Personal finance is intimidating.
It’s personal, so there’s no one-size-fits-all method, yet there’s a never-ending supply of books, well-meaning friends, public figures, and salesmen who won’t hesitate to tell you what to do. And they all disagree.
Plus, technology continually introduces a slew of new options like Bitcoin that weren’t even a figment of our grandparents’ imaginations. Are they all good choices? Certainly not. So how do you figure out what to do?
This review of The White Coat Investor: A doctor’s guide to personal finance and investing by James Dahle, MD* is Part I of a two-part series comparing two recent (and IMHO excellent) books to get you started or raise your game to the next level.
Forget the for Dummies® series. Dr. Dahle respects your intelligence and your ability to weigh pros and cons and make the decisions that are right for you and your family. He writes with physicians in mind, but his advice is applicable to all.
Think of it as CliffsNotes® to a personal finance textbook. It’s just the facts, Jack, in 145 pages (157 including the title page, table of contents, etc.).
There are a few personal anecdotes and stories from other physicians, but the book is short and sweet. Each chapter ends with a summary, recommended supplemental reading, and links to relevant posts on his blog where you can find more details, commentary, and reader feedback.
If you were fortunate enough to graduate without student loans, then feel free to skip these chapters. For the rest of us, they review important choices that seem much more important in hindsight. Please, please, if you haven’t yet chosen a school or accrued loans, or if you have kids who are making these decisions, start reading ASAP.
School choice is just as important, if not more so, than the interest rates, income-based repayment, and loan refinancing options that he also discusses. Many people pay as much for education as they would for a house, and compounding interest can sneak up as a nasty surprise.
However, while there’s a huge difference between an 800-square-foot condo with linoleum and a 5000-square-foot mansion with marble, the difference among degrees from accredited institutions is much smaller. Don’t enslave yourself to a future of debt just for a fancier piece of paper. It’s still just paper, and in a month no one will care what it says.
You might also have the chance to trade your future time for a ‘free’ education, but there’s always a catch. Make sure you know what you’re getting into and if it’s the right choice for you.
Yes, the military will pay for school and even give you a stipend, but you’ll end up working for a salary way below market rate and will probably come out behind financially overall. If you choose this route, do it because you want to join the military anyway, not to get the up-front money.
The same holds for working in underserved communities that pay your tuition but require you to live and work in the boonies for a few years after training. It might seem like a great idea when you sign up as a single student, but when you have to pay back that time and now you’re married with kids, your spouse might not be so thrilled with the move.
The Early Years
The first few years after training are where you’ll get the most bang for your buck. You’ll finally have an income, yet you’ll still be used to living like a student. You will be tempted to cash in all that delayed gratification and go crazy with a new house, new car, and some fancypants vacations.
Owning a home can be great, but only if you plan to live there for several years and you have an emergency fund large enough to pay for a new roof, hot water heater, or air conditioner. Or all three at once if you’re really unlucky. Plus, dealing with all these hassles takes time.
If you’re still training and there’s a chance you’ll move when you finish, or if you’re starting a brand new job, consider renting until you’re more stable. Owning a home will make you less likely to explore other options if you find yourself with a horrible boss, and realtor fees and market fluctuations can quickly demolish any savings or equity you’ve built.
Dahle outlines many more reasons to proceed cautiously with big purchases and to focus on saving and paying off debt instead. Aim to pay off your loans, start saving for retirement, and build a substantial down payment for a home within five years of finishing your training. If you can’t do this, then focus on finding a better job or moving to a city with a lower cost of living. Don’t give up and buy a Porsche on credit instead. There will be time for the fun stuff later if you still want it, and you’ll sleep better in the meantime.
So you just got your first real job, and now you want to retire? Maybe not, but I’m sure you’d like to retire one day, and to do it comfortably takes planning.
Your retirement savings depends on
“your income, what percentage of that income you save (your savings rate), the rate of return on your saved money, and the amount of time you allow that money to compound.”
Many professionals spend so many years in school that they don’t even have a real job until they’re well into their 30s. They give up over a decade of compounded interest! If you’re reading this in your 20s, use this jumpstart to your advantage. If you’re starting in your 40s or 50s, it’s still better to start late than never.
While you can look for another job that pays more or start your own business, there is a salary ceiling in most fields. You also can’t control the stock market, but you can control your savings rate. The more you save now, the earlier you can retire and the more savings you’ll have available to enjoy and be generous when you do.
So you’ve chosen to pay down debt, buy a home (or not), and are ready to invest for your future. Now what? It’s time to get an education. Reading books like Dahle’s and Bogleheads will get you on the right track without the expense of formal schooling.
Before discussing specific investing options, make sure you understand the risks including market changes and inflation, and why get-rich-quick schemes usually make you get poor quickly instead.
Diversification is also important, which is why index funds that own hundreds or thousands of stocks are a simple, low-fee, and easy option. Buying enough real estate or other investments to be truly diversified requires more time, money, and effort than buying a few shares of an index fund. If you love these other options and truly (make sure it isn’t just your ego talking) know enough to make smart decisions, then go for it. If you’d rather spend your time and energy elsewhere, then choose a few index funds and move on.
Don’t forget about the financial advisors who would love to help you with these investment decisions, for the low, low fee of 1%-2% or more of your assets. Every year.
Is it really that much harder to manage $1M than $10K or even $100K? Of course not. So why should they get paid hundreds of times more to do the same amount of work?
Beware of advisors who can’t justify their fees and those who earn commissions by pushing products that might not be in your best interest.
By the time you read a few books and know how to protect yourself from unscrupulous advisors, you probably know enough that you don’t need an advisor at all.
If you prefer to have help or know yourself well enough that you need someone to talk you through a rough market, then keep looking and interviewing until you find one you trust.
Taxes can be complicated, but they don’t have to be. If you own a business or rental properties or if you have a very large estate, you probably need some help. If your situation is simple, though, see the advice above. By the time you read enough that you can spot a good CPA, you might not need one anymore.
It won’t hurt to have someone review your returns before filing, but filling them out yourself can teach you a lot about the tax code. This book will help you figure out the level of assistance that you need.
Be careful to stay focused on the big picture and not on spending a lot just to save a little on taxes.
Insurance is something we hope to never need or use, unless it’s health insurance with a low copay, which some people want to use and use and use some more…
I digress. No one wants to be in an auto accident, to suffer a premature disability or death, be sued, or have a home burn to the ground. Unfortunately, these things happen. If you can’t afford to pay for these things out of pocket, make sure to protect yourself adequately.
Just like with financial advisors, though, some insurance brokers have a perverse incentive to sell you products you don’t need but that give them a large commission. Read this book and do some research on your own before purchasing whole life insurance–you’ll probably decide that it isn’t the best option for you.
This chapter is beyond what most people, even many physicians, need, though it’s nice to know the information is here if such a situation arises.
Even for non-physicians, the tax implications of being an independent contractor or forming a corporation can be complicated and probably deserve more in-depth reading or at least a very careful perusal of WCI’s related blog posts and comments.
It’s tough to condense an already condensed version of such important topics, so I recommend reading this book in its entirety for yourself. An afternoon of your time is a small investment in your future that will have phenomenal returns.
*I am a long-time reader of Dr. Dahle’s blog, the White Coat Investor. He sent me this book after I told him I planned to write a review, and I have passed it along to a lucky reader.
Have you read this book or do you recommend another personal finance gem? Which topics would you like to know more about? Let me know in the comments below.
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