Finance for Physicians

We went LIVE with our show, Finance for Physicians! We're over 100 episodes into our podcast, Finance for Physicians, and we've got the chance to learn great lessons together with our audience. But it's time to turn this audience into a community. That's why we did our first LIVE show! For this world premiere, Daniel Wrenne talked about: - What are the key lessons have been from the first 100 episodes- How Daniel realized that what is missing for physicians is a community of peers they can count on- Why the show is expanding beyond financial advice in order to make you smarter with your money- And much more! This is an interactive conversation that will shape the future of a community we'll build together.  Links: Contact Finance for Physicians Finance for Physicians

As a doctor, you begin your professional career as a high-income earner. But many people don’t talk about the cost of this achievement. As you know, medicine is a demanding field that requires a lengthy, expensive education and rigorous hours of training. When you spend that much time studying and working, you don’t have the time for side jobs to offset the cost, or the mental space to learn about anything else other than how to treat patients. This means most physicians, like you, end up having to take out huge loans to survive, without time to get a proper financial education. But by the time you start to earn income, you begin to feel trapped by “the system”. You start to feel behind in life - forcing you to continue to sacrifice your quality of life and your patient quality of care starts to decrease. This leads to poor health, stressed relationships, and a propensity for burnout from a vocation you worked so hard to achieve. We have a solution: we believe control of our finances leads to having control of our life. Welcome to “Finance for Physicians” a show where we teach and empower doctors, like you, to practice medicine the ways you always dreamed you would- free of financial worry to provide the best level of care for your patients, your family, and yourself. Don’t believe that “burn-out is a necessary myth.” You don’t have to sacrifice your health, relationships, and your career to live the life you want. If you want to learn how to have better control of your finances and more control over your life, this show is for you! “Finance for Physicians” is hosted by financial expert, Daniel Wrenne, of Wrenne Financial. Links: Contact Finance for Physicians Finance for Physicians

The pandemic in America is starting to look like a memory of hard days gone by, but the effects can still be felt throughout our country. That reason is, probably, why the Biden Administration has decided to extend their Covid 19 Forberances to the end of this year. In this episode of the Finance For Physicians Podcast, Daniel Wrenne will go into detail with Jeff Wenger about the situation surrounding Covid Forbearances while also taking a look at the currently shifting loan-giving and forgiving policy of the Biden Administration. Topics Discussed: How to financially plan in accordance with the extended forbearance period if you have mortgage payments on the way. Student loan forgiveness: Are you eligible? Is it useful at all? The Federal Pell Grant. How it works and how to know if you’re eligible. Links: Updates On 4 Big Changes To Federal Student Loans Contact Finance for Physicians Finance for Physicians

Does it take you hours and hours to count and track every single expense, every single month? How can you monitor your spending without spending too much time that you do not have and cannot afford to waste?  In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about how busy physicians can monitor spending without wasting hours by using a basic system that he developed to keep a pulse on cash flow and total household expenses. Topics Discussed: Goal: Make sure you’re not overspending or that your spending is aligned Cash Flow Tracking System: Shows if you’re on track or you’re slipping up Do’s and Don’ts: System only works if you do pay off credit card debt monthly Cash Balances: System watches them over time based on your spending Numbers: Starting cash balance, income, ending cash balance, and expenses What do your expenses need to be? What if they aren’t what they should be? Financial Plan: Decide how much for your lifestyle vs. spending vs. values/goals Categorization: Come up with categories that you want to sort everything by Expense Audit: Identify and plan what to cut/reduce by stopping/changing habits Links: Contact Finance for Physicians Finance for Physicians Full Episode Transcript: What’s up, everyone? I am recently returning from a podcast conference. Basically, a bunch of people like myself got together, shared ideas, and talked about how to improve. My goal up to this point has been just to basically produce episodes and share as much value as I can. Now that I’ve been at it for (I guess) a little over a year, maybe close to a year-and-a-half, the goal going forward is to start to proactively grow and really fine-tune the skill. This conference was super helpful in getting some ideas. I want to fill you guys in on that before we jump into the episode today, and share a couple of other things I’m going to be working on. Like I said, the big goal going forward is to really focus on growth and adding value, which has been my primary goal all along, is how do I get as many people listening as possible, and make sure it is valuable as possible. I got a lot of ideas from the conference. I’ll share those over time and you’ll start to see those come out over time as we implement them, but there are a couple I’ll throw out today. In terms of value add, a couple of ideas that I took away from that conference was along the lines of improving engagement. A couple of other things I’m thinking about is maybe doing some live format, where we allow the ability for guests to participate more in-shows, throw out questions, and just make it more interactive, with the goal being to make it more community-focused. Or maybe having a Facebook group where we’re doing form-type setup and having conversations. I have a lot of different ideas along the lines of building community and improving the interaction among you guys, so if you have ideas along those lines please share those. Ultimately, this show is for you guys, so I want to hear if you guys have ideas for how to provide more value and be more engaged. Ultimately, I want to know what you guys are looking for and what’s what we’re after. That’s the first big thing that I’m working on. The other big thing is growth. The goal there is to naturally grow through providing maximum value. Plus I think I’ll try to do a little bit more promotion, maybe on social media, although I’m not the most engaged. I’m not the social media type. Another big thing is potentially getting on other people’s podcasts. If you know of people that either might be good guests for this or podcasts that might be good for me to attempt to get on, please throw those out as well because we’ll be looking to do that in the future. More info to come. I just want to throw you guys in on that. Super exciting to see how many people are working in that space, and there are a lot of people with great ideas. The goal is to work through these things to continually improve on what this podcast is providing ultimately for you guys. The goal today was to talk about expenses and monitoring expenses  without spending hours and hours. I know that is a common issue. You’re probably thinking of budgeting when we talk about budgeting. We kind of are, but when I think of budgeting, I’m like, gross. That sounds terrible. I don’t really want to budget. Budgeting sounds painful to me. I think of counting every single expense every single month and hours and hours of time. That is commonly what it turns into, especially when you’re tracking every single expense. It’s also a common cause of arguments with couples when you get into the weeds. Not that budgeting is always bad, but I don’t think it’s a great starting point. So we’re going to talk about how to monitor your spending without getting into the weeds, and without spending hours and hours of time. Through my work with physician families one-on-one, and also just with my own personal finances, I’ve developed a system. It’s very, very basic. It’s nothing. I’m sure tons of people have used this before, but it’s a system that really works well for just keeping a pulse on cash flow and total expenses. For most people, that’s really all you need to do most months. I’ll talk about my experience with this as we go through this because I’ve seen the ups and downs in this. I think the goal is most people just want to make sure they’re not overspending or make sure their spending is in line with what they want it to be. This system will (at minimum) show you if you’re on track. It’ll also give you awareness if you’re slipping, if your lifestyle is starting to creep up. I’m going to talk through this cash flow tracking system. Basically, the system involves monitoring your total cash balances between your checking and savings account over time, and your income, and then using those values to back into what your expenses are. First of all, this is not going to work if you have consumer debt that you’re not paying off every month. If that’s you, you have to take care of that first. This is just not going to work for that. But assuming you’re paying off all your credit card debts every single month, this system to monitor will work. We’re looking at cash balances. Really the system is watching those cash balances over time and backing into what your spending is based on that. The way I do it is monthly. You could do it at any frequency, but I like monthly. It’s how I track everything else. Let’s say we’re looking at May of 2022. What I’m going to do is—I use a spreadsheet, but you could use paper—I’m going to look at May. The first number I’m going to write down is my starting balance between all my cash accounts—checking account, savings account—total them up, that’s my starting cash balance at the start of the month. Let’s say it was a thousand, so I started May with $1000. The next number I figure out is how much income came in. The reason we’re using this approach is because it’s simple. Hopefully, you have much less, much fewer transactions for income. For example, between our accounts we only have three or four income-lined items each month. With our clients, we typically see anywhere from a couple of transactions to maybe 15 at most. All you’re doing is totalling up all the income that came into your accounts for the month. Let’s just (for example) say that number is $5000. The third number you’re looking at is the ending all cash balance. So same thing as the first number, except we're just looking at the end of the month total between all the accounts cash balance. Let’s say that number is $1100. You started the month with $5000. Five thousand dollars came into the account and now you have $1100. That would mean that your expenses were $4900. In other words, your surplus was $100. The reason I love this approach is because it allows you to back into this total number, in this example $4900. It allows you to back into what your total expenses are very easily. It takes me 10 minutes a month to update these numbers. I know what that number needs to be for us. I can do a quick check and see if it’s in the range of what I want it to be, I just write down those four numbers and I move on. Usually it’s over for us and most people, but if it’s over or under, you can take action based on that, so I’ll talk about that in a second. I have gotten in the habit of doing this every month, just once a month. I write down those three numbers, starting cash income, ending cash, then I back into the expenses so it ends up being four numbers, and I just document it for June, July, August, September. The other thing is after you’ve been doing this for a while, you get a nice rolling tally of what your lifestyle is, and it’s just a much more accurate representation as opposed to just looking at one month. That’s my simple system for tracking cash flow or total household expenses. Another common question—probably the most common question—that comes up as a result to this, is what if my expenses are not what I want them to be? Or maybe even before that, the question is what do my expenses need to be? That’s a personal question and I think the best thing to do is have a financial plan. Part of the value of a financial plan is deciding how much your lifestyle should be versus how much you should be spending versus how much you should be giving away and tying that into your values and goals. Ideally, you have a financial plan and can use that to drive what your expenses should be. If you don’t have that, that’s got to be step one, because otherwise, you’re just flying blind. Once you have a plan and you know what your expenses should be, then that’s what you’re going to be using as a benchmark or a line in the sand. Going back to the example I just gave, say your number needs to be $4000 of expenses. We just saw it was $4900 or maybe the past 3 months it’s been averaging $5000 or $4900 or somewhere in that range. In other words, you’re over by close to a thousand dollars. What do you do then? What I would suggest at that point, that’s when you dig deeper. Lately, I have had that happen with my own tracking. I think everybody, a lot of people that I’ve talked to lately had had this happen. It seems like people are spending money plus things are getting more expensive. There’s been all this COVID travel pent-up lack of spending. I’m one of those people. Our lifestyle has creeped up the past six months to a year. And now it’s gotten outside the bounds that I would like it to be. What we do in this situation is that’s when we dig into the expenses. At that point, I would do what I call an expense audit. Basically, you’re just going to dig in a little bit more. I just did it earlier today, so it’s fresh. What I basically did is—I’m recording this June 2022—I looked at April and May, and I’m auditing those two months. First thing is what period of time are you going to audit or dig into? I typically suggest two, maybe three months at the most. You don’t want to make it too intense. I took April and May. First step is I’m going to go to all the accounts that I spend money on and log into them. For us, there are three different credit cards and one checking account where transactions happen. I logged into all four of those accounts and downloaded my transaction history in an Excel spreadsheet for April to the end of May, so for the two months. I just downloaded all those accounts into a spreadsheet and then I pull them all together into one spreadsheet. That’s the data. You pull all that into a spreadsheet. Then you have to take out the income and transfers. Sometimes, they’re just irregular things that you need to take out. Really, I’m focusing on expenses. If it’s a credit card payment, I take that out because that’s already going to be accounted for. I want to know what was swiped on the credit card. A credit card payment is not an expense. That’s just money moving places. I take the income out. I take the transfers from one account to the other out. I take the credit card payments out, that sort of thing. I got to take all that out first. Then for my account, I have to make sure some of the accounts show refunds as positive expenses. I had to add a negative to those because that’s a refund. We took something back and got a refund. I had to do some small corrections like that. Basically, you’re just reviewing your list of transactions from a high-level standpoint and saying, is there anything I need to take out? Is there anything I need to adjust? Ultimately, I made some tweaks to make it so that it’s strictly our transactions for expenses from those accounts for April and May. Then I’m going to go through and just categorize it. I would suggest using broad categories for categorization, like home or entertainment or travel or food. Food would be eating out, groceries. Or maybe you could use food/eating out and then food/groceries. Transportation is one I add. Basically, come up with the categories that you want to sort everything by. There’s always going to be an other or an unknown category. But come up with a big category that you’re going to sort everything by. Then go through the spreadsheet, identify which category all the transactions are going to be. Then total up by category. This is kind of painful, I’ll be honest. It takes an hour or two. The whole point of this is not doing this exercise every month. This would suck to do every single month. I’m sure you could come up with some automations or what not to make it faster. But either way, it’s painful to go through each individual transaction. The whole idea of this system is to track cash flow and get into the weeds every so often. For us, we’re typically doing this deep dig every year on average probably, or nine months to a year. It does take some time, maybe one or two hours. Ideally, you’re coming away with a very accurate representation of what your expenses are by category. Once you have it all categorized and you have summed up those transactions by category, then I would start to review the totals for each category, and maybe even review some of the individual transactions. This needs to be with your spouse or whomever you’re sharing your expenses with if you’re doing that. As a couple, you’re going through and reviewing each of these. You can’t be judgemental. You can’t be finger-pointing if there are two of you. You are going to review them and say, let’s start to highlight—maybe even do it on paper so you can literally highlight it—some of these transactions that we might consider cutting. Each of you go through and highlight as many transactions as you think might be transactions you cut, not that you will cut or change or something. As you do that, I think it’s important to remember what’s most important, your values, and your goals. You’re going to naturally go that direction, but I think it’s a good reminder to think about what’s most important. For example, for me, and this is where it gets tricky. I don’t really have a high value on clothes, for example. I don’t really spend anything on clothes. So when I see transactions for shopping at clothing stores, I’m like ugh. So that’s a low value thing for me. My wife is not super into that, but she definitely values that more than I do. She’s going to rank it a little higher, I’m going to rank it low. On the other hand, I definitely value traveling, so I’m going to be considering that a very high value expense. Ideally, you’re looking for things that you both don’t really value that high. Or even something that you completely don’t use. That’s low-hanging fruit. Almost always when we go through this, we’re going to see some just straight low-hanging fruit. Like a Netflix subscription that we never use, that’s low-hanging fruit. That’s an obvious one. Or maybe we’re getting carry-out food or something more than normal. Both myself and my wife don’t value that really at all. If we’re going to eat or spend money on food, we want to go to a nice restaurant. Carry-out is not that valuable to us. Really, we do it a lot of times when we get busy or lazy or whatever. So that’s something we definitely will often identify as something to cut, just that carry-out type. Or spending in a super convenient grocery store right across the street, but it’s way more expensive. Those are the types of things that typically get highlighted on my list, but everybody’s list is going to look different. Once you’ve identified all of those or highlighted all of those, then you talk through those with your spouse and star the things you’re going to cut or work on reducing. Once you star all the things you’re going to work on adjusting, you have to make a plan to do it, especially if it’s an entrenched habit, like dining out or carry-out can become a super entrenched habit. You have to focus on how you’re going to stop or change the habit. Habit change is not easy. You have to remember to make a plan. Sometimes, it’s as easy as just going online and canceling the Netflix subscription. Other times, it’s like how are we going to not eat out as much? Well, I don’t know. You can come up with something creative, say maybe if we spend less than $100 dining out next month, we can buy ourselves a treat or something. You can use some of those habit tricks to encourage or incentivize yourself to do it. Or you could just stop using your credit card because that makes it easy to swipe for certain things. The key is to make a concrete plan for changing it. Going even further, as you free up money you want to make sure it does its thing. If you’re freeing up money, it’s going to have to go somewhere. Think about where you would like it to go. Maybe you’re spending in a different category. Maybe you’re giving it away. Maybe you’re saving or investing it. Whatever it is, ideally you’re making a plan for that to happen. For example, if you need to save more for education for your children, the key is to cancel the Netflix subscription and at the exact same moment, like in an ideal world, you adjust the 529 contribution up by that exact amount. The dollars have basically just gone from one category to the other. That’s how the expense audit works. It worked well for us. Myself and my wife have had good results doing that. It is painful, but it’s not something we do every month by any means. We’ve had a lot of clients that use a similar approach. The key is it doesn’t need to be perfect. This temptation with budgeting is if you’re going to budget, you need no other expense. But I don’t think that’s the right way to look at it. Knowing what your total expenses are is very valuable and is much better than knowing nothing. A lot of people are like, I’m going to budget perfectly. Then they get into it and they’re like, this sucks. I’m never budgeting at all. Knowing your total expenses is much better than not budgeting at all. Ideally, you’re keeping a pulse on total expenses. And that’s keeping you out of the weeds. But then you know when the alarm bells are sounding and you can jump into the weeds every once in a while, and make some adjustments so that you’re not having that lifestyle creep we talk about a lot. That’s what happens pretty much for everybody. If you’re not looking at this, it’s happening for me right now. We’ve had lifestyle creep just over the past six months to a year. What’s important, though, is I’m aware of that. I see it happening, so that’s why I’m jumping into the weeds. I hope this has been helpful, and as always, I enjoy chatting with you. We look forward to talking next time.

