HSAs, FSAs, and Malpractice Insurance

Transcription – WCI – 416

INTRODUCTION

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 416.

Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy. That's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans. That could end up saving you thousands of dollars, helping you get out of student debt sooner.

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Welcome back to the podcast. I missed you guys this week. I'm glad you're back and listening. We've got lots of cool stuff going on right now. We're trying to give away money, and we need you to nominate people who do a fantastic job of educating their colleagues and trainees about personal finance and investing.

Now, you can't win if you're a blogger like me or if you're a financial advisor. This is for practicing docs who do this on the side, who just really help a lot of people to learn about financial literacy, help them become more financially disciplined. I would love for you to nominate somebody if you know about them doing this. You can do that at whitecoatinvestor.com/educator. You've only got until April 25th, then this year's ends and you have to wait till next year to nominate them.

We're going to bribe you to do it, too. Not only does the person that you really respect that's been doing this get a prize of $1,000 and lots of recognition, but you get something that might even be worth more money. If you write the best submission or the most compelling nomination, you get a free WCI online course of your choice.

Please submit those, whitecoatinvestor.com/educator. And if you need some help doing this to educate other people on that same link, that same website, you will see slides that can help you put together a presentation you can give. There's one for residents. There's one for students. There's one for attendings. You can modify those as you need. We just put them out there because people asked me for slides to help them. And so that's what those are for. Feel free to use them. We appreciate you giving us credit, but even if you didn't give us credit, we just want you out there helping fulfill the White Coat Investor mission to make high-income professionals become more financially literate and more financially disciplined.

CORRECTION

Okay. Now comes my least favorite part of the podcast. I have to do corrections. And you know what? You guys have started asking harder questions over the years. Have you noticed this? You guys love to get out into the weeds. And of course, you leave me these questions, and I don't necessarily spend an hour looking for the answers before the episode. And sometimes I screw things up.

The harder the questions you ask or the more complicated the subjects we get into, the more likely I have to publish a correction in two or three weeks afterward. A recent email came in, I think it's one from an advisor who said, “I loved your soapbox on RMDs in your recent episode, advisors need a boogeyman. So Congress gave them RMDs and you were 100% spot on.

But on a separate issue addressed in the episode, interestingly enough, you can roll a 403(b) to a 457(b), but there's no advantage to doing so. And I don't think I pointed this out. He says the 403(b) money, even if rolled to a 457(b) still attracts the 10% early withdrawal penalty if distributed from the 457(b) prior to age 59 and a half. The IRS notes this in a footnote and he gave me a link to it. And indeed they do. And we can include that link in the show notes if you want to look that up. It is section 72-T-9 and section 457-A-2. Pretty amazing. Appreciate the correction.

LIZARD'S TAIL INSURANCE

I got another email. This one's not a correction to somebody that wanted me to talk about this on the podcast. They said, “I was listening to the L Word podcast by Dr. Gaeta. L is for litigation. They're talking about an interesting and potentially phenomenally devastating med mal wrinkle where the national group employing W-2 employees is truly just a bunch of small subsidiaries designed to be bankrupted if large judgments happen, potentially leaving physicians a little more exposed than they otherwise were.”

And this is sometimes referred to as the lizard's tail. Because if some predator grabs their tail, their tail can just break off and they can run away and then grow a new tail. So that's what these small little entities that this big group is apparently made up of is a bunch of smaller businesses that can just be bankrupted and eliminate some liability there.

Now, I don't think this was as big of a worry as Kelly who wrote in about it thought it was, because the truth is most malpractice is personal. You can't get out of it by some sort of business entity. But the worry, I suppose, is that they were hoping they'd be able to not only sue you and your hospital and get more money, but sue you and your group and get more money. And this basically tries to get the hospital or the group off the hook.

And so, maybe they're a little more likely to go after your personal assets than they otherwise would be. It's a little bit of a concern there, but it's good to understand how the business you're working for or with is structured so you understand that that sort of a situation could apply in your case.

Well, we went back and forth with the discussion by email about this. And I thought a more important warning to give you was to understand the pluses and minuses of a couple of types of clauses that often show up in employment contracts. And these are veto clauses and hammer clauses. Basically these have to do with who gets to decide what happens in a lawsuit. And this might be between you and your employee, or it might be between you and the insurance company that these clauses are set up. But you ought to understand which one of them apply to you.

For example, can the insurance company force you to settle, or is it your call. And can you force them to settle in a situation? And that power is worth something and has all kinds of implications down the line, not only for what's going to happen in the event of a lawsuit, but also some strategies. There's pluses and minuses to having a hammer clause and to having a veto clause in there.

