Finance for the Whole Family
Today we answering your questions around family finances. We address questions about 529s, dependent care FSAs, what to do when you can't live like a resident, custodial roth accounts for your kids, and the importance of getting your spouse involved in your financial plan. There is a little something for everyone today.
Dependent Care FSAs
“Hi Jim. It's Jackie from the Pacific Northwest. My question involves the Dependent Care FSA. I've had four different opinions from tax consultants in our HR departments. I can't find our example when I review the tax code. We do our taxes married filing separately due to pursuing PSLF. Our previous tax specialist said we cannot use the Dependent Care FSA as it is more beneficial to take the child credit. My understanding is the Dependent Care FSA is actually better for high earning people. With married filing separately, what are the rules on how much we can put in a Dependent Care FSA individually? We both work for institutions that allow full use of these accounts even at higher incomes. Can you confirm the Dependent Care FSA is better than taking the child credit? Thanks for your help and we really appreciate you and all your staff at WCI.”
You should have saved it up for “stump the chump” at WCICON, because I had to look this one up. It's not entirely clear to me exactly which credit you're talking about. I think you mean the child independent care credit, but you could also mean the child tax credit. Bear in mind the child tax credit has a phase out on it. That phase out if you're married, filing jointly is $400,000. If you're single, it's $200,000. I assume you're married filing separately, it's also $200,000. If you're talking about the child tax credit, that's kind of a different thing and it's entirely possible to qualify for the child tax credit as well as use an FSA. I don't know why you're trying to choose between those two things. You shouldn't be.
But if you're talking about the child and dependent care credit, it's actually possible to use that and an FSA. You don't have to choose between them. What you do have to choose is each of the expenses. It can only be used for one or the other. If you pay for it out of an FSA, you can't take credit for it. If you took a credit for it, you can't pay for it out of the FSA. You've got to choose which to use. I don't know that it matters all that much. I suppose a credit is always nice and so I like getting credits for the most part better than deductions. Putting money in an FSA and spending pre-tax money is not as good as a credit. I think I would try to maximize the credit as much as possible. Anything that you can't take the credit on, I would use the FSA for.
There are a few nice posts on the internet on this subject. I believe if you have one dependent, the maximum you can put in a Dependent Care FSA is $5,000. If you spend $8,000 on childcare, you could pay for $5,000 of it with the FSA and you could take $3,000 for the federal tax credit. Bear in mind, the most you can take with the tax credit is $4,000 for a qualified person, $8,000 for two or more qualifying persons. Personally, I think I'd try to maximize the credit and then pay for the rest out of an FSA. That's a little bit tricky because you have to be careful how much you put in the FSA, but that's kind of the way I would try to work it is maximize the credit first and then spend anything else out of a dependent care FSA to pay for that child care. I think that's what you're asking about. If you're just asking about the child credit, the child tax credit, well, those are totally unrelated. So, feel free to take as much of that as you want. Good question though. Thanks for stumping the chump today.
More information here:
Optimize Tax Savings from Dependent Care FSA and Child and Dependent Care Tax Credit
What Is a Flexible Spending Account, and How Do You Use It?
Do 529 Accounts Impact Student Aid?
“Hi, Dr. Dahle. This is Leah in Indiana. I'm not an MD but have really enjoyed learning from your podcast. My question today is about 529 accounts. I have a 529 account that I'm the account owner on and my niece and my nephew are the beneficiaries. My nephew's parents are really quite low income. And so, I'm concerned if I put a bunch of money in there for him, will that hurt his chances of getting needs based financial aid? My niece's parents on the other hand have a very nice income and she will not be eligible for any needs based aid. What would you recommend I do in this case? Should I put most of the money in her account and then move it to my nephew his sophomore year of college, for example, or keep their account separate and continue contributing to both? Thank you.”
The FAFSA, the federal application for free student aid, does not care about money in a 529 owned by your aunt. They don't ask about it. They ask about money in 529s that are yours and they ask you about 529s that are your parents, but not ones that belong to your aunt. When does that money actually show up on the FAFSA? It shows up when it comes out of the 529 and gets used for expenses. If you paid for expenses when they were college freshmen, that could affect eligibility when they're a sophomore. As a general rule, if you're really trying to minimize the impact on what aid they qualify for, you kind of want to use that 529 later in college. I don't know what your plan is. The 529s I have for my nieces and nephews, there's not that much money in them. It's not going to pay for anybody's full college education. If this is something that was really worrisome, I'd tell them, “Hey if you're really trying to get needs based aid, spend this maybe as a junior or a senior rather than as a freshman.” But on the other hand, spending down their own 529 if they happen to have one might also affect their eligibility.
The truth is for most of our listeners, you're not going to get anything for your kids anyway on needs-based aid. So go ahead and just use the 529. Don't worry about it. Put money in a 529. You make too much money, you have too much in assets, your kids aren't going to qualify for anything need-based. That's not necessarily the case for nieces, nephews, grandkids, etc. You do have to be cognizant of these issues and it sounds like you're doing a good job doing that. The little game you're talking about where you put it in the niece's 529 and then change the beneficiary later, I don't see any point to doing that because this isn't going to show up on the FAFSA until it actually gets spent on expenses for the nephew.
You can have it in the 529 with the nephew as the beneficiary. That does not get reported on the FAFSA. It's only when the money comes out, but it ends up showing up on his income part of the FAFSA. I hope that answers your question. You're doing a wonderful thing. Thank you for doing that. I know many of us that paid for our own educations would've been super grateful to have had a rich aunt helping us out.
More information here:
529 Plans – A Fantastic Tax Break for the Rich
Best 529 plans: Reviews, Ratings, and Rankings
Cars and Insurance Policies
“Hi Jim. Thanks for all you do. I'm currently a resident and still driving the same car that I purchased prior to being 18 years old. Because I bought the car before I was 18, I put both the car and the insurance policy in my dad's name. Now, out of laziness or lack of awareness, I have simply kept the car and insurance policy in my dad's name for the past eight years or so. I'm curious, does maintaining this type of arrangement put me or my dad at risk for liability if I were to become involved in an accident? Thank you.”
Great question, Luke. Thanks for thinking about your dad. Yes, this does put your dad at risk. You should get his name off the title of the car. You should get his name off the insurance policy. I'm assuming it's not his car. It's just your car that you drive. Then yeah, there's no point in having his name on it. Presumably he has more assets and more income than you. It's worthwhile providing him a little bit additional asset protection by getting his name off of that title. Now, a lot of kids go to college with the car that still has their parents' name on the title and insurance for insurance reasons or because they're not planning on actually giving the car to their kids. Our cars are in our names, including the one that my daughter occasionally drives to and from college. But that's because it's our car and we're planning on teaching our next teenager to drive with it. If it was her car, I would've taken my name off it already. I think that's best asset protection practice.
It's possible they might get a little break on insurance being on your insurance policy rather than trying to get it on their own, but you're now 26, so that's probably not the case for you. You can probably get a reasonable rate on your insurance at this point. I’d just go ahead and do that. By the way, make sure you have enough liability coverage on your auto policies. In some states, the minimum is only $25,000 and in lots of states it's only $50,000. Meanwhile, we're driving around in Ford Super Duty trucks that cost $75,000 or $100,000 or Teslas that cost $120,000. And that's assuming you don't hurt anybody inside the car. You need a lot more liability coverage. As a general rule, you should raise your liability coverage to $300,000 and stack an umbrella personal liability policy on top of that. 80% of umbrella policy claims are related to auto. You really do need that personal liability coverage. Add that on.