Have you maxed out your 401(k) or 403(b)? What should you do now? There are a lot of different options—what do those look like, what might be a good out, and what to pass on.  In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about  401(k)s and what to do after you max those out. Topics Discussed: Max Contribution Amount: $20,500 for an employed physician Financial Plan: Allows you to match your goals with dollars to put them to work Is the 401(k) enough? If not, how much do you need to save? Assume more What’s the next best option? Maximizing tax shelters for added tax benefit HSA: Use as healthcare savings account instead of healthcare spending account Backdoor Roth IRA: Fund a traditional IRA and then convert it into a Roth More Options: 457(b), cash balance, deferred compensation, and after-tax 401(k) What to consider? Complexities, different structures, expenses, and side jobs Tax-Loss Harvesting: List of things you can do to minimize taxation Alternative: Investing in real estate business can be active or passive income Short- vs. Long-Term Capital Gains: Which are least and most tax-efficient? Links: E*TRADE Robinhood Using Your HSA To Build Wealth Why the HSA is a Hidden Gem Everything You Need To Know About Backdoor Roth IRA with Jennifer Quire Are You Saving Enough For Retirement Digging Into Tax Loss Harvesting Before You Buy Into Passive Income Why is Permanent Life Insurance Such a Terrible Short Term Investment Contact Finance for Physicians Finance for Physicians Full Episode Transcript: Hey, guys. Hope you’re having a great day. I am planning to talk about 401(k)s and what to do after you max those out. That’s a pretty common question that comes up, and I think there are a lot of different options after that, so we’ll talk through what those might look like, what might be a good out and what might be options to maybe pass on. Before we get into that, I want to give you guys a quick update on just the podcast in general and tell you a couple of things we’ve been working on. If you’ve listened awhile, you know my goal is really to help physicians (in general) use money to live better. I think what’s different about us is we’re focused on the ‘live better’ part and not necessarily the ‘more money’ part. That’s been great to focus on that in this avenue. In my day job, I work with a lot of individuals. It’s more of a one-on-one basis. Our planning firm—Wrenne Financial Planning—have several financial planners, including myself, working one-on-one with physician families. This has been a really great way for me to work more in a one-to-many avenue. It seems like, so far, we started to gain some traction. Surprisingly, it’s been almost two years. I think it was October of 2020 when I started this, maybe more like a year-and-a-half since I’ve been recording. At this point, we’re averaging about 5000 downloads a month, which I still really don’t know what to compare that to other than the past, and it’s going up consistently. To me that’s great news, but I have no frame of reference of what to compare that to. Based on the past, it does look like we’re getting some traction, so that’s always good to see. More people are listening, which is awesome. Thanks to you guys that are listening; that’s great to see. My plan going forward is to start promoting the podcast a little bit. Up to this point, we’ve not promoted it at all. My goal has been to just produce content, record shows, get in the routine, and give it a try. So going forward, my goal is to start promoting it a little bit more, start to get the word out and that sort of thing. A lot of it probably will be online and that sort of avenue. I’m actually going to a podcast conference this weekend. I’m recording this in late May, but I’m going to a podcast conference this weekend. It’s like they’ve got conferences for everything. This is apparently a big conference and it is where you go to learn the art of podcasting. Hopefully, I can learn some things. I’m still an amateur. I really don’t exactly know what I’m doing. I’m just kind of rolling with the flow, so hopefully this conference will allow me to pick up some new strategies I can pass along to you guys. In the future, the goal will be to get a little bit more tactical with trying to grow this thing. Always continue to provide great content and even better content in the future. At the end of the day, that’s what this is about, is we got to add value for you guys, and that will allow us to grow. I also wanted to say again thank you for listening. You guys are the reason I’m doing this. And thanks for the feedback that some of you have given and for sharing. Also, keep the topic suggestions coming. That’s been helpful. Any of the questions you have are great, going to be great topics for us to cover in the future. All right, so 401(k)s. We’ll say 401(k)/403(b). I’m sure many of you have those plans available, and if you’re in practice or you have a spouse with a higher income, odds are you’re getting close to or have already maxed that account out.  As of this recording in 2022, the max is $20,500 for an employee contribution. If you’re self-employed, that’s going to be quite a bit higher, but for the employed physician, you max that $20,500 out and you’ve filled the bucket up. A lot of you guys in that situation might be asking what’s the best next step. I think the first question to ask yourself is whether that 401(k) is enough. I would never assume these things. Some people assume it is enough or maybe they assume it’s not enough. First takeaway is don’t assume either way that it’s enough or not enough. You got to always go back to your financial plan. I’ve said this a bunch of times, but that’s part of the value of having a financial plan. It allows you to match up your goals with the dollars, and you could put those dollars to work to help you move towards those goals. A financial plan should help you get an idea of how much you need to be saving for whatever long-term goal—retirement is a big one. It’s going to help you get an idea how much you need to save to reach the goal. In some cases, it might be that your financial plan is indicating that maxing out the 401(k) is perfect, but that’s you’re on track. In that case, you don’t need to do anything. That’s all you need to do. In other cases, you need to save a lot more. For the average physician in practice, the latter is going to be the case just because your income is higher than average, and typically you need to save more than just your 401(k) or 403(b). I’m wrapping the 401(k) and 403(b) together as one. They are two different types of plans, but they both have that combined total limit. Anyway, first question is, is the 401(k) enough? If not, how much do you need to save? There’s a good chance most of you are going to need to save more than your 401(k), so we’re going to assume today that you do need to save more than your 401(k). In that case, the question is what’s the next best option. The second thing to focus on is really about maximizing tax shelters. What I mean is putting it in vehicles that provide some added tax benefit. The first tax shelter I’ll point out, which is actually the best tax shelter (really) of all of them that we’ll talk about, is the HSA. I’m going to link to some shows about the HSA because some of you that haven’t heard those are going to be like, what are you talking about HSA? The stooge is crazy. Check those out to get more on this. Basically, you have to have access to an HSA with your health plan through work. That qualifies you to be able to fund an HSA. If you’re able to access the HSA, then you can fund this fantastic tax shelter. Not everybody’s going to have access. But assuming you do have access or have that choice and you end up choosing it and funding the HSA, then the second part of the equation is you’re using it as a wealth-building vehicle as opposed to just a healthcare spending account. I guess you’re using it as a healthcare savings account instead of a healthcare spending account. By using it as a wealth-building account (or in other words, investing it)—most HSAs allow that—you’re able to leverage that fantastic tax shelter. I would consider it the best tax shelter (like I said) of all these that we’ll talk about. Like I said, I’ll link to the other shows where we talked more about what that tax shelter is and why this is a beneficial strategy. I would rank the HSA, using it as a wealth-building vehicle, as probably the number one alternative tax shelter beyond just maximizing your 401(k). So that’s the first one. Second one to potentially consider tax shelter–wise, would be the backdoor Roth IRA. Backdoor Roth IRA is actually just a made-up term. Technically, that doesn’t actually mean anything. What’s technically happening is you’re funding a traditional IRA and then converting it into a Roth. It’s a way to fund Roth IRAs no matter what your income is. This is kind of a multi-step strategy. The key is you have to understand the rules. There are some hurdles or problems that can crop up in funding a backdoor Roth IRA that you have to be aware of. But as long as you’re following the steps correctly and taking into consideration all these potential issues, it’s a fantastic tax shelter that allows you to save in addition to your 401(k), and save those dollars very tax-efficiently. I’ve covered backdoor Roth IRAs a few times in prior episodes, so I’ll link to those as well in case you want to dig into how the backdoor Roth IRA works. Going back to point number one, if the answer to that question is yes, you do need to save more than just your 401(k) to reach your long-term goals, then you should be considering backdoor Roth IRA as a really good alternative to start filling those buckets up to get you on track for that long-term goal. Beyond that, other options that work would be worth considering. Oftentimes, the question is raised to us, like what do I do? I’ve already maxed out all my work retirement plans, but I know I need to save more. Where do I save? What people sometimes don’t realize is there are actually other work retirement plan options available through their employer. Some examples that come to mine are 457(b) plans, cash balance plans, deferred compensation, after-tax 401(k). Those are just some of the more common options. But a lot of you will have additional options where you can save on top of that max from the 401(k) or 403(b). The 457, let’s look at that example. The 457 has a completely separate limit. The dollar is the same for employees. You can put in the $20,500 this year (2022) in the 457, but it’s a completely separate limit beyond the 401(k). In other words, you can max out both at the same job. The thing to watch out for 457 is there are two main categories of them—governmental or non-governmental. Governmental 457s are fantastic. They’re basically like the 403(b)/401(k) but a little bit better, typically. Non-governmental 457 is the second category. They’re not nearly as awesome. Especially if you have a non-governmental 457, you want to be a little cautious with that. Understand how it works and dig into it before you start funding that kind of a plan. But it’s definitely an alternative tax shelter to consider. Cash balance plans, I mentioned that. That’s an additional bucket to fill up beyond the limit of the 401(k). That type of plan, similarly to the 457, you really need to understand how it works because they’re a little more complicated and there are a lot of variances that you’ll see. The most common negative with a cash balance plan is no flexibility on how it’s invested, and you’re limited to a conservative investment option. If you’re really young and getting started, that’s not great because you can take risk and it’s going to lower your expected return and ultimate efficiency by being super safe with the money. But it’s definitely still worth considering, especially the more you need to save in the higher tax bracket. The other one I’ll mention just for today would be the after-tax 401(k). That’s a provision that your company’s 401(k) would sometimes offer and allows you to fund more than just the $20,500 employee limit. It’s a separate bucket that they allow you to fund as an employee, and it’s more like the employer part of the equation. It’s not Roth. It’s after-tax 401(k) funding. This is another one you have to look into and understand how it works, and see what your specific company allows or offers. If that is an option, that can be an additional bucket to save into. I think the big consideration I would start to throw out on these other options through work you got to look out for is first of all, some of the complexities I’ve already thrown out. You got to understand these. There are a lot of different types of structures. You have to understand the pros and cons. The second thing is expenses. Sometimes, the expenses are extremely high on these add-on plans, to the point where it even eats into the tax benefits. Sometimes, it completely eats into it to where it’s not even worthwhile. They can also get really complicated. As you start to consider these options, you want to be aware of the expenses, the complexity, what type of plan, pros and cons of that specific plan that you’re offered. Other options through work can be fantastic, but you really need to look at the specific plan that is available. There’s also another category of options I would consider for those of you that have second jobs or even side hustles where you’re self-employed. This gets even more complicated in terms of the rules that you have to be aware of, especially for the self-employed setup. But it’s definitely something we advise often with our one-on-one clients, and it’s something I know many of you would potentially benefit from. If you have two jobs (for example), you can often fund both company 401(k)s. But you have to be aware of how that coordinates. I’ll give you just an example of one that might come up. Let’s say you’re a partner in a practice and you’re maxing out the 401(k) there. But let’s just assume that it’s all coming from your employer, which often happens. Let’s say you’re in a small practice and the “employer” (the practice) is funding all that 401(k) 100%. When the practice is funding, it is a much higher number than that $20,500. But let’s just say the practice is funding all of it. Let’s also assume on the side, you’re self-employed in an unrelated business. And let’s just say you’re making $20,500. In that example, you’re actually able to fund, through that side hustle, 100% of it to a solo or individual 401(k) as an employee contribution and max out that $20,500 bucket. The reason is because your practice was 100% funded by the employer. In other words, you’ve not yet filled up your employee 401(k) max bucket. That number actually can be even higher than the $20,500 if you’re making higher through the side hustle. That can allow you to fund a lot, but it gets complicated quickly. For example, if you have a 403(b) through your primary job, that messes with the rules here a little bit. It adds some additional limits that can often restrict us. Another thing when you’re looking at this situation is you want to focus on making sure you’re maxing out the matching dollars. Oftentimes, you’ll have a match with both employers. You have to coordinate the two together and make sure you’re leveraging that. The key when you start to get into this realm of stuff is hiring or leveraging advisers or consultants or those sorts of things, especially if you get into self-employed retirement plans. You’re going to be able to save quite a bit—tax sheltered when you have that setup—but you have to be really careful that you’re following all these extra rules between the two plans. The further we go down this list, you have to look out for expensive products. Salespeople start to come out the further we get down this list. You have to look out for expensive products that are overly complicated and potentially so expensive that they would eat into that tax benefit. Sometimes, there are products that are not even in these categories I’ve thrown out that are often brought up as these tax shelter alternatives. Some examples are annuities or permanent life insurance. They’re typically sold as the answer to this question. This podcast we’re talking about is like, I’ve maxed out my 401(k). What should I do next? Oftentimes, these financial services companies or salespeople will sell these vehicles, like annuities or permanent life insurance, as solutions in themselves to this issue of where to save next. The problem with them is they’re typically extremely expensive. Often, it’s very difficult or impossible to figure out the expenses. That’s always a warning sign. If you can’t figure out what’s going on, don’t do it. They’re typically sold as the Swiss army knife style, like this is going to provide this additional tax shelter. I’ll link to a podcast where we talk about some of these a little bit more. You’ll have to look out for those vehicles. I would encourage you to focus on the traditional vehicles first and not the products themselves. What I’m talking about is focus on the 401(k), 403(b), 457, like the IRS-blessed tax sheltered retirement plans, HSAs or those sorts of things. Those are vehicles that the IRS has signed-off on and created code around. On the flip side, I would be cautious with some of these insurance company–created products that are in themselves designed to be tax shelters. That doesn’t mean that they’re always bad. You just want to be cautious with those. In some cases, your work plans can be really, really expensive. Maybe you have access to a 457(b) plan as an alternative through your work. But it’s just really expensive funds in the plan. That can be a restricting factor, maybe even to the point where it’s not worthwhile. The further down we get on this list, you just want to be aware of the expense aspect and the complexity aspect. I think a good rule of thumb is you need to be able to explain it to somebody else, at least the general pros and cons, understand the expenses, and understand the basics before doing it yourself. If you don’t understand it, you don’t want to put your money into it. That’s a big, broad bucket. The second big point is maximizing the tax shelters. As I said, as you get further down the list, you want to exercise some caution. Once you max out that 401(k) or 403(b), typically the next thing you go to is what other tax shelters are available. In a lot of cases, many of you will max everything out. Let’s say you have a 401(k) through work. You max it out $20,500. Let’s say you have a 457 as well, but you’ve maxed it out $20,500. Let’s say you’re also maxing out backdoor Roth IRAs. And let’s assume again your plan says you still need to be saving more on top of that. Then, what next after that? If you maxed all of these tax shelters that are available, which often happens, then you go to things like non-qualified investments. Stuff like a non-retirement plan. I call them non-qualified investments. Sometimes, people call them a brokerage account. Basically, that’s just like investing in your name instead of investing in a tax-qualified vehicle that has some special tax treatment like a 401(k), IRA or whatever. Non-qualified investing is basically just investing outside of all these vehicles we were just talking about. A plain Jane brokerage account investing in your name. Technically, a savings account is a non-qualified investment. That’s typically the third thing to look at, is if you need to save more on top of the tax shelters, typically you’re going to start looking at some of these non-qualified or less tax-efficient investments. The vehicle itself is actually pretty simple. It’s just like invest in your name. What you have to keep an eye on when you get into this realm is when you invest in these types of accounts, you can trigger taxes and they will cause harm sooner. There’s less or no tax protection, whereas with a Roth IRA or something, or even a 401(k). Let’s say you buy an investment in a 401(k) or Roth IRA. It’s just growing crazy, pays all kinds of dividends, generates all kinds of income, it just explodes in value and pays out income, interest, dividends, and all sorts of income. That doesn’t affect your taxes. Let’s say you sell that investment that’s grown a ton in a Roth IRA, 401(k), those sorts of things. It doesn’t affect your taxes. With non-qualified investing, that’s a completely different story. Same investment is growing crazy, generating interest, dividends, and spitting out income. Everything is theoretically going well. But each of those different avenues of growth will (in some cases) generate tax for you in the current year. You have to be much more aware of the tax impact of the investments you placed in the vehicle, and ideally it’s tax-efficient stuff. For example, real estate funds, when you just buy real estate in an investment fund. Generally, that’s not very tax-efficient. Just the income it kicks out is typically not as tax-efficient. So that’s not the best vehicle to own in your taxable investments. It’s not the worst thing, but you probably have a lien towards owning that, like a Roth IRA or a tax-sheltered investment, and would probably be a little less appealing to own it than just a non-qualified investment because it’s going to fully realize that tax hit. Even more of an extreme example, let’s say you have an investment account that you’re trading on E*TRADE or Robinhood or something like that, and you’re trading a lot. Let’s say you’re buying stocks here and there, and selling stocks here and there. You’re investing your money, so that part of it is good. But the problem with it is oftentimes, you’re kicking out short-term capital gains. If you buy an investment and sell it in a short period of time—let’s say a few months—if you only owned it a few months, that’s going to cause short-term capital gains, and they’re the least tax-efficient. If anything, you keep it for over a year and get long-term capital gains, those are much more tax-efficient. Ideally, maybe you don’t even trigger long-term capital gains. You just hold it for a really long time. Typically with taxable investments like non-qualified investments like this, you want to defer taxes as much as possible and avoid triggering tax now. That’s the general strategy. The more you trade or the more the funds that you even own trade, the more it generates taxation. Trading a lot is typically an issue with these kinds of accounts. Or even have them a broker. A lot of brokers have high turnover. Even the funds that they put you in are high turnover. High turnover means the stocks get traded a lot. That’s typically terrible for tax sheltering purposes. The key to non-qualified investing is you have to watch taxes. Taxes become an added expense. On top of normally paying attention to the expense of the vehicle itself, the tax it generates is an added expense on top of it all. If it’s managed well, you can be pretty tax-efficient with your non-qualified investing. You can pay attention to those investments that you own. Ideally, your tax laws harvesting, that’s another term I’ll throw out. I’ll link to a show where we cover that a little more. There are basically a list of things you can do to minimize the taxation on this type of an investment vehicle, knowing that it’s more sensitive to tax. The nice thing about a non-qualified investment vehicle is there’s no limit. You can put a ton of money into it. You don’t have to worry about the funding limits that you would typically see in all the other tax shelters. Also, it’s ultra flexible. There’s not really any limitation when you take it out. It might trigger a tax, but it’s not going to be penalized. It’s not like retirement accounts you have to hold it in there for a certain time, in a lot of cases to avoid any adverse tax penalties or whatever. With this type of investment it’s super flexible. That can be a solid alternative, particularly when you’ve already checked off those first two boxes, like you know you need to save more, and you know you’ve maxed out all the good tax shelters. That’s when this comes into play. So that’s non-qualified investing. The other thing I’ll throw out is a side note. I meant to mention this. If your goal long-term is saving for education, sometimes that can be an additional tax shelter that you might consider saving in an education savings account. If the goal is for education, you might explore that tax shelter as well. That can be a really fantastic vehicle to save into. First thing, figure out are you saving enough? Should you be saving more on top of your 401(k)? That’s when you consult your plan to see what that should look like and how much you should save. Second thing, look at all the tax shelters. Make sure you’re maximizing those. Third thing, if you still need to save more, look at non-qualified investing. The last thing I’ll throw out before we jump off, this often comes up, like what about getting into real estate, or I got this investment deal and my buddy’s doing, or syndications or whatever. I would lump those altogether in more active businesses. Even if they sometimes call them passive investing, when I say active I mean it’s going to require some effort on your part to screen or manage them. Let’s say buying/investing real estate. You’re going to have to be the one that decides which type of real estate you want to invest in. Especially if you’re directly owning property, you’re going to have to manage it and make sure you get tenants. That can be a pretty intensive business. It often comes up like, I heard that it’s worthwhile to invest in real estate as an alternative. That can be fantastic, actually, but I would look at that as more of a business. It’s an investment, but it’s more like a business you’ll have to be active in, depending on what business it is at varying levels. I don’t think that’s for everyone. I would definitely not do that or go that route just because of the tax benefits or because people said it’s a good thing. You need to have good reasons to do that outside of all of those things. Maybe for example, you have a passion for doing real estate or you really are interested in it, and you enjoy building something. Ideally, you have some solid reason for doing it that’s independent of all this stuff. In that case, it can be a fantastic thing, but you have to look at it differently. It’s not for everyone. That’s the last thing I wanted to throw out. I hope this has been helpful. As always, I enjoyed chatting with you today, and I will look forward to catching up with you next time.