Understand exactly how your contract with your insurance company works, who's got the power to decide whether there's a settlement or whether we take this one to the mat in the courtroom. But you really need to understand that stuff when it comes to your malpractice policy. So, ask those questions when you're buying insurance, ask those questions when you're joining a group or taking an employment contract.

CALCULATING YOUR INVESTMENT RETURN IN EXCEL WITH XIRR FUNCTION

All right, let's talk a little bit about the XIRR function. This is an Excel function that helps you to calculate your investment return.

Eric:
Hi Jim, this is Eric from the Midwest. Thanks for all that you do. I have several questions regarding the XIRR function in Excel. I tried reading your 2011 blog post, but the spreadsheet links no longer work and I need a visual demonstration. I want to calculate the annualized return on my individual retirement accounts, but I'm stuck on the nuts and bolts of the data entering process.

I understand that the calculation requires a cash flow with its corresponding date. Therefore, does this mean I have to manually enter every single date corresponding to every single bi-weekly contribution, employer match, or reinvested dividend into the spreadsheet?

Also, how do I use XIRR to calculate the annualized return on my entire portfolio at large? I have a 401(k), HSA, 457(b), and Roth IRA. Is it possible to use XIRR to calculate the return of the portfolio as a whole? If not, then what is the best method to do so? Thank you.

Dr. Jim Dahle:
Okay, great question. I've been getting this feedback that whatever software I used for that post 15 years ago when I first wrote it as one of the first posts on the blog apparently went out. It's not that Excel stopped working. You don't even need Excel to do this. You can do this in Google Sheets, but apparently the program I was using to put the spreadsheet into the blog post stopped working.

Well, I've redone that entire post. If you go to the website and you search XIRR, you will find this post. I think we're probably going to republish it again at some point, given all the work I recently put into it. I've now got a bunch of screenshots in there. I've also got the spreadsheet that you can download. You can actually download the spreadsheet and play around with it on your own computer. And so, I think I fixed the problem with the blog post.

XIRR is just a way to calculate the dollar-weighted return of your portfolio, which is really the return that matters. And all you need is two columns of numbers. The first column is cash flows. These are positive numbers when money goes into the account. They are negative numbers when the money comes out of the account. The number at the bottom of the list should be the amount that's in the account now, as though you were taking it out today.

The next column is dates, and you have to use the date function. You can't just type in the date. There's actually a date function in spreadsheets, and you have to use that to mark the dates. But yeah, you have to put in every cash flow if you want an accurate dollar-weighted return. You don't have to put in reinvested dividends though, because that's not money coming out of the account. It's only money when it comes into the account and comes out of the account, but each of those you have to have.

Now, if you're like me and you don't have a lot of cash flows, because you just stay invested all the time, it's not too onerous, but if you're swapping in and out all the time of this investment, it could be a pain to actually calculate your return.

As far as doing this for your whole portfolio, you just got to do it the same way. All the cash flows have to be there. Now, if you go from one investment to another in the portfolio, that's not a cash flow in or out of the portfolio, so you don't have to include that like a rebalancing or something like that you wouldn't include. But anytime you put more money in, and if that's every two weeks, it's every two weeks, and anytime you take money out, that cash flow has got to be in the calculation.

But otherwise, the XIRR function itself is just one column, and the next column, and then there's a third thing in there. You can put a guess of what the return is, but frankly, most of the time, you don't even have to do that to get the right answer. But that's how you calculate your own return. If you want to accurately calculate your return on an investment where it has cash flows going into it and cash flows coming out of it, this is how you have to do it.

Now, whether it's worth doing that or not, it's a totally different question. Maybe you're comfortable with whatever Vanguard or Fidelity tells you the return is on the portfolio, and that's good enough for you. But I've been calculating my returns since like 2004, so I can actually tell you what return I had in every investment in every year since 2004, and I go back and calculate what it was over any multi-month period for most of that time.

And so, I could literally tell you what my returns have been on everything, and I do it for the whole portfolio. I do it for each individual investment. I don't do it for every account in the portfolio. I couldn't tell you what my Roth IRA returns were or my 401(k) returns were, but I do for each individual investment. A lot of work, yeah, but it's led to a lot of great information that's been able to make this blog better over the years than it otherwise would be. But anyway, I fixed the blog post. Go check it out and just search XIRR on the website. It'll pull right up.

Okay, our quote of the day today comes from Warren Buffett who said, “If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.” And I love Buffett's emphasis on the fact that when you're buying stocks, whether you're buying them individually or via an actively managed mutual fund or via an index fund, you really are functioning as an owner of that company or those companies.