More information here:
Umbrella Insurance for Physicians
When You Can't Live Like a Resident
“Hi, this is Colleen from Illinois. I only recently started listening to your podcast, so I apologize if you have answered a similar question before. I just finished residency and I now actually have time to focus on financials. I had a question about recommendations for people who may not be able to live like a resident. I know that living like a resident's really the best option for maximizing savings, but my husband is currently working for a startup and doesn't have any income. Because he's working, we have to send our younger children to daycare. My older daughter just started kindergarten and we really wanted to make sure she was in the best school district. So, we ended up buying a fairly expensive house in that school district to make sure that she was in the area we wanted her to be, and she wouldn't have to move schools if we were to rent for a few years. Because of this, we have a lot of expenses that can't change. Our mortgage is much higher than I even like to think about though I can cover it with my salary fairly easily right now. And then daycare expenses obviously add up pretty quickly. Because of this, we really can't live like residents. We are doing things like not buying new cars until our current ones give out, and we don't have any loans on those. So, I'm trying, but I was wondering if you had any advice on what we can do to really maximize our savings knowing that we have some pretty high expenses that really can't change. Thank you.”
Let's start by referring you to a blog post I put on the blog a number of years ago. It's titled “What to Do If You Forgot to Live Like a Resident.” I think you ought to go check that out. But here's the deal. I hear a lot of talk about your expenses, a lot of justification of this expense or that expense and talk about what you're not spending money on. I don't care. I don't care what you're spending money on and what you're not spending money on. You don't get a pass on math. The math works the same no matter how you spend your money or what it gets spent on. What I did not hear is your savings rate. How much you're actually saving for retirement. That is where you should focus. Rather than what you’re spending on your house or the fact that you're not spending money on cars, it doesn't really matter whether you're spending the money on vacations or cars or houses or startup costs for a business. It doesn't matter. The math works the same.
If you are saving enough, it's okay. Spend your money on whatever you want to spend your money on. I don't care. If you are not saving enough, you need to make some changes. Now, what those changes are have to be guided by your values. Maybe you can live in a cheaper house and send your kid to a private school and actually come out ahead. Maybe you cannot go on vacations. Maybe you cannot eat out. I don't know where you're going to save the money if you're not saving enough. But I can tell you this, most people that aren't saving enough don't actually have a budget. Get a budget, figure out where every dollar is going every month, and make sure it's going to the things you actually care about. There are probably some dollars that are going places that you don't care that much about. Cut those, and save the money there.
The other thing to keep in mind is this might be kind of short term. Only you can decide if it's short term. Maybe this startup is about to start making gobs of money and it's going to bail you out from any bad financial decision you ever made. Maybe you're about to make partner in your group and your income's about to double. I don't know. In a lot of cases, if you're in a short-term situation, it turns out it's fine. Maybe people are just broke for a couple of years while they're paying on student loans, or maybe they really don't have much money while they're still buying into a dental practice or something, I don't know. If you're in a short-term situation, well, that's one thing. But if you're in a long-term situation, you calculate your savings rate and you're actually only saving 5% of your income and you don't see an end to that anytime soon, you can't increase your income, well, you've got to start looking at saving more money. And that means spending less.
It doesn't matter what you spend less on, only you can decide that. But if you're only saving 5% of your net income, the numbers work out that you'll have a 66-year career. So, if you started at 30, that means you work till you're 96. That's usually enough to get people to motivate themselves enough to really look at a budget more carefully and figure things out. The other thing to keep in mind is for the most part, people dramatically overestimate the difficulty of doubling their income. I've doubled my income a number of times during my career, and I can tell you it's not as hard as most people think it is. Whether that means asking for a raise, whether it means working more hours, whether it means moving to a different area of the country, whether that means doing some moonlighting on weekends, whether that means starting a business, whether it means being self-employed, a lot of times a higher income can bail you out of higher spending. Don't just look at ways you can cut spending. Also look at ways that you can increase income.
Hopefully that's helpful. Make sure you do look at that blog post. There's a lot of great tips in there. For example, maybe you can fire your financial advisor and do it yourself. That can save you some money, if you learn how to do that. That's like a significant raise for many people. Maybe you're paying on a whole life insurance policy you don't need, or maybe your investments aren't as good as they could be. Maybe you're investing in stuff that isn't doing as well as it ought to be. You're in some high expense ratio mutual fund, or you're buying individual stocks or something like that. Maybe you've got the wrong term life or disability insurance coverage and you can save some money there. Mostly you just have to realize you don't get a pass on math. It doesn't matter where the money's being spent. You only have so much of it and you've got to make sure you're saving enough money.
Now, can you be okay by skipping a “live like a resident” period? You probably can. But that means you're still doing what you have to do after the live like resident period, which is saving 20% of your gross for retirement. If you're doing that, you'll be okay eventually, you just won't build wealth quite as quickly as someone who's willing to live like a resident for two to five years. But you can still do it. If your plan is to somehow not save enough money ever, that doesn't really work. You eventually become one of those 11% to 12% of doctors in their 60s that have a net worth of less than $500,000 or one of those 25% of doctors in their 60s who are not yet millionaires.
They're out there and the reason they're out there most of the time, although there's sometimes some bad things that happen to people, disabilities, divorces, etc. But for the most part, those people are in that situation because they spent all their income year after year after year. Don't be one of those doctors. Some other things you might consider, some geographic arbitrage, changing jobs, changing houses. Our other podcast host, Dr. Disha Spath, she actually frugaled down. They moved to a cheaper house because they realized they were not reaching their financial goals. You might be able to lower your taxes, might be able to put kids into public schools. Sounds like you're already doing that. Might be able to downsize your cars, although it sounds like you're already driving something pretty inexpensive. You might have something else in the driveway. Maybe there's a boat or ATVs out there that you could sell. You can take fewer vacations. You can stop eating out. You can send your partner to work. I know your partner is getting involved in a startup, but you know what? Maybe he also has to have a side gig where he is actually earning money right now to help get that startup off the ground. Maybe you can find somebody to help with the daycare costs, whether that's a friend, family, some other situation. That's also a possibility. Maybe you just have to spend less on your own and your kids' activities to save more money. It's hard for me to say without going through your budget and knowing your values, but it shouldn't be that hard for you to say if you'll do that process. I recommend you do.
More information here:
What to Do If You Forgot to Live Like a Resident
Spousal Allowances
“Thank you, White Coat Investor, for being such a guide over the last several years. I have a pressing issue regarding spousal allowance. How is that best calibrated in a 50-year-old physician working ER doctor and a non-working spouse? Can this be addressed in a future discussion, daily blog, or equivalent to help guide us when your other spouse is not participating financially? Thank you.”
Let's talk about the ideal to start with. If you want to be successful financially, you both have to work on the plan. You both have to follow the plan. I would do whatever it took to get both of you on the plan. The way you do that is not by focusing on the nuts and bolts of budgeting or investing or that sort of thing. The way you do that is you focus on the big picture, on the long term, on the dreams, on the goals, what you want to accomplish. I would pick a time when nobody's under a lot of stress, because this is a long-term thing. It's not a short-term urgent thing. Maybe go out to dinner, get your favorite drink, and talk each of you about what your dreams and goals are and what it will take to reach them. Then work backward from there to get a financial plan in place. You can get professionals to help you. You can get financial advisors to help you. A lot of what financial advisors do is help spouses to get on the same page financially. You can even get marital counseling involved.
But the bottom line is it's really not okay for one spouse to not be participating in this. The reason why is because it leads to failure. It leads to resentment, number one. But number two, you end up treating your spouse like a kid. This is an adult you're married to. You can't treat them like a kid and expect this to work out well long term. You give your kids an allowance, you don't give your spouse an allowance. I don't think that's a great approach long term because they'll always resent having their spending limited. But when they're limiting their own spending, that's a much better thing. Some people recognize they have a spending problem and they realize, “Hey, I just need an allowance. Give me cash every month and when it’s gone I'll stop spending.” Maybe that's what they need, but work that out.
I have seen allowances, and I use that as a plural word, work in a marriage. Katie and I had allowances as part of our budget for a long time. This was essentially money that we could spend without having to be accountable to the other person for it. When we first started out, it was not a big piece of money. I think there are some budgets that we look back on from 1999 or 2000 where that allowance was like $20. It wasn't much. We didn't have much money. I think we were living on like $800 some of those months. You can have that and it's nice to have as part of a budget. Eventually, hopefully you're so wealthy that you can both just buy whatever you want. You don't have to think about it. We're kind of at that point now. We don't have allowances as part of our budget. Our budgeting process is essentially just tracking down what we spent so we know how much we have left to give and invest.