What are some of the behavioral tendencies we all can run into that affect our decision-making, and ultimately cause some big mistakes? What do big areas or behavioral tendencies look like? In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about investing behaviors that will wreck your financial plan. Knowledge and awareness are needed to avoid behavioral finance mistakes. Topics Discussed: What is behavioral finance? When people make errors, mistakes, and biases Why? People are not rational or self-controlled and don’t identify tendencies Overconfidence: Common idea that you know more than you actually do Self-serving Bias: Attribute good things/outcomes to skill, bad outcomes to luck Hindsight Bias: You know more or knew more than you really did in the past Confirmation Bias: Focus on what confirms beliefs, ignore what contradicts them Recency Bias: Hone in on short-term and overemphasizes that importance Refer to your financial plan and remind yourself of your financial goals Anchoring Bias: Relying and latching onto too much pre-existing info Loss Aversion: Overly fearful of losses and pull to avoid losses Herd Mentality: Suffer from fear of missing out (FOMO)? Links: Confirming Fund Managers Overconfidence - SSRN Behavioral Finance - Charles Schwab Asset Management What To Do When Your Investments Start Tanking How Market Downturns Look and Feel The Power Of Diversification Investing During Wild Markets with David Blanchett Free DIY Financial Planning Guide for Physicians Predictably Irrational: The Hidden Forces That Shape Our Decisions Thinking, Fast and Slow The Psychology of Money: Timeless lessons on wealth, greed, and happiness The Big Short GameStop on CNBC Contact Finance for Physicians Finance for Physicians Full Episode Transcript: Hey, guys. Hope you’re having a great day. I am excited to talk about investing, and this is the third in our series of three shows, talking investing. In the first, we talked a little bit more about how to navigate scary downturns in the market. The second, we talked more about how those looked historically, some of the numbers, returns and that kind of thing. Today, we’re going to be talking about some of the behavioral tendencies we all can run into that can really affect our decision-making, and ultimately can cause some big mistakes. We’re going to get into that today. This is a big topic, behavioral finance is what they call it. Behavioral finance is a monster topic. It’s one of my favorites to get into. Today, we’re just going to hit some of the high points of some of these behavioral tendencies that are out there, and hopefully give you some baseline knowledge and awareness so you can start to see them and other people and yourself, and ideally avoid some of the mistakes that can come into play as a result of them. So we’ll jump into that now. We’re talking behavioral finance. This is a fun topic. It’s one of those things. It’s a little easier (probably) to identify it in other people. We had to see it. It’s one of the fun parts about my day job. We work with people one-on-one all day long, so it’s really one of those things that we can typically see before sometimes people see it in themselves. Often, by pointing it out, we can really help people a lot, so that’s the fun part about it. Now, on occasion we can’t help, so that’s unfortunate. But it is one of those things. Like anything, behaviorally, it’s sometimes harder to self-identify these things, but it’s not something that you cannot self-identify, especially as you gain some awareness around it. We’ll be talking through some of the big areas or behavioral tendencies that I have seen come out, what they look like, and how you can potentially avoid mistakes around them. Behavioral finance is this whole study of people and how they’re not quite as rational or self-controlled. They’re ultimately prone to errors, mistakes, and biases. We’re going to talk about (like I said) some of the big areas that behavioral finance has identified. The first one that I want to talk through is called overconfidence. You might already be thinking the right direction on this. It is what it sounds like. Overconfidence is this idea that I know really more than I actually do. It’s really common. There’s been a lot of studies on this and they seem to say the same thing. There was one I was looking at recently, looking at investment fund managers. Seventy-four percent of them said they’re above-average and 26% said they’re average, and then basically 0% of them said they’re below-average. Everybody thinks they’re at least average or above—which is not possible—so this is reinforcing the whole overconfidence thing. Not everybody is subject to this and it can depend on the topic or how much you know about it. Sometimes, it’s most common when you know enough to be dangerous. You’ve heard people talk about that. What people say when they’re overconfident—because usually, you can acknowledge that people tend to do this—say something like, I know everyone says they’re above-average but I really am above-average. It’s one of those things you’re like, no, I’m not overconfident, but then, I’m sure there were times when you were. At least I can think of times where I was overconfident. Maybe not in all areas of my life. Definitely not in all areas but in certain times. Like I said, it’s usually when you know enough to be dangerous. The problem with overconfidence is confidence gives you this feeling of being in control. You’re less likely to exercise caution. It makes you way more prone to mistakes, all along the way considering yourself maybe an expert or more knowledgeable than you really are. This shows up with investing. Say you’re buying investments, particularly individual investments. Say you bought cryptocurrency in GameStop or whatever individual stocks. You started doing that (say) 2015 or something like that. From 2015 to 2020, everything’s going up. Your stuff, your trading, your investment choices have done exceptional. You’ve started to see the balances go up, have built up some confidence, and maybe it’s gotten a little in overconfidence level. What happens is you start to feel like you’ve got it figured out. With investing (at least), inevitably it always goes the other direction. This is where the mistakes often happen. The mistakes can happen when everything is going up, but usually, when everything’s going up, everything is going up, so it’s hard to not make money with general investing. But when things go down, that’s often when the big mistakes happen. When you have this overconfidence, you don’t really recognize that and you’re prone to those mistakes. They can happen really fast, especially when things go down. The problem with a lot of these is they’re difficult to self-identify. Ideally, this is where it’s helpful to get another person’s view. This is going to be true with a lot of these. Whether it’s a knowledgeable friend or if you work with a financial planner, this should be something you’re asking them about, especially if you’re pulling the trigger on certain things with your investing. It’s good to get others’ input on this and then listen to it because they might say something that you don’t agree with. It’s important to remember especially if they have expertise, like they probably know what they’re talking about and it’s probably easier for them to see some of my flaws, and maybe they have a point. So at least be open to other people’s input on this kind of thing. Even your spouse. If you know enough to be dangerous in that territory, that’s oftentimes where it happens. Sometimes, it happens when you say you know more than enough and you’re an expert—but you’re really not—so that’s probably even more dangerous at the time. Oftentimes, say the spouse that doesn’t really know much at all, can be bringing up really good points. We ought to get someone else’s opinion because this is not what you do. You don’t spend that much time on it. You’re so busy doing this other thing that you have going on or job or whatever. Sometimes, they can be the voice of reason. Sometimes, it just takes listening to them. That’s overconfidence. That’s a big one that can come into play. I think it’s most common probably in younger people that have had some experience investing but not a ton of experience. It seems like these big, huge market downturns will teach people some of these lessons through that mistake. So that’s overconfidence. That’s a big one. Self-serving bias is the next one that I wanted to talk about. Self-serving bias is where you tend to attribute good things or good outcomes to your skill, and bad outcomes to luck. If it’s a bad situation or outcome, you’re going to be like, oh that’s not me. That’s not my fault. Now if it’s good, you’re going to be like, pat on the back. For self-serving bias, I like the example of school because everybody can relate to this. If you get an A+ on a test, you’re going to be like, wow, I must’ve done so well with my studying. I’m a naturally smart person and I’ve got lots of skills. So, nice job self. Versus imagine getting the same test score back and you’re like, oh, I got a D-. Then you’re like, well, the teacher didn’t teach what they needed to teach and the books are lacking. There’s no direction. You’re just coming up with excuses. It’s not my fault. It’s external factors. That’s self-serving bias, and everybody has a little bit of it in them. It can become a major problem with investing especially if you’re involved in pulling the trigger and making decisions. It’s the same as the test score. You’re going to pat yourself on the back when things are good, and when things go bad, you’re going to look for excuses and blame other people, when in reality it’s probably not quite that way. With investing, when things go really well, most of the time it’s not you. It might be a little fraction of you, but most of the time it’s not you. Even when they go poorly, it’s often not you. I think with investing, people often attribute success with their investment too much to their own intelligence. A good way to counter that is to—same thing with overconfidence—getting others’ input; that’s going to be common in these. Also, maybe comparing to more objective comparisons, like how the overall market was doing. That’s always a good wake-up or benchmark check-up on this sort of thing. So that’s self-serving bias. Hindsight bias is the next one. I’m sure you’ll recognize this. It’s where you think you know more or knew more than you really did in the past. I hear this all the time with people talking about big events. In 2008, we had the housing bubble crash, and everybody that was around then probably remembers that. Everything tanked. What happens is you start to get people reflecting back on that. A lot of people—not everybody—would talk, like maybe they saw it coming, the writing was on the wall, it was inevitable and everybody knew it’s going to eventually crash. You create this belief in your head that at that moment in time you did see it coming, but in reality you look back to actual what was going on in the moment before that crash. Nobody knew that that was coming. That’s just not reality. In fact, if you actively knew it was coming, people would make fun of you. That was the least likely thing for people to be bringing on up. One in a million people knew that thing was coming. There was a movie made about the one dude that knew 2008 was coming. The Big Short. If you haven’t seen that, that’s a good movie. That’s the movie about the only dude that knew 2008 was actually coming, maybe a few more guys and gals. 2008, a lot of people looking back think they knew it was coming but really didn’t. What happens with this hindsight bias is you start to give yourself more credit than is due, and it goes along with these first three. It leads to more overconfidence, pat yourself on the back—I’m pretty awesome. A lot of these are related. Confirmation bias is a little different. It’s paying close attention to information that’s confirming your belief and ignoring information that contradicts your beliefs. My favorite example of confirmation bias is social media. Social media has completely figured out how real of a bias this is. Social media is programmed to put in front of you that’s in line with your values and beliefs, and not put stuff in front of you that’s against those. This totally makes people feel good about this. This is in line with confirmation bias. The same thing with social media. When you’re investing, if you only take in information in the area of the thing that you believe. Let’s say, you have just gravitated towards this idea. I’m going to go with the one that actually happened lately. GameStop stock was super popular. A lot of people talked about it. It was in the news for a while. They’re buying the one stock and it got crazy. Say around that time, you really just bought into that idea. The people you hung out with or the [...] were online in this group that all talked about it. That was what you were hearing all day long, and all the news stories you got were that. Even your social media started to pop up stuff just on that story. That’s just really pushing you down the same path you’re already going and confirming these beliefs you already have, which causes you to do more of it. What’s happened with GameStop, for example, it skyrocketed. Then it went way down and went back up. But since that huge skyrocket when it was big on the news, it’s been on a steady trend down. That’s often what happens with these. Even if it does pretty well, the problem with this is it leads you to be less open to other ideas. This can be any idea, but with investing there are all kinds of good ideas that are out there. Just because you’ve already committed to whatever given ideas you already have being great, that doesn’t mean they’re always going to be great. Or maybe even you’re wrong, and it’s good to consider the other side of the coin. This is one that it’s good to just force yourself to open up to other ideas or alternatives and have that open mind. Recency bias, the next one, is the one that’s actually similar to hindsight that I was thinking about as I was talking about it. Hindsight bias and recency bias are both looking at the past. But recency bias is honing in on short-term and really overemphasizing the importance of that. The short-term—which we talked about in the past couple of episodes—in the investing world should not be the focus. It’s a long game. There’s this tendency, though, for people to really just hone in on that. Let’s say the market tanked. The news says the worst loss in eight million years, everything’s going down, everything’s blowing up, and it’s based on this one-day drop. You’re going to have the tendency to be like, argh. This is a problem because it’s fresh. But if you go back and look at history, there’s actually been a whole bunch of days like this before. Many, many days like this before, if you look at it objectively. In reality, this day is not important. This is a good one where it helps to refer back to your financial plan and remind yourself of the goals, and the dollars are tied to those goals which should be long-term. You have to have a long view. Recency bias is about having a short view and having a pull towards that. Everybody has a pull that looks at what they recently had happened, but with investing it needs to be a long view. You have to pull yourself away from that, even though there’s that natural tendency. Anchoring bias is the next one. Anchoring bias is relying too much on pre-existing info or the first info that you come across. It’s latching on. For example, I’ve seen this with people we worked with one-on-one in the past with their planning. Maybe it’s like my parents lost lots of money in the market. Therefore, I’m going to lose lots of money in the market if I do it, so I’m not going to do it. They’ve latched on to this information that their parents have passed on to them, and they’re adopting that themselves. Or maybe it’s like, my buddy that I hang out with has done really well with real estate investments, so I’m going to do really well. The problem with it is it’s not adequate information. You’re latching on to a limited, tiny slice of the information, and potentially making huge decisions on that small, tiny information. With the parents example, maybe they had no idea what they were doing. Or maybe they didn’t lose as much money as they thought they did. Or who knows what happened. Maybe the timing was bad, which is a mistake in itself. There are a lot of things that could’ve happened. It’s impossible to draw a conclusion from it without knowing the entire story of not only the parents, but also, you should probably look at it like what the alternatives could have been for them. The problem with this is not doing a full, adequate analysis. Loss aversion is the next one I want to talk through. This is where you are just going to be overly fearful of losses. It’s just the pull to avoid losses, kind of like all cost or at greater cost. The research says if you’ve experienced prior losses, you’re going to have an increased chance of having this issue come up in the future, which makes sense. Or maybe other people around you, like the parents example overlaps with this. Maybe you’re pulling in that loss they’ve had and attaching to it. In down markets when investments go down, it just naturally brings more fear into the equation for everyone. Everyone has that little bit of this. You just see it when you hear people talk about investments a lot more when they go down. This is in play for all of us to a different extent. Some people are painfully fearful to the point where they can’t take any action on anything with any risk. Insurance companies actually leverage this. They have annuities with floors. They have a cap and floor. They limit the downward exposure. It’s basically capping the losses that you can have. But they come at a huge cost, typically. They basically sell these overpriced products a lot of times in order to help people address this behavioral tendency. I think a much better approach is to work through that and have some understanding of where the fear is coming from, a little bit of understanding of how markets work—that can help—and understanding how these downturns typically play out, and reminding yourself about the purpose of the dollars and consulting your plan. What’s the money for? Is it a long-term thing? It should be. If so, then this short-term loss is really not a problem because I’m not going to need it short term. The last one I want to talk about is herd mentality. This is the common one that comes up. It’s like the FOMO—fear of missing out—ties in with that. The tendency for people to follow the masses as opposed to doing their own independent analysis. Examples of this lately are cryptocurrency, GameStop, I bonds especially lately. This is probably one of the most often ones we see, just snippets of it from people we work with one-on-one. Typically, how it comes up is like, I’ve heard from several of my buddies that XYZ is a good place to put money right now, or something along those lines. I think it’s different if you work with a financial planner versus if you’re doing it yourself on a lot of these, especially this one. These people that are bringing up to us are doing the right thing. What I would tell you to do is bring it up to another person. Or if you’re doing it yourself, you could bring it up to another person, but they need to know what they’re talking about. Or you need to be doing your own independent analysis. If you’re putting your entire net worth into cryptocurrency, you really need to understand it backwards, forwards, understand all the risks, and how to fix your planning. It’s important to avoid that pull to go with what the people around you and the masses are doing. That’s where bubbles get created and then they blow up. Not to say any of these are necessarily bubbles, but you don’t want the herd to drive your decisions. It will pull you behaviorally, like this is what all this research is about. Behavioral finance is the fact that we all have these pulls either way. You don’t want it to pull you so much that it’s affecting your decision-making and causing you to make big errors. With herd mentality, think about the decisions, where it’s coming from. Are you running it by someone else? If you’re not running it by someone else, are you doing an independent analysis? Or are you just going with what the herd is doing? Thinking through those points (I think) will be helpful. All right, so that’s behavioral finance in a quick nutshell. This is one of those things, like I said, there’s been huge books written on it. You can dig in a lot on this. I’m happy to get into some of these areas more. Like I said, I enjoy this subject. However, I know it can get pretty intense. Let us know anytime if you have areas within this or other areas that you want us to dig into in the future, and we’ll definitely plan to do that as we hear from you. Hope you have a great rest of your day and good catching up as always.