And that's why you make money is because you own the company. It's not about finding the best price to buy it at and finding the best price to sell it at. It's owning the company for years. And as the company makes money, you participate in that profit making and benefit from that. In the long run, all the speculative stuff kind of drops out and the market becomes not a voting machine, but a weighing machine.

YOU CAN'T CONTRIBUTE TO AN HSA AND FSA IN THE SAME TAX YEAR

All right, let's take some questions about HSAs and FSAs.

Speaker:
Hi, me and my wife live in two different states. We have our own high deductible health plans until June 2024. I have enrolled for HSA through my employer for a total $8,300 at the beginning of year. My wife joined a new job in July 2024 and chose a no deductible plan with FSA as we had a baby in October 2024. She enrolled to contribute $1,500 for the FSA and already had $1,000 contributions from paycheck. We just realized that we can't have both HSA and FSA during the same tax year. What can we do now?

Dr. Jim Dahle:
Okay, great question. I understand the need for people and the desire to remain anonymous on podcasts and things like this. You can do that by emailing me your question. You don't have to record it in computer voice because I'm sure most of you out there don't enjoy listening to computer voice like this question came in as. So, please don't start doing this with all the Speak Pipe questions. People do not want to listen to that.

It's a great question though, so we're going to use it on the podcast. Yes, a regular FSA and an HSA, you're not allowed to use both. So, limited use FSAs can be used with an HSA though, like it was just for dental and vision, that sort of a thing or just for child care, then you can use it. But a regular health care FSA, you can't use that and still be eligible to make a contribution to an HSA for the year. If you have an HSA, you can use the money in it. But you can't make a contribution to an HSA.

So, you got to decide between the two. If your employer is going to give you a bunch of money in an FSA, well, maybe you don't want to use an HSA that year. But how do you fix this once you've kind of screwed it up? Well, you probably have made an excess HSA contribution. I think you've got to go back and take that money back out and including any earnings that hadn't probably paid taxes on the earnings. Maybe you can go to the employer and work the other end of it and say, “Hey, pay me more salary instead of this money you put in the FSA and reverse the FSA contribution.” But the important thing to know is that you can't do both unless it's a limited use FSA.

HIGH DEDUCTIBLE HEALTH PLANS AND CONTRIBUTING TO AN HSA

All right, our next question, also off the Speak Pipe.

Speaker 2:
Hi, Dr. Dahle, long time fan of your work here. I have a question about HSAs. I'm leaving the military soon and starting a new job. My wife is employed and on a high deductible health plan with her two children and it costs nothing extra for the added family members and premiums. It just raises the annual deductible. We were planning to add me on to her high deductible health plan when I leave the military as my secondary insurance.

We have not been allowed to contribute to my wife's work HSA while I was in the military since she has Tricare as her secondary insurance and we are hoping to return to contributing to the HSA now that we will be done with Tricare and the military. My plan is to sign up by myself for health insurance through my work in an accountable care type plan. It is not a high deductible health plan.

My question is, if I join my wife's high deductible health plan and I have separate insurance through work that is not a high deductible health plan, would I then make my wife ineligible again to contribute to her HSA? Our hope is for her to maximize the 2025 $8,550 family contribution. Thank you.

Dr. Jim Dahle:
Good question. This isn't that complicated. If you have no other health insurance coverage than a high deductible health plan, you are eligible to make an HSA contribution. If that plan is a family plan, then you can make a family sized HSA contribution. That's it. Those are the rules.

In this case, even if you and all of the kids had another coverage, she would still be able to a family-sized $8,550 HSA contribution for 2025. So, no big deal to have you on that plan. She should still be able to make a family-sized contribution so long as she doesn't have any other health insurance coverage other than that high deductible plan.

All right. Our next question also about FSAs comes in by email. It says, “I'm a doc. I was switching jobs last year. I was doing 1099 for the first eight months of 2024. Then I signed a contract in August and maximized my dependent care FSA through the new employer. Now I'm trying to reimburse myself for dependent care 2024, but the company does not accept my receipts prior to August stating it was before my plan onset.” Okay. That doesn't seem unreasonable.

“Can you advise me if there's anything else I can do? I did reimburse some of the dependent care expenses for the last part of the year, but I may lose almost $3,000.” That's a bummer. “Mainly for the summer dependent care and first part of the year, since I'm not allowed to have that reimbursed. My understanding is that these are my pre-tax money and Inspira acts as a carrier. I'm not sure why they're not letting me use it for the first half of the same tax year.”

Well, this is a bummer. The bottom line is don't put money in an FSA that you're not going to spend that year. FSAs are use-lose accounts. They're not like HSAs where it rolls over to the next year and you can invest it for decades. An FSA is for money you're going to spend that year. I think it's totally reasonable. I suspect the way the law is written that you can't use it for expenses before you establish the FSA. Come on. That's totally reasonable.

