TSP Fund, Indemnification Clauses, and Paying Off Loans

INTRODUCTION

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.

Dr. Jim Dahle:
This is White Coat Investor podcast number 405.

Tax season is around the corner. This means it's the perfect time to optimize your tax strategy. That's why enrollment is now open for Cerebral Wealth Academy's course, The Doctor's Four-Week Guide to Smart Tax Planning, but only until the end of February.

Designed for medical professionals with 1099 income, this course includes live Q&A sessions with Alexis Gallati, the founder of Cerebral Tax Advisors, and 22 easy-to-follow video lessons covering everything from choosing a business entity to advanced tax strategies in retirement planning.

Listeners of the White Coat Investor podcast can use the code WCIFEB300 at checkout for a $300 discount. Visit cerebralwealthacademy.com today to enroll.

All right, welcome back to the podcast. Hope you're having a great winter. We're recording this at the end of January. It's going to run February 6th, so not too big of a delay between those two.

But one thing you should know as you're listening to this, especially if you're a student, is that we have a webinar coming up, February 12th, 06:00 P.M. Mountain Time. It's what medical and dental students need to know about money. This free information can literally make a difference worth millions of dollars over the course of your career. You simply cannot afford to wait until the big paychecks start rolling in to learn about money.

Here's what you're going to learn. Why your patients need you to be financially literate, the secret to being a financially successful doctor, how to not worry about student loans, how to save money during residency interviews, why buying a house during residency may not be a great idea. Lots of good stuff. Please share this invite with others. You can sign up whitecoatinvestor.com/studentwebinar. It's live, February 12th, 06:00 P.M. Mountain Time.

This is the talk I'd give you if I was coming to your medical or dental school and talking to you. And I'm going to stick around afterwards just like I would if I came out in person and answer your questions. I think in previous years when we've done this, Andrew, our student loan guru and I, have stuck around for like an hour or two after the presentation, just answering your questions.

This is a great resource. Even if you're not going to make it live, sign up anyway, whitecoatinvestor.com/studentwebinar. We'll send you the recording anyway. Obviously, you can't ask your questions live that way, but it's still a great opportunity.

Okay, let's start with a couple of your questions today. This one's from military docs.

TSP AND ROTH CONVERSIONS

Dusty:
Hey, Dr. Dahle, this is Dusty from Minnesota. Thanks for all you do. A quick military-related question. The Thrift Savings Plan is going to start allowing Roth conversions in 2026. I've got some money still in the TSP for when I was on active duty. Included in that is some tax-free money from served in combat zones that is currently under a traditional status.

If I were to make a conversion of converting that to Roth, would I have to pay any taxes on that money that was earned in a combat zone that is in the tax-exempt portion of my TSP? Thanks for all you do. Appreciate it.

Dr. Jim Dahle:
First of all, thanks for your service. We appreciate it. The reason you got that tax-exempt pay is you went to a combat zone. Combat zones are not fun places to hang out, it turns out. I also got some tax-exempt money when I went to a combat zone while I was on active duty.

And when I got out of the military, I actually jumped through some hoops to isolate that basis and took that tax-exempt money. Actually, I took almost all the money out of my TSP and then rolled all the tax-deferred money back into the TSP and then did a Roth conversion on that tax-exempt money.

Now that the TSP allows Roth conversions, you don't have to do that. Now, I believe that you can convert just the tax-exempt money. I don't think it's like a pro-ration of that with your tax-deferred money in the TSP. I'm sure if I'm wrong, someone's going to write in here and let me know and I will do a correction in a few episodes.

But I believe you can just convert the tax-exempt money. This is essentially a mega backdoor Roth option for anybody with the TSP. Now, I'm not sure that they're allowing federal contractors or federal employees and military members to just make after-tax contributions to their TSP now. A classic mega backdoor Roth situation. But if you're able to get tax-exempt money in there from being in a combat zone, you certainly can convert that to a Roth. So, great option.

Obviously, most military people should be doing Roth. If you're a military doc, whether you're getting out in four years or whether you're going to stay 20 years and get a pension, you've got a very good reason to use Roth.

There are very few military people that I really think ought to consider using tax-deferred options. Most of you don't have student loans, which is one reason why people do it. Lots of you will have pensions, which fills up the lower tax brackets and makes Roth a little more valuable. And of course, many of you will be in a higher tax bracket later in your careers once you get out and start getting paid more. So Roth, Roth, Roth while you're in the military. Almost everybody should be doing Roth.

It was really a shame while I was in that you couldn't do Roth. I actually deferred money at 15% while I was in the military. And there's no way I'm getting that money out at a lower tax rate or any tax rate near that the rest of my life. It's just kind of unfortunate. We'll probably actually end up using that money for charitable contributions and QCDs and leave the money to charity to death. But it's nice now that that Roth option is there. It should have been added a long time ago.

The TSP is great, but they drag their feet sometimes. They're afraid of being trendy. And so, they wait a decade before they add anything new that comes along in the 401(k) world. That's good in that you don't get a bunch of trendy or expensive mutual funds in the plan, but it's not so good when an option like Roth conversions or Roth contributions even comes along. It seems to take forever for those sorts of things to be added to the TSP. Sometimes the government moves at the speed of a battleship.

Okay, next question, also off the Speak Pipe. By the way, if you want to leave a Speak Pipe question, you can do so, whitecoatinvestor.com/speakpipe. We would love to answer your question on the podcast.

SHOULD YOU ROLL YOUR 401(k) INTO TSP IF TAKING A FEDERAL JOB?

Speaker:
Hi, Dr. Dahle. I am currently a physician in private practice, approximately 10 years out of training, and I'm making the transition from private practice to a federal job where I'll have access to the TSP. I was planning on rolling over my 401(k) and my cash balance plan from my current practice to the TSP. I was wondering if you thought this was a good idea, if you saw any downsides to this. Thank you for all that you do and for your advice.

Dr. Jim Dahle:
Yes, this is a good idea. The TSP is a good 401(k). It has very low cost funds. It's continually improving. Like I just mentioned, it now allows contributions and Roth conversions, which is cool. But unless you want to be managing multiple 401(k)s, you're going to want to move this money over.

In general, a cash balance plan is something that as soon as you can, you roll it into a 401(k). It is just another 401(k) masquerading as a pension. So that's a great idea to roll that into some sort of 401(k). You have a little more control over the investments, a little more flexibility with the plan, and probably lower costs. That's a great idea.

Now, if you had a spectacular 401(k) that had really cool investment options and really low cost, maybe you want to hold that out there. But frankly, if I was becoming eligible for the TSP, I'd just roll the money in there. In fact, when I have been able to close cash balance plans in my partnership since I got out of the military, I've just rolled that money back into the TSP.

One other cool thing about the TSP is the G fund, which is a very unique investment. It's a conservative investment. If you're wanting all your money in stocks and real estate and that sort of thing, this may not be for you. But if you have some conservative investments in your portfolio, you ought to give some consideration to the G fund if you have access to it.

It's basically an investment that gives you a treasury bond yield with money market risk. There's really no risk of loss of principal, and it tends to pay more most of the time than money market funds will. Obviously, when the yield curve is inverted, that might not be the case. But most of the time, you're earning more money in there and not taking any more risk than you would if that money was in a money market fund. So, it's a particularly good bond or fixed income option.

But yeah, I would roll this 401(k) and cash balance plan into the TSP and not think twice about it. There's a little bit of paperwork to do it. It might take you a month or two to get the money over, but I think you'll be glad it's there.

