Top 5 Money Pitfalls Every Doctor Should Steer Clear

Most of us choose to become physicians because we care more about serving others than making the most money with least effort. In fact, one could argue a career in medicine is the antithesis of maximum money for minimum work.

There are many financial pitfalls that doctors are susceptible to, making financial disasters and trapping doctors in a rat race, without the option to retire or to cut back on work.
After chatting with many attendings and residents, I’ve identified top 5 most common money pitfalls that 90% of the doctors fell into at one point or another. If we are warned of these pitfalls, and mindfully avoid them, we would have much less financial stress and enjoy greater satisfaction in all areas of our lives.

1.      Borrow against our future, without practical understanding of how much the loans cost us in interest.
A friend from med school told me, “The financial aid people encouraged me to take out student loan and live comfortably so I could focus on school. It was like monopoly money. Anytime I needed cash, I shoot her an email, within 30 days, I’ve got a check waiting for me in her office. I could cash it for anything: a vacation, fixing my car, childcare expenses. If I knew how much my debt would snowball at the high interest rate while I was studying hard, I could have gotten by with less to prevent amassing such a large debt upon graduating med school.”

2.      Hire “the” professional, without knowing how much their service cost us.
Check out PoF’s calculation on how an average physician may end up paying 13 million dollars to a “financial advisor” over his/her lifetime, (3 decades working, 3 decades in retirement.)
I 100% agree with White Coat Investor’s mantra that if you take the time to learn how to find a good financial adviser, you would have gotten enough education and financial literacy to be the best financial adviser for yourself, free!
Before ever paying a “professional” an AUM (asset under management) fee, pick up one personal finance/investment book and find out for yourself how easy it is to make and manage money (hint: especially when your return is not eroded by 1-3% AUM fee.)

3.      Making more instead of spending less.
Money doesn’t buy happiness. Time is key to happiness. We all only have 24 hours/day. Even with sleeping only 4 hours/day for 15 years, I only had 20 waking hours/day.
Before you sign up for an extra shift thinking you need that extra money, ask yourself if there’s extraneous, meaningless spending in your budget. You know you can cut out an expense if it does not support what brings you lasting happiness.

4.      Overworked and under-satisfied with life; then seeking material objects to compensate for our sacrifices.
We are so over-worked in medicine that we have come to accept it as the norm. We internalize the expectations of our profession to care for others and justify neglecting our own needs. To the point that we are sleep-deprived, with no personal time, no exercise, and little social activities.
It was not uncommon for my friends in medicine to say, “Yeah, my family and friends know that I’d be MIA for a couple months because of Boards, interviews, crazy rotations and calls (fill in the blank.)” Medicine has plenty of grandiose excuses for us to neglect what makes us happy and what makes us who we are.
When we deny ourselves of our personal needs and all we know is studying, taking tests, 28 hour calls, extra shifts, we are in survival mode and we over-compensate our personal needs with purchases. It takes less than 5 minutes to buy a pair of ear rings and it give us the endorphin rush of short lived ecstasy.
“I deserve this.” I work so hard and have so little time to do anything. I deserve a lavish vacation. I deserve to enjoy this 750 series BMW, even if that means I’m delaying my retirement for a year.

5.      Vicious cycle.
The vicious cycle goes like this:

  • Over-working
  • Under-satisfied
  • Compensate with over-consuming/ spending
  • Saving less
  • Not reaching financial goals (or even paycheck to paycheck)
  • Working more.

Break the cycle anywhere you like. The pitfalls are linked, avoiding one likely helps you avoid another. Getting out of one will help you get out of another.

Best wishes,
You deserve so much more than what money can buy.

 If you like this article, you might enjoy other DWM articles on Personal Finance, Investing, Retirement, Practice Management, & Lifestyle.

All articles by DWM are for informational purposes only and not intended as a substitute for professional advice. Please consult a professional accountant, financial adviser or lawyer, before making financial decisions.

5 Uncommon Financial Commonsense

I’ve been hearing the term “educated dumb” and “commonsense is uncommon” frequently lately.