But when you're still in the wealth building stages, especially when you're trying to get your budget and your savings rate and everything under control, you just have to be a lot more strict about the process and make sure your money's doing what you want it to do. How much of your income should be going toward this sort of an allowance? If you're an emergency physician, let's say you're making $350,000 a year, I would think that an allowance amount could be $1,000 a month that you don't have to account to the other person for. That should be relatively easy. That allows you to save up in just a few months for relatively expensive stuff and to buy the trivial stuff, all the trivial stuff you want without ever having to ask your partner for it. Other couples set an amount that you don't have to talk to me if you're spending less than $100. You don't have to talk to me if you're spending less than $500 or $1,000 or $5,000. Then that makes people feel like they don't always have someone looking over their shoulder at them. That might work for you as well. But this idea of “I'm going to make the money, I'm going to decide how the money is saved and invested and how much you can spend each month” I don't think that's a great long term idea. I would desperately work hard to get out of that situation. I think it's a bad idea long term.
More information here:
7 Ways to Get Your Partner on Board Financially
Custodial Roth Accounts
“Hi Jim, this is Steve from Texas. I took your advice and opened a couple of custodial Roth IRA accounts for my young teenage boys who've been doing odd jobs around the neighborhood for our neighbors such as yard work, babysitting, dog sitting, etc. I had a few questions. First, how do you recommend we keep an account of each of these events? I've been making up some invoices that I have been saving, but it's a little bit cumbersome. Is it just as appropriate to keep a simple spreadsheet of the dates, the amounts and the neighbors for which they provided services?
Second, what about taxes? Since this is earned income and they will not be receiving a 1099 or W2, obviously from our neighbors, do I still have to file a tax return for each of them? And if so, are there any amounts after which they would be subject to either payroll taxes or federal income taxes? Finally, what are your thoughts about asset allocation? I know you would suggest that they would have a written financial plan, but they're not quite at that level yet. And thus, we decided to put them in target retirement funds through Fidelity, of which the longest term available was 2065, which have very low fees and will work out just about right for them retiring in their 50s. Thanks for all that you do, and I appreciate your answers.”
All right, Steve, lots of great questions there. Let's start at the end. Asset allocation, you're doing fine. I think that's a fine choice. Our kids' Roth accounts are at Vanguard. They're all invested in Target Retirement 2060. This is money that's going to be invested for a long time from now. It ought to be invested pretty aggressively. But you also want to keep it simple. A target retirement fund is a pretty good choice. If you told me you were going to put it all in a total stock market fund, I'd think that was reasonable, too. Heck, if you wanted to put it all into a small value index fund, I'd think that was reasonable. Keep it simple but something broadly diversified. Don't put it all in Tesla stock or McDonald's stock or something like that.
How to deal with this? A spreadsheet is fine. That's more than most people are doing for this sort of income. You have the dates and the amounts, that's great. The chances of this being audited are really low. The only thing you have got to watch out for, if you have a kid that's under eight, the Social Security Administration will send you a letter every year asking you what they're actually doing that's earning income. When my kids were under eight and getting paid for modeling, I had to put “model” on there every year and send it back to the Social Security Administration. It wasn't a big deal.
As far as taxes go, do not make them self-employed. I made that mistake one year and we actually had to refile Whitney's taxes. Self-employment is not the way to do it. The way you do this is, you have them be household employees of all these other people. If they're being paid less than $2,200 by any given household out there, the household does not have to file a special schedule and tax return and withhold earnings from them. They basically don't have to pay payroll taxes. They don't have to have money withheld. Because this is earned income, they can make the standard deduction $12,400 or whatever it is this year, before they have to start paying income taxes on it. Most states kind of follow that as well. Chances are they're not going to have to pay any taxes at all on this money, then it can go in a Roth account and it's never taxed again.
It's a pretty good deal. I think you're doing a great thing for them. You're teaching them about investing, you're teaching them about working. The government likes you doing that. They're not really going to look all that closely and carefully at this. There's not a lot of tax money being saved anyway, so don't stress out about it. I don't think you need a bunch of crazy invoice systems. The spreadsheet is perfectly fine. If they're just being handed cash, that's fine. In fact, what most parents are doing is they're taking the money that was earned, putting it in the Roth IRA and giving the kid an equivalent amount of money to go spend on their own. So, you're free to do that as well. Thanks for what you're doing. It's really kind of you to do this for your kids and you're teaching them a lot of great lessons.
More information here:
What to Do with Gifted Individual Stocks
“Hi Jim, this is Nick from South Carolina. I just want to thank you for everything you do and for putting together the Fire Your Financial Advisor course. I recently completed it and was able to put together a comprehensive plan and have the confidence to fire my advisor, who then berated me on the phone for five minutes and told me I was going to fail. I'm certainly glad I broke off that relationship. I have a couple questions for you. The first being I recently discovered reading through your blog posts that you grew up playing some puck and played college hockey. Just wondering if you were a sultan of salad, connoisseur of cabbage and had some sweet hockey flow back in the day. If so, I would love for you to post a picture of it on your blog.
This is my actual financial question. My parents were kind enough to give us individual stocks into our taxable account over the past few years. It's about a total of $25,000 in Boeing, Disney, and Walgreens. Just wondering what I should do with this: If I should sell it and just pay the long-term capital gains now and then use that money to implement my plan? Or just hold on to it since it isn't that large of an amount and sell it at a later time, either in retirement or gift it to my kids at some point in the future? And thanks for everything and I’m looking forward to hearing your advice.”
Yes, I was a sultan of salad, a connoisseur of cabbage. I had a mullet, yes, I did, as a hockey player growing up in Alaska in the 90s. Everybody had a mullet. I'm sure there are some pictures out there with my hair streaming out the back of a hockey helmet, but I'm not going to put any of them on the website. If you really want that, what you need to do is hit up Michelle in the Facebook group. She helps manage that and she happens to be my older sister, and I would bet you could talk her into posting a picture of my mullet from high school in the Facebook group. But I am not going to willingly do that. You're going to have to hit her up for that.
As for your advisor, congratulations on firing such a toxic individual that would berate you for doing something that probably happens with 25% of their clients every year. A good financial advisor knows that a certain percentage of their clients are going to become do-it-yourself investors and they congratulate them. In fact, we have a number of advisors on our list whose goal is to teach you to be a do-it-yourself investor. They want to get fired. They expect to get fired. They're working toward getting fired. That's the sort of advisor you want. Somebody that's functioning as a teacher for you. Lots of people want to keep using the advisor. Maybe just for second opinions every couple of years to make sure things are on track. Or maybe they just want somebody else to do this stuff for them. They don't like it. It's like mowing their lawn. They hate it. Shoveling the driveway. They hire somebody else to do it. That's fine. Just make sure you're getting good advice at a fair price. But somebody that's going to treat you like that after you move on, no way. What you need to do, of course, is to use that as motivation to do it yourself well. Because you're better off paying a good advisor a fair price than you are doing it poorly. Use that memory of being berated by this advisor to make sure that you become financially literate. Make sure you have a good financial plan. Make sure you follow it and make sure that you prove them wrong, that you can do this on your own.
Your last question about legacy investments is one we've talked about before on the podcast and on the blog. Legacy investments are something lots of us have, leftover from when we didn't know what the heck we were doing. Usually, we're talking about investments in a taxable account with low basis, because if you have a legacy investment in a 401(k) or an IRA, sell it. There are no tax consequences. Invest in what you really want to invest in. If you have a legacy investment for which you are underwater that you don't actually want to invest in, sell it. Harvest that tax loss and reinvest into what you want to invest in. If you have investments for which you are pretty close to your basis in that taxable account, you can sell those, too. There's not much of a tax consequence there, either. You can even sell some that have a gain if you have some tax losses that can offset the gain. Again, no tax consequences to doing that. All kinds of options with those.
