270: Helping Physicians and High-Income Earners Take Control of Their Finances with Dr. Jim Dahle
Today, I’m talking to Dr. Jim Dahle. Jim is a practicing board-certified physician and the founder of The White Coat Investor, where he writes about finance and investing specifically for physicians and high-income earners.
After learning that he couldn’t trust the financial professionals in his life, Jim taught himself personal finance and investing, specifically with physicians and other high net worth individuals. He realized that no one was teaching doctors how to handle their money, and now he’s sharing the knowledge and resources he wished existed when he was starting out.
As Jim sees it, high incomes and wealth are not the same things, and the numbers agree with him. According to a survey conducted in 2016, 1 out of every 9 physicians in their 60s has a net worth of under $500,000. And one in four under $1 million–despite having collected substantial paychecks for 30 years.
In this conversation, Jim and I discuss why his specific knowledge is in such high demand right now, the financial challenges that are unique to physicians, and how medical practitioners can either learn to manage their own finances or find a financial advisor to help them build wealth and fund a successful retirement.
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In this podcast interview, you’ll learn:
- Why financial security makes doctors better practitioners, parents, and partners and helps prevent burnout.
- Why physicians are so often pushed to buy term life insurance and why so many of these policies sold to doctors fail to meet their needs.
- Why the vast majority of doctors under the age of 40 have a negative net worth–and why they’re so prone to making bad investing decisions.
- The major mistake physicians make concerning disability insurance.
- Jim’s simple, step-by-step advice for any new physician who has just finished med school.
- How doctors (and especially doctors paid on W-2s) can save more money on taxes.
- Why Jim advocates that doctors use tax-deferred accounts in their peak earning years.
- How to test your kids’ financial literacy at an early age and allow them to make mistakes long before they may inherit an estate.
- How to make financial meetings with your spouse as effective and painless as possible.
- "For a doctor coming out of residency, their greatest financial asset is their ability to turn their time into money at a very high rate." - Dr. Jim Dahle
- "It's all about the percentage of your income that's going toward building wealth. It's not necessarily about how much of it goes toward your loans or how much of it goes toward a down payment. It's about how much is going toward building wealth." - Dr. Jim Dahle
- "I don't want to see people with student loans 20 years into their career. I think most doctors who drag it out longer than five years after residency regret it." - Dr. Jim Dahle
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Casey Weade: Jim, welcome to the podcast.
Dr. Jim Dahle: Thank you. It's wonderful to be here and congratulations on what you've built here, Casey.
Casey Weade: Well, thank you, Jim. Congratulations to you. You have done some remarkable things in the world of finance, specifically physicians' finance, and just the content that you put out in the world has helped so many individuals avoid pitfalls and mistakes and a lot of it came from your own life experiences. I've been a follower for years and have really enjoyed following your work as it's grown year after year, and I think it's just amazing. I didn't even know this when I've been following your site for some time, et cetera, but I didn't realize that your site has been the most widely read physician-specific website in the world.
Dr. Jim Dahle: Well, it's certainly the most physician-specific financial website in the world. I don't know that it's the most widely read physician-specific one, but certainly, those that speak about personal finance and investing, it's been the most widely read in the world for at least a decade now.
Casey Weade: That's amazing. And why do you think that is? I mean, why do you feel - and I don't think it's just you, but you were kind of the initiator of I feel like this charge for physician-specific financial advice. But now I feel like I see it everywhere. I feel like there's financial advisors that are now specializing in this niche. There's many other individuals that are trying to create something very similar to yourself, podcast, books, blogs. Why do you think this type of insight, this type of guidance is in such high demand today?
Dr. Jim Dahle: Well, I think part of it is I just recognized the need before a lot of other people did. And so, I was lucky. I started first. But the truth is that doctors aren't getting any of this sort of training, this information in college. They're not getting it in medical school. They're not getting it in their residency. They don't get it during their career. If they don't seek it out on their own, they don't get it anywhere. And it's really valuable information, just basic personal finance literacy. When you combine that with the physician income of $200,000 or $300,000 or $400,000 a year, it's worth millions over the course of their lifetime. And so, I suppose I look at it a little bit as my gift to medicine. You know, I truly believe that financially secure doctors are better partners, they're better parents, they're better practitioners. I think they give better patient care when they're not worried about making rent or paying their kid's college tuition or those sorts of financial concerns, much less paying off their own student loans, which a lot of them spend a lot of time worrying about. And so, it's been a bit of a crusade for me over the last decade but it's grown into a business now. We've got about 15 people working here. And so, it's been a great experience.
Casey Weade: That's amazing. You just started clicking some keys and now there's 15 team members.
Dr. Jim Dahle: Yeah. It's pretty wild. One of the fun things about entrepreneurship is creating a job that didn't used to exist.
Casey Weade: Yeah. And you've absolutely done that. I want to dig into a couple of things that you said there. One being, I wanted to ask about some of these more specific side effects that you see physicians experience once they have financial security or if they've gone through your program, they've read your material, they followed you for some years. What kind of specific side effects have you seen in these people's lives? One, for instance, does it make him a better physician?