I think you're out of luck for most of this. However, it is possible to roll over a small amount of your FSA to the next year from 2024 to 2025. I think it's $660. That's what you can do. I'd look at everything you spent after August and see if it can possibly qualify to be paid for with that money. Make sure you're not missing anything. I wouldn't create a fraudulent receipt or anything, but see if you can find anything there that you can. Beg HIR for mercy, but I think you're out of luck. I think the money's just going to be gone. Even that rollover thing is relatively new. It wasn't very many years ago, I don't think, where you couldn't do a rollover of FSA money at all. Be careful using FSAs. They are use-lose accounts.

Thanks for all of you out there and what you're doing though. It's not easy work. There's a reason burnout levels range from 40 to 65 percent in medicine. It's because the job is hard. If no one said thanks today for what you're doing, it is important. Yes, after 10 years of doing anything, sometimes it feels like moving widgets down the assembly line, but these are really important widgets that you're working on. Thanks for doing that.

Another question. This one comes off the Speak Pipe.

ASSET ALLOCATION

Cliff:
Hello. My name is Cliff from the Midwest Internal Medicine. I have a retired engineering friend who made the comment that he thought he was too aggressively invested because he had 100 percent of his brokerage account in equities, but I know that he gets about $80,000 between Social Security and the old-fashioned type of pension. I believe it was about $50,000 from the pension, $30,000 from Social Security. We were trying to figure out what his asset allocation would be.

I put his $80,000 per year into the present value function in Excel using 3 percent, which I believe would be inflation in this situation, and said it went for 20 years at $80,000. The present value would be $1.19 million. If you add his $400,000 in his brokerage account, you get $1.59 million. His equities would be the $400,000 divided by the $1.59 million, and you get 25 percent. He's thinking he has 100 percent in equities, and I think he has about 25 percent in equities. I just wanted to know your thoughts on this type of calculation and how to think about it. Thank you, and thank you for being such a great teacher.

Dr. Jim Dahle:
I feel like I'm settling an argument here, and somebody's going to be mad at me, no matter what I say. I'm actually going to opt out of the argument. I don't think you should be doing this at all. His asset allocation is 100 percent stocks. That's just the way it is. The money that he has control of, the money in his portfolio is 100 percent stocks, so his allocation is 100 percent stocks.

However, the way to think about these sorts of things, the way to think about Social Security, the way to think about a pension, certainly, maybe even the way to think about a TIPS ladder or even some real estate income, although I would discount real estate income because it's not a sure thing at all, is that these things, these sources of guaranteed income reduce your need for spending money for income from the portfolio.

If you need to spend, let's say you have a million dollars in your account, and I can take about $40,000 a year out of that and expect it to last 30 years. Let's say you've got a pension and Social Security that pay you another $60,000 a year. In reality, you're going to be spending $100,000 a year. You're going to be spending $60,000 from Social Security and the pension. You're going to be spending $40,000 from the portfolio. But in reality, to get your $100,000, what you are doing is you're recognizing the fact that you don't have to take it all from the portfolio. Your need for income from the portfolio is lower. That's the way I would think about it.

But I would not say my allocation is now 40% stocks and 60% bonds because my Social Security is my bonds. I think you just get into messy calculations doing that. I don't think there's any point to doing that. Recognizing that you have less need to get income from your portfolio than you otherwise would might change you to have a different asset allocation than you might.

But I don't think most people, when the market tanks like crazy and your stocks lose 50% of your value, all of a sudden go, “Oh, it's okay though. I got Social Security. I'm really not 100% stocks.” That's not how we think. We're like, “Man, half of my portfolio is gone. That sucks. I don't like this. I'm going to panic sell and bail out of my portfolio now at a market low.” That's what people do. I don't know that having a pension or having Social Security really helps them a lot from doing that.

If you're concerned about your ability to have good investing behavior in a bear market, you should probably have less than 100% stocks in your portfolio. If you're concerned about the admittedly low but potential outcome where bonds outperform stocks over your investing horizon, then you probably ought have some money in bonds. Otherwise, it's not crazy if you've got a lot of guaranteed income to still have a pretty aggressive portfolio in retirement.

Asset allocation is a very personal thing. My parents live almost entirely off guaranteed income between Social Security and a pension. They still have a 50-50 portfolio. They didn't decide, “Well, we're going to put it all in stocks since we're probably not going to be spending this money.” Every year, I try to get them to spend the money. Most years, they opt not to spend the money. And it gets reinvested in the taxable account when it comes out of their retirement accounts as RMDs.