You can also, if you are a charitable person, you give money to charity, you can donate appreciated shares instead of cash. That's a great way to get rid of these legacy investments. That's what we've done over time. Anything that we really didn't want to own long term, we just used for our charitable donations. You can gift it to somebody in a low tax bracket that you wanted to give money to anyway, and then they can sell it with much smaller tax consequences. But if you've got something that you're not going to be able to do any of that stuff for, it's got low basis, you've got to ask yourself, “Is this a terrible investment?” If it is, sell it. Super high expense ratio mutual fund and you're 35, you're not going to die anytime soon and get a step up in basis, you probably ought to just sell it, invest in something better. If you're invested in some high-risk extreme investment, a few individual stocks maybe, you can sell those, too, and just bite the bullet, eat the tax cost.
The other alternative, though, is to build your portfolio around those investments. Maybe you have an actively managed mutual fund. It's not terribly expensive, it's a pretty good fund. Maybe you just build around it. It's mostly invested in US stocks, so you just own a little bit less of the total stock market index fund than you otherwise would because that mutual fund is taking up some of that US stock space. Hopefully that's helpful and shows you how to deal with legacy investments in your portfolio. Don't feel bad. Most people have them when they become financially literate.
More information here:
Rules and Options for Managing Inherited Retirement Accounts – Podcast #213
5 Options for Legacy Holdings in Your Taxable Account
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Quote of the Day
George Soros said,
“It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.”
Milestone to Millionaire
#97 – Doc Pays Off $360,000 of Student Loans and Hits Millionaire Status
This doc reached two big milestones! She paid off her student loans and reached millionaire status just five years out of residency. This dual doc household has been taking advantage of working a little less now that they have their financial ducks in a row. Her advice to you? Maximize your retirement accounts while paying off your loans.
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Full Transcript
Intro:
This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.
Dr. Jim Dahle:
This is White Coat Investor podcast number 294.
Dr. Jim Dahle:
I'll be your host today. I'm Jim Dahle. I'm an emergency physician and the founder of the White Coat Investor. Today we're going to be talking about all kinds of things, particularly about how your finances affect your family and your family affects your finances.
Dr. Jim Dahle:
Now, first, let me tell you about our sponsor. You've heard me talk about CompHealth before and how they created the locum tenens industry as the very first agency to help physicians find short-term jobs.
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Dr. Jim Dahle:
All right, before we get into questions from listeners today, which is what we do most of the time on this podcast, it is driven by your content and your interests and your desires. You can always leave your questions on the SpeakPipe at whitecoatinvestor.com/speakpipe.
Dr. Jim Dahle:
But first I want to bring our student loan specialist, Andrew, back on the podcast. We had him on last month. Of course, within a week of us recording the segment for that, everything changes again about student loans. It seems like it's changing all the time. So, we're going to try to on a little more frequently, just to kind of update you on the most recent changes. Let's run a short interview with him first, and then we're going to talk about some family and finances.
Dr. Jim Dahle:
All right. We've got Andrew Paulson back here for a minute to give us an update. I wish you didn't have to come and update us so frequently, Andrew.
Andrew Paulson:
I know, and whenever I seem to come out with an update the next day, there has to be some huge whole scale change to student loans again.
Dr. Jim Dahle:
Yeah, exactly. For those who don’t know, Andrew is the lead student loan consultant at studentloanadvice.com. If you need help managing your student loans, I do not blame you.
Dr. Jim Dahle:
With how frequently the rules are changing, how complex they become with promises to become more complex over time, this is a great option to spend an hour with Andrew for a few hundred dollars and really make sure you're doing this right. Because it can be worth tens of thousands. It could even be worth hundreds of thousands of dollars to be managing your student loans correctly.
Dr. Jim Dahle:
Andrew, I had somebody on a podcast, I don't know if it will have run by the time people hear this podcast, but this was a guest on the Milestones to Millionaire podcast who had $780,000 in student loans. And she knocked them out in five years living like a resident.
Andrew Paulson:
Was that just her or was that a household student loan debt?
Dr. Jim Dahle:
That was just her.
Andrew Paulson:
Wow.
Dr. Jim Dahle:
Periodontist. Yeah. Knocked them out in five years too. I was super impressed. So, for those who haven't caught that episode, check it out on Milestones to Millionaire.
Dr. Jim Dahle:
Andrew, you got to update us. Tell us what's going on in student loans. It’s in the courts now. We're not just talking about the executive branch and the legislative branch. We're now talking about the judicial branch when it comes to student loans.
Andrew Paulson:
Yeah. I'd say kind of the big thing that's happened that's most pertinent to most of our listeners out there is that the student loan pause that has been around since March, 2020 was extended again. And it was extended until June 30th, but payments are set to resume 60 days after that point.
Andrew Paulson:
So, it's a very confusing way of saying that. It doesn't sound like anything's going to start until September 1st. But there's a caveat with that. There's also this student loan forgiveness that you had mentioned is right now tied up in the courts and it's going to the Supreme Court. And I don't know exactly how long it's going to be there, but I'd expect it's probably going to go into the summer and maybe even a little bit beyond that.
Andrew Paulson:
So, if this said forgiveness, we're talking about the $10,000 to $20,000 of Biden forgiveness that was announced back in August. If that goes through before June 30th of 2023, payments are supposed to start 60 days thereafter. So that means if the forgiveness is issued on February 1st, then payments would start on April 1st. But that's a huge thing. So, payments aren't starting June 30th. They're starting most likely in September. That's another eight months of no payments right now.
Dr. Jim Dahle:
Yeah. Let's be honest how the Supreme Court works. All spring they're looking at these cases. They're writing their arguments, they're going back and forth. They're having hearings. And it's usually not until summer that they're announcing their rulings.
Dr. Jim Dahle:
My recollection is a lot of them come out in June. And so, 60 days after that is going to be about the same as 60 days after June 30th. So, it's probably going to be late summer, I'm guessing, before anybody's going to be paying interest on their federal student loans again. But I guess it could be earlier. Who knows? Maybe the Supreme Court will get a fire under them and get a ruling out in March or April. I don't know. But I don't think that happens with most of the rulings.
Andrew Paulson:
Right.
Dr. Jim Dahle:
All right. What else is going on with student loans?
Andrew Paulson:
Yeah. And I would just say with that being said, with payments being paused, that also means that your next income certification, when they ask for your tax return or your pay stub, sometimes they call this IDR recert or recalculating your payment, that is going to be pushed again.
Andrew Paulson:
And if they follow the model that they had for this most recent pause, when payments were set to resume in January, nobody was going to have to send them any income information all the way until the earliest July 1st, 2023.
Andrew Paulson:
If they follow that pattern and that model for this most recent pause, that means a lot of you are not going to have to recertify likely until 2024. And thats assuming, from today, we're saying no more pauses. And it's hard to kind of speculate on that because they've already said the final-final a couple of times, but if this is the last payment pause, then you're not going to have to send them your taxes or any of your income information until 2024.
Andrew Paulson:
And so, for a lot of you, that means that you haven't had to send them any income information all the way back from 2018 or 2019 when you did your most recent certification.
Andrew Paulson:
I'm just getting a lot of people that are asking questions on taxes for 2021. But you got to think about it. If you're not going to have to recertify your income all the way until 2024, they're not even going to look at what you made in 2021. They're going to be looking at your 2022 taxes. Or if your income's gone down since then, you could always just send in a pay stub. Another big one that's been such a conundrum for everybody when they've been trying to figure out what their payment is going to be.
Dr. Jim Dahle:
Well, the problem is you think about it and you're like, “This doesn't feel right.” There's some attending out there making $800,000 who's making IDR payments as though they're an intern because it's been so many years since they had to certify it.
