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ALiEM Bookclub: The White Coat Investor

2017-11-06T18:29:46+00:00

white coat investor

“What’s the good life? My definition is a life free from financial worries, a career where you make a real contribution to society, a few luxuries along the way, the ability to help others financially throughout your life, and a comfortable retirement at a time of your choosing.”

– Dr. James Dahle, author of The White Coat Investor

Despite all of the training we receive as medical students and residents – anatomy, physiology, pharmacology, pathology, BLS, ACLS, ATLS, medical ethics, research – residents and physicians are typically in the dark about the the world of personal finance and investing. Physicians are already, by virtue of relatively high return on our educational investment and excellent  job security, in a great position to grow wealth provided they are given the advice, understanding, and tools to effectively manage their personal finances and investments. Dr. James Dahle (@WCInvestor), a board-certified EM physician, wrote The White Coat Investor to provide the basic understanding about wealth management that physicians can use to turn our passion into what he calls “the good life.” While the book focuses on all physicians, regardless of specialty, his background in EM makes it especially applicable to EM residents and physicians (and even interested medical students).

Synopsis: How to Find the Good Life

No one teaches you how to think about money in medical school or residency. Yet, from the moment you start practicing, you must think about it. – Atul Gawande

Dr. Dahle graduated from medical school in 2003. In just 10 years, with a stay-at-home wife and 3 children, he became a millionaire. He noted that many of his medical colleagues were uneducated about the ideal ways to manage their salaries, and thus his blog The White Coat Investor was born. Throughout the book, Dahle’s narrative is interspersed with advice on loan repayment, asset protection, and estate planning; making  a sometimes dry subject not only tolerable, but fun. Several anecdotes and specifically calculated examples give his advice a real foothold in the reader’s life.

In the first chapter, entitled, “The Big Squeeze,” Dahle explains that, in the face of rising tuition, lower reimbursement, and increasing regulations, financial literacy is more important than ever. Physicians spend a decade training during prime income-earning years. They often accumulate hundreds of thousands of dollars in debt, and they commonly have an indulgence reaction to an attending salary after years of delayed gratification. They are targeted by less-than-efficient financial professionals due to their profession. They are expected by society to live to a higher standard, and due to their basic benevolent nature tend to donate more to charities. Lastly, many physicians feel they don’t have the time to delve deeply into their finances. Dahle elucidates that when accounting for inflation, physicians are  making 28% less than they were 20 years ago and paying 4x as much for their education relative to inflation. Simply having a doctorate does not guarantee financial success.

In the following chapters, he creates a map for converting high income to high wealth with specific examples. Here are a few of the most salient points and recommendations:

Income and Wealth

The first step towards financial freedom is realizing that wealth and income are not synonymous. Wealth is not what you spend, it is what you accumulate. If one spends all of their income, they are indeed living high, but are not increasing their wealth. Live below your means and do not fall into a “rich doctor” lifestyle. Be debt averse and use bonuses to pay down existing bills. Save 20% of your salary and maximize your 401(k) contributions. Minimize superfluous purchases and avoid ongoing credit card balances.

Medical Students

Apply to medical school correctly the first time and attend the least expensive school you are accepted into. There are programs such as the military, public health service, or MD/PhD programs that will assist with schooling costs, but these each have their own hidden opportunity costs and limitations. Carefully consider the earning implications of taking time off or taking a longer route to medical school or residency. Some applicants may consider the Public Service Loan Forgiveness program. Plan to have your loans paid off within 5 years of residency graduation. When choosing a specialty, certainly take into account lifestyle and income in addition to choosing a specialty you will enjoy.

Residents

For many, this will be the first time earning an income. Learn to budget and “pay yourself first” (take care of bills and expenses before personal spending), and establish an emergency fund. Habits that you develop during this time period will follow you throughout your career. Given uncertainty in practice location and future plans, this is likely not the best time to purchase a home and renting can be advantageous. Purchase a high-quality individual disability insurance policy and consider a large Term life insurance policy if you have dependents. Invest in a Roth IRA or 401(k) (especially when matched by your employer) as taxes are withdrawn on the front end, rather than upon withdrawal (when physicians may fall into a higher tax bracket).

Attendings

Live like a resident, not necessarily forever, but doing so even for the first few months to years can help you build a solid financial base. Avoid the so-called “hedonic treadmill.” Your salary will triple or quadruple and even small indulgences can drastically increase quality of life. Spend those first months saving and don’t grow into your salary too quickly. The power of compounding means that dollars saved early are more powerful than those saved later in life.

The attending priority list Dahle establishes is:

  1. Contribute significantly to employer matched retirement plans.
  2. Pay off high interest debt.
  3. Maximize tax deferred retirement plans.
  4. Fund a Health Savings Account (HSA).

Purchase term  life, health, disability, auto, homeowner, and umbrella personal liability  insurance policies. Develop and fund plans for housing and college savings (529) if you have children whose college costs you intend to cover. Finally, Dahle encourages self-evaluation in predicting your future financial success based on what you do with your first paycheck – what did you do with your money? Did you: pay off your consumer debt, contribute to retirement, pay off student loans, pay toward a mortgage? Ultimately, what are you driving and what was your tax burden? Introspection can be valuable in establishing healthy spending, saving, and investing habits.