What do market downturns look like? Understanding what they look like or what they have looked like historically is helpful. We can't predict the future, but we do know what happened in the past in order to navigate better if and when history is repeated. In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about how market downturns look and feel based on market history and market factors. Topics Discussed: Long View: Have a financial plan that ties your goals to your actions Timing: What if it's not the right time? Maybe it’s the worst possible time to invest Franklin Templeton: People recover fast, the scariest time may be when to invest Financial Information: Where to get it and who to trust FOMO: Fear of missing out on what everybody else is doing with investments I Bonds: When inflation is high, investments are terrible, they look appealing Reminder: What is the purpose of the money and what's the goal? Alternatives: You're potentially moving away from the best route for your goals Links: Playing the Probabilities - Wealth of Common Sense Blog What If You Only Invested at Market Peaks? Bob - The Terrible Market Timer Learning from the Lessons of Time - Franklin Templeton Brochure What To Do When Your Investments Start Tanking The Power Of Diversification Investing During Wild Markets with David Blanchett Free DIY Financial Planning Guide for Physicians Dow Jones Industrial Average Contact Finance for Physicians Finance for Physicians Full Episode Transcript: What's up, guys? Continuing on with the theme of last time, we're going to be talking about downturns in the market. We talked about (last time) how to navigate a scary investment market, and I gave you some tips on actions you can take. I think the big takeaway from that conversation was making sure you have a solid financial plan that includes an investment plan. If you don't have one of those, that's important to create first. It's always good to consult your financial plan, especially when things get dicey and emotional like they are in scary markets. Try to avoid making changes or taking actions based on things that are out of your control and emotions that come into play. Definitely check that out if you haven't listened to that as a precursor to this. Today, we're going to be digging in a little bit more into what those market downturns have looked like historically. I think this is part of the education component. Understanding what this looks like or what this has looked like in the past is really helpful. It has been for me. Of course, we can't predict the future, but we do know what history has looked like, so we'll talk about what that has looked like historically so that you can have a little bit more of that education and be better armed to navigate it as this type of thing happens again in the future. Okay, we're going to be referring to a few sources today to give you guys some hard data. I'll link to the stuff that we mentioned today in the show notes. They have pulled together some of these numbers and concepts, so definitely check those out. We'll link to any of those sources, as I mentioned. The first concept I wanted to talk about was making sure to have a long view. We talked about it last time in the last episode about having a financial plan and making sure you tie your goals to your actions. With investing, if you have a long-term goal, that's where investment can work really well because investing is a long-term thing. You should not be investing for short-term goals. Using that approach, it's not about the short term. If you're looking at the short term, that's not really the right view for something that's not going to be needed until the long term. Also, looking at the investment data, the short term has been relatively unpredictable. The first source that I wanted to look at was the probabilities of how the market is done based on different time frames. The source that I have here is A Wealth of Common Sense blog. This is a blog from Ben Carlson and he's very much into investing and gets into some of the weeds of investing. If you're interested in that, this is a good blog to check out. He's a smart dude and writes a lot about this type of stuff. Anyway, he wrote a blog a while back where he shared the probability of positive versus negative returns based on different slices of time. He looked at the entire period from 1926–2015 of the S&P 500, which is the 500 largest stocks in the US. He looked at it for varying slices of time, was it positive or negative? First, he looked at daily slices of time. For every day, over that entire 1926–2015 time period, how many days were positive versus how many were negative. Positive was 54% and negative was 46%. Basically, a day in owning the S&P 500, it's almost a coin flip, slightly better than a coin flip. It's better than going to the casino, better than a lottery ticket, but not great, especially for your life savings. That's part of the problem. When you're looking at it daily, close to half the time, it's down. It's just unpredictable. When you go quarterly, it's 68% positive and 32% negative. One year slices of time over that entire 1926–2015 time frame, it was 74% positive and 26 negative. And the five-year period was 86% positive and 14% negative. Basically, the further out you go, it increases that positive percentage to the point where at 20 years, it's 100% positive. I think probably he has ten years as well at 94% positive, but it's got to be somewhere in between 10 and 20 years, which he did not calculate. Somewhere in between there, I would guess it's hitting 100% before 20 years. The takeaway is the longer you go out, the higher your odds of getting a 100% outcome positive returns, no matter which slice of time you look at up. The key is to take that long view and tie it to long goals. Really, you shouldn't worry about the short term because it is more like a coin flip. What you need to focus on is the long term. The next concept I wanted to hit on was timing. I think a common concern is what if it's not the right time? Maybe you're investing at the worst possible time and you just don't realize it or maybe you're worried that it's the worst possible time. The video that I will link talks about—it's a hypothetical example based on the actual returns of the market—they call him Bob, the Story of Bob, The Worst Market Timer. Anyway, they share Bob's journey as an investor who basically times his investments at the worst possible time. He buys at the peak of the market right before it tanks and it shows you how things turn out for him over a long period of time. Where Bob messes up, as he worries about it, and ends up investing when everything feels great, and typically that sometimes happens at the peak. Basically, he has bad luck and times it at the worst possible time possible every single time. He does that bad, but the good thing is he keeps his money in the market and does not change it. You'll see from the video that things still work out pretty well for him because he holds his money in there long term. That's the important thing. As I mentioned in the first point, you have to take a long view. It has to be a buy-and-hold sort of approach. Ideally, you're not trying to time it. That's the mistake he made. A much better approach is to remove that decision from the equation. You should not be trying to predict when the best time is to put it in the short-term period of time. Going back to the first point, we don't really know what it's going to do in a short period of time. You just have to invest based on your own circumstances, and it's generally best to put it in systematically over time. Maybe you're investing monthly at the same time every month. Ideally, you remove the emotion and the decision-making from the equation and systematize it and it just happens. You don't have to worry about this whole timing thing because most people that start to try and worry about the timing thing tend to get it wrong. They tend to gravitate towards this example of Bob timing it terribly. So that's Bob. The next example I wanted to look at was the reverse scenario. What if you're investing at the worst possible time when the market feels terrible? The Bob scenario was like he was investing only when it felt great and when the news was great, but what turned out to be the worst possible time. This example is looking at what if you invested when we looked back and we knew it was terrible? At the bottom of the market. What if you're investing at the worst possible time in reality? Maybe you don't know it at the time, but it's the bottom of the big market downturn. You can look at all the examples. This piece that I'll share is from Franklin Templeton. There are four examples in it. I'll just talk about the most recent one, which is 2007–2009. They all have the same sort of takeaway, but that was the big housing crash crisis in 2008. In that particular downturn, from the peak down to the trough, the S&P 500 index went down just over 50%. It was 50.95%. Check out the PDF link for all the details on that and the disclaimers are in there, too, so definitely read those. That was the 2008 crash from peak to trough. Then they look at what if you invested at that bottom point? The thing is, looking back, you're like oh yeah, duh, that's a great time to invest. If you were looking at it objectively and investing in that period of time, it felt like a terrible economy. Everything was negative. It just didn't feel like a good time. The world was telling you not to invest, but if you had invested at the bottom of the market, one year after your cumulative return was 53.60%, then five years after it was 137.49%, and then ten years after it was 367.39%. The takeaway is these downturns, it goes down fast and feels super scary. A lot of times people don't realize how fast it recovers and how quickly we can get back to where we started. Oftentimes, the scariest point in time is actually when it's a fantastic point in time to invest. Same sort of thing as I mentioned in the first point. I think the takeaway is you don't want to try to time it now, but if you do happen to have extra money, if you're going to be timing it lower when it's gone down, it's actually a better time to invest. At the end of the day, you want to have your dollars working for you and make sure you're investing that based on your financial plan and not based on where you're predicting the market might go. We don't really know what the short term is going to do, and these sorts of things happen. It's very difficult to predict at the moment. I think the temptation, though in that bad market is to maybe stop investing. You definitely don't want to do that. Or I guess a different temptation. Sometimes people that have even more fear might even be tempted to bail out. I think that’s probably the most important thing to try to avoid. Basically, if you had bailed out at that bottom in 2008, you're missing out on all that upside in recovery. You're basically cashing all your chips in at the worst possible time. If anything, do not go down that path, and really you should be continuing to invest based on your plan. There is a temptation to move away from the pain. It does feel painful when things are down, but you want to avoid that temptation and look at something like this piece I'll share with you and remind yourself how quickly things return to normal. Typically, when it feels like it's the worst period of time, oftentimes it's the best period of time to invest. The next concept, which is in the same PDF that I was just referring to, is oftentimes, when it's really bad or when you just feel unsure about things, I'll sit out for a few days. I'm just going to give it a few months. I'm going to stop investing for a few months or go to cash for a few months and let the dust settle, or something along those lines. This visual, this chart looks at the S&P 500 again, and it looks at 20-year periods ending December of 2021. If you're fully invested for that period of time, the return you would have had for that period of time is 9.46%. If you had excluded the ten best days, or 20, or 30, or 40, or 50, or 100 best days, it's basically looking at if you had excluded X number of days from 10–100, what would that have done to your returns? Just missing out on the 10 days out of a 20-year period of time, if you've missed out on 10 of the best days, it knocks your return down by down to 5.27%. If you miss the 40 best days, it knocks your return down to -1.57%. If you missed the hundred best days, it knocks your return down to -10.06%. Basically, you don't want to miss out on those good days. The problem is the days are really difficult, or really impossible (actually) to predict. You have to be invested fully for that entire period of time to get the maximum return. I think that's a very important takeaway. Sitting out for a few days doesn't work out well in the end. It's much harder to know when to get back in and oftentimes you start missing out on these good days. Now all of a sudden, it's too high to get in, at least that's what you tell yourself. You don't want to start going down that path. I think the other big temptation with any big story like this is to start tracking with the news. A lot of times, it's where people go for their information. Maybe it's not the news on TV, but maybe you're on social media, or wherever you're getting your information. Let's just call this financial information, to go to your sources of financial information and get the word from them. The problem with the general financial information out there is it's a terrible predictor of the future. This visual is kind of cool. It's the same piece from Franklin Templeton. It's a really good piece because it hits on all these concepts, but this goes through a really long period of time. This is going all the way back to 1972 and it goes through some of the big news stories and how the market behaved over those periods of time. It's looking at the Dow Jones Industrial Index, which is a pretty good measure of the market. It's not my favorite, but it's still an okay measure of the market. Anyway, what tends to happen is the worse the news gets, the better time it is to invest. In 2020—that's the recent one everybody remembers—unemployment and the pandemic. Unemployment is at the highest rate since the Great Depression. I think that was the big financial news story. There was a lot of talk of recession and all that stuff. It's like who in their right mind would want to invest? Those news stories get more amplified the further it goes down. Actually, if you go back in history and you look back, that's actually the better time to invest versus just a year before, there wasn't really much of any news. There weren't big-time headlines about the markets like there were in March of 2020. It's almost like the bigger the headlines get, the better it is to invest. It's the reverse of what you would think it would be. When the news says don't invest, at minimum, continue investing. That's the important thing because you don't want to get into this whole timing cycle, as I've already mentioned a million times and I'll continue to mention because it's important. You don't want to get into this trying to time the market mentality. It's super easy to get into, but we don't know what the future is going to hold, especially for a short period of time, so you just have to systematize it. The news is especially terrible, but it is a big temptation that can pull you away from systematizing this and trying to time the market. The temptation is going to be like things start to get negative, and the news starts to tell you it's negative. Right now it's getting negative. The news is saying that negative inflation is high. Everybody's going through a recession, the market, the war, all this stuff. You're going to be feeling a little tempted to say, maybe I should stop investing my monthly investment because it's going down. Definitely, you don't want to stop that systematized approach based on your plan. That would be a bad move, especially based on the news. They're terrible at this stuff. You can see from history, that it's very much shown through history over and over and over again that they're terrible predictors of the market and it's best to not make decisions based on what you're seeing in the news. You can also see this in, my favorite example is cryptocurrency, because it seems like cryptocurrency, everybody starts talking about how good it is. As the price goes up, people talk about how good it is, and as the price goes down, they question it. But it's the reverse of how it should be. Not that I'm endorsing cryptocurrency, but people talking in the news are a good representation of human nature, but a bad representation of what actually happens. The important takeaway, as I said, is not trying to time this stuff because it's incredibly impossible. It's just not possible. I think another common thought that creeps into the equation when markets get dicey, that I'll talk through before we wrap up today, would be this alternative that's creeping into the equation. Oftentimes—we hear this from clients and I felt this temptation with my own finances—clients will ask us on occasion what about the XYZ alternative? Like cryptocurrency, I bonds, real estate, or GameStop stock is an example that was popular a few years ago, or maybe investing in gold. Oftentimes those will come up. I think the question is to ask where is that coming from? Normally it's presented as an alternative, or diversification, or some sort of reasonable approach as a good investment. It's a little different than what we've talked about so far. It's not necessarily getting out of investments. It's not really necessarily timing investments. It's more of changing what you're invested in. Typically, if you peel back the layers, it's based on some underlying fear of whatever your primary investment is. Sometimes it's FOMO (fear missing out), everybody else is doing it kind of a thing. A lot of times it’s just fears of investments going down or not being as productive as the alternative. Lately, the most common thing that's been coming up is I bonds. Investments have been going down as of this recording, and inflation has been going up. An I bond is really the only thing that mimics or is pinned at inflation. It's a government bond that pays exactly what the inflation rate is. I bonds are the best possible investment that keeps up exactly with inflation. When inflation is high and investments are terrible, it starts to look more appealing. As I said, typically what happens is people are having greater fear with their investments as they go down because they're worried maybe they're not going to do as well, especially the further down they go. Then the further up inflation goes, they're thinking that's a better alternative. The temptation is to switch from investments to I bonds in just this example, you can use any example. The problem is it's based on short-term view and fear. If you peel back the layers, it's this fear that the market is not going to do as well and it's looking at this slice of time or really just not thinking about the long term. If you're investing, it should be for long-term goals. You have to remind yourself. That's why it's important to remind yourself what is the purpose of the money and what's the goal and the purpose? It should be some sort of long-term goal. Otherwise, it should not be invested. If it is long-term, you have to keep that long view in mind that I've been referring to. All this alternative stuff I've been talking about, at least so far, is kind of based on the short-term view and short-term fears. If I look historically at inflation and historically at investments, I think that's the best reminder of how these things work. Long-term inflation and long-term investments are good reminders. If you look at the short term, it's very emotionally prone to driving you to be fearful because right now inflation is high, investments are doing bad, but long-term investments will recoup. Long-term investments have considerably outperformed inflation over all periods of time if you look at it a long-enough period of time. Inflation or I bonds, for example, are not a great long-term investment. I think the key is to consult your financial plan. What are the goals? Focus on your situation and avoid this temptation to make changes to different things that are not in line with your goals and your purpose. That's the issue usually with these alternatives and really all these different concerns or fears around the market. The issue is that you're moving away potentially from what the best route is for your goals, so you want to really keep that focus on that. At the end of the day, short-term markets are very unpredictable, and you have to be careful not to tie that to a short-term need. You shouldn't be using investments for short-term goals and so don't let those short-term markets knock you off track. Remind yourself those investments are tied to long-term goals, and you got to take that long view because long-term markets are far less volatile and will really do well for you. History is such a great reminder of that. If you look back and you spread it out over a long enough period of time, those numbers start to look really solid. Even if, like we talked about today, you're timing it at the worst point in time possible, things will tend to work out and flatten out if we can extend that slice of time over a long enough period of time. I think that the key is really taking that long view and as I said several times, focusing on your plan and your goals, and not on these external factors and fears that inevitably crop up in our world from day-to-day, week-to-week, or month-to-month. All right, guys. That's it for today on market history and market factors. Next time we'll be talking a little bit about some of these behavioral tendencies and biases we have as humans. We'll go through some of these. I think these are super interesting. We're all prone to them and they can really cause some problems in our world, particularly in investing and personal finance. We'll look forward to talking about that next time.

