For most physicians most of what you need to know to avoid the real pitfalls in personal finance is encapsulated in a single phrase: One House, One Spouse, One Job.
Personal finance writers often spend far too much time on the little things in personal finance, and far too little on the things that really matter. Consider how many articles you have read discussing the Latte’ Factor, choosing the correct cash-back credit cards, avoiding restaurant meals, buying used cars, and using coupons. The truth is that for most physicians most of what you need to know to avoid the real pitfalls in personal finance is encapsulated in a single phrase: One House, One Spouse, One Job.
Physicians fall into the Multiple House Trap in 2 different ways. One is to have serial houses, and the other is to have parallel houses. First, the serial house issue. This is when you change houses every few years. Buying and selling a home involves some serious transaction costs. A good general rule of thumb is 5% to buy and 10% to sell. Don’t believe it’s that high? Go back and look at your closing statements for your last home, and then look at your credit card statement for the 3 months before and after. Sellers tend to pay for upgrades, repairs found on the inspection, closing costs for the buyer, and realtor fees. Purchasers pay for loan costs, upgrades, and maintenance items such as snow blowers, lawn mowers, and power tools. For a $500,000 house, the 15% round trip cost of purchasing and selling a home is $75,000, or more than many physicians save toward retirement in a single year. Do that a few times and you will find yourself way behind the 8 ball compared to your “one house peers” when it comes to retirement savings.
The second way physicians end up in a multiple house situation is with parallel houses, i.e. a vacation home. It might be a beach house, a mountain house, a lake house, or simply another house. A second home generally doubles all your housing-related expenses: Mortgage, taxes, maintenance, upgrades, furnishings, utilities, etc., not to mention those same transaction costs and the cost of traveling between your 2 homes. To make matters worse, many physicians mistakenly think this expensive consumption item is an investment. They envision selling it after it appreciates a great deal to pay for their retirement. Or perhaps they expect to rent it out a few weeks a year. The truth is an investment property is very different from a vacation home. If you actually run the numbers on your vacation home as an investor would, you will quickly see the return on your investment is likely to be terrible. If you wish to purchase a second home, view it as a pure consumption item. That means you should have retired your student loans, paid off your first home, be saving 20% of your gross income toward retirement, and be able to pay cash for the vacation home. If you cannot afford to do all that, you probably cannot truly afford to buy the vacation home. A recent thread about vacation homes on Sermo, a physician-only forum, contained advice from many doctors who have owned a vacation home in the past. See if you can see the common theme:
Like most things in medicine and personal finance, it is better to learn from the experiences of others rather than making all the mistakes yourself.
Divorce is personally and financially devastating. Whatever expense may be required to maintain your marriage should be considered as pennies compared to the cost of divorce. The truism, “It’s cheaper to keep her,” really applies here. In a bitterly contested divorce, not only do the lawyers for both sides walk away with tens of thousands, but your assets are also split in half. Then you may find yourself paying alimony and even child support. You are basically buying yourself a second house, except you don’t even get to vacation in this second home. To make matters worse, many physicians find themselves in serial marriages and divorces. Some of the least happy physicians I have ever met are working way too many shifts and taking far too many calls late in their careers as a result of alimony payments and devastated nest eggs.
Changing jobs is often financially devastating too. The new job may require a move, which brings in the multiple house issue. More significantly, if you are in private practice, it will take time and money to build your practice back up in the new location. You may also need to purchase malpractice tail insurance, or suffer a financial penalty as a result of breaking a contract. Your new job may exclude you from making 401(k) contributions for a year or 2 after starting. If you are leaving one partnership for another, you may have to pass through a 1-5 year partnership track before your earnings recover to prior levels. If the jobs are lower-paying employee jobs, there may no significant cost to changing jobs, but the lower income from not being an owner at either job will take its toll over time nonetheless.
One House, One Spouse, One Job. You can mess a lot of things up in your personal financial life and still recover, but you are likely to lose a great deal of money every time you disobey this rule. Serial disobeyers rarely build much wealth.
Dr. Dahle is not an accountant, attorney, insurance agent, or financial advisor. He blogs as The White Coat Investor and is the author of the best-selling The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing.