on VTCLX or other tax managed funds. I have not heard any discussion of these. For those with large amounts of stock holdings in taxable accounts who are not planning to donate the appreciated assets, is there any information around this type of fund versus a VTI, the total stock market fund or an S&P 500 fund?”
Okay, we’re using tickers, which really isn’t fair to use tickers. Who memorizes tickers? Yeah, I know VTI. I probably know the tickers for the four or five ETFs I actually use, but that’s not fair to podcast listeners. Nobody knows these things by the tickers.
VTCLX is the Vanguard Tax Managed Capital Appreciation Mutual fund. This is one of these funds that Vanguard started and it’s really interesting, and by the way, you should read this book I finished recently called Stay the Course, it was Jack Bogle’s last book. But you can read all about the history of Vanguard and when these funds were made and why and what the reasoning was behind them. And it’s super interesting actually, if you’ve been a fan of Vanguard for a long time.
But anyway, that’s what that fund is. It’s this fund that’s trying to appreciate your capital but also be fairly tax efficient for a taxable account. And so, you can learn about this mutual fund just like you can any other mutual fund.
If you search that ticker or the name of the fund and Morningstar, it’ll take you to Morningstar’s analysis. And what you’ll learn if you go here is there’s $18 billion in this fund. It’s got an expense ratio of 0.09%. It’s mostly invested in large blend stocks. That’s fairly similar to an S&P 500 fund.
And if you look at the portfolio, you can see that it’s pretty broadly diversified. It’s got 981 stocks in it, and they’re all the stocks you’ve heard of. Apple, Microsoft, Amazon, Alphabet or Google, Tesla. That’s what their main holdings are. This is similar to an S&P 500 fund.
The question is, do you just take an S&P 500 fund that’s going to be investing in the same stocks, or do you somehow grab this one and hope it does better because they’re tax managing?
Well, the truth is, an S&P 500 fund is very tax efficient to start with. There’s very little that can be added to make it more tax efficient. But what you’ll notice if you look at it is you’ll notice that it’s yield is probably lower, I’m going to guess, than an S&P 500 fund. Let’s look at it. The yield is 1.25%. And if I go and look at the same yield for VOO, which is the, S&P 500 ETF version, you’ll see that yield is 1.45%. The difference between 1.25% and 1.45%, you’ll get a little bit less money in dividends. You’ll probably have a similar return but a little bit less money in dividends. And so, it’s theoretically a little more tax efficient.
I’m not a big fan of that sort of active management. I think they’re just as likely to choose the wrong stocks as to choose the right stocks. And it’s already so tax efficient, I don’t know that it’s really worth bothering, but we can go and look at the performance of this fund.
Again, I’m at Morningstar. I click on the performance tab and I can go back and see what the performance has been versus the S&P 500, which I think is the index they’re using to compare here. Let’s see. No, they’re using a Morningstar index there, but basically what they’re saying is that over the last 15 years they got 10.86% and the index got 10.77%. They outperformed it by almost nothing. Basically got the index return.
And if we look at the same thing for the S&P 500 fund, we will see over the last 15 years, they don’t have a 15 year return for that particular ETF. So let’s use the fund, the FINX is what it is so we can get an apples to apples comparison. And you’ll see under the performance that it was 10.74%. So they did beat the index, but not by much. They beat it over 15 years by 14 basis points a year.
So, it’s not a bad choice. You won over the last 15 years, not by much. You put your nose across the finish line before the index fund did, but you won. So maybe you’ll win over the next 15 years.
Is it slightly more tax efficient and get about the same return? Yeah, it probably is. So it’s okay to use, just realize that once you buy something, you’re kind of stuck with it long term in a taxable account once it appreciates. If you’re not willing to donate shares to charity and you don’t want to sell them, you’re stuck with it long term. So be sure you really like it.
Anytime you’re using an actively managed fund, things can change, the manager can change. But I would expect that particular fund to be managed pretty conservatively. They’re mostly a closet index fund that just tries to add a little bit on the tax management side. So it’s okay to use that.
These funds in general from Vanguard, they’re mostly a failure because most of them are not necessarily dramatically more tax efficient nor necessarily outperforming the comparable index fund.
When you read Jack Bogle’s take on them a few decades after he created them, he doesn’t necessarily call them a failure, but he doesn’t call them a smashing success. They’re fine, but they’re nothing special. I don’t use them.