Dr. Jim Dahle:
My own personal feelings about the way they're managing the student loan program is, “Can you imagine running a business this way? The thing would be bankrupt.” I have mixed feelings because I love how much it's benefiting our audience but it just doesn't feel like it's being run competently. I guess it's no different than lots of other things the government runs in that respect.
Dr. Jim Dahle:
All right. Well, thank you for coming on and giving us that update. Further bulletins as events warrant. We probably ought to put a timestamp on this discussion. We're recording this on November 30th. The podcast is going to drop on December 22nd. Any date after today, this could be out of date.
Dr. Jim Dahle:
So, make sure you look up everything. Student loans are changing very rapidly. Keep your eye on the news. Hopefully nothing big changes until the Supreme Court comes out with a ruling probably next summer. But if not, well, we'll be sure to update you. As soon as we know, you'll know.
Dr. Jim Dahle:
For those who need some advice on their student loans, with the knowledge that we have at this moment, you can always book an appointment with Andrew at studentloanadvice.com.
Dr. Jim Dahle:
It's always great to have Andrew on the podcast to update us on what's going on with student loans. I hope we don't have to have them on every month, but I guess if student loan management keeps changing that rapidly, we might have to.
Dr. Jim Dahle:
All right, this first question we're going to do today comes from Jackie. She's got a question about Dependent Care FSAs.
Jackie:
Hi Jim. It's Jackie from the Pacific Northwest. My question involves the Dependent Care FSA. I've had four different opinions from tax consultants in our HR departments. I can't find our example when I review the tax code. We do our taxes married filing separately due to pursuing PSLF.
Jackie:
Our previous tax specialist said we cannot use the Dependent Care FSA as it is more beneficial to take the child credit. My understanding is the Dependent Care FSA is actually better for high earning people.
Jackie:
With married filing separately, what are the rules on how much we can put in a Dependent Care FSA individually? We both work for institutions that allow full use of these accounts even at higher incomes. Can you confirm the Dependent Care FSA is better than taking the child credit? Thanks for your help and we really appreciate you and all your staff at WCI.
Dr. Jim Dahle:
All right, great question. You should have saved it up for “stump the chump” at WCICON, because I had to look this one up. It's not entirely clear to me exactly which credit you're talking about. I think you mean the child independent care credit, but you could also mean the child tax credit.
Dr. Jim Dahle:
Bear in mind the child tax credit has a phase out on it. That phase out if you're married, filing jointly is $400,000. If you're single, it's $200,000. I assume you're married filing separately, it's also $200,000. So, if you're talking about the child tax credit, that's kind of a different thing and it's entirely possible to qualify for the child tax credit as well as use an FSA. I don't know why you're trying to choose between those two things. You shouldn't be.
Dr. Jim Dahle:
But if you're talking about the child and dependent care credit, it's actually possible to use that and an FSA. You can use both of them. So, you don't have to choose between them. What you do have to choose is each of the expenses. It can only be used for one or the other. If you pay for it out of an FSA, you can't take credit for it. And if you took a credit for it, you can't pay for it out of the FSA. So, you've got to choose which to use.
Dr. Jim Dahle:
Now I don't know that it matters all that much. I suppose a credit is always nice and so I like getting credits for the most part better than deductions. Putting money in an FSA and spending pre-tax money is not as good as a credit. So, I think I would try to maximize the credit as much as possible. And anything that you can't take the credit on, I would use the FSA for.
Dr. Jim Dahle:
There are a few nice posts on the internet on this subject. I believe if you have one dependent, the maximum you can put in a Dependent Care FSA is $5,000. So, if you spend $8,000 on childcare, well, you could pay for $5,000 of it with the FSA and you could take $3,000 for the federal tax credit. Bear in mind, the most you can take with the tax credit is $4,000 for a qualified person, $8,000 for two or more qualifying persons.
Dr. Jim Dahle:
Personally, I think I'd try to maximize the credit and then pay for the rest out of an FSA. That's a little bit tricky because you got to be careful how much you put in the FSA, but that's kind of the way I would try to work it is maximize the credit first and then spend anything else out of a dependent care FSA to pay for that child care.
Dr. Jim Dahle:
I think that's what you're asking about. If you're just asking about the child credit, the child tax credit, well, those are totally unrelated. So, feel free to take as much of that as you want. All right. Good question though. Thanks for stumping the chump today.
Dr. Jim Dahle:
All right, Leah has got a question about 529. So, let's take this one.
Leah:
Hi, Dr. Dahle. This is Leah in Indiana. I'm not an MD but have really enjoyed learning from your podcast. My question today is about 529 accounts. I have a 529 account that I'm the account owner on and my niece and my nephew are the beneficiaries. My nephew's parents are really quite low income. And so, I'm concerned if I put a bunch of money in there for him – will that hurt his chances of getting needs based financial aid? My niece's parents on the other hand have a very nice income and she will not be eligible for any needs based aid.
Leah:
What would you recommend I do in this case? Should I put most of the money in her account and then move it to my nephew his sophomore year of college, for example, or keep their account separate and continue contributing to both? Thank you.
Dr. Jim Dahle:
Okay, good news. First of all, the FAFSA, the federal application for free student aid, does not care about money in a 529 owned by your aunt. They don't ask about it. They ask about money in 529s that are yours and they ask you about 529s that are your parents, but not that are your aunts.
Dr. Jim Dahle:
So, when does that money actually show up on the FAFSA? It shows up when it comes out of the 529 and gets used for expenses. And so, if you paid for expenses when there were college freshmen, that could affect eligibility when they're a sophomore.
Dr. Jim Dahle:
As a general rule, if you're really trying to minimize the impact on what aid they qualify for, you kind of want to use that 529 later in college. Now, I don't know what your plan is. The 529s I have for my nieces and nephews, there's not that much money in them. It's not going to pay for anybody's full college education.
Dr. Jim Dahle:
And so, if this is something that was really worrisome, I'd tell them, “Hey if you're really trying to get needs based aid, spend this maybe as a junior or a senior rather than as a freshman.” But on the other hand, spending down their own 529 if they happen to have one might also affect their eligibility.
Dr. Jim Dahle:
The truth is for most of our listeners, you're not going to get anything for your kids anyway on a needs based aid. So, go ahead and just use the 529. Don't worry about it. Put money in a 529. You make too much money, you have too much in assets, your kids aren't going to qualify for anything need based. That's not necessarily the case for nieces, nephews, grandkids, et cetera. So, you do have to be cognizant of these issues and it sounds like you're doing a good job doing that.
Dr. Jim Dahle:
The little game you're talking about where you put it in the nieces 529 and then change the beneficiary later, I don't see any point to doing that because this isn't going to show up on the FAFSA until it actually gets spent on expenses for the nephew.
Dr. Jim Dahle:
So, you can have it in the 529 with the nephew as the beneficiary. That does not get reported on the FAFSA. It's only when the money comes out, but it ends up showing up on his income part of the FAFSA.
Dr. Jim Dahle:
I hope that answers your question. You're doing a wonderful thing. Thank you for doing that. I know many of us that paid for our own educations would've been super grateful to have had a rich aunt helping us out.
Dr. Jim Dahle:
All right, our quote of the day today comes from somebody that you probably wish was your rich aunt or rich uncle, George Soros, who said, “It's not whether you're right or wrong it's important, but how much money you make when you're right and how much you lose when you're wrong.”
Dr. Jim Dahle:
And I like this quote because it emphasizes two things. Not just the probability of being right or wrong, but also the consequences. And you always need to take that into consideration.
Dr. Jim Dahle:
All right, let's take a question from Luke about cars and insurance policies.
Luke:
Hi Jim. Thanks for all you do. I'm currently a resident and still driving the same car that I purchased prior to being 18 years old. Because I bought the car before I was 18, I put both the car and the insurance policy in my dad's name. Now, out of laziness or lack of awareness, I have simply kept the car and insurance policy in my dad's name for the past eight years or so. I'm curious does maintaining this type of arrangement put me or my dad at risk for liability if I were to become involved in an accident. Thank you.