Dr. Jim Dahle: Yeah, absolutely. I think it does. I mean, you look at the statistics on burnout, and especially over the last couple of years with the COVID pandemic, doctors are burned out to a degree that they never have been in the past. Surveys show about 50% of doctors have symptoms of burnout and a significant percentage of those it's affecting their lives severely. And I think a lot of the tools to deal with burnout require you to be in a reasonable financial position. And so, financial planning is actually an important part of treating burnout. It provides the keys for you to do a lot of things that help with your burnout. For example, you can leave a toxic job. You're not stuck in it. You can cut back on how much you're working. It's the first thing I tell a burned-out doctor is, "Why don't you cut back to full time?" You know, because most of them are working 60, 80 hours a week. You can drop things that are particularly painful to you in your job. For example, working nights was one of the things I dropped when I became financially independent. And maybe if there are procedures you don't like dealing with or particular types of patient cases that you don't like dealing with, you can drop those from your practice. And so, it just provides a lot of tools and a lot of power and the ability to craft your practice in the way you want it to be and feel in control of your life. And so, I think it's an important part of affecting and treating, both preventing and treating burnout. And so, I think that affects patient care because the studies show that burned-out doctors give worse care. You know, you're not as likely to have a doctor that's going to listen to you as well and spend as much time with you and give you as good a care as a non-burned-out doctor.
Casey Weade: And when I meet with a lot of physicians, I find that they're really passionate about what they do. They're not passionate about, say, the hours or the things that they don't want to do. And when I've worked with any high-income earner, for the most part, most high-income earners, I find, especially business owners, people that are really passionate about what they do, but they're feeling burnout, once we deliver to them financial security, once they have that financial security, at that point, you would think they would retire. They go, "Oh, I don't need to do this anymore. I can retire." But not only do they not retire, but I often see them start to make even more money now that money isn't the goal, ironically.
Dr. Jim Dahle: Yeah. It's interesting that way, for sure. But you know, it's interesting if you survey a group of doctors, almost all of them want to work less. Almost none of them want to quit completely. And so, I think financial planning, having a financial plan in place, moving toward financial independence, even if you're not completely financially independent yet allows you to do that. And it's just more fulfilling because now you have room in your life to spend time with your family to share meaningful experiences with friends and others you care about. You have the opportunity to do those things that promote wellness, to eat well and get plenty of sleep and exercise, and those sorts of things. So, I think it's a big key for a lot of people. If they can cut back a little bit, all of a sudden their lives are dramatically better.
Casey Weade: You know, as an aside, this has popped in my head. I was playing golf the other day and I was playing through a physician that has become a friend, and he asked questions about what we do. And I basically explained we're working with pre-retirees on their retirement transition phase. And he said, well, they're just now getting a financial plan and him and another physician are playing golf together going, "We've always had a financial plan but we find a lot of physicians aren't even thinking about having a financial plan until they're ready to transition into retirement." What do you see in general? Are most physicians getting ahead of this and seeking financial advice long before they transition into retirement more so than maybe other demographics?
Dr. Jim Dahle: I don't know if it's more common for physicians or not. My hope is that everybody will walk out of residency with a financial plan already in place. You know, I want them to know where every dollar they're going to make in that first year out of practice is going to go already. That would be the ideal. But to pretend that most doctors have that already, no, I think that would be folly. I think most doctors do what comes naturally and that is they go from their $50,000 or $60,000 a year resident income to their $200,000 or $300,000 physician income and grow right into it and more. And then six months later, when their student loans come due, all of a sudden, they're wondering how they're ever going to pay off their student loans on an income that's five or six times what they used to be making. So, that's probably the typical physician.
Casey Weade: Yeah. Well, you're focusing on physicians but it seems like the guidance that you're putting out there really is valuable for any high-income earner and especially any high-income earner that's a W-2 employee. Is there something that is unique about physicians beyond what you see facing most high-income earners?
Dr. Jim Dahle: Well, let's be honest, 95% of this stuff is the same for everybody. Personal finance investing? Same for everybody. Now, there's probably another 3% or 4% that's specific to high earners. You know, some retirement accounts stuff, maybe some student loan stuff, tax stuff, and asset protection kind of items, maybe some estate planning items. And so, a lot of what I write about is different from other personal finance websites, and podcasts is aimed toward those issues. And we spend a lot of time on first-world problems, for lack of a better phrase. And then there's probably 1% that's truly physician-specific. And even that we share with dentists and similar high-earning medical professionals of other types. But there are a few unique physician stuff. Take, for example, the student loan programs. You know, there are very few other professions out there that rack up $300,000 or $400,000 or $500,000 in student loans routinely. You know, that's pretty unique, and a lot of doctors tend to have a lot more retirement accounts available to them than other people.
For example, it's not uncommon for a doctor to have a 403(b) and a 457(b) and a 401(a) and a personal and a spousal Roth IRA and just have all these different retirement accounts. That's kind of unique. And then, of course, the fact that doctors work every day with a relatively large liability hanging over their head. They typically have some unique insurance and asset protection concerns that maybe everybody else doesn't necessarily share. Let's be honest, right? 95% of this stuff is the same for everybody.
Casey Weade: Yeah. At least, right? At least. But there are some things that are maybe unique opportunities that sound like you kind of pointed out some unique opportunities that physicians have having multiple retirement accounts, for instance, and just simply having a large income. What would you find in your work? I mean, I'd love reading the comments section of your blog that I probably spend more time in the comment section than anywhere else. I enjoy seeing...
Dr. Jim Dahle: A lot of interesting stuff there. Whether it's ad hominem criticism to attaboys, it's really highly variable what people decide to focus on from a given blog post.
Casey Weade: It seems like you've attracted a significant amount of criticism, and it's fun to see your responses to some of that criticism. And I just wonder, for you, what do you see as your most common critic or your most common criticism that you receive?
Dr. Jim Dahle: Well, this week it's all about my position on bitcoin. You know, in any given week...
Casey Weade: I read the blog post.