If you have been watching the markets lately, like I have, it's gotten a little dicey. It's been a while since we've had volatile downmarkets. What should you do when your investments get shaky? In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about what to do when your investments start tanking. Markets do go up and down. If you've been investing long enough, you realize that’s just the way it goes. Topics Discussed: Downturns: People make big mistakes and lose a lot of ground—and money What to do? There are some things you should do and some things to avoid What is shaky market territory? People get emotional when it gets more volatile What are natural reactions? These feelings are normal: This time it’s different, but is it, really? Are you tempted to find winners and get rid of losers? Historically, people work through it and recover nicely What’s not normal? Things get completely backward sometimes: Past: Inflation was high, cash paid nothing, and mortgage rates were low Present: Cash pays nothing, inflation is very high, mortgage rates are up What are action items? Remember to refer to your financial and investment plans Give yourself a little space between the feeling and the action Educate yourself on how markets work Recognize that the market is out of your control for the most part Create awareness around human investing behaviors/behavioral finance Rebalance investments and benefit from tax-loss harvesting Change your pre-tax IRA or 401(k) to a Roth conversion If you have extra dollars, put them to good use and start investing What are questions to ask yourself: What is the underlying concern? What is the money that I'm concerned about? What's its purpose? When are you ultimately going to use it? What's it going to be for? Links: The Power Of Diversification Digging Into Tax-Loss Harvesting Investing During Wild Markets with David Blanchett Free DIY Financial Planning Guide for Physicians Vanguard Total Stock Market (VTI) Contact Finance for Physicians Finance for Physicians Full Episode Transcript: Hello, everyone. I hope you're having a great day. I have been watching the markets lately. It's gotten a little dicey. As of this recording, we're in about the middle of May, and things have gotten a little dicey lately. It's been a while since we've had volatile downmarkets. I guess the last time was in 2020 when COVID started happening. Before then, it's been a really long time. Even with 2020, that was really fast, and then it just shot right back up. Markets do go up and down. If you've been investing long enough, you realize that that's kind of the way it goes, but either way, even if you've done this a million times, it can get scary. There's a lot of fear, temptation, and stuff to think about potential changes to make. We're going to talk about that today—what to do when investments get shaky like they are now—go through some of the things you should be thinking about, and give you some tools to arm you as we go through shaky markets like we're dealing with now and inevitably in the future. Like I mentioned in the introduction, if you've been investing long enough or you've researched investments, you know the vehicles when you invest. Things go up and down, but it's different when you actually see your balance go down. It can get emotional when markets get shaky like this and fear is high. The problem with shaky markets like we're having now is this is when people are prone to mistakes. A lot of times, people think that when the markets are good, that's when they're excelling because it feels like they're doing good, but when the market is really good, the majority of people are doing really good. What separates people typically is in these big downturns. It's mainly when people make big, huge mistakes and where they lose a lot of ground. The question that arises is what should you do about it? The market's shaky. I know you're feeling like I need to do something about it. There are some things you should do and there are some things you should avoid doing. We're going to talk through that today. We're going to talk about what it looks like. When I say shaky market, I'm going to talk through a little bit of what I mean by that. We're going to talk about some of the natural reactions people have, and then we'll talk about some action items you can take to avoid some of these big mistakes I'm referring to. Just a quick story, my first experience investing was one of those big mistakes I talked about. I was 16 and had saved up a bunch of money working over the summer. I've always been interested in investing and thought it would be a good idea to invest the money that I had earned. I took my entire life savings, which was, I think, $4000 at that time. It still feels like a lot of money to me now, but then, it was all the money I had when I was 16. The year was about late 1999. I invested my life savings. I really didn't have any plan at all other than I just wanted to make my money return something. There was really no purpose and no plan beyond just that. I picked some stocks. Tech stocks happened to be really popular at that time. I started researching and that was what was out there. It was everywhere. Everybody was talking about tech stocks, so that's where my research led me and that's naturally what I settled on. I did research on what the best ones were, and I picked some of those. I'm like, okay, great, we'll have a few of these, I'll invest in them, and then things will be great. I'm going to buy them and hold them for a long time because that's what you do with investing. If anybody was around investing then, you'll know what I'm talking about. If you've researched it, that was the tech bubble. A lot of these tech stocks and dot-com companies got overinflated, and then they crashed around that time. Right around the time I was investing, I guess I caught a little bit of the upturn enough to be like, man, I'm awesome. That's how it felt at the time, but it quickly started to crash. Like any first-time investor, I felt the temptation to do something about it, so what my action was is as I started to trade, I'm like, I got to get rid of these losers. I'm going to find some winners. I started trading and looking for the winners. Unfortunately, I never found the winner and basically, after a few years of trading, had lost pretty much everything that I had started with. That was my first big investing mistake. I really didn't have the knowledge and experience at that time and basically made all the mistakes you could possibly make. Fortunately, it was an early phase in my life and I was able to learn when the stakes were lower. That is a good example of some of the mistakes that happen. Hopefully, you're not making all of them at once like I did, but people make mistakes. We're all prone to those. I think it's helpful to recognize those mistakes and ideally, you're learning from the mistakes of others. Hopefully, you can learn from some of these mistakes we'll talk about and some of the mistakes I made in my past. When I talk about shaky markets and downmarkets, what does that look like? If you look at the short term, right now, the market has been starting to get volatile. If you go to Google and you google VTI, what you're looking up there is the Vanguard Total Stock Market. That's one of the good metrics of the market. When I say the market, basically, it's an ETF that owns basically every stock in the US. I look at it as a pretty good metric of the entire market. It's a good way to look at the historical market. I guess the fund is not super old. It goes back to the early 2000s, but you can look at how the market is doing by just looking up this fund. As of this recording, I'm looking at it. If I go to the year-to-date view of how it's doing, the ups and downs are starting to get a little bigger, and as of this second, it's down 16.31%. That's going to change every second because I'm looking at Google as of literally the second, but call it a little over 16% down year-to-date for this fund. I would define shaky market territory as in that 15% or greater territory. Twenty percent loss or greater is when people start to get alarm bells going on. Then, when you get into 30% territory, I think that's when it really starts to get bad and people start to feel it. By my unofficial definition—there are much more official definitions—I gauge it just by how our one-on-one clients feel, the feelings I'm seeing them having, and the number of them that are raising issues. I think at this point in time, it's starting to get into the shaky market territory with this downturn. Not quite like it was in 2020 or in 2008, but it's starting to get into that territory. The market is starting to get more volatile and starting to have more ups and downs, and people are starting to get a little emotional. That's what I mean by shaky market territory. In 2008, that's a good example of an extended bad market. Once things settled out at the bottom like I was talking about the Vanguard Total Stock Market—like I said, that's a good example of the overall stock market—from the top of the market in mid-2007 until when it got to the bottom in early 2009, it had dropped over 50%. That's a pretty big hit. If you're 100% in that fund with all your money, say you have $1 million, it's now $500,000. You're going to see that statement. Basically, it's going to feel like you just lost $500,000. That's shaky market territory. I wanted to talk about the reaction that happens there because I think that's important to observe. When people see the statement as things come up or they start to see the news go out, the feeling that either the news tells or we naturally tell ourselves is this is different. This time is different. I know it's down and I know markets go down, but this time is different. And maybe even like, this is something we're never going to recover from maybe because it's different. The interesting thing about that storyline is it usually is different. That's why it happened typically in the first place, because we often as a society learn from our mistakes but not always. These big downturns typically are caused because some new big issue came up or something flew under the radar and caused it. Oftentimes, the downturn is caused by something completely new and different, but also, historically, we're able to work through it, come through, and recover nicely, so those feelings are normal. Also, when we get in that shaky market territory, things just get completely backward sometimes. Right now, for example, inflation is high, cash is paying nothing, and for a while, mortgage rates were really low. There was this time in March of 2022 when inflation had already crept up, but mortgage interest rates were super low and cash was paying basically nothing. Fast forward to today, cash is still paying nothing and inflation is really high, but mortgage rates have gone up quite a bit. That's not exactly normally how it is. Typically, as inflation goes up, your cash should pay a little more normally and interest rates on mortgages would typically go up. They've started to do that on mortgage interest rates, but things can get backward, especially when you look at the really, really short-term periods of time. Sometimes, if you've ever heard people talking about their reverse yield curve, that's an abnormal thing that happens, but typically, these backward sorts of scenarios happen in a really, really short-term timeframe. Also, in these scary markets, salespeople really leverage people's fear, and so does the news. You have to realize that there are a lot of people incentivized by that fear and they can capitalize on it. That's just another consideration. The focus or the temptation is to really hone in on the day-to-day. People get this pull to start watching the market, especially the worse it gets. You can find yourself checking the daily market report or maybe even checking hourly, or watching it. There's this pull to watch that short-term market movement. Not to say that the news is bad or whatever. I'm just saying this is just a tendency that happens. Feelings will come out. That's just a thing that happens. When things get bad, people will get nervous, scared, or fearful. I think it's important to emphasize that that's completely normal. That's how this works. You're going to want to search for solutions that are out there. It's natural to avoid the pain and try to stop the pain. What happens with all this is you're prone to actually making changes. For example, selling low and buying high. You're prone to making changes that are not exactly logical and very emotion-driven. When it comes to investing, this is oftentimes the worst time to make the changes we are pushed towards in this situation, maybe get rid of my investments, or change the investments to a different type of investments. They're just at the point where they're at their lowest. That's the reverse of what we know we should be doing. I think it's good to recognize that those things are happening. It's normal. Ask yourself what is the underlying concern? Maybe think about what is the money that I'm concerned about for? What's its purpose? Think about when am I ultimately going to use it? What's it going to be for? You just think through those questions. The last thing I wanted to talk about in relation to these shaky markets is what can you do about it? What can you do to avoid some of the mistakes that I'm talking about? You got to remember your financial plan and investment plan. They're kind of integrated, your financial plan and investment plan. If you haven't made one by now, this is the prime time as soon as possible to have one because this is going to be the timeframe when you're going to really lean on it. Your financial plan allows you to connect your investments with your goals. It helps you to put a good purpose or tie in a purpose for your dollars and helps you to match up long-term goals with long-term dollars and avoid matching up long-term dollars with short-term dollars. For example, if you're investing money that really should be for emergencies, that's going to cause a lot more added fear and concern when you see them start to drop. You're going to be like, uh-oh, what if something happens and I need that money? That's my only reserve. A good financial plan is going to say, well, no, you should have an emergency account which should not be invested because you need to pair up short-term needs with short-term dollars. If you need it in the short term, you can't invest it because who knows what's going to happen in the short term? You're pairing up those dollars with those goals and putting a good purpose behind that money. On the flip side, for example, maybe you have a long-term goal of retirement. It's the most common one, retiring by age 50 or something. It helps you to think of dollars in terms of that goal and purpose and put it in a bucket. If you're 20 right now and all those dollars are tied to that purpose, that's a long time from now. You got 30 years. It helps you to not focus so much on the day-to-day. It doesn't really matter what's happening this week, day, or hour. You're not going to use those dollars for 30 years, so you shouldn't really be focused on that short period of time if you're not going to be using them. The big thing is having that investment and financial plan and consulting it in times when it gets shaky or you start to feel those emotions. If you work with a financial planner—especially if you start to feel nervous about it—talk to them about it. That's what we do or where we can help sometimes. As you feel those feelings and emotions, I think it's good to try to give yourself a little space between the emotion and the decisions or actions. The risk is you feel the fear, and then you make a move immediately or as fast as possible. It's better, especially with investing, to give yourself a minute to take some time to wrap your head around it and get some logic. Give yourself a little space between the feeling and the action. It's also great to always educate yourself on this type of stuff. For investing specifically, I would suggest educating yourself on human investing behaviors and behavioral finance. There's a ton of stuff out there on how people behave with investing, some of the falls or the biases we have, and that sort of thing. We've actually recorded an episode on that. I'll link to that in the show notes. It hasn't come out yet, but we'll have that linked up. You can check that out if you want to dig into that subject. It's helpful to understand how you're going to tend to behave and some of the behavioral risks you would have and educate yourself on that so you can gain awareness of it and avoid being as prone to those. Then, educating yourself just on how markets work too is a great step to take always as well. Same sort of thing, the more awareness you have of how these things work, the better you're going to be able to navigate this experience, especially when you're feeling the emotions. We're also going to do a podcast episode on that as well. I will have that linked in the show notes for you guys that want to dig in on that. I think the key though is just sticking to the basics of what your plan is and what the resulting investment strategy is to allow you to reach your goals. With investing, ideally, you're doing it as unemotionally as possible and sticking to pretty specific logical rules. In summary, the first step is if you don't have a financial plan or investment plan, I would suggest creating one as soon as possible. We've created a do-it-yourself guide. For those of you that lean toward that direction or are not sure which direction you want to take, I'll link to a do-it-yourself guide that we've created to help you work through that process. If you want one-on-one help, our planning firm does initial consultations at no cost. We're happy to do one of those. Step number one is having that financial plan you can lean on. That's going to be huge, especially the more emotional and scary it gets. Once you have the plan, you want to consult it, review it, lean on it when you start to feel that uncertainty and those emotions, and make sure that you're following it. It's going to be a reminder and a voice of reason for you, so you want to consult it. If you're working with a financial planner, you can consult the financial planner. The service they provide is going to be that voice of reason. But if you're doing it yourself, you want to consult your financial plan so that you can remind yourself of what that needs to look like. You don't want to make changes based on things you can't control like external market factors or emotions. Recognizing that the market is out of your control, for the most part, is really important. Separating some space between those emotions and the actions is helpful. Some last items I'll throw out if you're still looking for some actions are some (what I would consider) productive actions to think about when the market is shaky. These are not always applicable, but there are some potential considerations for you to at least think about. If you haven't funded all your tax-sheltered saving vehicles, when the market is down, it can be a fantastic time to do it. Ideally, you would have done that already or you already have a plan to do that. That's the ideal world because most of the time, the markets are good. But if it happens to be that today, you didn't really have a plan for dollars and it happens to be that you haven't maxed out those tax shelters, well, that's a good time to do that. Like I said, ideally, you have that plan, you can lean on it, you're already facilitating that process, and you're already on track to fund all those tax shelters. If you don't have that, you now are seeing yourself with lots of extra cash, and you haven't funded those tax shelters when the market is really, really down, it can be a great time to get caught up on all that. The second thing would be to tax-loss harvest. Tax-loss harvesting is when you're taking losses on investments intentionally to produce tax losses. It's a tax benefit that will come through on your tax return. We did an episode several shows back on tax-loss harvesting that I will link to if you want to dig into that. Then, just rebalance your investments. That's basically following your investment plan. Oftentimes, when the markets get shaky, it will pull you away from the target that you've established with your investment plan. What rebalancing is is rebalancing the categories of investments to stick with the plan you originally established. You're not actually changing the plan. You're just adjusting your investments because they've changed so much and they've gotten off track with your plan. Rebalancing and tax-loss harvesting can be really good. The more it changes, the more these can be beneficial. Another one that can sometimes be helpful is a Roth conversion. Roth conversion is when you're changing your pre-tax IRA or 401(k). You're changing your pre-tax account into a Roth account. You can always do this on your IRA, and then some 401(k)s allow you to convert from pre-tax to Roth. This is basically saying that on pre-tax money like a traditional 401(k) or IRA, you're not going to pay tax until you take it out. It's like, tax me later. On a Roth, you get taxed now, but then you never pay tax again. It's like, tax me now. With a Roth conversion, you're basically saying, I'd rather take the tax hit now. You're just like, let's just go ahead, pay the tax now, and get it over with. You usually do that because you think the tax hit is going to be lower now than later. That's usually why you do Roth. The Roth conversion can work well when the market is really low mainly because the values are down. You can use history as an example. It's not always easy to pinpoint this in real-time. It's actually very difficult to, but in some cases, say we're in 2008 at the bottom of a 50% drop, you are already considering this strategy of Roth conversion, and you just hadn't pulled the trigger yet. That can be an excellent time to do it because say you had $100,000 in an account. If you converted it to Roth, it would be $100,000 that was taxed. That triggers a tax on, say, 30%, which is $30,000, but you hadn't done it yet, so now, that account is dropped to $50,000. The same thing, you convert the $50,000 and it's taxed at 30%, but that's only $15,000 of tax. It's basically converting it at a discounted price which triggers less tax. Roth conversion looks slightly more appealing the more the market goes down. It's not a reason in itself to do Roth conversions, but it can add to the argument for Roth conversion. Then, the last thing is if you happen to have unaccounted-for dollars—this goes back to the financial plan—the most important thing is having the financial plan. But if you happen to have not had one, you have these unaccounted-for extra dollars that are just not being put to use good use, and let's say that they should be or could be used for long-term monies, it can be an excellent time to start investing those the further down the mark the market goes. Like I said, it's best if you're already putting those to good use, if it just happens to work out that you have, if you get a big bonus, or you have a good influx of cash, I'm going to lean slightly more towards getting that invested quickly, especially if I know we're in the middle of a huge downturn. As I mentioned, I think the biggest thing is having that plan and leaning on this as the market gets shaky. It's really pretty much always going to get emotional and scary for people as we go through this especially the worse it gets. It's hard to tell exactly how it's going to affect you until you're really in it, so I think it's good to recognize that that is something that's going to happen. It's okay to have some fear and concern around this, but just make sure that you're taking a minute, consulting your plan, and trying to put on that logical hat. I think it will save you some pain and regret later in life. Hopefully, you don't have to learn from your mistakes and hopefully, you can learn from this and some of my mistakes I made in the past. As always, it's been a pleasure. We'll look forward to catching up again next time where we dig into a couple of these issues I mentioned. We're going to dig into some of the behavioral tendencies we have when we invest. Then, in the next show after that, we're going to talk about some of the examples of how markets have worked in the past. We'll look forward to catching up on those topics next time.