The Hedonistic Treadmill (image)
Retirement

Having a million dollars supports a living of approximately $30,000 to $60,000 per year during retirement. You will likely have fewer expenses and can be comfortable on 25-50% of your preretirement income. However, it is important to spend time with a financial calculator in order to set and understand your financial goals. Prior to retirement, try to save 20% of your income and expect your money to grow at 3-7% secondary to inflation, expenses, and taxes.  Typically, the higher your savings rate, the sooner you will reach your retirement financial goal, all other variables remaining equal.

Investing

Dahle metaphorically compares the plethora of ways that you can invest your money to the saying,

There are many roads to Dublin.

He proposes that some roads are faster and more reliable, which in his metaphor he parallels to the British motorways. He advocates that despite possible shortcuts, his proposed investment motorway should be your default method. Focus on the 5 investing factors within your control:

  1. Risk
  2. Diversification
  3. Investing expenses
  4. Tax efficiency
  5. Behavior

The ideal portfolio is diverse, low cost, mostly passively managed, and appropriately risky. He notes other possible “diversions” from the motorway such as real-estate and currency investing, which may attract certain investors depending on their lifestyle, hobbies, and habits. Each individual is unique in their ability to tolerate risk and you should aim to optimize your asset allocation to your personal comfort level. Financial advisors have benefits in planning, protecting you from your own risky behavior, streamlining the process and time you invest personally, and providing access to investments, but he warns about potential high costs and mismatched investing goals and urges physicians to exercise caution in finding external financial advice.

Further knowledge

Despite relatively large salaries, physicians tend towards being UAWs (under accumulators of wealth). You can become a PAW (prodigious accumulator of wealth) by following the above guidelines and reading the later chapters on real estate investing, obtaining reliable financial advice, asset protection, estate planning, income taxes, and choosing a business structure. Dahle recommends that you read one book about finance each year and consider it CFE (continuing financial education). This will improve financial literacy and make obtaining your investing goals more enjoyable.

Clinical Application

Physicians typically enter the profession out of an innate desire to help others. Dahle suggests that one major obstacle to physician financial acumen is that money was never the initial motivating factor. It is for this reason that physicians are often embarrassed to speak about money and may even feel the need to apologize for having it. Fine details of wealth management are consequently left to others who may take advantage of such naivety. This, in combination with busy resident and attending work loads with little free time to read up on this complex topic, can cause the world of personal finance to feel overwhelming.

Dahle reframes the conversation concerning wealth in a powerful way. He points out that financial stability can open the door to your dream job. You can work on research, travel, volunteer in a free clinic, or just have the freedom to speak up when you feel that departmental changes are not in the best interest of patients. You can also take greater risks when it comes to venturing outside of emergency medicine to pursue passions of entrepreneurship or administration. And, when it is time to retire from the specialty, you can do so autonomously at the time of your choosing.

He states “money might not bring happiness, but having been both rich and poor, I definitely prefer rich.” He is able to live a life where there are no arguments over money and vacations are limited primarily by time, not finances. His children are able to participate in activities of their choosing, and he can engage in hobbies without guilt. His financial acumen allows him to support his loved ones as well as his favorite charitable causes.

Dahle provides a clear and common sense navigation of the world of finance that is digestible for the busy resident. He delivers compelling and feasible explanations for becoming a millionaire by forty. After reading this book, you will likely be inspired to learn more; links are provided at the end of each chapter to suggested deeper reading. Dahle offers more in-depth information on his very successful blog. This book ultimately reveals that improving your financial literacy can be enjoyable, and that optimizing personal finance and investment practices is less about the accumulation of dollars and more about ensuring the opportunity to accrue the experiences you desire for personal fulfillment – “The good life.”

DISCUSSION QUESTIONS

  1. What kind of retirement savings options are available to you at your institution? Are you actively using them?
  2. How does fellowship change financial prospects and what actions can one take to improve financial well-being during additional training?
  3. Practicing physicians, how did you live immediately following residency? Where did your loan repayment and retirement savings fall on your list of priorities following residency?
  4. What are the first steps one should take towards improving their financial situation?
  5. What is the most effective way to spend a sign on bonus/pay checks?

Google Hangout Discussion featuring the ALiEM Chief Resident Incubator

Google Hangout Discussion Participants

Author: Dr. James M. Dahle (@WCInvestor)

Featuring:

 * Disclaimer: We have no affiliations financial or otherwise with the authors, references or hyperlinks listed, the books, or Amazon.

Edited by Dr. Nikita Joshi and Dr. Matt Klein

Maggie Sheehy, MD, MSc

Maggie Sheehy, MD, MSc

Emergency Medicine Global Health Fellow
Massachusetts General Hospital;
Chief Operating Officer,
2016-17 Chief Resident Incubator
Maggie Sheehy, MD, MSc

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