Dr. Jim Dahle: It might be something like whole life insurance or whatever. And part of that is because I'm not just trying to give the facts on personal finance. I'm trying to also give my take on it. I want to say, "This is how it works. This is why it's out there. This is what I think of it. This is maybe who should consider it and who shouldn't." And if I think something's garbage, I'm not afraid to tell people I think it's garbage. And for example, we have a few other writers at the White Coat Investor. We've had a few people writing some articles for search engine optimization and that sort of stuff. And I had a writer the other day submit an article on universal life insurance, and it was completely factually accurate. There was nothing wrong with the article, right? It was all accurate material. But what it lacked was any sort of a take, you know, any sort of a, "Should I use this or not? Yes or no?" And so, I had to make a few adjustments in the article because, personally, I think the vast majority of people do not need any sort of a universal life insurance policy. Are there some niche uses for it? Absolutely. You know, but to present it as something that ought to be equally weighed by a 30-year-old doctor with term life insurance is just not the right way it ought to be positioned.
And so, I tend to do that with every topic I treat, whether it be in an online course, the podcast, or the blog. And I think, honestly, that's why I have the followers. Now, they might disagree with me on one or two topics, and that's fine. I tell them, "Take what you find useful. Leave the rest." You know, they don't have to agree with me on everything to become financially literate. There are lots of controversies in personal finance and it's important not to miss the forest for the trees.
Casey Weade: I could take this so many different directions but you said whole life insurance and there was something I wrote down in my notes that I just really loved what you said there. And I have a legitimate question around this, though. And I probably won't read the whole quote, you said a friend came by. This was in your bio. "A friend came by and sold us an inappropriate whole-life policy. I won't tell you which company he was interning for that summer, but it rhymes with..." I won't say it. That just stood out to me because I see this so often, specifically with physicians. Why are so many physicians targeted specifically? And maybe they're not targeted. Maybe there's some other reason this is happening, but why do I see so many physicians that have so many whole life policies with this, say, specific company more often than others and maybe just whole life in general at a very young age? This happened to a close friend of mine that didn't have any kids, was earning a decent living, didn't have a mortgage, didn't have a spouse, didn't have any retirement savings at the time. But he's got a big old whole life policy that was sold to him by the same company. And I wanted to know why you think that happens so often specifically to physicians where I most often see this occur.
Dr. Jim Dahle: Well, I mean, I think it's financial malpractice to sell a whole life policy to somebody that owes $300,000 in student loans. You know, I think it's morally bankrupt. And there are agents and companies out there who truly believe in their heart of hearts that the best thing they can do for somebody is sell them a whole life insurance policy. I mean, I don't even think they think they're screwing over their clients. I think they think they're helping them. But the truth is they aren't. And once people understand how a whole life insurance policy works and what the other potential uses for their money are, the vast majority are going to choose not to buy it. I mean, this one that was sold to me, I was a medical student. I don't even have an income. You know, I didn't even have an income and I was sold a whole life insurance policy, "Oh, you're definitely going to want this. You know, you're going to want this for retirement savings. You're going to want this for estate planning purposes." I'm 25 years old with a net worth of nothing, an income of nothing, right? If there was anything I needed, it was a big, fat term life insurance policy. But do they tell me that? No. They sold me a whole life insurance policy that's too low for my insurance needs, that really doesn't meet any need I have. And why is it sold? Well, because it pays a really good commission. Let's be honest. That's why it gets sold.
Do they target doctors? Absolutely. You know, the particular company we're mentioning and every doctor listening to this podcast knows exactly which company we're talking about because they all get into the residency programs and they come and they give some presentation and they call it financial planning or whatever. They say they're a financial advisor but what do they do? They don't get paid to give financial advice. They don't get paid to put together a financial plan. They get paid by selling whole life insurance policies. So, what do they do when they get up in front of a bunch of docs? Well, they sell whole life insurance policies. And, yeah, I do think docs are targeted and a little bit of education goes a long way. In fact, that's how a lot of people become financially literate is they hear about whole life insurance. It doesn't feel quite right to them. They google it and they end up on my site and all of a sudden they start reading all of their stuff and they become financially literate and we end up saving the millions of dollars over the course of their lifetime.
Casey Weade: And I don't want to go down this life insurance rabbit hole too deep because we could probably make the whole podcast around this. But I myself, I own a lot of life insurance. I'm a big believer in life insurance, cash value life insurance, but I didn't start there. I started with a term policy. I get my term policy. I start saving in my HSA. I start saving in my Roth. And it's a long ways down the road before a cash-value type policy would make sense for the vast majority of Americans, no matter what type it is, variable, whole life, index, universal life. So, I guess what I often see is people are jumping the gun and they're getting way ahead of themselves into a cash value policy when they haven't even done the basics in their financial life, such as increasing their income or paying down their debt, for that matter.
Dr. Jim Dahle: Right. I mean, if somebody understands how the policy works, they truly understand how it works and they want it, more power to them. Go buy as much as you want. But I find a lot of people, it's clearly not the right thing. They're being told, "Don't put any money in your 401(k). Put it in this whole life insurance policy. Don't pay down your student loans. Put it in a whole life insurance policy." And that advice is clearly wrong. You know, it's clearly wrong.
Casey Weade: Well, I do appreciate that about you and the black and white nature that you've painted that on your site so I appreciate that. There's also something you mentioned just a moment ago how these physicians, they go from 60,000 and also they're making 200,000, 300,000 and then student loans come due. They go, "How am I going to pay for all these student loans? And now I've got a 5X income." And I wanted to ask you how you and maybe you haven't really overcome this for yourself but maybe this is one of your biggest mistakes, too, but how do you overcome those typical and kind of social pressures that physicians experience to get the nice big house, get the nice car early in their career and go, "Hey, I'm a doctor, I'm supposed to have this stuff?"