If ETFs had never come along, I think they’d be more popular. But with an ETF, I think you can get that extra little bit of tax efficiency you’re looking for. And I don’t think you need to use the tax managed funds.
All right, let’s talk about moonlighting and tax deductions. This is a question on the Speak Pipe from Brad.
MOONLIGHTING AND TAX DEDUCTONS QUESTION
Hi, I’m an HBSP graduate finishing my civilian deferred radiology residency this summer and will soon be starting work with the Air Force at Langley Air Force Base in Virginia. I have listened to a few of your podcasts about moonlighting as well as tax deductions, but I have a few questions pertaining to these topics.
I would like to moonlight for a company as a 1099 independent contractor reading films from my apartment, which I’ll rent in Virginia. Am I able to deduct all of my expenses related to this and how far do these deductions extend?
I assume I can deduct my direct expenses such as desks, chairs, computer, hardware and internet. Can I deduct the entirety of my rent and utilities? If I decide to go to a radiology conference in Hawaii for a single hour, can I deduct the entire vacation if I stay for a week and claim it as education? Where is the line drawn with deductions and at which point does the IRSs get suspicious?
Dr. Jim Dahle:
All right, great question. First of all, thanks for your service. I also spent four years at Langley, so I know that first fighter wing hospital very well. I’m also aware of the local moonlighting opportunities there as I moonlighted at some of the trauma centers in that area. It sounds like you’re going to be working for more of a national company as a 1099.
Your question is a good one. And doctors, we like to have things black and white when we can. Here is okay, here is not okay. But guess what? This is a very gray area. So what can you deduct? Well, if that computer is only being used for this moonlighting job, you can deduct 100% of the cost. You might have to depreciate it, depending on how much it costs, but for the most part you can deduct it.
Same thing with furniture. You may end up having to depreciate it over a few years, but if you’re only using it for the business, that’s a business expense. However, if this is a computer you’re only using 10% of the time for the business, guess what? You only get to deduct 10% of its cost. And that’s the way all these expenses go.
Same thing with your apartment. If 10% of the apartment is a home office that is used regularly and exclusively for this home business, then yeah, you can deduct that percentage of the cost of the home, including rent, including the mortgage payment, including insurance, utilities, everything. If it’s 10% of the home, you can deduct 10% or you can do what most people do, which is just take the simplified version, which is $5 per square foot up to 300 square feet and they just take that deduction. But the same rule applies. You have to use that space regularly and exclusively for the business.
Now, if it gets used for 10 minutes for something else, the IRS isn’t going to come knock on your door and find out and disallow that deduction. But if it’s being regularly used by your kids to do their homework each afternoon, well, that’s not very honest of you to just claim it’s being used exclusively for the business.
Are you going to be caught? Probably not. And it’s one of these things where pigs get fat and hogs get slaughtered. You try to take too much and the IRS starts paying a little more attention to it. So, same thing with the travel deduction.
Now when you go to a conference in Hawaii, the main purpose of the trip, if more than 50% of the main purpose of the trip is to attend the conference, then you can deduct that. But if you’re going there for an hour and you’re spending a week vacationing, it’s going to be pretty hard to justify that in the event of an audit. Now, do a lot of people claim that? Yes. Do they deserve it? No. But they can claim that.
There’s this other question that’s kind of gray but if you talk to a CPA, what they will tell you is that if you are moonlighting and you have a regular job as a radiologist, you’ve got to prorate that expense and you can only take a deduction for the percentage of the income that’s coming into your time used as an independent contract radiologist. And so, that further decreases your deduction as the most honest way to take it.
Now are most people doing that? Probably not, but that’s the way you’re supposed to do it. If you got a W2 job that’s half your time and you got to 1099 job that’s half your time and you’re going and trying to write this off as a business expense, you’re really only supposed to write off half of it because the other half your employer ought to be reimbursing for.
And so, it’s a little bit complicated, it’s a little bit gray, but that’s the way it works. I hope that’s helpful to you and hope you’re able to get some sort of deduction there, even if it’s maybe not quite as big as you had hoped it was going to be.
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All right, don’t forget, you can sign up for the Financially Empowered Women, our new WCI community at whitecoatinvestor.com/few.