It’s true that to be financially successful, all one needs is commonsense, which is pointed out by a VA nurse who’s retiring at 55, with 750k in retirement savings, and have helped others generously, including her adult son’s family by 200k in educational costs/debts.

While there are doctors at her age, who’s made 300 grand annually for 2 decades with less savings in retirement account, she humbly says that it’s just commonsense.

It’s true. As complicated as most financial salesman like to make personal finances sound, it really is simple. So if you keep it stupid simple, KISS, you’d well!

So let’s remind ourselves what we (should) know as kindergartners.

Ø Save.

Don’t try to buy happiness. It just doesn’t work. Look at the most consumptive culture in the world, the US, with the most cases of depression. Go figure.

Put savings as your #1 non-negotiable expense category in your budget. Pay yourself first, then play with what’s left. If there’s nothing left, count it as a blessing. Having no money to spend on clothes, entertainment and frivolous stuff make you happier.

Don’t agree with me? Were you happier in college without a dime in your savings, or happier now with >1 million net worth?

I have great nostalgia for my college years when all my belongings could fit in the back of a sedan. Those are my funniest, greatest learning years, where I made some of the most lasting friendships in my life.

Ø Make your money harder and longer than you.

Put your savings where it can generate more money for you. Not under the mattress or in bank accounts bearing 0.03% interest. Buy index funds. Buy and hold. Buy in your younger years (low tax bracket) voraciously, like there’s no tomorrow. It will pay off in tremendous time value of money and tax savings.

Ø Give and share.

It’s incredibly true that the more you give, the more you have. Reason is, $40 bucks means so much more to a staving child in 3rd world country than to you. Having a worthy cause to give your money to, makes you realize how blessed you are, and how little you need to spend more on yourself.

Ø Create opportunities.

If a group of kids don’t play with you. You devised your own game and draw players to your game, didn’t you?

Your mind and your time is your greatest asset. Use it wisely. Create opportunities for yourself to generate more income. It’s easy to do when you look around you and see where you can provide service to others. If you follow your heart and your desire to help others, money will follow you. I’d never imagined that I could make money by writing articles. But the income from writing, which is my hobby and one of the major ways that I help those around me, is helping to max out Mini’s 529 at 14k in 2016!

Ø If it’s so complicated that you can’t understand it, it’s not a good thing to buy/service.

Just because it’s complex and expensive doesn’t mean it’s good stuff! Don’t buy anything, particularly financial products if they are too complicated to understand. You are a doctor, you master the most intricate, difficult to appreciate concepts there are on earth, discovered by human so far. If you can’t wrap your mind around how whole-life insurance-annuity-cr*p works to your benefit, it’s probably because it DOESN’T benefit you. It benefits the sales person with 2 weeks of financial training in front of you.

 

There you go.

5 financial commonsense restored. Now, go out there and be a DIY/self-made millionaire!

 Personal Finance, Investing, Retirement, Practice Management, & Lifestyle More articles like this on Physician’s Money Digest.

How My 8 Year Old Funds Her 2016 Roth IRA: Just in Time, Tax Break for Mom, Roth IRA for Kiddo

IRS is pretty strict about what you can pay your kids for. In a tax audit, paying an 8 year old 10k a year may seem hard to justify. But I think I have a case with my 8 year old Mini Wise Money (MWM).

 

Moneywise, it makes sense to pay Mini 10k, deduct her pay from Dr. Wise Money LLC business income, let MWM file and pay her own taxes, and then fund her own Roth IRA. Not only is MWM’s 10k AGI tax rate way lower than mine and that of DWM LLC, but also it is likely the lowest tax bracket MWM will ever enjoy going forward. Both Mini’s income and the tax rate are bound to increase as she gets older.

As many of you know, MWM is a gifted artist. Here’s a piece of oil-painting she completed in 9 hours, over 3 Sundays as a 4 year old. Her art teacher, taught a group of 15 5 to 13 year-old, MWM got in this group class because I convinced the teacher she was a very well behaved 4 year old.

IMG_7881
The red flower in a jar was Mini’s very first oil painting at 4 years old. The yellow flowers was her 2nd painting.