Dr. Jim Dahle: Well, it's the classic confusion of income with wealth, right? A doctor comes out of training, their income is $200,000 or $300,000. Their wealth might be minus $300,000. You know, their actual net worth is negative. They're poorer than the bum living under the viaduct, right? That guy's got a net worth of zero, at least. They're $300,000 behind that. And so, I think that's the mentality you have to take in order to overcome that because by becoming a physician, everybody assumes you are wealthy. Your parents think you're rich, your friends think you're rich, your spouse might even think you're rich. You know, your patients think you're rich. But the truth is the vast majority of doctors under 40 are not rich. They have a negative net worth. And way too many doctors, even at the end of their careers, have not built any substantial wealth. If you look at the surveys, 25% of doctors in their 60s are not millionaires and 11% to 12% still have a net worth under $500,000. That's their house. That's their retirement savings. That's their bank accounts. That's their cars. That's everything they own, minus everything they owe less than $500,000 after 20 or 30 years of making $200,000 or $300,000 a year. It's just a terrible failure to plan, a failure of financial planning.
Casey Weade: And I also wanted to ask along those same lines, physicians go through so much schooling, right? Six, eight years, 10 years, depending on what your area of specialty is and you develop a high level of expertise. You develop a high level of competence in what you do. And there's also some status and recognition that goes along with that. How do you see that impacting negatively financial decisions that physicians are making later in life when they start investing specifically? I ask that question because I have seen, seems like more often than not, physicians that are taking big bets. They're doing day trading. They're trading options. They're taking risks that they maybe shouldn't be taking at this point in their life, or they don't completely understand, but they feel like they do. I mean, how do you think...
Dr. Jim Dahle: And probably don't even need to be taking.
Casey Weade: What are your thoughts on that just in general?
Dr. Jim Dahle: It's true. Doctors have a knowledge base that is very deep but also very narrow in their typical specialty. And they spent a lot of time acquiring that and they are viewed in their day-to-day life as experts. There is a certain amount of status there. And I think that leads to two problems. The first one is overconfidence. They assume because they know a lot about one thing that they know a lot about everything, and it's just not true. You know, it's pretty amazing. You take this doc that spent four years in college and four years in medical school and seven years in post-graduate training. And then you got to teach them what a Roth IRA is, right? Because nobody mentioned that to him the whole time. And so, overconfidence is certainly a problem there. The other thing I see is underconfidence. You know, they assume because they're an expert in one thing that there must be experts in everything else and that they really shouldn't do anything outside their funnel of expertise. And so, they get paralysis by analysis. And I run into doctors that got $600,000 and it's all sitting in their checking account because they're afraid to do anything with it. And so, I think you see both overconfidence and underconfidence among physicians pretty commonly. And financial literacy, I think, pulls people in from both ends of the spectrum and gets them appropriately confident and hopefully gets them into some sort of a reasonable financial plan that they can follow.
Casey Weade: How do you help them overcome that maybe underconfidence, which would be the overwhelm? I think you could spend an hour on the White Coat Investor blog and be completely overwhelmed with all the different things that you have to think about the decisions that you need to make. How does someone consume that information and then distill it down in a way that is not overwhelming, but very actionable?
Dr. Jim Dahle: The interesting thing I've found is that confidence lags knowledge by about a year. You know, they get to the point where like, you know what, and this isn't for everybody but a lot of doctors after they become financially literate, they decide, "I'm going to try being a do-it-yourself investor. I'm going to do my own financial plan and be my own asset manager." And most of them say, "You know, I probably could have started doing this about a year ago but I just didn't have the confidence yet in my knowledge base." And so, I think that's an interesting phenomenon, number one, but the main thing they need is a framework. They need some sort of framework to hang the additional pearls of knowledge that they learn. You know, here are the basics of investing. Here are the basics of budgeting. Here are the basics of retirement accounts. Here are the basics of investing and asset protection and estate planning and whatever. They need a framework. Once they have the framework in place, then every time they learn a new piece of information, they know where to place it in the framework.
And so, what I try to provide, whether it's through my books or through particularly the online course we have is really designed to give people this framework from the beginning, is a lot easier, I think, than picking up random pearls from a podcast or from a blog that by necessity is not designed around a framework. And I think that's the key is to get the basic framework in place, do some initial financial education, and then the stuff from blogs and podcasts provides the continuing financial education, if you will.
Casey Weade: Do you think everyone is right for this? Everyone's right for, and not necessarily DIY, but in a way, following your information, going deep, truly understanding, following a framework, doing it themselves, is that right for everyone or are there certain types of individuals that are just a perfect fit for what you're trying to create? And if so, what do those people look like, and what do those look like that maybe should be seeking financial guidance, maybe not doing it themselves?
Dr. Jim Dahle: Sure. Well, I think everybody needs to learn the basics of financial literacy. Everyone needs to learn that. But how they learn that can be pretty variable. Some people prefer going to the library, checking out some books, spending new money. They're going to read 20 financial books this year. And you know what, by the end, they're going to know quite a bit about personal finance by necessity, whereas other people are going to go to a financial advisor. Their financial advisor is going to help to educate them. It's going to help them put a financial plan in place, may help them implement it, and manage it throughout the years. It just depends on the person. I would estimate that approximately 80% of doctors need and want a good financial advisor, somebody who gives good advice at a fair price, but that still leaves about 20% of people that truly can learn enough to do this well themselves, with an occasional consultation with a professional about insurance or estate planning or whatever. Right? I mean, I just met this week with an estate planning attorney. Just because I do most stuff myself, I'm not going to try to draft my own trust. Some things are well worth paying a professional to do.