Thanks for those of you leaving us a five star review and telling your friends about our podcast. We have a review from Leigh Leite who says, “Always inspiring. This is such a great podcast and an inspiration to medical professionals to take control of their own finances.” Five stars. Thanks for that great review. We appreciate it.
All right, we’ve come to the end. I’m glad I’m still here after getting back from Half Dome. I’m glad you’re still here. Don’t go climb Half Dome at least if you like your skin and don’t want to be exhausted. Actually, it was a pretty great experience, I’m not going to lie. But not one I can necessarily recommend to everybody else out there.
At any rate, I missed you guys. It’s good to be back with you recording podcast and we’ll see you next time on the White Coat Investor podcast.
The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
Milestones to Millionaire Transcript
This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.
Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 136 – Cutting back to full-time.
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All right, we’ve got a great guest on the podcast today with a new milestone we have yet to celebrate on the podcast. But stay tuned afterward, we’re going to talk a little bit about home buying.
Our guest today on the Milestone to Millionaire podcast is going to remain anonymous, but I’m still excited to have her. Welcome to the podcast doc.
Dr. Jim Dahle:
All right. Tell everybody, this a unique milestone. We haven’t had this milestone on yet. In 136 episodes or 135 prior episodes, we’ve never had this milestone. Tell us what milestone you recently accomplished.
My milestone is that I’ve cut back to 1.0 FTE.
Dr. Jim Dahle:
And I’ve only got one job.
Dr. Jim Dahle:
I love this milestone because when I think about it, yes, this was a milestone I got to. I guess some people start out their career like this, but a lot of us especially in those work like a resident years, like a resident years or not only spending like residents, we’re working like residents too. We’re moonlighting, we’re working a lot of hours, we’re taking extra call, et cetera. And so, there comes a time when we often go “This isn’t worth it anymore” and cut back. And it sounds like you hit that time recently.
I did, yes.
Dr. Jim Dahle:
Yeah. Okay. So tell us a little bit about your career. What do you do and how far you’re out of training and what you’ve done so far with your various jobs?
Sure. I’m a pathologist and I work in academics. I’m six years out of training and I spent five of those years working in a different academic institution. And then one year, my full-time job was a nonclinical position. Now I have just started a new position back in April at another academic job. And this was a really exciting job for me to take because it feels like a very long-term sustainable, great fit, both for me and also from the hospital department side.
Dr. Jim Dahle:
Awesome. Tell us, are you single? Are you married, kids? What kind of situation are you in?
I’m married. I have been married for almost 12 years and I have three children who are all school aged. My husband is a stay-at-home dad and has been since our youngest child was born about five years ago.
Dr. Jim Dahle:
Okay. So for the most part, for your career, it’s been a one income household. Were you working more jobs out of interest before or primarily for financial reasons?
I would say it was a mix of both. I started doing moonlighting when I was a resident. In my state at that time, pathology residents were allowed to work as medical examiners. Even if you were not a fully board certified pathologist and you hadn’t done a dedicated forensic pathology fellowship, you could still be granted medical examiner credentials.
I started doing that in 2015 when I was a third year resident. I did that for about a year. Usually it would be going in on a weekend, on a Saturday morning for a few hours to do exams that were really just external exams. If a decedent needed a full autopsy, then that would be handled by the forensic pathologists and not by the weekend medical examiner.
I started doing that because at the time my older two kids were both very young. They were both in full-time daycare. My husband was working and he had basically a resident salary. We pretty much had a two resident household, but it just always felt like we never had enough.
And so, when this opportunity came up, it felt like a reasonable way for me to spend a few hours a week that wasn’t going to be overnight, it wasn’t going to be doing something that I wasn’t comfortable with or that was particularly out of my area of interest.
That was the first side job that I had. And then when I was a fourth year resident, I started doing some teaching for a third party educational company where I was teaching mostly online for step one pathology related content. And then that kind of lasted me through the first couple of years of my attending position as well.
That teaching job ranged anywhere from $5,000 a year to about $17,000 a year in my highest take home year, which was a lot for us at the time. That was almost 20% of our income when I was a resident. So it made a huge difference for us to pay both kids in full-time daycare and diapers and bottles and all of that.
But at the same time teaching is an important part of my career as an academic physician. And so, it was also building a skill that I’ve now got hundreds of hours teaching online and that was a skill that came in very handy when the pandemic started.
Dr. Jim Dahle:
Wow. So, was this a goal that you had for some time to cut back to 1.0 FTE or did just something that came up?
I think it was really a goal that I had. When I first left my first attending job, I actually didn’t completely leave. I tried to give notice to my department chair and he asked me to stay on part-time. I remained on at 20% effort at my old clinical job while I was also doing a full-time nonclinical job.
And I made that decision because I didn’t think I was ready to completely walk away from clinical medicine. I didn’t feel like I was done. I wanted to keep a foot in the door and make sure that if there was going to be an opportunity in the future, in the near future, in the longer term, that I wouldn’t have a big gap on my CV.
I did do that for six months and then after that 20% effort contract expired, I took a position as a laboratory director where I was an independent contractor for about four hours a week. And again, as a pathologist, that is part of our clinical work is the laboratory director side of things. For most of that nonclinical year I was doing this lab director position on the side as well.
Once I had applied for what is now my current job, I was feeling like I was ready to only have one job. It felt like I had been juggling so much and really the benefit that I was getting of keeping a foot in the clinical opportunities that was no longer going to be necessary.
And the money that I was earning from it was about $1,000 a week, which is not nothing, but at the same time with where we are currently in our financial life, it didn’t feel like it was a big enough percent of what our income was to justify continuing to do a side job.
Once I started on in this new position back in April, about four months ago, I did let the laboratory director job go as well. That was my last side job, and here we’re.
Dr. Jim Dahle:
Awesome. It’s interesting. I talked to lots of docs who are trying to get more side gigs, clinical and nonclinical. Not very many that are trying to cut back from them, but it is an important milestone.
So, what happened? I assume you’re taking a pay cut by cutting back, you’re actually going to have a lower income. Is that correct? Or is that not correct?
It’s actually about the same as I was making in my nonclinical year. I did take about a 5% pay cut when I left my first attending job to do the nonclinical work. But with the side job, with the lab director position, it was maybe like a 2% pay cut to do that. And then my salary now in the hospital I’m in is essentially the same as what it was in my previous attending job. So, it’s slightly more than what I was making last year during my nonclinical year, but kind of back to what my baseline was before I left the first job.
Dr. Jim Dahle:
Understood. Understood. But certainly part of this was making sure that your new gig paid you fairly, it sounds like. Some contract negotiation and evaluation and making sure you’re being paid well. How much effort did you have to put into that?
Yeah, that was definitely a big part of our thinking through this decision. “Are” being me and my husband. But when I was interviewing and when I was reviewing contract paperwork, my now department chair was remarkably transparent with how folks in our department are compensated. He was very free to share benchmarks and ranges.
I did feel like I was coming into this position with eyes wide open and I tried to negotiate a little bit and actually there was no negotiation in the end because it’s a very large academic system, and I understand that, and that’s kind of part of the price of admission to be working in a prestigious institution. And it wasn’t to the point where I felt like I was being unfairly compensated.
Dr. Jim Dahle:
Okay. So, what else did you do in your financial life that allowed you to feel like you didn’t need to work more than full-time anymore?
Yeah. I think about four years ago at this point was when we were back to broke. When I graduated residency, we were probably at about negative $100,000. And so, two years later we were back to broke.
And at that point we really discovered this world of personal finance. I became a little bit obsessed with learning as much as I could about taking control of our money. I felt a lot of responsibility as the primary breadwinner for our household to make sure that we were not going to squander an opportunity that most Americans would kill for to have this kind of income.
Got really tight with our budgeting. Not tight in a sense of cutting back, but transparent, I think is probably the better word. We started using YNAB, which was absolutely life changing. Paid off about $40,000 in student loans in that first year of using YNAB.
And then that just felt like it set us up for being able to contribute more to retirement, to be aware of what our kind of long-term known expenses are, planning for vacations or new cars or computers, anything like that. It felt like we kind of had the spending side really well under control. We had the investing side really well under control. Everything kind of felt like it was known variables at that point, and there wasn’t a big scary financial mess that we were kind of dealing with anymore.
Dr. Jim Dahle:
I understand you had a few other changes in your finance that had an effect on how much you needed really.
Yes. My youngest child had been attending a private school. He was identified as gifted when he was three years old, which is a wonderful thing, but it’s also a challenging thing when the child is not able to really thrive in a typical preschool atmosphere. We needed to change where he was going to school.
Fortunately, we have an all gifted school in our area, so he was able to attend preschool there for two years, which was amazing. And he’s really flourished, but he’s about to start kindergarten and we needed to make a decision as to whether we would continue him in this private school or if we were going to put him in public school. And when we did the math, it was going to be $500,000 over the next 13 years to keep him in this school, which just felt like an impossible pill for me to swallow, knowing that the public schools in our area are very, very good. It’s like one of the top five school districts in the state that we live in.
With our older two children already in the district, we were familiar with some of the guidance counselors and with the gifted educators. So, we were really able to have conversations with them about what will kindergarten look like for this child who has basically different learning needs than what the typical kindergartener does.
And so, I feel really good about our decision to put him in public school for kindergarten. Their main point was that it is much easier for them to meet the academic needs of a child who’s in a socially appropriate place. That meant for him not starting him in first grade, not doing any kind of acceleration or anything like that, keeping him with same aged peers, but then having the confidence that there was a plan to meet his needs even though he was no longer going to be in a dedicated school like he was previously.
Dr. Jim Dahle:
Okay. And it also sounds like you did something with your house.
Yes. Oh my gosh, we did. We purchased the house when I first started my new attending job. It was just a hot mess. The house needed so much work and we bought it nearly sight unseen. My husband had toured several houses with our realtor, but we were moving out of state from when I was in training to start my new attending job.
And so, I didn’t see the house until the inspection. And at that point it really did feel whether or not this was true, it felt like kind of our only option for being able to live in the school district that we really wanted to live in for our children and also having a reasonably short commute for myself.
We stayed in that house for three years before the pandemic fueled real estate craze kind of started. And we saw that as an opportunity to get out of this money pit without as much maybe headache or friction as we otherwise would’ve had. So, we ended up accepting an offer for the house maybe 36 hours after it was listed. And there were no inspections, there were very few contingencies.
And so, we went back to being renters about two years ago. And it is just such a freeing feeling for us in addition to having a really predictable monthly expense for our housing. Your rent is the ceiling of how much you’re going to pay for housing and your mortgage is the floor for how much you’re going to pay for housing. So, we were always worried, “Okay, well which toilet is going to break next? When are we going to have to replace the roof? When are we going to have to replace the water heater?”
And taking away not only the financial burden of that, but also really the mental burden of having constant worry in the back of our minds going back to renting for us was absolutely the right decision. We’re in a house now that we’re planning to stay in long-term. The owner wants a long-term tenant, it’s a single family house in a wonderful neighborhood, our kids can walk to school.
So, it feels like we’re just maybe not people who are homeowners. And that’s okay. In our house, we don’t always do things in what I see as the way that most people do things. We have non-traditional gender roles and we had children at a pretty young age. We’re renting when a lot of other people are at this point in their career looking at buying their doctor house. And that’s okay with us, that’s okay that we don’t do what everybody else might do in what they think is their financial next step.
Dr. Jim Dahle:
Okay. Well, let’s say there’s somebody out there that’s like you. They’re working 1.3, 1.4, 1.5 FTEs and they’re a little scared to cut back. They’re not thrilled about a decrease in income. They’re not thrilled about fewer career options. What advice do you have for that person?
I think for us minimizing our fixed expenses as much as possible was a really big part of that equation. I felt really confident where we were with our monthly spending and monthly saving in addition to being renters that there weren’t going to be too many surprise expenses coming down the pike that we might need to have a bigger pile of cash to prepare for. That was one of the things.
I think another thing that I’ve heard you say on the podcast is about marrying right, marrying once, marrying right. And I think that is a huge part of where we are now. I think my husband and I have an amazing relationship and we communicate extremely well.
Treating your partner as having a sacred relationship with you and taking care of your partner as much as you can in whatever way you can to make sure that you’re on the same page.
And being on the same page doesn’t necessarily mean that we agree on everything all the time, but being able to discuss with each other these hard conversations about potentially making less money or potentially working more hours. Being able to have that kind of conversation with confidence that you’re on the same team, you’re working towards the same goals, that has been absolutely instrumental.
Dr. Jim Dahle:
Awesome. Well, thank you for sharing that and thank you so much for being willing to come on the Milestones podcast to celebrate your milestone, which I congratulate you on, but perhaps more importantly to inspire others to do the same.