But we haven't changed the asset allocation because of that. It's an allocation that they've tolerated through 2008 and 2020 and 2022 and all the blips in between. It works well for them. It's dramatically better than what they were doing before I came along 20 years ago and pointed out that they were getting bad advice and paying way too much for it.

The point is, I would not try to put some sort of a value on your pensions or your Social Security and fold them into your asset allocation, just like I wouldn't put your house into your asset allocation. I wouldn't put your car into your asset allocation. Everything doesn't have to go into your asset allocation. I don't know where this idea comes from that people feel like it does. It doesn't. It's okay to leave stuff out.

The White Coat Investor, its value as a business is not in our asset allocation. It doesn't have to be. If you own a surgical center, you may not put that in your asset allocation. You probably don't put the value of your buyout of your partnership into your asset allocation. And that's okay. Just have your more traditional investments in there, your stocks, your bonds, your real estate, whatever. You don't have to put everything into your asset allocation.

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DISCLAIMER

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INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 219 – Veterinarian gets back to broke in 10 months.

Full disclosure, what I'm about to say is a sponsored promotion for locumstory.com. But the weird thing here is there's nothing they're trying to sell you. Locumstory.com is simply a free, unbiased, educational resource about locum tenants. It's not an agency. They simply exist to answer your questions about the how-tos of locums on their website, podcasts, webinars, videos, and they even have a Locums 101 Crash course.

Learn about locums and get insights from real life physicians, PAs, and NPs at locumstory.com.

All right, thanks for being out there in White Coat Investor land. I know not all of you are hardcore do-it-yourselfers, and that's okay. You can be financially successful without taking this on as your favorite hobby. A lot of you, in fact, are delegators. You want a money person. You can dump all this stuff on and have them take care of it.

Well, the best place to find a high-quality financial advisor that would give you good advice for a fair price is our Recommended Advisor list. If you go to whitecoatinvestor.com/financial-advisors, or just go to the Recommended tab on the website, you will see this list of folks. And know that at least you're paying a fair price, getting good advice, and you're going to be successful anyway.

Does that maybe happen slightly slower than if you became a hardcore do-it-yourselfer hobbyist? Yeah, probably. Those fees have to come out of your returns. That's just the way the math works. But you are way better off paying a fair fee and doing things right than you are doing things wrong. So, keep that in mind.

INTERVIEW

All right, we have a great interview today. And afterwards, stick around. We're going to talk for a few minutes about mutual funds. Our guest today on the Milestones to Millionaire podcast is Jack. Jack, welcome to the podcast.

Jack:
Thanks so much for having me.

Dr. Jim Dahle:
Let's start by introducing you to the audience. Tell us what you do for a living, what part of the country you live in, and how far you are out of your school or training.

Jack:
Yep, I'm a veterinarian. Just graduated this past May, May of 2024, and then currently live in the Midwest outside of Des Moines, Iowa.

Dr. Jim Dahle:
Holy smokes, you're less than a year out as we're recording this.

Jack:
Yes.

Dr. Jim Dahle:
Okay. Well, tell us what we're celebrating today. What happened?

Jack:
Yes, celebrating kind of getting back to broke.

Dr. Jim Dahle:
Back to broke? Or have you completely paid off student loans, or where are you at?

Jack:
I have just a small amount left, and we're kind of in the process of purchasing a home here. The mortgage guy told me not to pay anymore on the loans. I just stockpiled a little bit up for the down payment.

Dr. Jim Dahle:
Yeah, a little bit of cash is helpful in that situation for sure. Okay, so last May, you walked out of veterinary school. How much did you owe?

Jack:
I owed about $145,000 when I graduated and had no assets at the time.

Dr. Jim Dahle:
Okay, your net worth when you're starting out this career was minus $145,000.

Jack:
Yes.

Dr. Jim Dahle:
And you're back to broke just 10 months later.

Jack:
Yes.

Dr. Jim Dahle:
That's pretty cool. My understanding is a whole lot of vets out there come out of school and they are not making six figures. Tell us about your income over the last year.

Jack:
Yeah. Definitely, the wages of veterinarians has increased over the past couple of years significantly. My wage starting out, I just took a full-time job and that was at about $115,000 base salary, but getting production on top of that. I only stayed there about six months, but at that six month mark, I was on track to make about $180,000 per year, which for vets is great money, just working four days a week. But also on the side, I started offering or doing in-home euthanasia services. That has greatly supplemented my income kind of as a little side hustle.

Dr. Jim Dahle:
Not a side hustle that physicians, human physicians are able to do in most states, I don't think, but certainly a creative one. Okay, the numbers don't add up here. $180,000, even if you made that in the last year, you haven't even been out a year. Your net worth has swung $145,000. What the heck? What happened? How did you do this? What are you eating?