But a lot of people come to the realization that asset management is not necessarily that complicated, particularly if you use a handful of index funds as the main building blocks of your portfolio and they decide, "You know what, I really don't want to pay even a fair price for this. I don't want to pay $5,000 or $10,000 a year to somebody else to manage my assets. I want to do that part myself." And I think that they're perfectly capable of doing that. What you don't want to do, though, is try to do it yourself and then do a piss poor job. You want to make sure if you're going to do it, that you do it right. You become educated enough. You understand how the process works. You're actually putting the time into it to pay attention to it. And if you're not willing to do that, you are far better off paying a fair price, at least, to get good advice and good service from a true financial advisor.
Casey Weade: Let's talk specifically right now about some of those issues that specifically impact physicians that come off most often in the conversations that I've had and what I see often on your blog and conversations you have, some things you mentioned, student loans, disability insurance. I want to go to disability insurance first and foremost. What guidance do you have in regards to disability insurance? What mistakes do you see physicians often make when it comes to disability insurance? And how can they avoid them?
Dr. Jim Dahle: Well, the biggest mistake is not buying it, far and away. You know, that's 95% of the mistakes I see with disability insurance if somebody just doesn't have disability insurance. And a doctor coming out of residency, their greatest financial asset is their ability to turn their time into money at a very high rate. Now, it's far more valuable than anything else they own and for many years than anything else they will own. And it should be protected. You protect it in lots of ways. You protect it from you dying through life insurance. You protect it from you becoming disabled through disability insurance. You know, you protect it from burnout by doing those things in your career that keep you from burning out. Burning out after eight years in your career is just as devastating as becoming disabled eight years into your career. So, the main thing is go get some disability insurance. That's the main message I give people and I recommend they buy it from an independent agent, somebody who can sell them a policy from any company. And there are five or six companies that we call them the Big 5 or Big 6 that sell own-occupation, true own-occupation policies to doctors. Generally, they're specialty-specific.
And the idea here is if the doctor is disabled enough that they cannot practice their specialty, the policy is going to pay. It doesn't do any good to have a disability insurance policy that isn't going to pay out. And so, the definition of disability is all-important. And so, the next mistake I see doctors make is they buy weak policies, policies where maybe it only pays out for a couple of years if your disability is primarily psychiatric, or maybe there's so much gray in there that it's not a true own-occupation policy. And if you're able to still teach, even though you can't operate, it's not going to pay out, even though you're getting paid dramatically less to teach than you were being paid to operate. And so, I think that's a fairly common mistake as well. Some people are underinsured. You know, you need to make sure you're buying enough of a benefit that not only it pays all your living expenses but also pays for you to save for retirement. Because most of these policies only pay until age 65 or 67 and at that point, you'd be living on nothing but Social Security unless you've saved something for retirement. You know, sometimes maybe they buy riders that it would have been better off putting money into the base policy and just getting a bigger base policy than buying a rider like a retirement rider or a student loan rider or something like that. But for the most part, the big mistake is not buying the insurance at all.
Then, of course, once you're financially independent, you can cancel the policy. If you don't depend on your income, you don't need the policy. And so, the sooner you can reach financial independence, the sooner you can save those premiums because they're not insignificant. I mean, disability insurance is expensive stuff. You get to expect to pay about 2% to 6% of that benefit every month. So, if it's a $10,000 benefit, it's going to cost you $200 to $600 a month to insure that income. It's expensive but worthwhile as long as you depend on your income.
Casey Weade: And this presents a bit of a conundrum. We want to reach financial independence as quickly as possible but we have to buy this really expensive disability policy before we get there. What are some of the basic steps that physicians need to take after they get out of school, they get into the workforce, or income starts going up? What do you recommend as the first few steps say put it in the light of a Dave Ramsey step-by-step program?
Dr. Jim Dahle: Sure. Well, I think the most important thing I can tell a new doctor is a forward phrase that I call, "Live like a resident." And the idea here is that you maintain your lifestyle something similar to what you were living while you're in residency, while you're making $50,000 or $60,000 a year, despite the fact that you're now earning $200,000, $300,000, $400,000. And if you can do that, that frees up an immense amount of income with which you can use to reach your financial goals, even though you're going to be paying a lot more money in taxes. You know, let's say you're making $300,000, maybe you're paying $75,000 now in taxes if you're still living on $50,000, well, that leaves you $175,000 a year with which to build wealth. You know, your $300,000 in student loans are not going to last very long when you're throwing $10,000 a month at them. They're going to go away pretty quickly and you'll be able to save up a down payment toward your dream home. You'll be able to max out your retirement accounts. You'll certainly be able to afford the insurance you need. And so, that's what I tell people is live like a resident for two to five years after you come out of residency.
And if they will do that, they can botch almost everything else with their finances the rest of their life because they will have gotten back to broke. They will have built a little bit of a nest egg. They won't have those student loans hanging over their head anymore. They'll be into their dream house by the end of that three or four or five-year period. And so, that's probably the most important thing now. Everyone always comes out going, "Well, I've got some money now. Should I put it toward my loan? Should I invest it?" It doesn't matter, right? It's all about the percentage of your income that's going toward building wealth. It's not about necessarily how much of it goes toward your loans or how much of it goes toward a down payment or whatever. It's about how much is going toward building wealth. And so, I advise people to concentrate on their savings rate. And even later in their career, I want to see them saving 20% of their gross income for retirement. But early on, I'd love to see that percentage of their income that's going toward building wealth be far higher than that. And the only way you can do that is to continue living like a resident. If you grow immediately into that new income, you're not going to be able to do that at all.
Casey Weade: I think what you said was a little unique there that, hey, it doesn't matter where you put it, pay off the student loans or put it in your 401(k). It's all the same. You're just saving. You're just creating wealth as a result of that. But I don't think that's how we think. We think, "Hey, the debt snowball says I should pay down the debt first," right? So, if I hear you correctly, I get my disability insurance first. I work on my student loans and my 401(k) but really doesn't matter which one. I just need to focus on one of the two. And as long as I'm putting dollars towards both of those things at an appropriate savings rate, I'm doing a good job, and then I'm saving for my home.