Now, some people complain about distribution options when it's time to retire in the TSP. Well, most retirees roll their 401(k)s, TSPs, et cetera, at least after they turn 59 and a half, into IRAs anyway. You're going to do the same thing with most of your 401(k)s at that point. Maybe you get a little more asset protection if you leave it in a 401(k) at that point. But frankly, most of our liability goes way down when we retire as doctors.

INDEMNIFICATION CLAUSES

It's not very often that I get stumped on a question here at the White Coat Investor. I mean, I often have to look stuff up on the internet. This is the fun thing about not doing this live is I can just pause the recording and look something up and answer the question.

But to not be able to find the answer, it doesn't happen very often. And every now and then, I've got to wave the white flag and call in for reinforcements. So, I have done that on a question I got from one of you, and I've called in reinforcements. I have Kyle Claussen here, with Resolve, a sponsor of this podcast for a long time. And he's agreed to come on and help us answer some of your questions. Thanks so much for being here, Kyle.

Kyle Claussen:
I appreciate it. Hope it can help.

Dr. Jim Dahle:
I had a longtime listener write in and say, “I'm a radiologist in the Northeast looking to sign my first 1099 contract. A previous podcast host mentioned the significant harms of indemnification clauses in a recent episode. And sure enough, as written, some of them could, in theory, negate malpractice coverage, particularly if you as the physician agree to hold harmless the company for any vague negligent acts or omissions on your part. Can you and your team do a deep dive on how we can best protect ourselves, whether it's reciprocal statements of indemnification and or specific language?”

I know the answer to this question is contract to term your review, which, of course, is why I've got Kyle here with us. But you and your team have a great way of explaining and advocating for us docs. Before we get into this, Kyle, let's talk in general about indemnification clauses, contracts, et cetera. What are we talking about here and why are these showing up in physician contracts these days?

Kyle Claussen:
Yeah. Indemnification, it's a legal terminology that basically means you're going to shift risk from one party to the other. As the physician, likely when we hear these clauses, it's going to say that the physician is indemnifying the employer and holding them harmless from probably any and all acts or claims that might come in. Employers are doing their best to remove themselves from any liability of the physician. And oftentimes they're too broad. And so, I'm curious on what these say, but we run into this a lot in the contracts that we look at.

Dr. Jim Dahle:
Yeah. All right. So let's look at these two. This is from two separate contracts this doc is being offered. The first one mentions an employer. I'll leave the employer's name out, but the employer agrees to indemnify, defend and hold harmless the contractor from any and all costs, losses and any reasonable attorney fees caused by the negligent or wrongful conduct of employer. Employer will provide at their expense the contractor with professional medical liability insurance to cover all services delivered on behalf of the employer.

Likewise, contractor agrees to indemnify, defend and hold harmless the employer from any and all costs, losses and reasonable attorney fees caused by the negligent or wrongful actions of the contract.

And the second clause, totally different contract. This is a different potential employer who says “Indemnification provider hereby indemnifies and holds the employer and its affiliates and their officers, directors, members, managers, shareholders, representatives, employees and agents harmless from and against any and all claims, losses, liabilities, damages and expenses, including reasonable attorney fees incurred by the indemnified parties that are caused by or arise out of A) any credentialing decision by a client or facility, B) any request for provider to stop providing services on behalf of a client in accordance with Section 5, which I don't have. C) provider's classification as an independent contractor or D) any act or omission of provider or his or her employees or agents. This provision shall survive the termination of this agreement.”

Kyle Claussen:
Well, that last one is the great example of they are listing out specific items like if there's damages from you not being able to be credentialed. They likely have a contract. It sounds like it's a locum position or something, staffing company, where they want to remove themselves from that damage. Or if there's a tax issue. Your classification is a 1099. The IRS is coming back against us. We want you to absolve us from that risk.

But then the last category, that Section D is anything. It's all acts and omissions. So not only the three that we just said, but the scope is really, really broad on that one. And so obviously, it's problematic from a malpractice and an insurance standpoint, because a lot of times those policies will say our policy is good as long as there's not this other contractual obligation. As long as there's no other indemnification. So that's one issue.

But beyond that, you know this, physicians can get sued for a lot of different things. And so, to take that all on without any help from your employer, I think it's really problematic. A lot of the large national specialty societies have weighed in on this too. And I think the general philosophy is the best indemnification clause is to delete them. There shouldn't be one there. And so, our advice would be to have them be mutual or reciprocal at minimum, but if you can get them taken out, that's the best course of action.

Dr. Jim Dahle:
What percentage of the time do you think you and people you work with are able to get the clauses out of the contract?

Kyle Claussen:
I think it depends on how bad the client wants it out. Everything that we do is customized for the individual. I would say 10 to 30% of the time, as a gut feel for that, that most employers are open to a reciprocal or a mutual kind of indemnification. If it's in there, legal doesn't like to take it out kind of wholeheartedly.

Dr. Jim Dahle:
Okay, what's the worst case scenario? What bad things can happen because this clause is in your contract?

Kyle Claussen:
Well, malpractice insurance being invalidated would be one. That's a problem.

Dr. Jim Dahle:
You get sued and you go to your malpractice insurer and they're like, “Nope, you agreed to hold the employer harmless if you get sued?”

Kyle Claussen:
Correct. That's one possible outcome. The other outcome that you think of is improper billing. Stark and kind of fraud and abuse cases that you hear about. A lot of the indemnification clauses that we see those didn't mention it specifically, but they'll talk about billing. And so, I think you're taking on a ton of risk there because most physicians now are employed and they're not doing the billing themselves anyway. They're submitting their codes, but it kind of leaves their hands after that. I do think there's potentially large amounts of liability that are out there with these clauses.

Dr. Jim Dahle:
You mean if the billing and coding is done wrong, the docs got to make the employer whole for it or something?

Kyle Claussen:
Correct. Yeah. If you're going in and you're charging insurers improperly, or fraudulently billing in their eyes, and there's a damage amount that comes in for that, if your contract has this indemnification clause in it, you're likely taking responsibility for that.

Dr. Jim Dahle:
Wow. That seems kind of ridiculous to even try to put that into a contract.

Kyle Claussen:
Yeah.

Dr. Jim Dahle:
I kind of understand the theory behind just blacking it out and sending the contract back and saying, “No, you want me to get rid of this?”

Kyle Claussen:
Yeah.

Dr. Jim Dahle:
Do you think a lot of docs are signing this without understanding them?

Kyle Claussen:
I think it happens every day. Yeah. I think it's buried usually in kind of the miscellaneous section of a contract. It's kind of along with assignment and some of these other things that don't mean much to you. And so, I think if you're not reading it carefully and potentially understanding what it's doing and the scope of it is what's really important, I think a lot of physicians are taking on a lot of risk.

Dr. Jim Dahle:
Have you heard of anybody getting really burned yet because they had a contract like this?

Kyle Claussen:
I have not personally. No. We haven't had anybody come back and said, hey, here's this bad outcome, but we also don't litigate. At Resolve, we're transactional and helping up front. And so, there certainly could be cases out there that we're not aware of.

Dr. Jim Dahle:
Yeah, very true. Wow. It's quite a thing. Is this a new thing? Are these just starting to show up the last few years or has this been an issue with physician contracts for decades?

Kyle Claussen:
I think they've always been in the larger systems contracts. They've been there for 10 plus years, but the shift towards employment means that more and more physicians are now having these hit them directly. We don't see them in a lot of private practice contracts, but those are certainly now the minority of potential employers that are out there.

Dr. Jim Dahle:
Now, in this case, it's a 1099 contract this doc is looking for. Any difference between having one of these and a 1099 contract versus an employment contract?

Kyle Claussen:
No, it's shifting risk from an employer or the company. If you're not an employee, even if you're a 1099, it's shifting risk from one party to the next. So your employment status doesn't really matter. It's the fact that you're absorbing it.

Dr. Jim Dahle:
Well, thank you for helping to clear up indemnification contracts. Anything else new in the physician contract review space in the last year or so since we had you on the podcast?

Kyle Claussen:
Well, I think we talked about non-competes pretty heavily. We are seeing some states move forward and despite the FTC being stalled at this point, some states are still moving forward on that. Compensation obviously always changes. Every year to six months, there's new numbers out to take a peak at. So things are always changing. It keeps us on our toes.

Dr. Jim Dahle:
When you say non-competes, we're talking about this FTC regulation idea that was basically going to outlaw non-competes.

Kyle Claussen:
Right.

Dr. Jim Dahle:
It's still tied up in court, though, is where we're sitting with that.

Kyle Claussen:
It is. Yeah. We don't have any outcome on that.

Dr. Jim Dahle:
States are putting laws in place that ban non-competes.

Kyle Claussen:
Correct. Yeah. There's always been a few states, historically, like California, that's banned those. There's other states now hopping in, and saying, “Hey, we've got new laws in place” that are either wiping them out or limiting them. And saying, “Hey, they can only apply for a year. They don't apply if you terminate without cause.” And so, those are exciting for us to see. We think more flexibility and giving you guys the options to move around is certainly a benefit.

Dr. Jim Dahle:
Now, Kyle, I assume winter is your busy season when docs are getting contracts for the next year and you're doing most of your contract reviews in the late fall and winter. And so, I appreciate you taking time out this cold January day to record this with us. But for those who are interested in contract review services, check out Resolve, whitecoatinvestor.com/resolve and Kyle’s associates can help you to make sure you're not getting hosed by some terrible contract that an employer is trying to get you to sign.

So, make sure you do that. It's very cheap compared to what mistakes in this area can cost. For a few hundred dollars, you can save yourself potentially a few hundred thousand dollars. Thank you, Kyle, for what you do.

Kyle Claussen:
I appreciate it. Thanks, guys.

Dr. Jim Dahle:
Okay, let's listen to a two-part question here. I think we have two recordings for this one.

MAKING EXTRA PAYMENTS ON YOUR STUDENT LOANS

Caleb:
Hey, Dr. Dahle, Caleb from Colorado, the dentist again. I was recently trying to do an extra payment with Mohela through SoFi through your link that I refinanced my student loans. And I was told that I could not make an extra payment towards principal. It could only go towards interest. And this seemed a little counter to the White Coat Investor spirit to me. And so, I got into a brief exchange with her about why I couldn't make an extra payment towards principal. And she said I had to satisfy all outstanding interest first. But if I am doing all of my payments normally, then why do I have outstanding interest? And why can't I make extra payments towards principal? Please enlighten me. Thank you. Bye-bye.

Caleb in Colorado for a quick follow-up about the student loan with Mohela. I was told that interest begins accruing immediately and that the only way to make a principal payment would be to do an additional payment on the day that I make my normal monthly payment. I had never heard of this before. Thank you. Bye-bye.

Dr. Jim Dahle:
Okay, good question, Caleb. This is also the first time I've heard of this. This is not something I've run into before. If you have run into this, like Caleb, shoot us an email, would you? We'll using that and your information, et cetera, we'll talk to SoFi and see if we can get this sorted out. Because this is wacky. There's no doubt about it. It's wacky. You should be able to make an extra principal payment at any time. Just make your regular interest payments whenever they're scheduled to be made.

I don't know if he just ran into an agent on the phone that doesn't really know what they're talking about or whether this really is a policy. But if it's a policy, we'd like to see if we can get it changed, number one. And number two, explain it to other White Coat Investors so everybody understands exactly what's going on. Because I agree, this is wacky.

So let's do this. Let's have you send in an email that we can then forward to them and ask what is going on with this and see if we can get it sorted out. And I will have our main advertising person, who's Cindy, talk with SoFi to see if they can sort out if this really is the policy. Because I agree, it's weird and ought to change. We'll see if we can get it changed.

You'd be surprised what people will change when the White Coat Investor comes to them and says, “Hey, we got a whole bunch of people complaining about this.” But I worry this might just be a single agent who was maybe a little bit confused.

QUOTE OF THE DAY

Okay, our quote of the day today comes from Warren Buffett. He said, “Never depend on a single income, make an investment to create a second source.” I like that. He's not saying that your spouse or partner has to go to work. He's saying, make an investment. Because every time you make an investment, that creates a second income. Whether that investment is in bonds and they pay interest, whether that investment is in stocks and they pay dividends out of their earnings, whether that investment is in real estate, which pays rents. You're getting an additional income. That might not be the main reason you're making the investment. And if you don't need the income, you may not actually like getting it because you got to pay taxes on it as you get it. But it does give you another source of income. And eventually, the idea is that source of income becomes your main income. Eventually, as you become financially independent and move into the decumulation phase.

All right, the next question is off the Speak Pipe as well.

BEST WAY TO PAY OFF PRACTICE LOAN

Andrea:
Hi, my name is Andrea and this is my first time reaching out to you on this podcast. I'm an nephrologist working here in Georgia for the past two years. I have a partnership track and I have been an associate with two years of experience on a salary of $250,000. Now is my time to do the partnership track, which is currently paying me with becoming the partner, come next one month, my salary will go up from $250,000 to $375,000. However, in order to buy in the practice, the buy-in is of $600,000. I am still waiting to get a loan approved in order for me to be able to take the $600,000.

I needed some recommendation from you as to what would be the best way to pay off this loan. Should I pay it as soon as I can and as much as I can? Or should I take my time and try to pay it off over the next seven years because this loan that I'm applying for is for the next seven years? Any input from you will be highly appreciated. Thank you.

Dr. Jim Dahle:
Okay, great question. When we boil it down, it's actually a question that just about every White Coat Investor has as well. Some of these partnership tracks are a little odd. You come into it and you're a pre-partner for one or two or three years or whatever, you don't get paid all that much. And then you get a big raise when you become a partner.

In my group, the way this is done is it's a sweat equity, it's essentially your buy-in. You work for less for a couple of years and then you get paid more. But there's no cash buy-in. It really doesn't make sense because there isn't a lot of value in an emergency medicine partnership. We don't own any buildings. We don't own any dialysis centers or anything like that. It's just the accounts receivable is all you're getting is your share of the accounts receivable. So, the buy-out is not huge. The main benefit of becoming a partner is you get paid more and you have more control over your job. That's why people want to be partnered in our group.

In your group, there's a big fat buy-in. How is a doc going to come up with $600,000 one, two, three years into a job that's paying them $250,000? That's not going to happen. So nobody, just about any typical doctor anyway, is going to have that sort of cash to pay cash for this thing.

It's a little bit weird that it's not all set up really well how to do this. Even if it's a loan from the partnership itself, or they've already got a lender set up with some pretty good terms for all the partners as they become partners, it's surprising that you're going out on your own and having to get a loan. Maybe you're not. That wasn't entirely clear from the question.

I'll tell you this. I would not pay $600,000 if the only benefit I'm getting is an income increase from $250,000 to $375,000. That's way too much. It's going to take you four or five years. And that's assuming you're not paying taxes on any of that income for that additional income to make up for that cost.

I assume you're buying into something else. You're buying into a building. You're buying into a whole bunch of equipment. You're buying into a dialysis center or something like that, that you're actually getting something significant besides just a higher income. Otherwise, I don't know if this is a good deal for you. It may not be. So, make sure you're not buying into something that's not a good idea, that's not a good business move for you.

If your hope is the only way you're getting any cash from this buy-in is that other partners are going to come along and make the same deal down the road, I don't know this is a great idea. So, make sure it's a good partnership. You're really going to get $600,000 worth of value out of this before you buy in.

Okay. The rest of this is just the classic question every White Coat Investor has, which is, should I pay down debt or should I invest? And you're going to have this question until you don't have any debt. You're always going to have this question. And it's a complicated question and it depends on lots of different things.

It depends on your attitude toward debt. If you are the type of person that just hates debt, wants to be out as soon as possible, maybe you're putting all your extra cash and it's really squeezing your budget down tight to get even more cash out and putting that toward the debt, just to be debt-free as soon as you can.

On the other hand, if you're one of these people, it's like other people's money, let's use leverage. Surely I can beat whatever this rate is with my investments. And so, you carry the debt as long as you can. It sounds like the longest you can carry this particular loan you're looking at is seven years. That's the maximum.

And if you're only making $375,000 total and you got $600,000 to pay off, you may need close to all seven years to pay that off. Unless you're going to live like a resident. How many years do people expect to do that? I would assume after being in a partnership track for one, two, three years, you're not going to do that for very many more years, probably not seven more years. That's a long time to live like a resident.

It's probably going to be closer to seven years than it is to one or two years, unless you're getting huge dividend checks from some dialysis center you own or something. So you probably can't do it all that fast. But I would probably seek a balance.

My general recommendation is that you save 20% for retirement. If you're a doc, if you're a high income professional, 20% of your gross income for retirement. 20% of $375,000 comes out to be what? That's $75,000 or so. $75,000 needs to go toward retirement. Now, if you can carve another $100,000 out of your income, and that might be even asking too much, then that can go toward the debt, for instance. And I think you'd be in a good place doing that.

But keep in mind, if you're paying $100,000 in taxes, that means you're only living on $100,000. That's not all that different from living like a resident, quite honestly. Whether you can really put that much toward building wealth and paying off debt each year, I don't know. You might have to scale it back a little bit, but that comes down to your budget.

But how fast you pay it off is up to you. I think in this situation, you're not going to do much better than five, six, seven years, something like that. If you're a typical doc and want to keep saving for retirement in the meantime.

So, hopefully that income keeps growing up. Hopefully there's additional benefits for that $600,000 you're putting into the partnership. And hopefully this all works out great and there's a great long-term partnership. But go in with your eyes wide open. Not every physician partnership is a good deal for every physician.

Despite that, doctors out there in partnerships, for the most part, make more money than doctors that are employees. This trend away from ownership toward employment among doctors, I don't think is great. I think it contributes to burnout. I think it decreases physician incomes on average. And I think a lot of people really regret it by mid-career because they have less control over their work.

But if you're in one of those situations, we're still grateful for you. If you're not in a great partnership, if you're in an employment situation that's not awesome, you're still doing important work. And what you do each day for your patients matters. And so, thank you for doing that. If nobody's thanked you for that, let me be the first. But you still ought to look for something maybe a little better for you.

CASH FLOWING AN MD-PHD PROGRAM

Okay, next question is about MD-PhDs.

Marlena:
Hello, Dr. Dahle. My name is Marlena. I wanted to inquire about paying for an MD-PhD program. I'm interested in funding my education. Although there will be a stipend provided, I wanted to cash flow as much of my expenses as possible.

I've asked around and it seems there's a pretty even divide. Some of the physicians I've asked who have gone through this program have done as I was thinking, working on a part-time basis and cash flowing the remainder of their expenses that could not be covered by stipend, as well as setting aside money for savings. But then there are other physicians who have taken out loans because the stipend is solely their source of income for the duration that they're in the program.

I wanted to find out, if I am using the next three years to aggressively save for medical school, is cash flowing my additional expenses a reasonable goal and feasible for the duration of the program, which usually they're on the order of seven to eight years? Thank you for your time. I appreciate it.

Dr. Jim Dahle:
Well, in general, there's three ways to pay for medical school. One's to have somebody else pay for it. The classic example here is public service loan forgiveness. Essentially, you spend 10 years in public service, three to seven of which might be in training, maybe stay on as faculty or work for a nonprofit or whatever. And then the rest is paid for by the taxpayer.

That's the first way. And it's becoming more and more common all the time. I think 50% of docs might have this as an option, particularly those in academia, which is where a lot of MD-PhDs end up, by the way.

The second way, of course, is the classic, just pay off your loans. Live like a resident, refinance your loans, make big fat extra payments and they go away in one, two, three, four, five years, something like that. And then you're debt free and you move on with your life.

The third method is a contract program. Some of these are called scholarships. The classic one might be the military's health professional scholarship program, health profession scholarship program, whatever it's called. HPSP. This is how I paid for medical school.

They call it a scholarship. You feel all good when you receive it. But the truth is, it's not a scholarship. It's a contract. They give you more of your money upfront and less of your money down the road in that you just get paid less. And so, it's a contract program.

There are other contract programs out there. There's the FAP program for residents in the military. The Reserves and the Guard have similar programs. National Health Service Corps, Indian Health Service.

I'd lump the MD-PhD programs in with these sorts of contract programs because you have to do something in addition. Basically, your debt is time. It's not money. That time is time in a PhD program. And most PhDs, at least in science, are generally getting paid something. They're getting paid a stipend in exchange for, frankly, a lot of work that they do for whoever they're working under. And so, it's a similar contract program.

It's a reasonable way to pay for medical school if you want to get an MD-PhD. If you do not, this is not a great way to pay for medical school. Don't sign up with the military if you don't want to be in the military. Don't sign up for the National Health Service Corps if you don't want to go to an underserved area. Don't sign up for the Indian Health Services if you don't want to be on a reservation. All these contracts, they're great if you want to do that thing anyway, but these are not like alternative ways to pay for medical school if you just hate debt.

Doctors can pay off their medical school debt. All you have to do is live like a resident for a few years. You just have to live like the average American household for two to five years and you can pay for medical school. So you don't have to do these programs to pay for medical school.

But presumably you want to get the PhD. You want to get an MD. This makes sense for you and your career. And so, that's fine. So, how should you pay for it? Well, it's like anything else. They're going to give you a stipend. They're usually waiving tuition. So you're not going to have big tuition payments due or big fee bills due and you get some sort of a stipend to live on. If you can't live on the stipend, I guess you have to borrow the money. That's the way it works. Hopefully you can live on the stipend and don't have to borrow the money.

These days, it's a little harder to advise people what to do when it comes to paying for medical school. In the olden days, and by olden days, I mean just a few years ago, it seems smart to use money if you have money to pay for medical school to minimize the loans you're taking out. That might be at 5, 6, 7%. These days at 8, 9%.

Avoid that debt. Avoid those fees. Maybe you can wait until your third year before you just have to start paying for medical school. You have your parents' savings they're helping you with and their cashflow.

But as student loan programs have become more generous in the last few years, the REPAYE Income Driven Repayment Program, the SAVE Income Driven Repayment Program, both of which look like they're probably gone for now under the Trump administration. They're increasingly generous and public service loan forgiveness is clearly a thing. Even just among the people that came to our student loan advice company, which is called studentloanadvice.com last year for advice, I think 130 of them got public service loan forgiveness last year.

This is not uncommon at all. It happens for docs all the time. Hundreds of thousands of dollars forgiven. These programs are very generous. And when you start med school, you don't know if you're going to take a job in 7-11 years that's going to qualify for public service loan forgiveness. You don't actually know if the program's still going to be there. Although I think anybody that's borrowed money because it's in your promissory note and it's an act of Congress, I think you're going to get grandfathered in, even if the program changes at some point in that time period. But you don't know if you're going to take that job.

And so, in order to maintain optionality, to maintain the option to receive $200,000 or $300,000 or $400,000 from the taxpayer, the right thing to do right now is probably to borrow the money, as long as it's federal loans, even at 8 or 9%. Even if you have money, leave your money invested. It might not make 8 or 9%, but hopefully it makes something in that time period that helps offset all this interest and fees you're paying in the loans.

But even if it doesn't offset it, maybe you're borrowing $250,000, $300,000 and maybe it costs you $40,000 in interest to maintain that option. But I guess it's half of docs now that are taking PSLF qualifying jobs or could take PSLF qualifying jobs and be perfectly happy. That's not that much money to maintain that option available to you.

And so, when people are asking now if they should use their money for med school or whether they should borrow federal loans, these days I'm telling them to borrow the money. Keep their money growing in investments. Don't borrow more money than you need. Don't go crazy just spending like crazy because you're hoping for free money from the taxpayer, but borrow what you need, leave your money invested and then you can use that money to pay off your loans if you decide to take a private practice job and don't end up in a PSLF job. That's what I'm telling people to do.

Now, if we apply that to this sort of MD-PhD system, you're not going to be borrowing that much money. You're only going to be borrowing a little bit of money. Maybe you come out of your MD-PhD with $30,000, $40,000, $70,000, something like that. So it's not going to make as huge a difference in your life as it might in that of someone who's borrowing $400,000 to pay for school.

But you're almost surely going to be at an institution that's going to qualify for PSLF. Most PhDs are working at a university. And most universities qualify for PSLF. You're not going to be a partner with the university. You're going to be their employee. So you're going to qualify. So it can make some sense, I suppose, to borrow that money in expectation of receiving public service loan forgiveness for it.

I hate telling people that. I hate that that's the right answer, but I think it is right now given current policy. But really your question is probably boiling down to should you work or not? Can you work on the side of doing your MD-PhD? And that comes down to your time really and how hard this MD-PhD program is. Certainly in regular medical school, there are times when you can work. Between that first and second year, you can probably work. Late in your fourth year, you can probably work. I had jobs in both of those times.

But if you're trying to work during your obstetrics rotation as an MS3, that's probably a mistake. And you're probably too busy trying to work at that point in time. Maybe you shouldn't be working while you're studying for step one. Be smart about when you work during med school.

But I don't know, during the PhD program, maybe it's totally reasonable to drive for Uber in the evenings when you're done with your work. I have no idea. But if it is, feel free to work. Use that money to live off if you want or borrow the money if you want for reasonable expenses and leave your money invested. This isn't permission to just spend your money willy-nilly on trips to Costa Rica. But as long as you're investing that money, it maintains the option for public service loan forgiveness.

I hope that's helpful. I know it's confusing now. That's partly why we started studentloanadvice.com is because it's really confusing now and we want people to be able to get the right answers for their situations. But I think that's probably the right answer for you.

SPONSOR

Tax season is around the corner and this means it's the perfect time to optimize your tax strategy. That's why enrollment is now open for Cerebral Wealth Academy's course, The Doctor's Four-Week Guide to Smart Tax Planning, but only until the end of February.

Designed for medical professionals with 1099 income, this course includes live Q&A sessions with Alexis Gallati, the founder of Cerebral Tax Advisors, and 22 easy-to-follow video lessons covering everything from choosing a business entity to advanced tax strategies in retirement planning.

Listeners of the White Coat Investor podcast can use the code WCIFEB300 at checkout for a $300 discount. Visit cerebralwealthacademy.com today to enroll.

All right, don't forget about that student webinar. It's February 12th, 06:00 P.M. Sign up at whitecoatinvestor.com/studentwebinar. It's totally free. It's probably worth millions of dollars to you. Go to the webinar.

All right, thanks for those of you telling your friends about the podcast and those leaving five-star reviews. They do help us to spread the word. A recent one came in from Danny Laurie who said, “Thank you for delivering the best financial advice. You made a tremendous change on my financial life.” Five stars. Thanks so much for that review.

Okay, that's it for this week. Keep your head up, shoulders back. You've got this. We'll see you next time on the White Coat Investor podcast.

DISCLAIMER

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.

INTRODUCTION

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 208 – PM&R resident gets back to broke.

With Weatherby Healthcare, you choose your own healthcare career path. Our locums experts then support you every step of the way, helping you find the right opportunities at the right times.

We understand your professional and personal goals and are experts at helping you achieve them. Let's keep your career interesting with new locations and settings and diverse patients and cases. And just importantly, let's make sure you get more free time for your hobbies or to just relax. We'll help you find that balance with more jobs and more locations. Weatherby gets you where you want to go, whitecoatinvestor.com/weatherby.

Welcome to the Milestones to Millionaire podcast. We sure think this is a fun time. We love having you guys on this podcast. Every time I interview somebody, I'm like, “Now, have you listened to any of these episodes?” And most of them say, “I listened to all of them.” And they kind of know the drill. Granted, there might be a little editing between the interviews we record and what actually gets published on the podcast. But for the most part, there's very little editing that takes place in the content that we're recording as we do this podcast.

You're hearing the interviews we're having. And I think they're interesting discussions. I like talking finance with doctors, though. If you like listening to me talking finance with doctors, you should like the podcast, too. But we do need support doing it. We got to have guests on the podcast to do this.

So, if you've accomplished a milestone, maybe you're a decamillionaire, maybe you're a millionaire, maybe you're financially independent. Maybe you're retiring. Maybe you paid off your car or your mortgage or your student loans, or you got back to broke, or you did something unique. You donated $100,000 to charity. I don't care what it is. We're going to use it to inspire others to do the same. You can sign up whitecoatinvestor.com/milestones.

All right, for you students out there, that time of year has rolled around again. I do some speaking gigs every year. I like doing speaking gigs while I'm there. I don't like traveling to come do speaking gigs. I don't really get a kick out of driving to the airport. I don't like hanging out in the airport. I don't like finding my bag at the bag claim. I don't like finding an Uber over to the hotel, sleeping in a hotel, eating in restaurants, getting another Uber to wherever the speaking gig is. That part I can do without.

Because of that, I only do six to 12 of these a year. I cannot get to all the medical schools only doing six to 12 of these a year. And I'm not going to all the medical schools. What I can do, though, is put on a student webinar every year. This is the talk I would give if I was coming to your medical school and talking to you for an hour in person. And afterward, we do a Q&A session. I stand around like I would if I was at your medical school, and I answer questions as long as you guys have questions. Sometimes it goes an hour or two hours.

Now, I say we because I'm bringing somebody with me. I'm bringing Andrew, principal at studentloanadvice.com. Because I know a lot of you have questions about student loans and student loan management. And frankly, it's so complicated these days that you really have to be an expert in it to give all the right answers. I'm going to get part of this webinar. Andrew is going to get part of this webinar. We're going to cover student loans and everything else applicable to students and their finances. If we don't cover what you think is applicable, we're going to stick around afterward and answer your questions.

This webinar this year is live. It's going to be February 12th, 06:00 P.M. Mountain. That's 05:00 Pacific, 07:00 Central, 08:00 on the East Coast, sometime in the middle of the night if you're living in Paris, whatever. But it's live. So, please come. You can sign up whitecoatinvestor.com/studentwebinar. Now if you sign up, we're going to send you the video afterward. But it's way more fun live. So, come live. We had hundreds of people on last time we did this. In fact, I think our counter broke and started telling us the wrong number of people that were there. But it was a lot of fun.

We're going to talk about what medical and dental students need to know about money. It's free. It can literally make a difference worth millions of dollars over the course of your career. You really can't afford to wait until the big checks start to learn about money. You've got to learn about it before you get there.

You're going to learn why your patients need you to be financially literate. You're going to learn the secret to being a financially successful doctor. You're going to learn how to not worry about student loans. You're going to learn how to save money during residency interviews. You're going to learn why buying a house during residency might not be a great idea and more. whitecoatinvestor.com/studentwebinar is where you sign up. And again, it's February 12th, 06:00 P.M. Mountain.

We try to do what we can for students. We know students aren't like customers. They don't buy much from us. We give away our book to students. We try to give it away via the Champions Program. We try to do webinars. We try to speak to as many of you as we can because we know that if we can get you financially literate at the beginning, you become a financially stable doctor much sooner and can be a better doctor, better parent, better partner. And that's what we are trying to do here.

All right. We got a great interview. It's not a student we're bringing on. It’s a resident. But a resident has been very financially successful considering the stage of career that he is at.

Now, I want you to stick around afterward. We're going to talk a little bit about mortgages and specifically a mortgage when you're trying to turn the property you are living in into a rental property.

INTERVIEW

Our guest today on the Milestones to Millionaire podcast is Greg. Greg, welcome to the podcast.

Greg:
Thanks so much for having me.

Dr. Jim Dahle:
Introduce yourself a little bit to us. Tell us what you do for a living, where you're at in your career, what part of the country you're in.

Greg:
Yeah. I'm currently in upstate New York. I'm a third year resident in physical medicine and rehabilitation.

Dr. Jim Dahle:
Very cool. Not quite done with training yet, which makes this milestone you've hit all the more impressive. Tell us about the milestone.

Greg:
Yeah. I recently made it back to broke, which is pretty exciting for me and exciting to be here today. I appreciate you having me again.

Dr. Jim Dahle:
Yeah, this is exciting. Now, for those who listen to this podcast regularly, a week ago, we had a doc who was back to broke, was not a resident, though, was well out of residency, had quite a bit more debt, I think, than you have. And so, it took him a while to accumulate enough assets to offset that debt. Your situation is not quite so extreme as that. Tell us a little bit about your balance sheet. Why don't we start with your assets? Tell us about your assets.

Greg:
Yeah. I recently merged my finances with my fiancé and together we have about $185,000 in total assets broken down between investments and our savings. In total, she has a retirement account with about $29,000 in it. I have a retirement account that has $33,000 through my employer. And then I have my own Roth IRA with about $27,000 in it and another taxable account that has just under $9,000. And then we've also got a pretty decent amount in a high yield savings account, $57,000 right now. And then we have another $25,000 in savings as well. So it's kind of scattered across the board.

Dr. Jim Dahle:
What's that total up to?

Greg:
$185,000 total in assets.

Dr. Jim Dahle:
$185,000 in assets. And you say fiancé. And there's a difference between fiancés when you're getting married in 30 days and fiancé when you might get married in 10 years. Which sort of fiancé is this?

Greg:
We actually got engaged in April of 23 and we're getting married in July of this year. So, it's coming up.

Dr. Jim Dahle:
Okay. So you'll be married very soon. Because the general recommendation, of course, is don't combine finances until you're married for various reasons. Okay, let's talk about the liability side of the ledger. I assume at least one of you has got some debt.

Greg:
Yeah. I carry the debt burden. I've got $135,000 in student loans. And one of my goals before merging our finances and putting that burden on her was to offset my debt with assets. I was able to do that a couple of months ago. And at that point, we merged our finances and we have what I just told you.

Dr. Jim Dahle:
You're back to broke all by yourself without her assets.

Greg:
Yeah, just barely.

Dr. Jim Dahle:
Very cool. $135,000 in student loans as a PGY-3 is not scaring anybody. That's dramatically less than average. Average at graduation for MDs is like $205,000, something like that. Higher for DOs, higher for dentists, higher for Caribbean grads, higher for lots of MD grads that finished with $400,000, $500,000. What in the world? How do you only have $135,000?

Greg:
Yeah. A combination of things, but first of all, huge shout out to my parents for helping me out with that. My mother worked at an academic institution. Both my parents are lawyers. And so, when I selected my undergrad education, I chose the academic institution that she worked at. And that helped me out a lot with undergrad.

They had a full 529 for me. I did not utilize all that because of the tuition benefit from going to school where my mom worked. And then the leftover in the 529 was used to cover about half of my medical school tuition. The first two years were fully covered. And then that $135,000 comes from the rest.

Dr. Jim Dahle:
Very cool. Now, there's no such thing as a full 529. What's the most you ever saw when you looked at that 529 balance sheet? What's the most it was ever worth? $100,000, $150,000, something like that?

Greg:
I'm not entirely sure on that. I wasn't given the responsibility.

Dr. Jim Dahle:
You weren't given the keys to the kingdom, huh?

Greg:
No, no, sir.

Dr. Jim Dahle:
But it covered a couple of years. You didn't start borrowing until you were a PGY-3.

Greg:
Correct. Yes.

Dr. Jim Dahle:
Very cool. Well, that is a shout out to them. Well done, mom and dad. We're proud of you for doing that. You said they're both attorneys?

Greg:
Yes. A lot of gratitude for them.

Dr. Jim Dahle:
They're both high-income professionals themselves. They could certainly fit into the white coat investor community. All of you out there saving for college, look what is possible. Even if you can't come up with enough in a 529 for a full undergrad and a full medical school education every little bit helps. You didn't even have to start borrowing until your PGY-3 year. That's awesome.

Greg:
Definitely.

Dr. Jim Dahle:
Okay. You said that was one of the things. What else helped you keep it down?

Greg:
I think in general, I'm a frugal person. I kept my living expenses down throughout medical school with low cost of living. And that's also attributable to where I went to medical school. It's not a big city area. And then that was a big deciding factor for residency as well. I was able to stay at my home institution. But another thing I was thinking about was cost of living when I applied to residency. I took that into account.

Dr. Jim Dahle:
Did you have a choice for medical school? Did you get in a whole bunch of places or were you like most of us, you got in one place and you went there?

Greg:
I went to the place I was accepted.

Dr. Jim Dahle:
Yeah. Okay. But you did have more of a choice for residency. PM&R is not the least competitive, especially, but it's not the most competitive, especially either. I imagine you didn't go too far down your rank list, did you?

Greg:
Correct. Yeah. I was lucky to match with my number one program.

Dr. Jim Dahle:
Yeah. Yeah. Okay. So you had significant input there, of course. And was that your number one when you started interviewing? Or were there other places that you just didn't get interviews to that you would have liked to go to?

Greg:
It was my number one from the start for convenience and lifestyle perspective with my fiancé. I was really happy to be there.

Dr. Jim Dahle:
How much of an impact did the cost of living have on that decision, you think? Do you think that was a minor factor or a pretty significant factor?

Greg:
It was more on the minor side. I wouldn't say I was really 100% invested in staying in this area, but it was definitely something I considered. And overall, thinking about quality of the program and all the other factors that you think about with residency, it came out on top.