Jack:
The six month mark, I'd say, was the most pivotal. I quit my full-time job and went more to locum or relief status. And that has drastically expanded my income, almost doubled. And then as well as giving more time to do the in-home euthanasia appointments, kind of on track now to be earning about $300,000 this year.

Dr. Jim Dahle:
Wow, that seems really good for a vet.

Jack:
Yes.

Dr. Jim Dahle:
I've looked at some veterinary salary surveys and the averages are nowhere near $300,000. How did you learn that that sort of earning is possible in your field?

Jack:
It was honestly all thanks to you. I was listening to you on your podcast in vet school and it was, you can double your income pretty easily. I was just trying to navigate different situations or different ways to help increase my income here. The in-home euthanasia, it was great. It's on average an extra $4,000 to $8,000 per month that I'm earning through that. And then the relief, like I said, the rates are basically just double of what I would be if I was a full-time employee.

Dr. Jim Dahle:
And I bet that's a great service for families. I assume these are pets mostly. These are dogs, these are cats, they've got cancer, they've got a broken bone or their body's filled with tumors or whatever, and the family's ready to put them down. And now they get to do it at home, surrounded by loved ones painlessly. That's a pretty cool service you're offering.

Jack:
Yeah, it's awesome. I do it through a company called CodaPet, but I'm technically like a 1099 independent contractor through them. They do all the marketing and backend stuff. And then I run the business here in Des Moines.

Dr. Jim Dahle:
Okay, you've clearly become, not only financially literate, but financially disciplined pretty early in your career. How did that happen?

Jack:
I'd say my parents kind of raised me this way. Nothing was ever kind of handed to us growing up. Had to buy my first car at 16, had to pay for college out of pocket. I only did two years of undergrad. That helped significantly in terms of undergrad debt. And then going into vet school, I was fortunate enough to go to my in-state school. That helps tuition drastically.

Dr. Jim Dahle:
If you were buying a house now, would you have the student loans completely paid off?

Jack:
Yes, yeah. I'm about, I would say $20,000 cash net positive.

Dr. Jim Dahle:
Yeah. When you were starting vet school and you're thinking, “Oh, I'm going to have to borrow a whole bunch of money for this”, did you think you were going to have your student loans paid off in less than a year?

Jack:
My goal initially when I started was two years. I said I knew I could live cheaply and work hard the first year. My initial goal was two years. And then I started doing it and I was like, “This can actually be done a lot faster.” That got me motivated and got me moving.

Dr. Jim Dahle:
Is there a partner, a spouse, any kids in the picture here?

Jack:
No kids, but I do have a fiancé. She's also a veterinarian, but she's going on for advanced training. She's in her internship year currently.

Dr. Jim Dahle:
Okay. So, not a ton of income being contributed there, I presume.

Jack:
No.

Dr. Jim Dahle:
Okay. Even so, you're doing a pretty good job controlling expenses. Do you have any idea what you spent per month over the last 10 months on your lifestyle?

Jack:
I'm about $2,500 to $3,000 a month.

Dr. Jim Dahle:
Holy smokes.

Jack:
We are very fortunate our rent here is very, very cheap. We have a four bedroom house here outside of Des Moines for about a thousand bucks a month. Me and my finance split that, so that helps a lot. And then I do have a horse, that is a little bit of an expense. And I do like to travel about once a month, that is where the extra money goes to as well.

Dr. Jim Dahle:
Very cool. It's pretty easy to describe the way you've been living the last year as kind of a live like a resident period, if you will. How long is your period of living like this going to last? Is this your plan for your career, or are you kind of done now, or another year or two? What do you think?

Jack:
I have definitely found myself already spending a little bit more, but I think it helps my finance being in that mindset already. She is forced to live like a resident, so that unknowingly forces me to calm down on the spending and things. I still drive an old car, not looking at getting a new one anytime soon or anything like that. I think that mindset, and especially her workload, right now, she's working 70, 80 hours a week, so I work nothing near that, but I always try to compare it, “Oh, I work four or five shifts in a week and I'm exhausted.” But no, compared to her who's working six or seven, I really can't complain much.

Dr. Jim Dahle:
Tell us about what you're driving. Year, make, model, and mileage.

Jack:
It's a 2005 Mercury Sable, and it's at about 80,000 miles, just turned over.

Dr. Jim Dahle:
It has 80,000?

Jack:
Yes. I got it in my third year of vet school from this old lady.

Dr. Jim Dahle:
Who owned it before? Some little old lady that just drove it to church?