Her art teacher loved MWM so much that when I went on residency interview trail, she offered to take MWM off of her dad’s hand. She joked she would adopt MWM if she could.

Many people have offered to purchase MWM’s artwork, but parents, grandparents are not willing to part with MWM’s original art pieces. Hence MWM has only sold replica so far, but she has sold one original sculpture to my company DWM LLC at $300, and that’s with a generous discount (which Mini called mommy discount.)

MWM has generously displayed her artwork in galleries on drwisemoney.com. So for that, she’s getting compensated for $1500/year. Additionally, you noticed her pictures throughout many of my blog posts and even published on Physicians’ Money Digest. For her modeling work, she gets $1500/year flat fee.

We recently moved into our dream home (the second home I purchased in 2 years). We kept the first home in our family and got this dream home for MWM, my parents, and myself. As soon as the seller signed our purchase contract, MWM started planning parties and summer camps.

I was going to hire a professional party planner for MWM’s 9th birthday, but to my great surprise, Mini rose up to the occasion with quality-work that beats the professional I was going to hire. The tear-jerking party invitation letter (which really was an essay) and the party schedule (planned down the minute) certainly would have taken me more than 4 hours to produce (which is worth $388/hr x 4 to me.)

So MWM deservedly earned herself $1500 orchestrating her own 9th year old birthday party. See below for her party invitation letter, and the party schedule. I would definitely hire MWM for future company parties and events. Since at this party, we will be entertaining & feeding business associates and conducting business meetings for DWM LLC, we can definitely justify paying MWM from the DWM LLC. So it’s definitely wonderful that I am not paying personally, but my company DWM LLC is paying Mini for this company event/birthday party. When I pay Mini, it’s post-tax dollars. When DWM LLC pays Mini or me, it’s pre-tax money.

[Johanna CPA says: What DWM means by this is that, as an individual, there is no ordinary and necessary “business purpose” for taking a tax deduction for payments to MWM. However, she believes there is justification to deduct payments to MWM through DWM, LLC as ordinary and necessary business expenses.]

Back to MWM’s talent and hobby in art. She is designing and making our DWM LLC company uniform. The art supply and raw materials would be deducted from DMW LLC. Furthermore, MWM makes $500 for her creative design of the company T shirts. Then she gets $30/shirt purchased. I’m buying 40 shirts for business associates and volunteers. She made another $1200 here. We’re now at $6500.

IMG_3045
Min and best friend posting with their hand made unique tie-dye shirts.

Do you notice how many posts/articles I write are about MWM? She’s my think tank and creative juice. For every post she helps me generate, I started paying her $50 on 1/1/2016. Then I realized MWM was involved in so many posts that it was getting expensive, so we negotiated a fair deal after we discussed DWM LLC’s balance sheet.

Mini gets $2500 flat fee for the year of 2016 regardless of how many posts she help me generate. It’s already saving me money, as I have written more than 50 articles inspired by her this year, not counting all the other ones from prior year when MWM worked for future earnings. $9,000.

While I can’t exactly justify Mini’s equestrian lessons as DWM LLC company expenses, I could certainly justify her art lessons as furthering employee education. Since she directly benefits DWM LLC with her digital art gallery contribution on drwisemoney.com, time she spends on improving her art skills are compensated. MWM, voluntarily on average spends 15 hours per week watching art/DIY videos and creating new art pieces: 1-2 hour on each week day; 5-8 hours on the weekend. To be safe, we will count 10 hours per week and that’s 520 hours per year. So I pay her $2,000 for her 520 hours of work, which is just south of $4/hour. Not too shabby right?

So MWM will have made $11,000 in year 2016. She’s a pretty good little entrepreneur, right?

As her mommy, I’m more than happy to deduct her pay from my business,

watch her fund her Roth IRA at the tender age of 8 years old.

This one-time 5.5k she contributes to Roth IRA in 2016, assuming 8% annualized return, will double every 9 years.

She’d have (2 to the 5th power= 64x of 5.5k = $352,000) at retirement age of 62; tax free too.

If she contributes 5.5k for the next 10 years before she starts college.

The 10th 5.5k would have 4 doubling time, so still worth $171,000 at 62.