Dr. Jim Dahle:
Very cool. Okay. So, you've been investing as a resident significantly. Now, are you moonlighting or anything, or is this all just resident pay you're investing?

Greg:
Mostly resident pay. There's a couple of things I've done on the side throughout. First of all, in medical school, I worked in my third year as a nursing assistant. That was when COVID kind of popped up and they really just needed extra bodies up in the ICU. I was up there helping turn patients, stock shelves, things like that. And that allowed me to start investing at that time before I even graduated and started thinking about things there.

And then intern year residency, I also had a side gig. I was an academic consultant that was completely on Zoom, picked my own hours, and I would just talk with medical students, even some residents and other healthcare professionals about their career paths. And that gave me a pretty decent boost for a short period of time, at least.

Dr. Jim Dahle:
Is that like coaching? What is that? Healthcare consultant? What does that mean?

Greg:
It's mostly like academic consulting, meaning talking with undergrads about how to apply, helping them prepare for their MCAT, doing mock interviews, for example. It was a pretty broad role.

Dr. Jim Dahle:
Were you somebody's employee or did you start this business?

Greg:
No, I was employed through a corporation that did that.

Dr. Jim Dahle:
Very cool. Okay. So you've had a little more income than resident salary. What are you being paid these days as a PGY-3?

Greg:
Right now, we actually just got a raise due to some of the chaos with residency programs, forming unions and whatnot. But I'm now making $74,000 a year.

Dr. Jim Dahle:
That's pretty darn good for a resident. When I signed on, it was $34,000. It feels like a lot. Granted, it's been a couple of decades since I was a resident, but it feels like… I guess for 80 hours a week, maybe it's not that much, but it's better than a kick in the teeth, for sure.

Okay. What do you think your savings rate is right now? Have you ever calculated that?

Greg:
I was actually looking into this, and no, I haven't calculated it. But through my institution, it allows me to see what percent of my paycheck goes into my university Roth 403(b). And that was at about 30%. And at this point, I'd also like to say my current living situation is quite low cost of living because I'm in my parents' house with my fiancé. They moved out of state, didn't want to sell the house, and so we moved in. I do pay them rent, but it's definitely lower than your average. That 30% number is high, mostly because of my low cost of living.

Dr. Jim Dahle:
Very cool. Well, you take advantage of what you can.

Greg:
Exactly.

Dr. Jim Dahle:
We've all got advantages in our financial lives, and we all have disadvantages, and you take advantage of the ones you can. For example, in your case, your parents were able to help you out with school. You're staying in their house now, but you're also not a neurosurgeon. You're not going to have the same income when you finish your training as somebody in neurosurgery residency that maybe doesn't have those same parental advantages that you have. So, you do what you can with what you have.

Have you maxed out this account, this 403(b)? 30% of your salary, that's got to be pretty close to maxing it out.

Greg:
I don't think I've quite gotten there. I also have an IRA that I max out every year, but I think the max for a 403(b) is pretty high. I've put a decent amount into it. I think I'm a couple thousand short of maxing it out, though.

Dr. Jim Dahle:
Yeah. But you've also got an HSA. You've already got an emergency fund. You're kind of doing stuff that lots of people don't do until their attendance.

Greg:
I've spread it out a little bit here, and I also want to keep some of my assets liquid right now because of applying to fellowships. I might be moving twice in the next three years and buying a house and having a wedding, of course. That was the reason for my high-yield savings account, keeping some of those assets liquid.

Dr. Jim Dahle:
You guys talked about how much you want to spend on a wedding?

Greg:
Yeah. Our goal is under $25,000. It feels like a lot to me, but as weddings go these days, it's pretty low cost.

Dr. Jim Dahle:
A wedding is the classic, it costs what you're willing to pay expense. You can go down to the county courthouse for $150 and get married, or you can throw the classic Indian wedding where just the flowers are half a million dollars, and you ride in on elephants. You literally can spend what you want on a wedding. Very cool.

Now, I want to hear about these discussions. You're coming up on getting married here. You've been together for a while already. I want to hear how you guys are managing money together, and as you're preparing to be married, as you're already together, and it sounds like starting to combine finances. Tell us how those discussions have gone.

Greg:
We have very open communication, and I have the best fiancée in the world, obviously. But we have very open discussions about our finances. We were both relatively frugal coming into our relationship, so neither of us had to make dramatic changes. But definitely, as we've grown and started looking into different investments and savings accounts, we've just had conversations about it. And eventually, we were sick of splitting the grocery bill each month. So we decided to put it all in one checking account and merge our income in that way.

But even from the very beginning, we started our relationship in medical school. She was my sugar mama for a little period there. But from the very beginning, we've always split everything pretty much right down the middle, 50-50. And so, it's been pretty easy in that regard.

Dr. Jim Dahle:
Now, you have taken advantage of some work a friend of mine did, a friend that lives just a few miles from me by the name of Jesse did, on an app called You Need a Budget.

Greg:
Yeah.

Dr. Jim Dahle:
He's the founder of that company and you guys have used that. Tell us why you like that app.

Greg:
I love YNAB because the role is to give every dollar a job. And I like that ideology. If I get $1,500, I get paid twice a week. And let's say I see $1,500 of it, I don't want to suddenly feel like, “Oh, I can go out and buy this, that, and the other thing.” I assign that $1,500 into different categories based on what I know I'll need to pay for. And that includes your monthly rent, food, groceries, gas.

But it also includes those things that you're maybe paying for once a year. For me, that's disability insurance. I pay one lump sum per year, but I put money into that basket every single month so it doesn't feel like a huge burden for me. It's been huge in that regard. And that's something that my fiancée was forced into adopting, but she jumped in with open arms. So I'm lucky in that regard as well.

Dr. Jim Dahle:
Okay. Well, we've talked about some of the advantages you've had, but what do you see as your secrets to success? Because there's plenty of people that have been given your advantages that haven't been as successful as you have been. So, why were you successful where maybe some of them have not been?

Greg:
I think definitely the advantages I've been given really helped out a lot. And I know that other people get that too. I think that educating yourself early on is huge. Listening to this podcast, I read your book. And then just being conscious about how you're spending your money.

Because as a medical student going to a resident, it's going to feel great to have all that money, but it's easier to lose money than it is to gain it. If you just continue to increase your income and also increase your expenses, you're not going to be where you want to be 10, 20, 30 years down the road. So, I try and keep that in mind as I get these raises. And especially as I transitioned to an attending, I'm going to try and live like a resident to keep my savings increasing.

Dr. Jim Dahle:
Yeah. What a lot of people don't realize is it's just as easy to spend all your money making $74,000 a year or making $300,000 a year. It's not that hard to spend all your money. You can do it, I assure you, if you don't intentionally choose to do something else.

All right. What's next for you and your financial goals?

Greg:
I'm hoping to pay off my loans pretty aggressively. As soon as I get out of fellowship and get my attending job, I've talked with my fiancé about living like a resident and using her income to support us for a period of time while my income goes more towards the student loans and potentially a mortgage at that time. What I have written down is five years from now, I hope to have paid off my student loans.

Dr. Jim Dahle:
Very cool. I wouldn't be surprised if you end up doing it in half that time, given your motivation and financial literacy level.

Greg:
Yeah, fingers crossed.

Dr. Jim Dahle:
All right. Well, congratulations, Greg. You've been very successful. You've hit our first milestone back to broke very early in your career before really your career even starts. You should be proud of yourself. I'm proud of you. I'm proud of your parents for what they did to help prepare for your educational costs. And I wish you and your fiancé all the success in the world that you guys deserve.

Greg:
Thanks so much. Thanks for having me.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview. The truth is you can start being financially successful even during residency. Now I tell most residents, your goal is not to get rich during residency. If you can accomplish a handful of things financially during residency, you're probably way ahead of your peers. If you can get disability insurance in place, if you're married or have kids, some life insurance, figure out how your retirement accounts work and get yourself a match, learn how to budget, have a written plan for your first 12 attending paychecks. I'm happy. You don't have to get back to broke as a resident to be successful.

But obviously, with a little bit of time and effort and a little help from your parents, you can get back to broke even during residency and get started on your financial pathway that much sooner.

Last week we had a fellow that came on, was back to broke two years out of residency. Here's a doc who's done it within residency. It's pretty awesome to hit that first milestone. There's nothing better than knowing you're building net worth and moving in a positive direction and actually becoming wealthier every month than you were the month before. It's a good place to be.

FINANCE 101: TURNING YOUR HOME INTO A RENTAL PROPERTY

Okay, I promised you at the beginning, we're going to talk a little bit about mortgages, particularly when you want to turn the place you're living in into a rental. Now, this happens to lots of people. It happens to lots of people who buy a house during residency, because I can't talk you guys out of buying a house in residency. And it doesn't help the last five years when housing just went through the roof. Even those of you who bought a house for a year and a half sometimes are coming out financially ahead. Even though historically, you come out ahead only about a third of the time after a three-year residency, and about half the time after a five-year residency.

But in the last five, six, seven years, everybody's come out ahead. Nobody's had the experience I had with the house I bought in 2006 and couldn't sell when I got out of the military in 2010 until 2015. At which point I sold it at a loss.

Now what happens sometimes if you can't sell the place or just because you think it might be a good idea is people think about turning that first place they bought, they lived in for a while into a rental property. They start thinking, “Oh, I want to build a rental property empire.”

And that's fine, if that's what you want to do. If that's one of the ways in which you're going to build wealth. I'm a big fan of real estate. I like real estate. I like direct real estate. I don't want to do it myself. I'm too busy doing WCI. But I don't think it's a bad way to build wealth. You need to be deliberate about it and you need to be smart about it and you got to put in a little bit of work to do it. But it certainly can work out very well.

But what you need to ask yourself is, “Do I want to do that?” Because if you don't want to have direct real estate investments in your portfolio, then no, you shouldn't keep the place you've been living in the last few years as a rental property, you should sell it and move on, whether you're selling it with no gain, with a significant gain, with a loss. Hopefully you've got cash to be able to sell at a loss and move on. That's question number one is do you actually want to have direct real estate investments?

Okay, question number two is assuming yes, you do. Do you want this to be your first one? And would you buy this place as an investment? If you were looking at all the places in your city, is this the one you want? There's a good chance it's not. Because when we buy a place to live in, we use different eyes than when we buy a place to rent out. We're looking at the location and how close it is to our job and where we want our kids to go to school. And whether we like the colors or not. And whether it's got a place to store our rock climbing gear or whatever, I don't know.

You just don't think like that when you're buying a rental property. It's all about the numbers. It's like, “Well, what's it cost? What's it going to rent for? How much do I have to put into it? Are people moving to this area? Am I likely to be able to raise rents?” It's the numbers game. You're running numbers on the place. You don't really care less if it's like the most beautiful interior paint job ever. If the paint isn't that nice, well, you rent it for a little less than if you fix it up and put some new paint in there. And you can paint it whatever color you want and so on and so forth.

That's the question, it’s, are you going to buy this place? Is this the place you want? And if the answer to that is yes, great, rent it out. Perfect. Get started. If it's not, I want you to ask yourself a couple of additional questions. And the main one is, “Does that change if you don't have to pay closing costs on this place?” Because this is the benefit of renting out the place you already own. There's no closing costs, you already own it. That might be as much as 5% to buy a new place. It's usually 10% or so of its value to sell a place, especially once you pay off realtors. And so, there's some additional profit there if you can turn a place you already own into a rental.

The other thing is you might get to keep the mortgage. And a lot of people right now, especially have mortgages that are 2.5%, 3.5%. If you go out to get a new mortgage now it's 6.5%, 7%, 7.5%, whatever. You're not getting a 3% mortgage. So people are like, “Well, this could work out really well for me. It's appreciated while I've been here. I don't have to pay closing costs and I've got this 3.5% mortgage. Maybe I should keep it as a rental.”

Well, again, do you want to be in the business of renting houses? If the answer is no, that is not enough to change your mind. But that might take you from going, “I'd rather have a different property to let's use this property.”

What do you do about the mortgage? Well, the first thing you do is you go back and read your contract that you have with the mortgage company. It might have a requirement that you tell them if it is no longer owner occupied. If it's become a rental, you might have to tell them and you might have to pay off the mortgage or refinance it or whatever. But read that carefully. They may not require that or they may be okay with you putting in a renter.

A lot of people operate on the “Don't ask, don't tell policy.” They're like, “Eh, they probably won't find out.” Well, they might. Then you might be in a little bit of trouble. But the truth is, I think people do this a lot. Even though their contract says they're supposed to, they don't tell anybody when it's no longer owner occupied.

Some of the contracts also say it only has to be owner occupied for a year and then it's whatever. And so, it might work out fine for you to keep that same mortgage on it. You bought some physician mortgage with nothing down on it for 3.5% four years ago, you might be able to keep that for the next 26 years while you use it as a rental property. So you just got to read the contract and see what it says on that.

Now, if it turns out you're supposed to refinance it and it doesn't make sense as a rental property if you refinance it and you want to do the right thing according to your contract, well, I guess you're going to have to sell the property. The alternative, of course, is to break the contract. You told them you were going to tell them and you don't tell them. Well, okay, what's the penalty? It may not be much of a penalty. You might be surprised how little a penalty is and you might be willing to take that if that's the case.

The bottom line is the lenders are most interested in lending to people who pay them back as agreed. And as long as you do that, there's a good chance they won't be asking a lot of questions about it.

I hope that's helpful as you decide what to do with a house that you're thinking about renting out after living in it. One of the thing to keep in mind about it, of course, is the capital gains tax exclusion on owner operated homes.

Now, if you've lived in the house for at least two of the last five years, when you sell it, you can exclude up to a quarter million dollars of gains. If you're married, it's twice that. So if you live in it for three or four or five years as a resident, now you're renting it out.

Well, how long can you rent it out for before you lose that? Well, you can rent it out for three years and then you've got to sell it if you want to take advantage of that exclusion. Otherwise, when you sell it, you don't get any exclusion. Even though you lived in it 13 years ago, the IRS doesn't care. You're going to pay capital gains on the whole value. And of course, anything you depreciated on is going to be recaptured as well. Now you can avoid that by exchanging the property instead of selling it, but that's a whole another level of hassle that it adds in. I hope that's helpful to you.

SPONSOR

This episode has been sponsored by Weatherby Healthcare. With Weatherby, you choose your own healthcare career path. Our locums experts then support you every step of the way, helping you find the right opportunities at the right time.

We understand your professional and personal goals and are experts at helping you achieve them. Let's keep your career interesting with new locations and settings and diverse patients and cases. And just as importantly, let's make sure you get more free time for your hobbies or to just relax. We'll help you find that balance with more jobs and more locations. Weatherby gets you where you want to go. Learn more at whitecoatinvestor.com/weatherby.

All right, this is another great episode of the Milestones to Millionaire podcast. Keep your head up, shoulders back. We'll see you next time on the podcast.

DISCLAIMER

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.