Thank you. And actually I did think of one more thing. I think being open to change and being willing to step off of the medicine conveyor belt can be really scary. And when I took a nonclinical job, it was really a hard left turn that I never expected to make.
Again, it’s okay to do something that is not just continuing to put one foot in front of the other because that’s what you always thought you should be doing. I think being willing to look around and make decisions that are best for you, even if it’s not necessarily what all of your colleagues or your classmates from medical school might be doing.
Dr. Jim Dahle:
Awesome. Good advice. Thank you so much.
Dr. Jim Dahle:
All right. I hope you enjoyed that interview. By the way, for those who aren’t familiar, YNAB, You Need a Budget, it’s an app people use to track their spending. There are some similar apps out there. Dave Ramsey’s Every Dollar is one, but most people who use one of these find it works a whole lot better than just using Mint or using what Katie and I used for many years, which was just an Excel spreadsheet to track our budget.
If you need an app that will help you to keep track of things and allow you and your partner to enter information independently as the month goes on, check those out. They’re great options.
But I think what I like most about this particular milestone is that the first thing I tell burned out docs is, “Why don’t you cut back to full-time?” Because so many of us are doing one job, two jobs, three jobs, looking for a side gig. Take an extra call.
Full-time in this country is generally defined as 40 hours a week and there are many, many docs working more than 40 hours a week. What would’ve taken your life for you to be able to cut back to full-time? Would you be happier if you’re only working 40 hours a week? That means if you have a hard call, you’re not working banker’s hours the rest of the week. What would that look like? And how much would you have to adjust your finances? How much more would you need to have in savings to feel comfortable doing that?
These are all questions worth talking to yourself. And if you have a significant partner in your life to your partner about, because it might dramatically improve your life. You can get an unlimited amount of money in your life, but you only have a limited amount of time and you can’t get any more of that.
Like I’ve mentioned on other podcasts, would you trade places with Warren Buffet? Very few of us would because he doesn’t have that much time left and the time he has are crippled by living in a 90 year old plus body. And I bet he would give a lot of money to get a 20 year old body back. Time is more valuable than money in a lot of respects.
FINANCE 101: HOME BUYING
All right. I told you at the beginning of the podcast that we’re going to talk about home buying. And indeed we are going to. I often talk about home buying with regards to residents and I kind of tell them, “Hey, you don’t have to buy a house during residency.” Because most of them don’t even consider that as an option because they got this burning desire to own a house.
Well, the default option for people in training probably ought to be renting, honestly. And the main reason for that is a financial one. It just takes time for a home to appreciate enough to overcome the transaction costs of buying and selling. Generally think about buying a home, costing you about 5% of the value of the home and selling a home to cost you about 10% of the value of the home. That’s a 15% total round trip. 15% of a $500,000 house is $75,000. So, if your home doesn’t appreciate $75,000 while you’re in it, then you’re coming out behind.
It’s not throwing money away to rent, it’s okay to rent. You’re trading money for housing. And guess what? Homeowners do that too. You throw money away on property taxes, you throw money away on insurance, you throw money away on mortgage interest, you throw money away on repairs that your landlord would cover if you were renting.
There’s lots of throwing money away no matter what you are. Don’t let that be a reason that you buy a house and maybe it’s not the right time to do it. You got to do more of the analysis than just mortgage payment versus rent payment.
People are like, “Oh, well, I can get a mortgage that’s less than my rent payment.” Well, of course you can. You’re supposed to be able to do that. Think about it as an investor. What does an investor have as income? They have rent. What do they have as expenses? Well, they have a mortgage plus everything else. Taxes, insurance, repairs, upgrades, all those other things plus they want to make a profit. So, of course your mortgage should be less than rent. That’s just kind of a given. If your mortgage is more than rent, then you’re really not getting a good deal.
Those are all the reasons that people really ought to think twice before buying a house during residency. Does it never work out? No. I’d say for a three year residency, it probably works out a third of the time. For a five-year residency, it probably works out half the time that you do. So, if you really want to own a house and you’re okay with that risk, knock yourself out. Go buy one. I don’t care. It’s not my money. But at least think about just renting during residency.