Jack:
Yes, my cousin is an estate lawyer. She was managing her estate, she just passed away and bought it for her for $2,000.

Dr. Jim Dahle:
Wow, okay. Well, you've got a lot of miles left in that car actually. A couple of years ago, I was driving a 2005 as well, that Sequoia that I just exchanged literally two years ago was a 2005. It had far more than 80,000 miles. I think by the time I was done with it, it had 280,000. But that's pretty cool. That thing is old, but maybe not so worn out yet.

Jack:
Yes.

Dr. Jim Dahle:
Very cool. Okay, tell us what other lifestyle hacks, tips you have here to be living on $2,500 or $3,000 a month? That's pretty remarkably inexpensive compared to most people in the White Coat Investor community.

Jack:
Sure, sure. I'm really big on meal prep, so we do a lot of cooking at home, meal prepping for the week. Usually, Sunday or Monday, we make breakfast, lunch, dinner almost for the whole week. That saves a lot on eating out, Uber Eats, things like that. I'm not one that loves Starbucks or anything, so we're really not going out to eat a whole lot. The meal prep is definitely a big factor.

And then our lifestyle, I don't do a whole too much day-to-day going to different shows or things. We're in the Midwest, there's not a whole lot to do, unfortunately, in terms of entertainment. I do travel frequently, but I'm more of a budget traveler, so going to places where I already have friends to stay with, things like that. I have a lot of good buddies out in Colorado who just came from a trip, and now going to Florida with a couple friends from high school next month, but we're all just renting an Airbnb, and it's going to be like $400 round trip for the Airbnb, airfare, and food. So, pretty cheap travel.

Dr. Jim Dahle:
Yeah, I don't want to rub this in too much, but those of you in high-cost-of-living areas for whom this sounds like a pipe dream, we've talked about geographic arbitrage, that it's possible to have dramatically lower cost of living, dramatically lower taxes, potentially higher income by moving inland from the coast, and this is kind of a pretty good demonstration of that in just what's possible. Even in what's typically considered as not a particularly high-income profession.

A lot of people look at vets and go “That's a five-figure income” is the way a lot of people look at it. It sounds like it's a little bit higher now over the last couple of years, but that's pretty awesome. You're doing great. What's next for you in your financial goals?

Jack:
Yes, we're looking at buying a house, like I mentioned before. We'll be closing hopefully in the next month or so, and then going to start putting away a lot for retirement.

Dr. Jim Dahle:
Very cool, and pretty soon, you're going to have another shovel going.

Jack:
Yes.

Dr. Jim Dahle:
That'll make a difference as well. Awesome. Well, was this easier or harder than you thought it was going to be a year ago?

Jack:
I would honestly say it's been a lot easier. I'm truly not working 80 hours a week, working all the time. That aspect makes it a lot easier. I would say I'm working with the average veterinarian works three to five shifts a week.

Dr. Jim Dahle:
What would you say to somebody out there that wants desperately to be a veterinarian, but is scared, they're scared to take on the debt to get through school?

Jack:
I would say be smart about which school you go to. If you're able to go to your in-state school, or there's a couple schools out there that allow you to get in-state tuition after your first year, I would say be pretty smart about that. And then your cost of living while you're in school. I had roommates all four years. My rent was only $300 a month in Missouri. That drastically helped keep costs of spending down while I was in school, then keeping the amount of debt that I had down as well.

Dr. Jim Dahle:
$300 a month. Was that the whole apartment? Did you have a roommate? Were you renting a room in somebody's house?

Jack:
Yeah, I had three roommates. It was about $900 a month for the whole place.

Dr. Jim Dahle:
Very cool. Well, Jack, congratulations on your success. Through frugality and smart decisions and hard work, you've become very successful in a very short period of time. And I have no doubt that you're going to reach whatever financial goals you set for yourself. Thank you so much for being willing to come on the podcast and inspire others to do the same.

Jack:
Yeah, thanks for having me.

Dr. Jim Dahle:
All right, we get a lot of flack out there. We get flack because we feature people on this podcast that got a bunch of family help, or they have some ridiculously high income. They're making $800,000 a year. And of course they became financially successful relatively quickly.

But you know what? The last few interviews we've had are people that didn't have that high of income, that maybe weren't even in what a lot of you consider to be a high paying specialty or a high paying field. And yet they've still become financially successful by becoming financially literate, by becoming financially disciplined.

In this case, we have somebody that's made 2X or maybe 3X what the average person in their field makes. And I've told you this frequently. That it's easier to double your income than most people think it is. And that the variation in pay among any given specialty or any given profession is much higher than the difference between the averages of professions or specialties. And I mean that, you can increase your income.

