Review, Part 2 of 3
This is the second part of a three part review, and focuses on chapters 4 to 9 of the book. If you haven’t already read it, start with Part 1, which is here.
Step 4 - Student Loan Plan
This chapter could be an entire book on it’s own. Actually, we really recommend these books on student loans. If you have federal student loans, you need to become an EXPERT on repayment plans and PSLF. Keep in mind that PSLF is a robust plan and no one has ever proposed making changes for existing borrowers. We strongly dislike the term “grandfathered” when referring to any potential future changes, as that implies an “exception” would have to be made. Instead, the likelihood that future changes will affect current borrowers is so close to zero that you shouldn’t spend any time thinking about it. Although, we are indeed fearful for those in high school or college who are considering a career in medicine!
We like that the chapter explains the REPAYE interest subsidies, which most people seem not to understand that those are yours to keep regardless of PSLF. We have our own page describing REPAYE subsidies, which includes a video tutorial on how to use our calculator to calculate subsidies for any set of balance and income.
Regarding federal loans, we’d like to add that many forget that accumulated interest is interest-free. If you pay extra towards your loans in order to pay down the interest, it will NOT affect the rate of future interest accumulation. And we’ve now seen three borrowers who have refinanced loans into a HIGHER interest rate. How does that happen? It’s because the “printed” rate on your federal loans may not be the actual rate. Consider a 5% loan with a principal of $100,000 and interest of $20,000. The rate of annual interest accumulation is only $5000. But on a total debt of $120,000, your actual interest charged on the debt is 4.2%. See our blog post which has a chart illustrating effective vs actual interest rates on federal loans. You very much need to understand this concept completely if you have federal loans.
Step 5 - Boosting Income
A two page chapter that touches on salary, negotiations, and side jobs. Not much meat here, just introduces ideas.
Step 6 - Housing Plan
We agree strongly with Jim that renting is not “throwing money away”. One could counter with “paying taxes, interest, and maintenance on a home is throwing is throwing money away.'' A home is not an investment. It’s a place to live. There are significant transaction costs with moving into or out of a home one owns. Given that many docs are moving between jobs more than ever (it seems), owning a home can tie you to one location and prevent one from taking advantage of job opportunities. So rent without guilt! As always, location matters and everyone’s situation is different. This New York Times rent vs. buy calculator is amazing. However, we usually see people put in WAY too rosy assumptions for both future real estate price appreciation and maintenance costs which of course makes owning seem comparatively better than renting. Any bias regarding owning a home very likely influences the economic assumptions you enter into the calculator. Be careful.
Step 7 - Retirement Accounts
A few things we’d like to add about this. If you are shooting for PSLF (and eventually receive it) making contributions to an HSA and a deductible 403b/401k is like getting a 10% or 15% match from the government (unless you are already above the payment “cap” which comes with IBR or PAYE), because such contributions lower your income for income-driven repayment plan purposes, which then increases future forgiveness, not to mention it increases your current cash flow.
Next, there is no correct answer when it comes to deciding whether to pay off debt or invest. But if you are not going for PSLF, then you’ll likely have refinanced to a low(ish) rate, and we tend to advise docs to max out a 401k/403b and a Roth IRA (please learn about the “backdoor Roth”!) prior to paying down debt. This decision however, is as much a personality issue as it is a math issue. The tables in this chapter are a bit cartoonish and take up way too much space (an issue we discuss at the end of Part 3 of our review).
Step 8 - Investing
Here’s our addition to some topics brought up in this chapter. 1) Fees matter. Learn what a mutual fund “expense ratio” is and what fees your investments cost you. 2) If you choose to hire an advisor, paying as a percentage of your assets is usually much more expensive than other options. And advisors who make commissions on selling you insurance are not advisors, they are salespeople. 3) If you wonder whether a “Target Date” mutual fund is right for you, the answer is “yes” (We take credit for coming up with that expression). If you do nothing other than invest in one of these “all in one” funds your entire life, you’ll do just fine. Later, you can make incremental improvements to a Target Date type of fund if you are motivated and want to put in just a little extra effort.
Jim is a big fan of real estate investing, which is probably in line with his personality. We find the majority of docs are content to just have ONE job, and do not want to start a new business (i.e. real estate investing). Many have told us they feel stupid or inadequate for not wanting to buy a rental property or directly invest in real estate in some way, given how much time all the the doctor advice blogs/businesses spend on the topic. We’ve also seen people reluctantly buy a rental property as if not doing so was akin to not taking advantage of an employer match! If you want to invest a little in real estate type investments, but don’t care to learn to run a business unrelated to your existing skills (medicine!) you can do so easily through a type of mutual fund called a “REIT”.
Step 9 - Correcting Past Mistakes
Doctored Money’s audience tends to be early career MDs. We hope to help you prevent mistakes you have not yet made. But there are some good warnings in this chapter which relate back to previous chapters: avoid whole life, avoid expensive advisors, etc.
Stay Tuned
Part 3, the final part of our review, will be along shortly!
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