Dr. Jim Dahle:
Great question Luke. And thanks for thinking about your dad. Yes, this does put your dad at risk. You should get his name off the title of the car. You should get his name off the insurance policy. I'm assuming it's not his car. He doesn't want the car back. This was a gift to you. It's just your car that you drive. Then yeah, there's no point in having his name on it.
Dr. Jim Dahle:
Presumably he has more assets and more income than you. And so, it's worthwhile providing him a little bit additional asset protection by getting his name off of that title. Now, a lot of kids go to college with the car that still has their parents' name on the title and insurance for insurance reasons or because they're not planning on actually giving the car to their kids.
Dr. Jim Dahle:
Our cars are in our names, including the one that my daughter occasionally drives to and from college. But that's because it's our car and we're planning on teaching our next teenager to drive with it. If it was her car, I would've taken my name off it already. So, I think that's best asset protection practice.
Dr. Jim Dahle:
It's possible they might get a little break on insurance being on your insurance policy rather than trying to get it on their own, but you're now 26, so that's probably not the case for you. You can probably get a reasonable rate on your insurance at this point. So, I’d just go ahead and do that.
Dr. Jim Dahle:
By the way, make sure you have enough liability coverage on your auto policies. In some states, the minimum is only $25,000 and lots of states it's only $50,000. Meanwhile, we'll driving around in Ford Super Duty trucks that cost $75,000 or $100,000 or Teslas that cost $120,000. And that's assuming you don't hurt anybody inside the car.
Dr. Jim Dahle:
You need a lot more liability coverage. As a general rule, you should raise your liability coverage to $300,000 and stack an umbrella personal liability policy on top of that. 80% of umbrella policy claims are related to auto. You really do need that personal liability coverage. And so, add that on.
Dr. Jim Dahle:
All right, next question from Colleen about people who struggle to live like a resident. This should be very interesting.
Colleen:
Hi, this is Colleen from Illinois. I only recently started listening to your podcast, so I apologize if you have answered a similar question before. I just finished residency and I now actually have time to focus on financials.
Colleen:
I had a question about recommendations for people who may not be able to live like a resident. I know that living like a resident's really the best option for maximizing savings, but my husband is currently working for a startup and doesn't have any income. Because he's working, we have to send our younger children to daycare.
Colleen:
My older daughter just started kindergarten and we really wanted to make sure she was in the best school district. So, we ended up buying a fairly expensive house in that school district to make sure that she was in the area we wanted her to be, and she wouldn't have to move schools if we were to rent for a few years.
Colleen:
Because of this, we have a lot of expenses that can't change. Our mortgage is much higher than I even like to think about though I can cover it with my salary fairly easily right now. And then daycare expenses obviously add up pretty quickly.
Colleen:
Because of this, we really can't live like residents. We are doing things like not buying new cars until our current ones give out, and we don't have any loans on those. So, I'm trying, but I was wondering if you had any advice on what we can do to really maximize our savings knowing that we have some pretty high expenses that really can't change. Thank you.
Dr. Jim Dahle:
All right, Colleen. Great question. Let's start by referring you to a blog post. I put on the blog a number of years ago, looks like I wrote it or published it in 2019. I probably wrote it in 2018. It's titled “What to Do If You Forgot to Live Like a Resident.” And I think you ought to go check that out.
Dr. Jim Dahle:
But here's the deal. I hear a lot of talk about your expenses, a lot of justification of this expense or that expense and talk about what you're not spending money on. I don't care. I don't care what you're spending money on and what you're not spending money on. You don't get a pass on math. The math works the same no matter how you spend your money or what it gets spent on.
Dr. Jim Dahle:
What I did not hear is your savings rate. How much you're actually saving for retirement. And that is where you should focus. Rather than what you’re spending on your house or the fact that you're not spending money on cars, it doesn't really matter whether you're spending the money on vacations or cars or houses or startup costs for a business. It doesn't matter. The math works the same.
Dr. Jim Dahle:
If you are saving enough, it's okay. Spend your money on whatever you want to spend your money on. I don't care. If you are not saving enough, you need to make some changes. Now, what those changes are have to be guided by your values. And maybe you can live in a cheaper house and send your kid to a private school and actually come out ahead. Maybe you cannot go on vacations. Maybe you cannot eat out. I don't know where you're going to save the money if you're not saving enough.
Dr. Jim Dahle:
But I can tell you this, most people that aren't saving enough don't actually have a budget. Actually, get a budget, figure out where every dollar is going every month, and make sure it's going to the things you actually care about. There are probably some dollars that are going places that you don't care that much about. And cut those, and save the money there.
Dr. Jim Dahle:
The other thing to keep in mind is this might be kind of short term. And only you can decide if it's short term. Maybe this startup is about to start making gobs of money and it's going to bail you out from any bad financial decision you ever made. Maybe you're about to make partner in your group and your income's about to double. I don't know.
Dr. Jim Dahle:
But in a lot of cases, if you're in a short-term situation, it turns out it's fine. Maybe people are just broke for a couple of years while they're paying on student loans, or maybe they really don't have much money while they're still buying into a dental practice or something, I don't know.
Dr. Jim Dahle:
But if you're in a short-term situation, well, that's one thing. But if you're in a long-term situation, you calculate your savings rate and you're actually only saving 5% of your income and you don't see an end to that anytime soon, you can't increase your income, well, you've got to start looking at saving more money. And that means spending less.
Dr. Jim Dahle:
And it doesn't matter what you spend less on, only you can decide that. But if you're only saving 5% of your net income the numbers work out that you'll have a 66-year career. So, if you started at 30, that means you work till you're 96. And that's usually enough to get people to motivate themselves enough to really look at a budget more carefully and figure things out.
Dr. Jim Dahle:
The other thing to keep in mind is for the most part, people dramatically overestimate the difficulty of doubling their income. I've doubled my income a number of times during my career, and I can tell you it's not as hard as most people think it is.
Dr. Jim Dahle:
Whether that means asking for a raise, whether it means working more hours, whether it means moving to a different area of the country, whether that means doing some moonlighting on weekends, whether that means starting a business, whether it means being self-employed, whatever, a lot of times a higher income can bail you out of higher spending. And so, don't just look at ways you can cut spending. Also look at ways that you can increase income.
Dr. Jim Dahle:
Hopefully that's helpful. Make sure you do look at that blog post. There's a lot of great tips in there. For example, maybe you can fire your financial advisor and do it yourself. That can save you some money. If you learn how to do that. That's like a significant raise for many people.
Dr. Jim Dahle:
Maybe you're paying on a whole life insurance policy you don't need, or maybe your investments aren't as good as they could be. Maybe you're investing in stuff that isn't doing as well as it ought to be. You're in some high expense ratio mutual fund, or you're buying individual stocks or something like that. Maybe you've got the wrong term life or disability insurance coverage and you can save some money there.
Dr. Jim Dahle:
But mostly you just got to realize you don't get a pass on math. It doesn't matter where the money's being spent. You only have so much of it and you've got to make sure you're saving enough money.
Dr. Jim Dahle:
Now, can you be okay by skipping a “live like a resident” period? You probably can. You probably can. But that means you're still doing what you have to do after the live like resident period, which is saving 20% of your gross for retirement. If you're doing that, you'll be okay eventually, you just won't build wealth quite as quickly as someone who's willing to live like a resident for two to five years. But you can still do it.
Dr. Jim Dahle:
But if your plan is to somehow not save enough money ever, that doesn't really work. And you eventually become one of those 11% to 12% of doctors in their 60s that have a net worth of less than $500,000 or one of those 25% of doctors in their 60s who are not yet millionaires.
Dr. Jim Dahle:
And they're out there and the reason they're out there most of the time, although there's sometimes some bad things that happen to people, disabilities, etc, divorces, etc. But for the most part, those people are in that situation because they spent all their income year after year after year. Don't be one of those doctors.