There's a lot of crazy stuff in the news. If you're old enough, you've experienced these crazy times before. The investment markets' economies go up and down. These kinds of things happen. With all the craziness going on in the markets and the world, what news—financial or otherwise—are you concerned about? In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about how to make sure your financial plan is solid. Topics Discussed: What are I Bonds? Savings bond earns interest based on fixed and inflation rates Financial Plan: What is it? Foundation to going in good direction, making good decisions Why is it so important? Aligns values and goals for living out your ideal life What does it provide you? Clarifies your values, goals, and risks What does it not provide you? Path to getting rich Balancing Act: What’s most important? Think about today vs. tomorrow/priorities Components: Have/write a plan and clarify values to make progress toward goals Values Exercises: Every few years (at minimum) review your values Are your finances organized? Strive for balance, not perfection Awareness: Where’s your money going between saving, spending, and giving? Uncertainty: Be aware by knowing when you’re drifting from values and goals Links: Financial Vitals Check What Should You Do About Inflation Is Money A Tool Or The End Goal 3 Exercises To Help You Clarify Your Values White Coat Investor Dave Ramsey Contact Finance for Physicians Finance for Physicians Full Episode Transcript: Hello, everyone. Hope your day is going well today. We've gotten a lot of questions lately that revolve around a lot of the craziness going on in the markets and just the world in general. There's a lot of news out there that people are fearful of, concerned about, and that sort of thing. Today, I wanted to talk about your financial plan and how that ties into this. I think having a really good financial plan is the key defense against some of this fear. We'll help you navigate a lot of these questions that come up. I wanted to talk about the concept, explain what I'm talking about a little bit more, and go through that today. Hopefully, it'll help you in general, especially when things get a little hectic like they are now. There's a lot of stuff coming up in the news. It's a little bit of a crazy time. If you're old enough, you've seen these crazy times before. The investment markets' economies go up and down, so these kinds of things happen. By day, we're financial planners, we get to talk to people one-on-one, and we hear a lot of the concerns. The questions we often hear are like, well, should I change my investments? How do I deal with this inflation? We talked about that in the last episode. I'll link to that in the show notes. Should I buy into these XYZ investments? Lately, people are asking about I Bonds. Those kinds of questions are normal. They're good questions. Even not in scary markets, there are a lot of questions we get like, how am I doing? I want to make sure my investments are efficient. The challenge we have with questions like these and even other types of questions—you might think of a simple question like how much should I be saving, how much should I spend on a house, or those sorts of things—is if you ask a good financial planner, they're going to be like, well, it depends. I'm not sure. Or they're going to dodge the question. The issue with answering those kinds of questions is it really needs to be based on your financial plan. If you have a rock-solid financial plan, it is pretty easy to navigate these kinds of questions. I don't know about easy. Straightforward is probably a better way of looking at it. The answers to these questions can be very straightforward. I think that is the key to helping to address these sorts of questions. We're going to talk about what that is, why it's so important, and the outline of it. We talk a lot about it. I know you've heard us talk about a financial plan and the importance of it, but I want to focus on why it's important, what it provides you, and that sort of thing. I'm sure you know that in general, everybody acknowledges that a good plan is worthwhile. It's for anything, like a business plan or whatever. Having a plan is a good direction, but I think it's especially important with your finances. A lot of people agree with me. I've said it many times. If you look at the big financial voices in the world of medicine, [...] is a pretty popular voice in personal finance. If you read enough of his stuff, you'll get the sense that he agrees it should be the foundation. More than general personal finance, Dave Ramsey is a pretty popular voice. He definitely says you should have a solid financial plan and it should be the bedrock foundation of your decision-making. All of us agree on that, but why is it so important? Like I said, in general, with planning, if you don't have a plan, you're going to tend towards meandering and not knowing which direction to take. But before we talk about why it's so important, I think it's good to look at what we are not looking to do. What is a financial plan not going to provide you? A financial plan is not about showing you the way towards getting rich. It's not about the path to becoming rich and wealthy. That path is actually pretty straightforward. Basically, it's work and earn as many dollars as you possibly can in the hours that you have to work. Make as much as possible and as long as possible. Start work at an early age, make as much as you possibly can, work as long as you possibly can, spend as little as possible along the way, and invest as much as possible, and you'll be rich. I know that's not everything. Your profession and income is important, but you can have some control over that. By educating yourself and selecting a higher-earning profession, you can amp that up as well. That's a pretty straightforward route to building a ton of wealth, but if you take it to the extreme, you're going to just die with a bunch of money. Most people, if you peel back the layers, don't really want that out of their life. On the other hand, it's not about living in the moment completely. It's not about just spending as much as possible either, of course. Really, the financial plan is your plan for living out your ideal life. The purpose of it and what it's for is to help you identify what your values are. Your values are what's most important. They should shape your goals. Ideally, your decisions around money and life are in alignment with those goals and values. Your financial plan should help you be more in alignment with your values. Ideally, your values are driving the ship with your life in general and particularly for your finances for the sake of a financial plan. It should help you view money more as the tool to reach those values and to build out that best life. I talked about that as well. I'll link to that show on using money as a tool to live out that best life. Ideally, your plan is that mechanism for helping you to better do that, and on top of that, just being, in general, efficient with your money along the way and thinking about some of the risks that might come up that you might not always think about. A good financial plan is all those things. It's helping you align your values with your actions. It's helping you better use money as a tool to build out that best life. It's helping you be efficient with money. It's helping you think about some risks along the way and address those. You're going to be able to—by going through that exercise—start thinking about balancing today versus tomorrow or priorities. There are a lot of values people have. They're going to be competing with one another, so it's like, how do I balance all these important things? Which one of them is most important? Balancing today and tomorrow and also balancing which of these things are most important.  Which one is the highest priority versus the lesser? For starters, when people ask me these questions and I'm not their financial planner, if they're asking me what should I do with my investments, should I buy I Bonds, should I change my investments, and all those sorts of things, the question in my head I'm always asking is well, do you have a financial plan? Let's look at it. That's a weird answer to give somebody without some context, so I typically just brush off the question and have a surface-level conversation about the pros and cons or something like that. But a good solid financial plan, first of all, needs to be written. Maybe not on paper but in a document online or whatever. It needs to be documented and very concrete. Let's talk about the components of it. Some of you might be like, well, I don't have a plan. That's straightforward. It's going to be worthwhile for you to start there. Have a plan. Write a plan. You need to have a plan. That's step one. Others of you might be like, well, I think I might have a plan, I kind of have a plan, or I probably have a plan. Maybe you're not exactly sure if your plan is solid. Whether you're one or the other, I think it's good to understand what are the components of a good financial plan and what does it address? As I mentioned before, the big thing is, first of all, it needs to help you clarify those values, iron out your goals based on what's most important, and start to route out the specific steps to making progress towards those goals. Then, it asks you to also consider life especially if the future is not completely predictable and there are uncertainties. We got to address the risks. Ultimately, your plan should round out with a concrete action plan for executing the steps to get you on track. I think it would be good to just think about some of these questions. This will hopefully help you to assess where you're at in regard to a plan. Before I go through the questions, this is a lifelong thing. Nobody's perfect at planning. It's something that you oftentimes will do a really good job with, and then life changes and it gets stale and needs to be updated or things don't go as planned. Or maybe it's your first time and you're not as efficient as you could be. Nobody's perfect at this. It's a lifelong thing. Errors and mistakes are inevitable. It's more about are you working in the right direction? Some questions to think about to help you assess how solid your plan is: are you clear on your values? Do you recognize what's most important? That can seem like a weird or maybe an obvious question, but I think the ultimate would be you haven't written it down or you've at least spent some time thinking about it and you haven't written it down. Ideally, it's in priority order. The same thing, are you clear on your goals? Do you know what you want life to look like in an ideal world in the future? Ideally, all those are written down—your goals and your values—and you can refer back to those because you're typically going to be fine-tuning, adjusting, adding, or subtracting them over time. If you don't feel like you're super clear on values, check out our episode. We go through some values exercises. The intent is to help you have some concrete steps to iron those out. If you feel like you haven't done that in a while, that's always a good thing. I think every few years at the minimum—maybe even more frequently—it's good to just take a minute and go through that. Another question to think about is are your finances organized? How organized are your finances? Maybe yours are perfectly organized, but we're not going for perfection. I know I've said that already, but I'm reemphasizing that we're not going for perfection. We're going for balance. With organization, a lot of you probably have a lot of stuff. Really what we're going for is a general understanding of where everything's at and making some progress along the way, especially if you're feeling like you could stand to get more organized. Do you know where everything is? Do you know your balances for stuff? Do you know what your insurances are or who the contact people are? Do you have your logins handy? Like I said, I have struggled with this in the past. It's a work in progress. Perfection is not the goal here, but it is good to assess this every so often. It's like, how organized am I? What can I do to be better organized? That's going to be critical. It's really impossible to have a solid financial plan if you're completely unorganized. If you have no idea where you're at, what your financial stuff is, what you're making, generally where your money is going, and what type of accounts you have, it's going to be very difficult to have a good financial plan. Now, if you work with a financial planner, you can lean on them to some extent, so it is good to make sure they're keeping you organized, but that is one way to take a little bit of weight off your shoulder. If you are working with a financial planner, they should be able to produce a summary of, for example, your assets and liabilities. That's not to say you should not pay attention, but it is a way to shortcut a little bit, especially with organization. Another question asked is do you have a good awareness of how things are going? This overlaps with being organized, but day-to-day, do you have an idea of what you're saving versus spending versus giving? I think that's one that's easy to let fall by the wayside. The same thing with being organized, we're not necessarily going for perfection necessarily. General awareness, I think, is good. Maybe you don't know exactly where every penny is going, but do you know maybe rough percentages of how much you spend? Say you know your lifestyle is $10,000 a month and you can back it up through looking at a credit card statement, checking account statement, or something. Having a general awareness of some of these things that are happening in your finances is healthy and good. It is really necessary to have a good, solid financial plan. Are you addressing some of the risks along the way? Have you thought about worst-case scenarios and made plans to address those? It's not human nature to think about worst-case scenarios, so you have to sometimes force yourself to think about what is the worst-case scenario? Have I made a plan to address those things? The worst-case scenario examples are if I were to pass away unexpectedly, have I considered that in my finances? Another question is do you have an investment plan that ties into your goals? Ideally, with your investments and really with all your assets, when you have a good plan, what it does is it helps you equate or tie in assets to goals because that's really what it's about. The assets are not in themselves providing you anything. A good financial plan helps you map up where you want to go in life with the resources that you have. An investment plan is saying, okay, these accounts are for this purpose. Here's how we're going to manage them to help us move towards that given goal. A huge part of having a good financial plan is that you have a specific investment plan if you have investments. If you don't have investments yet, that's a different story, but having a concrete investment plan is key. Then, being able to answer the question, are you on track is a common question that people naturally think of. If you aren't sure of the answer, that's a sign that you probably don't have a solid financial plan because the plan—the exercise of going through it—is going to help you see how you're tracking basically. I mentioned awareness of things. In particular, I mentioned where your money's going between saving, spending, and giving. Let's assume you have good awareness. If you have awareness, it would be good to ask yourself, is that in line with what my ideal would look like? Ideally, your saving, spending, and giving—in other words, where your money is going—is in perfect alignment with your values and goals. Now, that's not realistic. It's more of let's work towards that, but it's worthwhile to ask yourself how close am I? Am I way off track? How am I aligning there? Once you have that awareness of where your money's going, ask yourself, is it in alignment with my values and my goals? You can see that a lot of this stuff intertwines together. Everybody's going to be in different phases within this. Maybe you have a good awareness of values and goals and you're pretty organized, but maybe you're not sure exactly where your money's going, maybe it's not going in the right places and you need to make some changes, or maybe you have all that going on, but you just haven't thought about some of the big risks that come into play. On top of that, it's worthwhile to look at how well you are following that. Whatever given plan it might be—let's use the investment plan, for example—the question I asked a minute ago was do you have an investment plan? Oftentimes, we have investment plans, and sometimes, we don't follow them exactly. One of the most valuable times to have a good investment plan is when markets get crazy. Going back to the question, should I change my investments, well, it depends on the reason. If you have a good, solid investment plan, you should do what it says and you should not change your investments because of external market factors. It's having a good investment plan and then following it. Are you doing a good job following that even when the market is scary? Just in general with all this, another good question is are you following through on some of these activities that come up as a result of going through these questions and going through the exercise? Did you buy the insurance you thought you needed or realized was important? Have you completed a will? Those are some of the harder ones that sometimes are very easy to procrastinate, so it's worthwhile to ask yourself, how well are you executing these follow-up steps, and in general, are you being efficient along the way? Sometimes, that's hard to self-assess. In all of this stuff, educating yourself will be helpful because you will be able to better define what efficiency looks like. It's a worthwhile question for anyone. I think by asking these questions, it's going to help you to better assess where you are today. If you don't feel good about, for example, some of these questions, that's probably a good sign that you ought to either do a financial plan for the first time or go back to the drawing board and reassess your financial plan. Now, if you work with us one-on-one and you feel some uncertainty about any of these questions, it's a good time to reach out to us and we can help you reassess. Maybe it's time to revisit your financial plan, update, or that sort of thing. It's normal to have uncertainty. Like I said, no one is going to be having perfect alignment with all these things at once. It's normal human nature to drift away from these things, but the key is having that awareness. As you follow a good plan, some of the things you'll feel as a result of that are very worthwhile. It's hard to put a price on it. It's priceless. What is it worth to live your ideal life depends on the person. It's difficult to quantify, but everybody would agree that it's a very worthwhile thing. The results of having a good plan are going to be you feel balanced, confident, and on track. You feel like you're being intentional with your finances. You feel happier. Greater happiness is going to be a result of having a solid financial plan. Maybe you're not rich, but you're moving in the direction of your goals. You're going to tend to view money differently than what the world tells you. You're going to compare yourself less to your peers or the world, and you're going to compare more to your plan, which I think is a healthy thing. You'll feel organized. You'll be less prone to shiny objects. Some of us are more prone than others. Human nature is to be enticed by some of these things, but you're going to be better able to navigate shiny objects and less tempted to make huge changes based on FOMO or scary markets. You're going to be less likely to view money as the end goal and you're going to be more likely to view money as a tool. When your money actions are in alignment with your values, doing a good plan will pull you towards that alignment of values and actions. If you don't have a good plan, you're going to be more prone to being pulled toward the world's values, your peers' values, or that sort of thing. Some of you might be a spender tendency and some of you might be a saver tendency. When you don't have a solid financial plan, the tendency for the spender type is to get pulled towards enjoying today and skip or not pay as much attention to saving for tomorrow. On the other hand, the saver type is going to be the reverse. You're going to be less likely to enjoy your money today and more likely to just stockpile for tomorrow. Ideally, you have that good plan to help you balance the two of those and you can lean more on it. Everyone tends to have a pull one way or the other there. All this stuff is not easy. It can be straightforward with a good financial plan, but it's never easy. Nobody's perfect, but I think the end goal is to have a plan. It doesn't have to be complicated. You can start small. In fact, it's probably better if it's not complicated. Ideally, it's straightforward. Starting small is better than not starting at all. The key is to have a plan and have it written so that you can have that awareness. It's going to pull you towards those values in an ideal life. If you take away anything from today, the key is to make sure you have a fresh, written financial plan, and over time, revisit it, adjust it, and update it so that it's fresh. Make sure you're using it over time. I think that's going to help you to navigate some of these normal questions that come up in life that can pull you away from it. All right, as always, I enjoyed chatting today. Like I said earlier, the fact that you're listening in is a huge deal. A lot of times, people will just bury their heads in the sand or not do anything about it, but as we all know, that is not ideal. The fact that you all are listening in, educating yourself, and working towards this tells me you're the type that's going to be down to having a plan. You're already ahead of the curve there. Give yourself a pat on the back for that. It's just a matter of where you're at in the journey and taking those next steps to continue to make good progress. All right, guys, we'll catch up with you next time. Hey, guys. I had one, quick announcement I wanted to throw out before we get off today. We have recently created an email series called The Vitals Check Series. The idea behind this is to help you guys have some concrete steps and tools to really have some concrete vitals financially. Ultimately, this is foundational stuff to help make progress towards having a rock-solid financial plan, so I wanted to throw that out there. It's at no cost. It's just a quick email series to really give you some concrete steps. None of this is too intense. It's not going to be extremely time-consuming but a quick hitter, high-level steps to start making progress towards having a rock-solid financial plan. I'll link to that in the show notes. I think that would be great for those of you that are not sure where to start on having a solid financial plan. It'll give you, like I said, some of those key starting steps ultimately to get you where you're confident in your financial plan.