Dr. Jim Dahle: Yeah.
Casey Weade: Would that be appropriate...?
Dr. Jim Dahle: I think some people are more debt-averse than others and they say, "I'm really not going to save anything for retirement until I'm done with these student loans, but I'm going to pay them off in 11 months." Great. You know, I think that's perfectly fine. Well, if someone else is like, "You know what, my loans are only at 3%. I just refinanced. I hope I can beat that with my investments or I'm going to have bigger problems." And they may spend a few more years paying off their student loans. But I don't want to see people with student loans 20 years into their career. You know, I think most docs who drag it out longer than five years after residency regret it. And so, I'd like to see a student loan plan that gets rid of them within five years. You know, even if you decide you're going to put most of your money toward investments, try to be done with your student loans by the time you're five years out of residency or fellowship. And I think if you do that, you won't regret it. Now, that doesn't mean you've got to pay it off in one year. I think it's perfectly fine to pay it off in four years, but don't make a plan that ends up with you still being in debt to your student loan lender 25 years into your career. I think that's folly. I think people regret that and that leads to burnout and they feel trapped in their career.
Casey Weade: Let's talk about the elephant in the room here, and that is taxes. I think this is one of the things that I hear from physicians most often that, well, what can I do about taxes? They want to know how I can save on taxes, how I can save on taxes and the W-2 employees, and they want to be W-2 employees from many instances that I'll find, "I want to be a W-2 employee. I like my job. I like where I work. I don't want to own my own business." So, if I want to maintain this career as a W-2 employee but I want to save more money on taxes, what do you tell somebody?
Dr. Jim Dahle: Well, part of the big problem is there's this misconception out there that people think, "I'm paying too much in taxes because I'm not filing my taxes right or because I don't have the right person preparing my taxes. And that's why I paid too much in taxes. If I can just get the right person to do it, I can find all these tips and tricks to cut my tax bill in half." It's just not the way it is. The way taxes work is if you are willing to significantly modify your financial life, yes, you can have a lower tax bill. You know, you can get married, you can have kids, you can save more money for retirement. You can start a business. You can give more money to charity. You know, you can have a big mortgage that costs lots of interest. You know, those sorts of things, yes, they lower your tax bill but they are not some little trick that you can do that has a dramatic difference on your tax bill. Now, there are some tricks, right? If you can qualify for a Home Office deduction that saves you a little bit of money here and if you write off your business mileage between your clinic and the hospital or whatever, that'll save you a few dollars there.
So, there are a few tax tricks but for the most part, the way you lower your tax bill is by living your life in the way that Uncle Sam's prescribed, married, children, businesses, saving for retirement, giving to charity, those sorts of things. Those are the things that have significant impact on your tax bill. So, the biggest one that the docs can really address, particularly a W-2 doctor, is by saving more money for retirement particularly in tax-deferred accounts. This is a great deal for most docs. If they can put tax-deferred money in while they're in the 35% or 37% tax bracket, they are highly likely to be taken out and the majority of that money, if not all of it, in much lower brackets, some that may be as low as 10% or 12%. But certainly, in the 24% range, which is a huge arbitrage, be able to put money in at 37%, take it out at 24% aside from the benefits of the tax-protected growth for all those years and the asset protection you get from having that money in your retirement account. So, doctors who want to save more money on taxes and aren't maxing out their retirement accounts, that's probably step one.
Casey Weade: Maybe I misread this and maybe I got this wrong but I thought I read somewhere that you are a Roth saver, a Roth 401(k) saver, and believe in putting your dollars currently at Roth. Do you save in Roth or do you save pretax tax-deferred?
Dr. Jim Dahle: I use both...
Casey Weade: What's your philosophy?
Dr. Jim Dahle: ...for various reasons. I think the typical physician in their peak earnings years should be primarily using tax-deferred accounts. In any other year, residency, fellowship, sabbatical, the year you leave residency, after you're working part-time when you cut back at the end of your career, a year in which you take a lot of maternity leave, those sorts of years, those are great years to primarily do Roth accounts just because you're in a lower tax bracket than you otherwise would be. Now, for most doctors, they can't get a tax deduction for putting money into an IRA, so you might as well use a Roth IRA. You know, certainly Roth is better than just investing in a non-qualified or a taxable account. But if you're in your peak earnings years, most of the time you're going to be better off with a tax-deferred account. Now, are there exceptions? Absolutely.
Casey Weade: Well, you're absolutely in that maybe not on your peak earning years but you're up there, right? And when you're in the highest tax bracket, there is and you're still putting some money in Roth.
Dr. Jim Dahle: Yeah. I put money in Roth, for sure. And part of it is, is the primary exception to this, which is a super saver, right? If you're going to end up with millions and millions of dollars, if you're going to have an estate tax problem, if you're estimating that your tax-deferred accounts are going to be $12 million by the time you hit retirement, you're a super saver and supersavers that tax benefit of a tax-deferred account is not as high and the tax benefit of a tax-free account is higher. And so, it kind of changes the calculus. It's not a simple equation by any means. The rule of thumb is tax-deferred during your peak earnings years but just recognize there are lots of exceptions to that rule of thumb, the primary one being a super saver.
Casey Weade: Good stuff. Well, I've got one more thing that I thought was really unique. The 20s Fund. Can you talk to us about the 20s Fund, what that is?