And for most of us as high income professionals, our income is our main wealth building tool. That is what you use to build wealth. You have to turn that high income into a high net worth if you ever want to be financially successful, if you ever want to have financial freedom. And Jack's done a great job of that. I appreciate him coming on and talking about the early success he's had in his career. Now he's just barely back to broke at this point. He's not a gazillionaire by any means, but I have no doubt he's going to get there by applying the same principles that he's been applying.

Paying off student loans is a little bit like a test run for financial independence. And if you can pay off your student loans in one or two or four years, you can become financially independent in 15 or 20. It's the same financial muscles you're using. It's the same budgetary techniques that you're using to do both of them. Use that live like a resident period to train yourself and to do a test run for becoming financially independent and performing that greatest task of your financial life, which is saving up a nest egg that will support you the rest of your life.

FINANCE 101: MUTUAL FUNDS

Now, at the beginning of this podcast, I told you we're going to talk a little bit about mutual funds. And the reason why is that mutual funds are the main way that most people save for their long-term goals. And it should be the main way that most people save for their long-term goals.

There are obviously lots of mutual funds out there, but the ones that I think most people ought to be using for the vast majority of their portfolio are index funds, low-cost, broadly diversified index funds. We're talking about things like a total stock market index fund. And you can buy these from Vanguard or Fidelity or iShares/BlackRock or from Schwab or wherever, low-cost, broadly diversified index funds.

There are total international stock market index funds. If you want some sort of a tilt in your portfolio, maybe you want to tilt towards small value stocks because you're convinced they'll have higher long-term returns. Well, you can use an index fund for that. You might want to have some real estate in your portfolio. And if you want to use publicly traded real estate, guess what? There's an index fund for that. The bonds in your portfolio, yes, there's index funds. There's index funds, there's index-like funds. Either one's probably fine. The main point is it's broadly diversified and it's low-cost.

So, what is the deal with mutual funds? Why are they so good? Well, they do a few things. Number one, you get professional management. You don't have to become an expert in this stuff. You don't have to go out there and pick your own stocks. The professional takes care of all the buying and selling of the stocks. All you have to do is dump your money in the mutual fund, take it out in 30 years, and it's done its thing. Professional management, that's awesome.

You also get instant diversification, especially if you're using an index fund. You dump your money into a total international stock market fund. You just bought 10,000 of the most successful companies in the history of the world. 10,000 of them. Who cares if Nestle goes out of business? It's not going to impact your returns. Who cares if Toyota goes out of business? It's not going to impact your returns. You can do the same thing on the U.S. side. You buy a total stock market index fund and you own 4,000 companies who are broadly diversified.

The other thing you get that you don't necessarily get with all investments if you invest in a surgical center or you invest in a real estate syndication or a private real estate fund, you're not necessarily liquid. You might be locked into that investment for years. But with a mutual fund, you can liquidate it at the end of the next trading day. By 04:00 P.M. Eastern that day, you're out. Your money is in cash. And it might take a day or so to transfer it to your bank account, but it's totally liquid. If something comes up or you just want to change your investment plan, you can get out.

Now in a taxable account, there's tax consequences for that. But if you're in a Roth IRA or a 401(k) or a 457(b), there's not even tax consequences. There's usually not any sort of fee or even commission these days. Truthfully, given the advent of low cost, nearly zero index funds out there, investing is essentially free. Now, you don't have to pay expense ratios of 0.5 or 1% or higher. You can invest for free. Beta or the return you get from the market is now free. So that's pretty cool.

But even when it wasn't free, you still get the benefit of pooling your costs with other investors. You get these economies of scale because that manager is managing money for literally millions of people out there. And so you're pooling your money together with other people and there are some advantages to doing that. You get instant diversification, you get professional management, you get data liquidity, you get economies of scale. That's why we use mutual funds.

Now, there are other legitimate ways to invest out there. If you want to put a little bit of your money into collectibles, you want it in gold or you want it in some sort of speculative investment, maybe we're talking about commodities or we're talking about some Bitcoin or something, fine. Put a little bit of your money into that.

If you're really into real estate, I've known lots of docs that have become financially independent primarily from investing in real estate. That's fine. But you know what? There's a place for mutual funds in just about everybody's portfolio and in lots of people's portfolio, that's the only investment in it. And that's perfectly fine. You can become financially independent and have a wonderful financial life without investing in anything besides mutual funds.

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All right, this is the end of our podcast. If you want to come on it, we'd love to have you. whitecoatinvestor.com/milestones is where you apply.

Until next week, keep your head up, shoulders back. We'll see you next time on the podcast.

DISCLAIMER

The hosts of the White Coat Investor 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.