Now imagine adding up all the 10 years worth of 5.5k’s from 2016 to 2026.

I didn’t fund My Roth IRA until 30.

Mini’s certainly starting early and using time value of money as her ally, rather than a foe.

 

[Johanna CPA says: DWM is saving income taxes by deducting MWM’s pay from income at DWM’s higher marginal bracket and reporting in MWM’s lower tax bracket. As long as MWM has earned income, she will be able to use her standard deduction of $6,300 without reducing DWM’s Head of Household standard deduction of $9,300. Note that MWM will not be able to claim an exemption for herself since DWM will be claiming her. But that is not all: children working in a parent’s unincorporated business do not have to pay self-employment/FICA taxes if they are under age 18. That means that DWM is shaving FICA taxes from her tax bill which is a net gain. In addition, she does not have to pay federal unemployment taxes on MWM’s earnings until MWM is age 21, although she may have to pay state unemployment taxes, depending upon where they live. DWM’s strategy is also a good opportunity to teach MWM about budgeting by helping her work out a budget for MWM’s personal expenses and use her own earnings to buy extras while saving or investing what’s left after her Roth contribution and discretionary spending in a taxable account.]

 If you like this article, you might enjoy other DWM articles on Personal Finance, Investing, Retirement, Practice Management, & Lifestyle.

All articles by DWM are for informational purposes only and not intended as a substitute for professional advice. Please consult a professional accountant, financial adviser or lawyer, before making financial decisions.

6 $ Tips I Would Tell Dear Older Me

After I wrote about 6 $ Tips I Would Tell Dear Younger Me, I thought I should write to my future self too.  If it’s true that we learned everything we needed to learn in life as kindergartners, then I would thank myself for writing this when I’m older.

·        Remember enough.

Remember how content you are living on 50k and saving 24k? Remember all the things that make you happy had nothing to do with money once you’ve got your basic needs like food and shelter met?

·        Stay minimalist.

Remember how you love space more than clutter. You love people more than stuff. You taught Mini that the only things that matter in life are in kept in 2 places, in your brain and in your heart.

Don’t fill your life with belongings.

·        Feed someone hungry; don’t develop your own hunger.

Remember how you wanted to sponsor more kids in developing countries? Remember how you wanted to pay for Mariela (the child you started sponsoring in 2014) to fly and unite with her sponsor family?

Feed the truly hungry people. Don’t feed into the insatiable hungry monster within you.

·        Give yourself the permission to work less.

Remember how simple and comfortable life was when you made 50k? Give yourself a pay cut, work half time and make 125k. You should still feel like money is flowing out of every one of your orifices, you have too much money to know what to do with!

If you don’t feel that way, it’s time to cut back even more and living like a resident again, to remind you how wonderful life is when there’s not much money and possessions to worry about.

·        Work to learn, not to earn.

The epiphany you had at age 32 about time being the most precious resource any one has is still true. Don’t exchange your precious time for money. No matter how high the price is, it’s never really worth your time.

Invest your $ passively; invest your time actively. Never cease to learn and improve yourself, as a doctor, a mother, a partner, a human being. Most people on their death bed never wished they had worked more because most people associate work with earning money rather than learning new things.

I’m sure you won’t regret learning more, staying curious and adventurous into old age. Trust me one this, your younger self.

·        Don’t follow money. Follow your heart.

Who has your heart right now? If it’s something inanimate, without a soul, then you are way off the mark, dear older me! Read the bible and find that true treasures are store in heavens again.

Turn off all your electronics and stop checking your billion dollar portfolio, it’s an obsession. You’ve always had a bit of an obsessive personality, but you got to choose the right thing to obsess over.

How about all the big dreams you had when you were young? World health? Financial justice? Patient doctor relationship? Physician wellness? If you have yet accomplished your dreams of making the world a better place, it’s time to get to it!

Personal Finance, Investing, Retirement, Practice Management, & Lifestyle More articles like this on Physician’s Money Digest.

State of the Blog: Dear Readers

Hi There,

I’m Elva, apbka (also, previously, briefly, known as) Wise Money Shopper. Amanda, aka Dr. Wise Money, was my sister.

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