Dr. Jim Dahle: Sure. This is a little bit of my wife and my attitude toward inheritances. You know, I went away to school. My parents flew me home for Christmas and I think one year, about eight months, my mom paid my rent. It was $188 a month. And that was about all the help I got for college. That was it. And college, home down payments, medical school, all those expenses you have in your 20s, getting married, going on a mission, going to Europe, honeymoons, whatever. You know, I didn't get a lot of money then but that is the time in my life when money would have been most useful, when an inheritance would have been most helpful. You know, getting money now from my parents, if they leave me anything, I'm probably going to disclaim it and it's going to go right on to my kids. It's just not helpful to me at 40, 50, 60, 70 years old and I'm already set at this point. And so, our 20s fund kind of follows that idea that the time in life when money from your parents is most going to help is your 20s.
And so, we have various savings accounts for our kids. You know, when they earn money, we match what they earn and it goes into a Roth IRA. We have a 529 to help pay for their college, but we also have a UTMA, uniform transfer to minors account, for each of them that we call their 20s fund. We tell them, "This becomes your money at 21, which is what it is in our State of Utah, and you can use it for whatever you want. You can use it for a down payment. You can use it for college expenses or dental school or going to Europe or going on a mission or whatever you want to use it for." But we tell them this is your main inheritance. You know, far better to get a bunch of money now in your 20s than even more money in your 60s when you're already set. And so, that's what the 20s fund is. The nice thing about it is we get to see how they spend that, how they use that money, and it gives us a clue as to how they're going to use later money that they may inherit.
Casey Weade: That's the best part. I think that's the best part. You don't get to know how good your children are going to be with money that was just simply gifted to them until you're gone. So, you never know. And this is a way for you to kind of test the waters. "Hey, I give them a chunk of money. How are they going to handle it?" And then maybe I need to restructure my trust or my estate plan and do an overhaul because of what they're doing. Or maybe you're really thrilled. You go, "You know what, I don't even need this trust anymore. I'm going to leave these dollars out to them and leave it to them outright." So, I thought that was a really neat thing, an approach that you had to legacy. I only have one more specific financial question. We're down to one bullet here.
Dr. Jim Dahle: Sorry. Let me add one more thing to that last point.
Casey Weade: Please.
Dr. Jim Dahle: You know, as we're doing our estate planning, we're probably not giving them anything else until they're at least 40, no matter when we keel over, even if we keeled over next year. It's the 20s fund. It's all they get until they're basically 22 years out of high school. And so, that gives them a chance to sink or swim a bit on their own, you know, not be left completely abandoned but give them a chance to have life and not have our money ruin them. But at the same time, we're hoping by that point they're going to be able to handle it and be able to look at it as being a steward of the money and be able to pass it on to the next generation. So, yes, they'll probably inherit more money than that but the main thing is we wanted to get that money early on that really help them with getting started and then let them still have to fly on their own for a while.
Casey Weade: Wonderfully unique concept. So, we have one question that we want to pose today, one of the many we received from one of our weekend reading subscribers. So, if you subscribe to our weekend reading email, you get it every single Friday but you also are invited to ask your questions about a week in advance of the guests that we have upcoming. And I chose this one specifically because you had a recent blog post around it, so I knew it was fresh in your mind. And Tom asked this question. He said, "Can you tell me if U.S. I bonds have a use to hold my cash reserves instead of using an online savings account? I understand that you must hold them for more than a year. You can only buy $10,000 a year. But if I ladder some every year, in your opinion, is this a safe way to hold cash and minimize the bite of inflation?"
Dr. Jim Dahle: Yes. I mean, it is. It's a very safe investment and it's indexed to inflation. In fact, if you bought these things in 2000, they're currently paying 11% right now. Even if you just bought them this year, they're paying over 7%. A safe, essentially guaranteed investment that's paying 7% is pretty attractive these days. And so, yeah, I bonds are great. The big downside, you can only buy $10,000 of them a year. So, if you've got a net worth of $15 million, I bonds aren't likely to make a big difference in it. But you start early in your career buying $10,000 for you, $10,000 for your spouse in I bonds, then it can add up to a pretty good sum after a few years and certainly can function as part of your emergency fund, especially after a year once you can tap it.
Casey Weade: Awesome. Well, I want to get to my philosophical questions, but before that, I want to talk about cash. So, when it comes to a high-income earner, when it comes to a physician, do you recommend that they carry higher levels of cash reserves than your average American? Let's say they're spending as much as their neighbor, but they're making five times as much. Is there a reason that a physician shouldn't carry higher levels of cash than your general investor, general American?
Dr. Jim Dahle: Well, I don't think so. I think physician incomes are probably more secure than the typical American. Should they still have some cash reserves? Yes, particularly in early career. I think an emergency fund is worthwhile. The standard three to six months of expenses, I think, is more than adequate. And it's expenses. It's not income. If you're making $30,000 a month but you're only spending $10,000 a month, a $30,000 emergency fund may be just fine. You don't need $250,000. And so, I think having some is worthwhile. No, I don't put a specific percentage of my investment portfolio into cash. I don't feel like that's necessarily an asset class that has to be included in your investment portfolio. If you have a $5 million investment portfolio, you don't need $800,000 in cash by any means. But I think having some cash on hand is a pretty good idea, and most of that might sit in your checking account with some in your savings account or some in I bonds, that sort of thing. But some cash is good. Too much cash is probably a mistake.
Casey Weade: Well, let's get to the good stuff. Some general questions. We'll get away from some of the more specific financial questions. But what is your strangest daily financial practice?
Dr. Jim Dahle: My strangest daily financial practice.
Casey Weade: And maybe it's not daily. Maybe it's just weird.