What are pros and cons of physician mortgage loans? What do you need to know before taking one out, especially during a crazy market and changing rates causing sticker shock? In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks to Doug Crouse, mortgage lender that specializes in physician loans and author of Hippocratic House: Do No Harm When Purchasing Your First Physician Home. Topics Discussed: Advantages: Low down payments, lack of PMI, and new job qualifications House Poor HENRY? Don’t go into major debt to keep up with the Joneses Hippocratic House: What to ask/expect as a first-time physician home buyer Disadvantages: Some lenders price their physician loans higher due to upsides Due Diligence: What to consider with lenders—service, rate, and closing costs Doug’s Predictions: Rates will continue to climb but not at same pace ARM: Makes sense if you don’t stay in the house and you make enough money Links: Historical 30-Year Mortgage Rates Doug Crouse - Physician Loans at BMO Harris Bank Hippocratic House: Do No Harm When Purchasing Your First Physician Home by Doug Crouse (Amazon) Hippocratic House: Do No Harm When Purchasing Your First Physician Home (Free Copy) The Big Short Movie Contact Finance for Physicians Finance for Physicians Full Episode Transcript: Daniel: What's up, everyone? Welcome to the Finance for Physicians podcast. I'm your host, Daniel Wrenne. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our resources at financeforphysicians.co. Let's jump into today's episode. Hey, guys. I hope you are having a great day. I am excited to have a special guest joining me today, and that is Doug Crouse. He is a mortgage lender who specializes particularly in physician loans. When it comes to physician loans, Doug pretty much knows all there is to know. He actually even wrote a book about it called the Hippocratic House: Do No Harm When Purchasing Your First Physician Home. He offers that as a gift. I think you can buy it on Amazon, but he will offer it as a gift if you contact them. Anyway, Doug knows physician loans backwards and forwards. We're going to be talking about some of the pros and cons of the physician loan and some of the things you need to know before you go about taking one out. We'll also talk about some of the crazy market stuff going on with mortgages lately. If you haven't been paying attention, the rates are through the roof. We're going to talk a little bit about what's going on there and how that might change over time. Without further ado, let's jump into today's episode. Doug, what's up, man? Doug: Hey, Daniel. Thanks for having me on. Daniel: How you been doing? Doug: Doing good. Daniel: Are you surviving all this mortgage craziness? Doug: It has been a little chaotic with the Fed move. It's a little shocking when I talk to some people and they see rates are two points higher than they were three months ago. That's kind of a sticker shock to some. Daniel: I guess it's been two months, three months time has been up about 2% on average? Doug: Yeah. I think, probably end of January, 1st of February, I had 30 year fixed rates hovering around threes, low threes even, and our upwards of five for 100% no money. We're a little different than most in that our jumbo rates are quite a bit better than our conforming rates. If it was below the 6.7 limit, mine's actually mid- to high-5s, where if it's a jumbo 5% down, then I might still be in high 4s, but big jump. Daniel: That's a really unique setup. I guess I want to get into that because that's (I think) an important point we'll circle back to. Today, I was thinking maybe we should talk about the pros and cons of physician loans. A lot of you guys listening, or physicians are thinking about the physician loan quite naturally, but there are multiple options out there. A lot of cases, the physician loan is going to make the most sense, but there are plenty of cases where it doesn't make a lot of sense. Doug already kind of started to sprinkle in one of those scenarios, which like I said, we'll circle back to. Maybe before we get into that, let's start with the advantages of the physician loan just to kind of get that out there. Doug: There are three main reasons why people take physician loans. One, low down payments. Normally, you couldn't borrow a 7-figure loan without putting 20% down. In my case, every lender is going to have different rules for their program. But mine, we go to a million dollars with no money down, a million and five with 5%, and $2 million with 10% down. That's going to be 20% down on a typical jumbo loan. There's your first advantage. The second is lack of PMI. It means our default rate on doctor loans is zero, so we don't really need PMI to insure us against loss. That's a big savings compared to a jumbo loan that was going to have PMI. The other almost main reason that people utilize a doctor loan is when they're moving across the country and taken a new job, this one actually lets you start with just an employment letter with a signed contract showing your salary. This is something that varies. Everybody's got their own set of rules again, but mine's up to 90 days before your job starts. If you've got a signed offer letter, then that's what you qualify on as your future income. That's really your three main benefits of a doctor loan. Daniel: No money down or less money down than the typical loan, you get to avoid PMI. PMI (Private Mortgage Insurance) is the annoying cost that you pay normally when you don't have 20% down. Doug: That's quite expensive, and that one's credit-driven, too. Daniel: And it sucks because it's just a pure expense. It's just straight up. Doug: It's using insurance to protect the bank. You're getting nothing out of it except a loan. The bank's the one that's getting the benefit out of it that somebody else is sharing in their risk that if you default, they're going to take on part of the loss. That's what it's for. Daniel: Yup, and then the simple underwriting or simple process, less rigorous requirements, to qualify would be the third big one, right? Doug: No. The other one would be being able to close before the job starts. A regular jumbo loan, you'd have to have a job in hand and pay stubs, where this one you can close just on that future job. Daniel: Most banks, like the average bank that doesn't do a physician loan, if you're in training or going into practice, you're like, hey, I got this contract, they're going to be like, you're crazy. Like, show me a pay stub or maybe two, right? Doug: And something else I see a lot is people are like, well, I'm already attending, I'm already making $300,000–$400,000 a year. It doesn't matter if you're leaving Ohio and moving to California and buying a house in California. You can't use your Ohio income to buy a California house because it's obvious if your primary residence is California, you're leaving that job at some point. Even with the income and you say I've got a future job starting in California in two months, I'm going to state this job until then, so there's no gap in income, you can't get that with a regular jumbo loan, because the other job hasn't started. The one you're talking about saying, I'll make my payments with this income, it's going away. Daniel: In some cases, I guess that third reason in itself could kind of make it a good deal in itself. Sometimes, you got to do what you got to do and make it work. You're moving across the country, there are a lot of moving parts of that as it is. I know those time crunches can get pretty tight there. Doug's got a nice set up because he can work in 49 states, right? Doug: Everywhere but New York. We're actually adding them here in another month or so. Daniel: That's really nice because you can kind of maintain a relationship. I know a lot of you guys are moving quite a bit, especially if you're in training. Even beyond that, there's typically some moving going on. That typical mortgage can cause some problems in that setup. Now the no-down scenario is (I think) an appealing one as well for an earlier career or maybe to have another house, potentially? Doug: Yeah. Somebody could have a house that has their down payment on it, that they need to move, get their kids settled or whatever, and then sell them after the fact. That way, you're doing no money down. You don't have to have that equity. You do have to qualify both payments, but you don't have to strip the equity out of that one by pulling out a HELOC or something to bring the money to the table on the new one. Or maybe once you sell it, the better use of your money is you want to spend it to pay off your student loans or something else anyway. Daniel: I think that's probably the most common reason we're seeing with our one-on-one planning with people. The most common reason we're seeing people go for that 0% down is they just need to catch up on investing. They want to make sure they're maxing out all these tax shelters and they got student loans they want to pay off potentially. There are a lot of things that they want or maybe should do from a financial standpoint to catch up on those things. Being able to put zero down is appealing because they can put the money to work elsewhere. But I think that can also get into one of the downsides of it. You have to be careful with that, putting 0% down. Doug: Yeah. If the market pulls back here, you could be underwater, and then you're stuck. You don't want to be in the same people from 2010–2012, where they owed 100% and then houses went down 20%, 30%, 40%. Then you're really underwater and you don't have the option of selling unless you're just sitting on cash on the sidelines. You could write a check to get rid of it. Daniel: I guess that makes us old guys knowing that we both are around in the last real estate downturn. Maybe not that old. Doug: Well, I am. Daniel: We'll say season veterans. Doug: I started in the business in 1999, so I've been around. Daniel: So real estate can go down, by the way, and can go down a lot, but it's been a really good run. I'm going to try not to make predictions, Doug. You can make predictions if you want, but I have no idea what it's going to do in the future. I don't think it's going to crash like it did. Doug: I think we're in a different environment than then. I'm going to blame Wall Street. Not the mortgage guys; we were just the middleman. There were just some garbage loans out there that were packaged. If anybody's ever watched The Big Short Movie, it's a very telling, a very accurate portrayal of what happened. Daniel: That's a great movie. Doug: Somebody that worked at McDonald's making $10 an hour and said, hey, you can go buy 10 investment properties. Daniel: I bought my first house in 2006 or 2007 and they're like, we don't need anything. I mean, I don't even remember if I showed. I might have. It was very, very little financial requirements. In fact, I probably should not have bought the house. Fortunately, my life improved financially. I was okay. The lender, and it was actually Countrywide, loaned me the money, but it was a very easy process. I was surprised. Doug: Yup, stated income, stated asset is like, hey, I make this much money. Daniel: Stated income, that's where I make all of it. Doug: Yup. I make this much money, it's like, okay. Then I don't have any down payment, like, no problem. We don't really need to see a pay stub and you don't have any down payment. You don't have any reserves, no problem. Here, how many houses do you want to buy? That was the market then. Daniel: It was a different market. Doug: Things are QM now (qualified mortgages) where banks are actually responsible to make loans that they can see that the borrower has the means to repay, which is a good thing. I hope we don't end up with short-term memory and bounce back to Wall Street getting greedy and saying, well, let's start selling this crap again. We'll make a bunch of money on it and then the market implodes, because that's exactly what happened. As soon as the first person couldn't pay, then it just rolls uphill to the point of, if they can't pay, then there's nobody to sell their house to to buy the next more expensive one. Then got to the point where there are people like, yeah, I can afford to pay my mortgage. But heck, if nobody else is going to pay theirs, why would I want to pay off my million dollar house that's only worth $700,000 now? And then they strategically walked away. I don't see that happening again. Aside from the doctors and veterans, most people, if they're buying a million dollar house, they're putting $200,000 down. The veteran and the doctor are really the only ones. When I say doctor, I'm including dentists and a few other professions they lump in, the professionals that I joke about. My wife's a doctor, too. If she loses her job, she's got five more offers at the end of the day. Only an unemployed doctor is one that chooses not to work. She's going to have the means to continue to pay her mortgage. If something happens, she's not going to be in the same boat of a recession and, hey, we don't have a job for you. There's always going to be a job for doctors. That's why banks are excited to get them as clients. That's why we offer no money down, and no PMI, and, hey, we'll even let you close three months before your job starts. Everybody's rules are different on that. These are portfolio loans where it might be a little quirk here and there that one bank goes to 750, the next bank says we only do 60 days. Some other bank says, hey, we include pharmacists in our program. As a rule, the idea behind it is zero risk pharma because they have the ability to pay. They do pay. I've been doing doctor loans for several years and not one has defaulted. The banks love that kind of book of business. Daniel: Did you? Were you doing them in 2008? Doug: No, I didn't start probably until 2013–2014. Daniel: I worked with physicians then. We had a handful of people that were stuck with two houses. They were underwater on houses or they got kind of stuck in an area. Unwillingly-ish like a long story, those sorts of situations. But they definitely were not in danger of foreclosure, which is the nice thing about a physician. You have a higher income and you're in demand. You typically can make the payments. It might negatively affect your planning if the market were to turn. Doug: Even physicians, though, part of my book is from my wife's perspective. I'm sure you probably fully agree with this. Not to buy the McMansion and put yourself in a position where you have a great income, but then you're still married to your job because you took out a 45 debt ratio. I don't think that's a good idea for anybody, but I especially don't think so whenever you're making really good money to go to that same level of Keeping Up with the Joneses. If you're making 300,000 a year, you should not be at a 45 debt ratio. It's just not something I like to see. I hate for people to feel like they can't take a vacation, or afford a new car if they need it, or whatever the case is. Daniel: Can you clarify the 45 debt ratio? Specifically, what's that mean? Doug: If somebody had an income of let's just say, for argument's sake, $120,000 to keep the math simple, then they make $10,000 a month, then you can spend $4500 a month towards all of your credit reportable debts, which are going to be your house payment, your car payment. If you have a child for alimony, anything like that, but not your car insurance, your groceries, paying your taxes, all of that's coming out of the 55%. The bank's looking at what's going to show up on your credit report, subtract all that, and whatever's left can go to your mortgage. What I'm saying is, great. If you're making $600,000 a year, then don't go buy a $2½ million house just because one of my competitors says you can afford it. If you make $600,000, you can pay off a house in 10 or 15 years if you buy something for a million or a million-and-a-half, where you spend $2½–$3 million, you're going to be just like everybody else. Drug out 30 years and scraping by to make the minimum payments. Daniel: Yeah, 45% equals house poor. Doug: Exactly. Daniel: Because that's partially how the lenders set the limit, because house poor means you're still in the house. You can afford the house, but just barely afford the wealth. Doug: Right, 45% is you can just barely pay your bills. You have to remember, if you're in a high income, as you know, you could be in a W-2 situation paying out nearly 50% of your paycheck, your probably take home is 50%-55% if you're lucky. That doesn't leave much if you're taking 45% of it to pay everything that shows up in your credit report, because you still got to eat, pay car insurance, take a vacation, and whatever. Daniel: What does that get you? I guess at $100,000 income, let's assume you have no other debt. I mean, that's like a million dollar house, right? Doug: $4500, you can probably buy $800,000. That's kind of a loaded question, because in Colorado, it'd probably buy $900,000. In Texas, it'd probably buy $600,000 or maybe even $500,000. The reason being, Colorado, an $800,000 house, the property taxes might only be $2500 a year. Daniel: I get it, the total payment. Doug: Yeah, five times that. Daniel: Because they have crazy property tax. Doug: Yeah. I mean you don't have to pay any state income tax. You have to get it somewhere. Daniel: Illinois is the double digit. Doug: You mean in most places. Daniel: Yeah, it's high income tax and high property taxes. Doug: Texas is right up there with the highest property taxes. A million dollar house in Dallas is probably $25,000 a year in property taxes. A million dollar house in Denver is probably $5000, $6000 max. Daniel: You mentioned the book. Some of you listening might not be familiar with Doug's book. Doug actually wrote the book on this stuff, which is even better. Hippocratic House, right? Doug: Yup. My wife, again, she's a physician. We have a podcast on financial residency, but that's where this is branded through. hippocratichouse.com or dougcrouse.com. We just give it away. It's definitely not a Grisham novel. It's a couple of 100 pages. Especially a first time buyer, a physician buyer, everything in it kind of applies to you. There's a chapter in it about credit. There's a chapter about realtors, definitely something about the settlement, what to expect. Again, it's not a riveting read, but it's a very good read for somebody that wants to learn. The problem is that you could call me and I could talk to you for hours on end. But if you don't know the questions to ask or if I'm not available at 2:00 AM when you have time to read this book, then there are just things out of this that if you read it ahead of time before you call somebody like me or one of my competitors. It gives you kind of a, hey, I should ask them this. Daniel: Yeah. Doug's unique in that. Of course, you are in this business as well. You do have financial incentive to work with people. But Doug is about as objective as you can get from the standpoint of someone that's working in that industry. That's going to be a more objective assessment of that process. Doug: Yeah. I tell my wife all the time. She refers business to me. Daniel: That's always a good sign. When your wife refer you business, that's a good sign. Doug: But I always tell people, there are just niches that certain banks, like one bank might be, hey, our niches, we want loans under $500,000, and they're going to price aggressively. The other banks are going to be like, we don't really want that business, we want $2 million loans. That's where they're aggressive. In my instance, I don't have probably as good a rate as you're going to find with somebody else if it's a $500,000 loan. But if you're over 650 with the jumbo limit in most parts of the country, we're super aggressive. I just tell people that. They just call me like, hey, here's my rate. But do your due diligence. Make a few phone calls, because you might do better. I don't want