Dr. Jim Dahle:
Some other things you might consider, some geographic arbitrage, changing jobs, changing houses. Our other podcast host, Dr. Disha Spath, she actually frugaled down. They moved to a cheaper house because they realized they were not reaching their financial goals.
Dr. Jim Dahle:
You might be able to lower your taxes, might be able to put kids into public schools. Sounds like you're already doing that. Might be able to downsize your cars, although it sounds like you're already driving something pretty inexpensive. You might have something else in the driveway. Maybe there's a boat or ATVs out there that you could sell. You can take fewer vacations. You can stop eating out. You can send your partner to work.
Dr. Jim Dahle:
I know your partner is getting involved in a startup, but you know what? Maybe he also has to have a side gig where he is actually earning money right now to help get that startup off the ground. Maybe you can find somebody to help with the daycare costs, whether that's a friend, family, some other situation. That's also a possibility.
Dr. Jim Dahle:
And maybe you just have to spend less on your own and kids' activities to save more money. It's hard for me to say without going through your budget and knowing your values, but it shouldn't be that hard for you to say if you'll do that process. So, I recommend you do.
Dr. Jim Dahle:
All right. For those who are interested in real estate investing but not really ready to commit to our No Hype Real Estate Investing course, we offer something else. It's called the Real Estate Masterclass. It is a three-class series that is video. It's basically me presenting information that you'll get over the course of a few days if you sign up at whitecoatinvestor.com/remasterclass.
Dr. Jim Dahle:
It's totally free. There's no commitment. You can see if this is the sort of stuff you want to learn about. And if you like what you're learning, and want to sign up for the full class, you'll find a discount at the end of the Real Estate Masterclass that you should check out.
Dr. Jim Dahle:
All right, let's talk about spousal allowances. This should be a very controversial topic. I'm looking forward to this one.
Speaker:
Thank you, White Coat Investor, for being such a guide over the last several years. I have a pressing issue regarding spousal allowance. How is that best calibrated in a 50-year-old physician working ER doctor and a non-working spouse? Can this be addressed in a future discussion, daily blog or equivalent to help guide us when your other spouse is not participating financially? Thank you.
Dr. Jim Dahle:
Okay, great question. Let's talk about the ideal to start with. If you want to be successful financially, you both have to work on the plan. You both have to follow the plan. So, I would do whatever it took to get both of you on the plan.
Dr. Jim Dahle:
And the way you do that is not by focusing on the nuts and bolts of budgeting or investing or that sort of thing. The way you do that is you focus on the big picture, on the long term, on the dreams, on the goals, what you want to accomplish.
Dr. Jim Dahle:
And so, I would pick a time when nobody's under a lot of stress, because this is a long-term thing. It's not a short-term urgent thing. Maybe go out to dinner, get your favorite drink, whatever, and talk each of you about what your dreams and goals are and what it will take to reach them.
Dr. Jim Dahle:
And then work backward from there to get a financial plan in place. You can get professionals to help you. You can get financial advisors to help you. A lot of what financial advisors do is help spouses to get on the same page financially. You can even get marital counseling involved.
Dr. Jim Dahle:
But the bottom line is it's really not okay for one spouse to not be participating in this. And the reason why is because it leads to failure. It leads to resentment, number one. But number two, you end up treating your spouse like a kid. And this is an adult you're married to. You can't treat them like a kid and expect this to work out well long term. You give your kids an allowance, you don't give your spouse an allowance.
Dr. Jim Dahle:
And so, I don't think that's a great approach long term because they're always resent having their spending limited. But when they're limiting their own spending, that's a much better thing. And some people recognize they have a spending problem and they realize, “Hey, I just need an allowance. Give me cash every month and when it’s gone I'll stop spending.” Maybe that's what they need, but work that out.
Dr. Jim Dahle:
I have seen allowances, and I use that as a plural word, work in a marriage. Katie and I had allowances as part of our budget for a long time. This was essentially money that we could spend without having to be accountable to the other person for it. And when we first started out, it was not a big piece of money. I think there are some budgets that we look back on from 1999, 2000 where that allowance was like $20. It wasn't much. We didn't have much money. I think we were living on like $800 some of those months.
Dr. Jim Dahle:
And so, you can have that and it's nice to have as part of a budget. Now, eventually, hopefully you're so wealthy that you can both just buy whatever you want. You don't have to think about it. We're kind of at that point now. We don't have allowances as part of our budget. Our budgeting process is essentially just tracking down what we spent so we know how much we have left to give and invest.
Dr. Jim Dahle:
But when you're still on the wealth building stages, especially when you're trying to get your budget and your savings rate and everything under control, you just got to be a lot more strict about the process and make sure your money's doing what you want it to do.
Dr. Jim Dahle:
So, how much of your income should be going toward this sort of an allowance? If you're an emergency physician, let's say you're making $350,000 a year, I would think that an allowance amount could be $1,000 a month that you don't have to account to the other person for. And that should be relatively easy. That allows you to save up in just a few months for relatively expensive stuff and to buy the trivial stuff, all the trivial stuff you want without ever having to ask your partner for it.
Dr. Jim Dahle:
Other couples set an amount that you don't have to talk to me if you're spending less than $100. You don't have to talk to me if you're spending less than $500 or $1,000 or $5,000. And then that makes people feel like they don't always have someone looking over their shoulder at them. That might work for you as well. So, you should consider that.
Dr. Jim Dahle:
But this idea of “I'm going to make the money, I'm going to decide how the money is saved and invested and how much you can spend each month” I don't think that's a great long term idea. I would desperately work hard to get out of that situation. I think it's a bad idea long term.
Dr. Jim Dahle:
Okay, the next question comes from Steve. Let's take a listen.
Steve:
Hi Jim, this is Steve from Texas. I took your advice and opened a couple of custodial Roth IRA accounts from my young teenage boys who've been doing odd jobs around the neighborhood for our neighbors such as yard work, babysitting, dog sitting, etc.
Steve:
I had a few questions. First, how do you recommend we keep an account of each of these events? I've been making up some invoices that have been saving, but it's a little bit cumbersome. Is it just as appropriate to keep a simple spreadsheet of the dates, the amounts and the neighbors for which they provided services?
Steve:
Second, what about taxes? Since this is earned income and they will not be receiving a 1099 or W2, obviously from our neighbors, do I still have to fire a tax return for each of them? And if so, are there any amounts after which they would be subject to either payroll taxes or federal income taxes?
Steve:
Finally, what are your thoughts about asset allocation? I know you would suggest that they would have a written financial plan, but they're not quite at that level yet. And thus, we decided to put them in target retirement funds through Fidelity, of which the longest term available was 2065, which have very low fees and will work out just about right for them retiring in their 50s. Thanks for all that you do, and I appreciate your answers.
Dr. Jim Dahle:
All right, Steve, lots of great questions there. Let's start at the end. Asset allocation, you're doing fine. I think that's a fine choice. Our kids' Roth accounts are at Vanguard. They're all invested in Target Retirement 2060, I think is what they're invested in. Maybe ought to change it 2065.
Dr. Jim Dahle:
But the point is, this is money that's going to be invested for a long time from now. It ought to be invested pretty aggressively. But you also want to keep it simple. So, a target retirement fund is a pretty good choice. If you told me you were going to put it all in a total stock market fund, I'd think that was reasonable too. Heck, if you wanted to put it all into a small value index fund, I'd think that was reasonable. Keep it simple but something broadly diversified. Don't put it all in Tesla stock or McDonald's stock or something like that.
Dr. Jim Dahle:
Okay. So, how to deal with this? Well, a spreadsheet is fine. That's more than most people are doing for this sort of income. You got the dates, you got the amounts, that's great. Now, the chances of this being audited are really low. The only thing you got to watch out for, if you have a kid that's under eight, the Social Security Administration will send you a letter every year asking you what they're actually doing that's earning income. So, when my kids were under eight and getting paid for modeling, I had to put “model” on there every year and send it back to the Social Security Administration. It wasn't a big deal.