Dr. Jim Dahle: You know, I don't know if this is weird. It's certainly most people don't do it and should, I think. My spouse and I meet once a month and we go over our finances. And in the beginning, it was a pretty hardcore budgeting meeting where we're like, "Hey, what did you spend $22 on?" And looking back at those early budgets, it's really funny to see how much money we're spending on certain categories. You know, long distance. You remember when you had to pay extra for long-distance? You know, we had that category in there. Nowadays, it's more like, let's just figure out what we spend and see what we made and decide where the extra is going to go. You know, how much are we going to give away? How much are we going to invest for the future, et cetera? Make sure we have enough cash flow to make our quarterly estimated tax payments. We've continued throughout our entire marriage 22 years now, having a meeting once a month about our finances. And a lot of people say, "Oh, it's a good idea," but it's weird enough that most people don't do it. So, I guess that's probably the weirdest thing. I'm a saver by nature. And so, spending is more painful for me than saving.
And so, I use lots of tricks to help me spend more. You know, I use credit cards because it helps me spend more, right? Everyone says, "Don't use a credit card, it makes you spend more." Absolutely, it does. That's why I use them. I let my wife do a lot of the purchasing. You know, if we're going on a trip, I let her buy the tickets because I enjoyed the trip a lot more if I don't think about what it cost. When we did our home renovation, I didn't want to be involved in the little decisions I did not want to know, you know, the difference in price between one thing or another. We just kind of looked at the top line is all I was interested in knowing. And so, those are probably a little bit weird because most people are not natural savers. You know, they need more tips to help them save than to help them spend but I actually look for ways to help me spend more money.
Casey Weade: You've been maintaining momentum in these monthly meetings for years with your wife and being that this will be ultimately released on the podcast on Valentine's Day, I think it's appropriate for us to dig in a little bit deeper here, and this is a perfect element of the conversation for that particular day of the year. And one of the things I find that even my wife and I struggle with as we have these meetings, as maintaining momentum in those, keeping them interesting month after month, as you're getting together every month, how do you maintain that momentum? How do you keep them interesting and not go, "We got it this month. I think we're on the same page," and just move on? Is there a certain structure you use, a framework, a process in order to keep those things interesting and ultimately maintain that momentum?
Dr. Jim Dahle: Well, the process has changed over the years, and we're continually trying to refine it and make it more streamlined and efficient because this isn't something we're trying to make interesting. It's a chore. It's a chore to manage money. We want to make sure that we're not getting ripped off so we go over, and when I say we, this part is actually one of my wife's tasks is to go over through the bank account, through the credit card statements, and make sure it's not something on there that shouldn't be there. And since she does most of the spending, that's the perfect part for her to do because she's more familiar with all the transactions. I tend to buy the same stuff every month at the gas station or whatever. And then my task is typically to add up the income. So, I got to go through the investment accounts and add up the income and all that sort of stuff. And then we get together, project how much we're going to spend the next month, and sometimes it's a little more, a little less, whatever, and decide what to do with the excess. And that's the part we do together. And that's where the interesting discussions take place is what charities we might want to support or what family members we might want to give money to, what's come up in the last month and how much we want to give away, and where investments are going to go and what investments we need to invest in this month to keep our investment plan on track.
Casey Weade: Is there a checklist somewhere for those meetings?
Dr. Jim Dahle: No. Maybe we ought to make one but it's pretty much habit at this point.
Casey Weade: I like the idea. I want a checklist. I'm a checklist guy. I want to see what boxes that we need to check to make us feel like we're on the right path. My final question today really is more on the philosophical nature of retirement and work. What does retire with purpose mean to you, Jim?
Dr. Jim Dahle: Well, I think a lot of people spend too much time planning the financial aspects of retirement and not enough time planning the other aspects of retirement. You need something to retire to. And you know, I reach financial independence long before I was done working. You know, I'm working as much now, maybe in different ways, but as much now as I ever did because the main purpose of my work wasn't the money. Was that an important part of the work? Sure. But that wasn't the main purpose of the work. And so, I think even for people that find themselves staying with their career or staying with their job or staying with their business primarily for the money, they've got to be thinking about what they're going to do when they're not doing that anymore. And vague ideas like, "Oh, I'll volunteer more or I'll golf more," well, you can only golf so much in a week. Very few people spend 60 hours a week golfing.
So yes, that can be part of it but I've been amazed talking to some retirees how surprised they've been and how much free time they have despite doing everything that they plan to do. And so, I advise a lot of people to try to take a test run. Do as much of that stuff you think you're going to do in retirement now as you can. Go on the trips now. Certainly, there are trips that you can do at 50 that you cannot do at 70. And so, go do those, make plans to do those, try to adjust work such it allows you to do those things. There are activities you think you enjoy. Try doing them a few hours a week now and see if you would like to do more of it. And so, take as many trial runs as you can. Some people say when after they retire, "I don't know how I ever had time to work. I've got so much stuff going on." But a surprising number of people find there are some pretty big holes in their life they need to fill once they retire.
Casey Weade: Well, Jim, we're just scratching the surface here. I figured this could have been a Tim Ferriss episode four to five hours as we continue to dive deeper into these issues. If you're listening and you would like to learn more, specifically if you're a physician, we've partnered up with Jim to provide something to you that is just an invaluable resource. We're going to be giving away copies of Jim's book, The White Coat Investor: A Doctor's Guide to Personal Finance and Investing. For those of you that just do this, all you have to do is write an honest rating and review for the podcast over on iTunes. Shoot us an email at firstname.lastname@example.org and we will happily provide you a free copy of The White Coat Investor as long as it lasts here in our office. So, Jim, thank you so much for your time. It's been an absolute pleasure.
Dr. Jim Dahle: You're very welcome. It's been wonderful to be here.