to close a loan just for the sake of winning the business. If you have an opportunity to save money, I'm actually going to tell you that. Daniel: We covered some of the upsides of the physician loan. Let's talk about some of the downsides of the physician mortgage relative to other alternatives. Doug: Really, based on some lenders, they're going to price their physician loans higher. Meaning they're going to look at a Fannie- Freddie-type rate or their jumbo book of business and say, well, we're not making them put money down. There's no PMI, so they're going to build it into the rate, and the rates are going to be more expensive. Not the case with my bank. My bank looks at it and says, hey, these guys don't default, so we don't need to rely. Daniel: It's a 0% default rate. Doug:  Yeah. They look at it and say, these are loans that we really want. They're borrowing the right amount of money. It's a good diversified product for us. We actually take our jumbo product, and then cut the rate nine-eighths of a point. Even if it's 100% financing, we're cheaper rate on the doctor loan. That's not true of all my competitors. Most of them are looking at the downside being the rates. Sometimes, some of them are charging extensive fees. Also not the case with mine. Our underwriting processing fee is $1150, ut if you're a million dollar loan, we're giving you $1800 credit. We're actually paying you to take a loan from us. It just depends. You have to do your due diligence. When you're asking the three things that you're looking at when you're choosing a lender is service, obviously. You have to find somebody you like, thinks going to get the job done. Rate, and then the closing costs. The closing costs and/or rate with some of my competitors are higher, and that's the downside. Daniel: If you're comparing a conventional with 20% down versus a physician loan, it's on average, a touch, what would you say higher percentage-wise? Do you have a rough idea on average, like conventional 20% down versus typical physician loan with zero down? Doug: Normally, I would say that a physician loan is going to be an eighth quarter higher, but like I said, in my case— Daniel: 8% or quarter percent? Doug: For the physician loan, but in my case, we're looking at whatever. Hey, if you're 20% down and here's the rate, doctor loans that rate minus an eighth. That's just the way we price our doctor loans. Daniel: Do you take an eighth off the jumbo or both conventional and jumbo? Doug: We take an eighth off of whatever you price out as a non doctor loan. It's an eighth lower if you take a doctor loan. If somebody comes to me and says, hey, I want a $2 million house at 20% down, you think you want a jumbo loan, but really, it's like, no, you're a doctor. I'm going to give you that jumbo loan, but I'm going to call it a doctor loan because you're getting an eighth off the rate. It's just a cheaper product. I think the only thing that probably is going to compete with a doctor loan would be a veteran that's disabled. If you have that 10% disability and you waive the funding fee, then VA rates, oh, my god. Back in March of 2020, my 30-year VA rates at the time got down to like 2.1% for 30 fixed. This bank I'm at doesn't even do VA loans. It takes special training for the underwriters and they don't have it yet. That's really the only one I find really competitive with a doctor loan, unless you're at a bank that is upcharging their fees and/or rate because it's a doctor loan. That's going to almost always be the case if it's a broker. Brokers are a fantastic outlet for 80% of the population for a loan. But for a doctor loan, they just don't have the access. Banks don't really offer this through the broker channel. If they do, I know any of your listeners ran into this back around Mother's Day. NorthPoint was doing them, and they pulled the plug, and it's like, we don't care if you're closing tomorrow, we stopped doing doctor loans. Huntington Bank is another bank that offers their products through the broker channel that goes directly to Huntington. You're going to get half a point to a point better rate than you would through a broker. Brokers are fantastic for 90% of the people that are not in this space just because they just can't compete because banks are like, this is our bread and butter. Why would we give this to a broker? Daniel: That makes sense. Downside, in general, sometimes interest rates can be higher overall in the market. But with your products, it sounds like they're a touch lower. It's worthwhile to compare. Especially, if you're not working with Doug, you want to compare alternatives. Especially if you can put 20% down, you can ask, how's this compared to conventional? We have had clients that the lender kind of pushes them to a physician loan, and they had 20% down. We're like, no, no, ask about the conventional loan, because in that instance, it was quite a bit lower cost-wise. It's good to look at your options. I think one of the other downsides is not like a product downside, it's more of psychological. I guess there's a temptation with going 0% down to kind of maybe get a little overextended and have 0% equity there. If you have $0 elsewhere, that can be a problem. If you're really pushing the envelope of this, you can kind of get into more trouble the further you go with all this stuff. What I'm trying to say is if you're going to get into trouble, I'd rather you have 20% equity than zero. Doug: It's human nature. People have a tendency to not necessarily be tied up but just spend the money. If you're not going to be somebody diligent, invest it, save it, and have access to it if you need it, then 100% finance loan, as you're saying, and then you don't have an emergency fund and/or if push came to shove, say I need to move across the country and I owe 100% here by the time I pay a realtor, you need to write a check to get rid of your house. If you're in that boat, then you probably shouldn't have taken the 100% loan. I joke about the acronym, we call them HENRYs, which is higher earners not rich yet. Some new attendees, of course, fall into that. That's partly what doctor loans exist for too, is, yes, you can make the payment. But no, I don't really have any money just yet. You're going to get there. But I am definitely in the camp that if you're taking 100% financing and you don't have a lot of money, then start gaining some money quickly. Don't buy a house to where you can't then start setting aside a decent chunk of money to build up your emergency funds. If you're going to close on a house and you're at a 45 debt ratio, you're not really able to then say, now, I'm going to save another $2000, $3000, $4000 or $5000 a month for that instance, where I do want to move across country and I have to write a check, get rid of my house. It's got its pros, but it's also dangerous if you don't use it right. Daniel: Yup, that's like anything. We're always trying to talk people into tracking their net worth just as a kind of good financial discipline. It's maybe not the coolest thing in the world to track your net worth, I don't know. I'm a financial planner geek. Anyway, the nice thing about it is when you start tracking it—I would always suggest it quarterly or even monthly—you can really see your progression in how you're doing and how things are growing. Going back to what we were just saying, a lot of people get overextended on the house, which limits their ability to grow their net worth, or maybe just their home is the only asset that's growing. That's a problem sign. Doug: Yeah, and hopefully the home does keep growing because like you said, the last 20 years, yes. Well, not the last 20 but since the implosion corrected and since 2012 (the last decade), we've seen nothing but appreciation. It doesn't necessarily mean that's going to be the case for the next 20. Daniel: Yup, so if your net worth is not growing aside from the house. A lot of people have nice houses in medicine, real expensive houses, and they've been growing a lot. You get a million-and-a-half dollar house all of a sudden. But what I'm trying to say is if everything else has not been growing because you kind of got a little overextended with the house, I think it would be helpful to be aware of that. That's why it's good to track your net worth because what happens in that scenario is if things go south, you have a lot less wiggle room in that scenario. You can't really take as much of a downturn. And you're not even able to save for things like retirement, education, traveling and those other things in life. There are other things in life and I'm sure many of you have other areas you want to focus on, but it is a personal decision. Different people put a much higher value on having a nicer house. I'm not the guy that says move to the lowest cost of living area just so that you can save money and try to save as much as possible. I think there are reasons to move to high cost of living areas like around people and family, if that makes sense. I think that's what really matters in people's lives. That's what it's really about. It's like being able to match this sort of thing with what you consider most important. Doug: I just talked to a doctor the other day. He was saying several of his friends in Salt Lake bought houses for $350,000 five years ago, and they're selling them for $900,000 right now. That's where you're going to invest in the market with that kind of return, but not this year. Daniel: No, that's crazy. That's abnormal. Doug: That is abnormal. Don't expect to replicate that. Daniel: Those kinds of numbers make me think that there's some bubble going on there. Most areas are not quite. Salt Lake City has exploded growth-wise. It's been a hot market. Anyway, do you see any short-term? I'm going to try to make you do a prediction here. I just said we're not going to make predictions, but I'm going to make Doug make a prediction. Maybe not a prediction, but what are your general thoughts on where things are going from here? With the lending world, do you see any trends? I'm curious about your observations. Doug: Before we started, we were just joking about it. I think an expert weatherman is going to be right 60% of the time, so I'm going to preface my guts here. Daniel: That's why I want to know. Most people are 40%. Doug's going to be 60%. This is great. Doug: Flipping the coin 50/50, you're going to be right half the time. I might be right 60% of the time. I think rates are going to probably continue to climb the rest of this year, but not at a pace that we've seen year-to-date because I think we've seen a huge move. If you see rates go up another three quarters of a point between now and the end of the year, I'm in the camp of it. It's just as likely that next summer rates will be lower than they are at the end of the year than they are higher. The reason I think that'll happen is they've got to do something, because as we were talking, Salt Lake or Austin, some of the prices there went up 35%, even 40% in a year's time, something's got to give. They got to put the brakes on that. That's going to happen with the Fed stepping in. When they do it, I think they're going to do things to a point where it's not an exact science, so they're probably going to overshoot. That's where I think there's just as good a chance that as rates are potentially higher at the end of this year, I could see it being 50/50 that next summer, they actually might have to come back and say, oh, we overdid it, and we just don't want to crash the market, so here, we're going to lower rates back down. Time will tell. That's my 60% guess. But housing prices, there are too many factors that rate is not the only that's driving them that nobody can sustain. I don't care if you're a cardiothoracic surgeon making a million dollars a year. If prices keep going up 20% a year, the surgeons coming out five years from now aren't even going to be able to afford a house. That's got to stop. I don't personally think that we're going to see anything close to what we did in 2012 or 2013. I think if you see a correction, it's going to stop seeing 20% appreciation and if it's flat, then that's a win in my opinion. Daniel: Yup, and it is very location dependent too. Historically, these downturns have been a big time location. I live in Lexington, Kentucky. Historically, Lexington, Kentucky at least has had much less volatility than the average market. That's not to say it's going to change, but Las Vegas, for instance, has had super volatile. Doug: Right. Florida, Texas, California, for sure. Those markets that you see the big swings, when they go up, they do come down. The ones that go up the most— Daniel: Like in Salt Lake City? Doug:  In fact, speaking of that, we do finance in 49 states, but there are seven states that we limit to 95%. That's the states that they're looking at and saying, hey, if something's going to happen, it's going to be one of these seven states. Daniel: Can you tell us the seven states? Doug: It's Florida, California, Maryland, Idaho of all states. Daniel: Idaho is hot. Doug: Is it? That one surprised me. Daniel: It's super hot. Doug: And then Nevada and DC. Those states are states that my bank is saying, hey, we're just going to limit these to 95%. We don't think the market is going to come crashing down either or we wouldn't still be doing 100% loans. But we're looking at and saying, if something's going to happen, it's probably going to be the states. I don't even see that happening there. I think you're going to stop seeing 20% and maybe see flat or 5%. As you said, you're in Lexington, I'm in Kansas City. It's a Steady Eddie market. 0%, 3%, 4%, was the norm. Kansas City saw 20% last year, and it saw 18% the year before that. That's just so unheard of for back-to-back years like that. Daniel: Yeah. Historically, houses kind of gravitate to inflationary rates. I guess inflation is high lately. Doug: Yeah, for sure. Daniel: Real rates. That's still too high, 20%. One other question I just thought of before we part ways, I've been hearing people mention the ARM more lately. I guess the reasoning behind it is that they're thinking or the lenders are thinking that rates are going to go back down. They're telling them, hey, let's do this ARM product and get that for 5, 7 years, whatever 10-year ARM, and then that way, you have that period of time locked-in. But sometime from now until then, rates are bound to go down back to where they were or below, and then we'll just refinance them. I'm curious if you've been seeing that or what your thoughts are on that. Doug: I see a lot. From a bank expense standpoint, obviously, it mitigates the risk. If you're giving somebody a 30-year note, you're locked in if they actually stay 30 years, which nobody does. But if they did, the banks are on the hook, and then they have to answer to regulators that they keep enough on their balance sheet to account for that. If they do an ARM, then after 7, 10 years, or 5, whatever length of the ARM you take, then we can just adjust our rate to the market so we're not on the hook, so we don't have to keep as much. Of course, an ARM rate, there's no reason to take it if you're not saving enough to mitigate the risk you're taking. I will say 23 years doing this that 90% of people do not keep a mortgage longer than 10 years. That may change as we move forward, because in the past 20 years, rates were falling. Part of what drove that fact that mortgages didn't stay on the books 10 years was take whatever today because next year, you're going to be refinancing to a lower rate anyway. Daniel: Yup. Everybody was refinancing over, and over, and over, and over. Doug: Those days, I think, are gone. I think we're going to see an ascending rate pattern for a decade. You're always going to have a pullback. If you close today at 5, then there might be an opportunity to refinance at 4½. If rates go to 6, they might pull back to 5½ for a while, but maybe. Really, I like ARM for two reasons. One, either you know that you're not going to stay in the house. Who cares what happens to the rate if you walk in for 10 years and this is especially a resident? Four years now, I'm moving across the country and not staying wherever I'm doing residency. This is not where I want to live. Or two, you make enough money and you were conservative enough that, if my rate does jump 2%, 4%, 5%, on me, I could just write a check and get rid of my mortgage. Those two reasons are why I think an ARM makes sense. But otherwise, if you're saying, I'm going to save $200 a month times the next 10 years, that's $24,000. You'll actually save, in that scenario, another $7000 or $8000 that the cheaper rate will pay down equity faster. That's all going to disappear on you in two years. If your 11-year rate jumps 3%, 4%, in year 12 it jumps another 1% or something, then that's great. You save $30,000 and then starting year 13, you're way in the hole. The only other reason would be somebody that, hey, this is the only way I can afford the house right now, I'm on the resident salary in two years, and I'm going to be on an attending salary and my income is five times as much. $200 a month savings today means a lot more to me than a $400 increase might hurt me later. As a rule, I only like ARMs if you fit into the category of either you're conservative and I can write a check, or I'm not going to be here so it doesn't matter. Daniel: I think the problem I have with the whole approach is it's built on this assumption. For it to work, rates have to go back down. That's like a known— Doug: That's not given like it used to be. Daniel: As it's been coming up, I don't just send them this, I kind of give them some breakdown of it. I like to send them the historical 30-year fixed mortgage rates, like a chart of it. If you look at it, it's like back in the 70s and it's way high. It's been a pretty consistently reducing percentage rate from the 80s until just not long ago going downward. Rates, like Doug was saying, for a long period of time have been consistently going down. It wasn't huge. There was a little bit of up and down, but there weren't huge, massive changes. My point is, the reverse can happen. We could have the same exact thing happen in the reverse, where it's slowly going up for 10–20 years. In that situation, that's a train wreck if you get the five-year or seven-year ARM, and you end up with the house for a really long period of time. It's not worth taking the risk. In most cases now, I agree with your exceptions there. Doug: Something that comes up a lot is, my book definitely points this out as you should be asking if there's a prepayment penalty, which they almost don't exist anymore. Those types of loans were what we were talking about in 2012 and 2013, the Wall Street loans. You don't have those types of penalties. But even without a prepayment penalty, the first thing I hear is, why wouldn't I just take this ARM, save the money, and if rates go up, I'll refinance? I'm like, stop and think about that. If your ARM started at 4½ and let's say that's a half cheaper than 30 fixed, then you want to refinance because your ARM went to 6½, it's like, what do you think 30 fixed is? Thirty fixed, if your ARM went to 6½. Thirty fixed is probably 7½ now. Daniel: Everything goes up. Doug: Yeah, so yes, you can refinance. No, there's not a prepayment penalty. But your flawed logic of you could just refinance is true, but all you can do out to refinance is start the clock over and stretch it out to 30 years again. But you're not going to go from, hey, my rate went 6½, I'll just refinance to a new 4. Once you get to 6½, 4 is way in the rearview mirror. Daniel: Awesome. Doug, it's always fun talking about mortgages with you. I've enjoyed it and I appreciate you coming on chat. Doug: Thanks for having me. Daniel: As always, thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our website at financeforphysicians.co for all sorts of additional content. See you next time.