Dr. Jim Dahle:
But as far as taxes go, do not make them self-employed. I made that mistake one year and we actually had to refile Whitney's taxes. Self-employment is not the way to do it. The way you do this is, you have them be household employees of all these other people. I think the amount is $2,200. If they're being paid less than $2,200 by any given household out there, the household does not have to file a special schedule and tax return and withhold earnings from them.
Dr. Jim Dahle:
So, that's good. They basically don't have to pay payroll taxes. They don't have to have money withheld. And because this is earned income, they can make the standard deduction $12,400 or whatever it is this year, before they have to start paying income taxes on it. And most states kind of follow that as well. So, chances are they're not going to have to pay any taxes at all on this money, then it can go in a Roth account and it's never taxed again.
Dr. Jim Dahle:
So, it's a pretty good deal. I think you're doing a great thing for them. You're teaching them about investing, you're teaching them about working. The government likes you doing that. So, they're not really going to look all that closely and carefully at this. There's not a lot of tax money being saved anyway, so don't stress out about it.
Dr. Jim Dahle:
I don't think you need a bunch of crazy invoice systems. The spreadsheet is perfectly fine. If they're just being handed cash, that's fine. In fact, what most parents are doing is they're taking the money that was earned, putting it in the Roth IRA and giving the kid an equivalent amount of money to go spend on their own. So, you're free to do that as well.
Dr. Jim Dahle:
Thanks for what you're doing. It's really kind of you to do this for your kids and you're teaching them a lot of great lessons. In fact, thank you to all of the White Coat Investors out there for what you're doing. Your daily work is difficult, and whether you're listening to this on the way into work, the way home from work, while you're working out or walking and trying to recuperate for your next shift, I know your job's hard and I know it's often thankless, I may be the only person thanking you for doing it today but let there be at least one.
Dr. Jim Dahle:
All right, we got some, I think more than one SpeakPipe here from Nick. Let's take a listen to him.
Nick:
Hi Jim, this is Nick from South Carolina. I just want to thank you for everything you do and for putting together the Fire Your Financial Advisor course. I recently completed it and was able to put together a comprehensive plan and have the confidence to fire my advisor, who then berated me on the phone for five minutes and told me I was going to fail. I'm certainly glad I broke off that relationship.
Nick:
I have a couple questions for you. The first being I recently discovered reading through your blog posts that you grew up playing some puck and played college hockey. Just wondering if you were a sultan of salad, connoisseur of cabbage and had some sweet hockey flow back in the day. If so, I would love for you to post a picture of it on your blog.
Nick:
This is my actual financial question. My parents were kind enough to give us individual stocks into our taxable account over the past few years. It's about a total of $25,000 in Boeing, Disney and Walgreens. Just wondering what I should do with this, if I should sell it and just pay the long-term capital gains now and then use that money to implement my plan or just hold onto to it since it isn't that large of an amount and sell it at a later time, either in retirement or gift it to my kids at some point in the future. And thanks for everything and I’m looking forward to hearing your advice.
Dr. Jim Dahle:
Okay, great questions. Thanks for calling in. Let's do the fun one first. Yeah, I was a sultan of salad, a connoisseur cabbage. I had a mullet, yes, I did as a hockey player growing up in Alaska in the 90s, everybody had a mullet. I'm sure there are some pictures out there with my hair streaming out the back of a hockey helmet, but I'm not going to put any of them on the website.
Dr. Jim Dahle:
If you really want that, what you need to do is hit up Michelle in the Facebook group. She helps manage that and she happens to be my older sister, and I would bet you could talk her into posting a picture of my mullet from high school in the Facebook group. But I am not going to willingly do that. So, you're going to have to hit her up for that.
Dr. Jim Dahle:
All right, next question. First of all, your advisor, congratulations on firing such a toxic individual that would berate you for doing something that probably happens with 25% of their clients every year.
Dr. Jim Dahle:
A good financial advisor knows that a certain percentage of their clients are going to become do-it-yourself investors and they congratulate them. In fact, we have a number of advisors on our list whose goal is to teach you to be a do-it-yourself investor. They want to get fired. They expect to get fired. They're working toward getting fired. That's the sort of advisor you want. Somebody that's functioning as a teacher for you.
Dr. Jim Dahle:
Now, lots of people, they want to keep using the advisor. Maybe just for second opinions every couple of years, make sure things are on track. Or maybe they just want somebody else to do this stuff for them. They don't like it. It's like mowing their lawn. They hate it. Shoveling the driveway. They hire somebody else to do it. That's fine. Just make sure you're getting good advice at a fair price. But somebody that's going to treat you like that after you move on, no way.
Dr. Jim Dahle:
So, what you need to do, of course, is to use that as motivation to do it yourself well. Because you're better off paying a good advisor a fair price, than you are doing it poorly. So, use that memory of being berated by this advisor to make sure that you become financially literate. Make sure you have a good financial plan. Make sure you follow it and make sure that you prove them wrong, that you can do this on your own.
Dr. Jim Dahle:
All right, your last question about legacy investments is one we've talked about before on the podcast and on the blog. Legacy investments are something lots of us have, leftover from when we didn't know what the heck we were doing. Usually, we're talking about investments in a taxable account with low basis, because if you have a legacy investment in a 401(k) or an IRA, sell it. There are no tax consequences. Invest in what you really want to invest in.
Dr. Jim Dahle:
If you have a legacy investment for which you are underwater that you don't actually want to invest in, sell it. Harvest that tax loss and reinvest into what you want to invest in. If you have investments for which you are pretty close to your basis in that taxable account, you can sell those too. There's not much of a tax consequence there either. You can even sell some that have a gain if you have some tax losses that can offset the gain. And again, no tax consequences to doing that. So, all kinds of options you have with those.
Dr. Jim Dahle:
You can also, if you are a charitable person, you give money to charity, you can donate appreciated shares instead of cash. And that's a great way to get rid of these legacy investments. That's what we've done over time. Anything that we really didn't want to own long term, we just used for our charitable donations. You can gift it to somebody in a low tax bracket that you wanted to give money to anyway, and then they can sell it with much smaller tax consequences.
Dr. Jim Dahle:
But if you've got something that you're not going to be able to do any of that stuff for, it's got low basis, you got to ask yourself, “Is this a terrible investment?” If it is, sell it. Super high expense ratio mutual fund and you're 35, you're not going to die anytime soon and get a step up in basis, you probably ought to just sell it, invest in something better. If you're invested in some high-risk extreme investment, a few individual stocks maybe, you can sell those too and just bite the bullet, eat the tax cost.
Dr. Jim Dahle:
The other alternative though, is to build your portfolio around those investments. Maybe you have an actively managed mutual fund. It's not terribly expensive, it's a pretty good fund. Maybe you just build around it. It's mostly invested in US stocks, so you just own a little bit less of the total stock market index fund than you otherwise would because that mutual fund is taking up some of that US stock space.
Dr. Jim Dahle:
So, hopefully that's helpful and shows you how to deal with legacy investments in your portfolio. Don't feel bad. Most people have them when they become financially literate.
Dr. Jim Dahle:
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Dr. Jim Dahle:
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Dr. Jim Dahle:
Don't forget about the Real Estate Masterclass that I mentioned earlier. You can sign up for that at whitecoatinvestor.com/remasterclass. Thanks for those leaving a five-star review, and thank you to those of you telling your friends about the podcast, the blog, the books, et cetera.
Dr. Jim Dahle:
A lot of this does spread by word of mouth, but reviews actually help spread this message of financial literacy. And we had one from GSDMD that read “Making physician finance simple and practical. It really helped me put my finances in perspective and set clear goals. The book and podcast both help me completely eliminate the need for a financial advisor. I'm a fan.” You're clearly not the only one who it has helped to be a do-it-yourself investor.
Dr. Jim Dahle:
All right, our time has come to an end. Keep your head up, shoulders back. You've got this, and we can help. We'll see you next time. Thank you for being a White Coat Investor.
Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.
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