But as a general rule, I’m a big fan of ownership. I know our guest today was not, and that’s fine for some people. They want to be lifelong renters or renters for long-term or maybe in a different stage of life they buy whatever. That’s fine. I’m a big fan of ownership. I want you to own your house.
When you’re in a job that’s stable, when you’re in a personal situation that’s stable and looks like it’s going to be stable for five plus years so you can get appreciation more than the transaction costs, I want you to own a home.
And home ownership is great. I love owning my home. You can do whatever you want to it, you can renovate it. Although I guess technically you could still lose it to the government if you don’t pay your property taxes. The bank can’t take it, especially once it’s paid off.
Plus it’s a bit of a hedge on housing costs once that mortgage is gone. When we bought this house many years ago, it was probably worth half or a third of what it’s worth now, and that’s before the renovations. We put enough money into it. It’s probably worth substantially more than that now.
But the point is that mortgage payment doesn’t go up over time. If you’re on a 30 year fixed mortgage, it’s the same mortgage payment at least principal and interest for 30 years. So, if rent skyrockets, you’ve hedged against that. And once the house is paid off, shoot, all we got to pay now is property taxes and insurance and repairs and that sort of thing. There is no rent payment, there is no mortgage payment. And that’s nice because it kind of helps control housing costs down the road.
I’m a big fan of ownership. I want you to own a home, but you need to buy it at the right time in your life and in your career to do it. Now, when you go to buy it, here’s a couple of guidelines, and I think these are becoming more important now that people aren’t getting 2.5% mortgages.
I just saw an article saying mortgages are at the highest rate they’ve been since 2002. They’re up over 7% for 30 year on average. I think it was 7.1% is what I saw. And that reminds me of my first mortgage in 1999. It was 8%. And my second mortgage that we took out in 2006 was 6.25%. Those are more normal mortgage rates. This 2.5%, 3% kind of stuff that people have been seeing the last few years is not normal. Expect to pay more than that on mortgages in general. Sure, if rates fall and you can refinance to that, do it for sure. But you got to keep in mind that that’s not really normal.
Here’s my recommendations. I recommend you don’t spend more than 20% of your gross income on housing. I include everything in there. That’s your mortgage payment, your principal and interest, your taxes, your insurance, maybe even throw utilities in there. Keep that to less than 20% of your gross income and that will help you to build wealth.
Dr. Jim Dahle:
I also throw out a more useful figure sometimes, which is to keep your mortgage to less than two times your gross income. So, let’s say you got a $100,000 payment, you’re making $200,000 a year. I would suggest you don’t have a mortgage more than $400,000 and don’t have a house that’s more than $500,000. 2X your income plus the down payment that you have.
Now in some high cost of living areas, you’re probably going to have to stretch that a little bit. But stretching is like going to 2.5X, 3X, maybe 4X, not 10X, and that’ll just make you house poor. You don’t want to do that. So, follow those guidelines when you’re ready to buy a house, when you’re in a position to buy a house, and then the house will be a blessing in your life and not a curse.
Mortgage payments or down payments are great. They help you to get a conventional loan, which generally has a lower rate, lower fees, more people competing for your business.
But if you have a better use for your money, like maxing out retirement accounts, paying off student loans, building up an emergency fund, whatever, right when you’re coming out of your training, yeah, a doctor mortgage is not a crazy thing to do.
A doctor mortgage allows you to put down less than 20% and still not pay that private mortgage insurance, that PMI, that insurance the bank forces you to buy to protect them from you defaulting. It doesn’t do you any good to pay PMI. But if you don’t get a doctor mortgage and you don’t put 20% down, you’re going to have to pay PMI.
So, it’s okay to use a doctor mortgage to buy your house, that’s fine, but recognize your payments will be higher because you borrowed more of the cost of the house and you’ll probably have a little bit higher interest rate and probably have a little bit higher fees. But it’s a reasonable route to go if you have a better use for your money.
I hope that’s helpful in your decision, whether to buy or rent, when to buy, how much to buy, what kind of mortgage to use to buy and we’ll help you to build wealth in your life, build your way toward financial independence and have an enjoyable life at the same time.
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All right, that’s it. We’ll see you next week on the podcast. Keep your head up, shoulders back. You’ve got this and we can help. If you want to come on the podcast, we’d love to have you. Apply at whitecoatinvestor.com/milestones and we will celebrate whatever milestone with you and use it to inspire others to do the same.
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.