budgeting

Financial Success Requires Offense and Defense

…and, defense may not be what you think it is

By Tom Strangstalien, Financial Protection Advisor

Offense, financially speaking, is focused on growth. Defense is focused on keeping what you have. Pretty simple concepts all-in-all. However, each has nuances that vary depending on your tolerance for risk, age, retirement goals, current and future lifestyle goals, and of course, income.

Income itself is one of your offensive tools. This includes the income you earn from working and passive income earned by investments. The other form of offense shows up in investment portfolio design and is generally about choosing assets or combinations of assets that have a high probability for growth… and generally, a greater degree of risk. And, of course, you can also play defense in your portfolio by choosing assets that are slower growing and less risky. The proportion of offense and defense in your portfolio is dependent on the variables mentioned above. This is where the advice of a professional investment advisor who understands your current situation, along with your goals and desires, is essential to your success.

As to other forms of defense, well that’s where I have spent my life helping people figure out. For example, during your earning years, your salary and other earned income is your most formidable offensive asset. But what happens to your plans if due to illness, injury or – God forbid – death, reduces or eliminates your income? How will you and your family maintain your standard of living? How will you be able to continue pursuing your retirement plans?

A substantial market for income replacement insurance has steadily developed for decades. (I include life insurance in this definition as it provides income for your family if you die.) There are as many options as there are individuals who need this type of defense, which means you have the opportunity to choose the type of insurance that exactly fits your current situation (including budget), and future goals.

A general feeling within the insurance industry, is that once a couple reaches the age of 55, there is substantial probability that one of them will need a form of long term care during their lifetime.   I have personally witnessed this within couples that I have worked with throughout my career.  That’s where another form of defense plays an exceptionally important role in protecting your immediate financial security and the integrity of your estate.

Now, like income protection insurance, there are many long-term care insurance options. To choose the option that’s right for you, you have to take into consideration how much tax you are paying and will pay. Again, the nuances can be quite subtle, but generally speaking, an experienced advisor will be able to show you all the ins and outs of the insurance products available.

One thing is for certain; the best time to do this type of planning and make your decisions is now. The sooner the better because, as you age, your options may become more limited, and for certain, the cost will increase.

If you would like a personalized tour of all the options that are right for where you are today and where you want to be in the future, contact me. I look forward to being your defensive coach.

Tom Strangstalien 

Direct:  608-442-3730

Cell:  608-304-1579

tom.strangstalien@wismedassure.org

Different Kinds of Debt: The Good, the Bad, and the Just-Don’t-Do-It!

By Rufus Sweeney

Amassing a considerable amount of debt during medical school is “situation normal” for practically every medical student. Even though debt is rarely seen as a good thing, you need to know the difference between good debt, bad debt, and debt to be avoided at all cost.

Choosing wisely now makes paying off your debt much easier.

In the category of “Just-Don’t-Do-It”, all sorts of credit cards are available and in many cases, actively promoted to medical students with special offers that include an interest free period, cash back on purchases, and all too easy sign up terms. But once that interest free introductory offer ends, you’re on the hook for anywhere from 12 to 25 percent interest on any balance you carry from month to month.

When you use a credit card to finance your lifestyle choices or, worse case, pay for essentials without a plan for paying off your balance each month, you’re playing with financial fire.

The “bad” in comparison to credit card debt, doesn’t look all that bad, but still with interest rates ranging from six to 10%, unsubsidized student loans are an expensive choice.

The “good” are those loans with the lowest possible interest. For example, interest rates for institutional loans from medical schools range from four to five percent. If low interest was the only criteria for determining “good” debt, then a mortgage at three to five percent and car loans at four to five percent would also fall into this category. That said, check out my previous blogs and podcasts on the pros and cons of buying a home and the reasons why it is a good idea to live like a resident, even after you become an attending physician.

Paying the piper

No conversation about interest rates is complete without a word or two about repaying debt.

Generally speaking, there are two popular methods: the snowball method and the avalanche method.

Popular financial expert Dave Ramsey recommends the snowball method because he says, “… personal finance is 20% head knowledge and 80% behavior. You need some quick wins in order to stay pumped enough to get out of debt completely.”

Here’s how it works:

Step 1: List your debts from smallest to largest regardless of interest rate
Step 2: Make minimum payments on all your debts except the smallest
Step 3: Pay as much as possible on your smallest debt
Step 4: Repeat until each debt is paid in full

Here’s an example using four different debts:

  1. $500 medical bill—$50 payment
  2. $2,500 credit card debt—$63 payment
  3. $7,000 car loan—$135 payment
  4. $10,000 student loan—$96 payment

Using the snowball method, you would make minimum payments on everything except the medical bill. You would pay as much as possible each month on the medical bill until it is paid off.  You would then take the money you used for the minimum payment on the medical bill, plus as much extra as you can afford and use it to pay off your credit card debt. As soon as that debt is paid, you take all the money you previously used to pay the medical bill and credit card debt off and apply it to your car loan.

By the time you are ready to pay off your student loan, you’ve got a pretty big debt repayment snowball working for you.

The avalanche method takes a more practical approach… at least mathematically speaking.  You make minimum payments on all debt and use any remaining money to pay off the debt with the highest interest rate. Like I said, this method is a more practical approach because it allows you to save hundreds of dollars in interest payments and reduce the time it takes to pay off all your debt.

When it comes to choosing which method to use, remember what Dave Ramsey says… “personal finance is 20% head knowledge and 80% behavior”.

In my next blog, we will explore the different ways in which interest rates are calculated.

If you need help managing your debt, one of your best resources is your financial aid officer. And, I highly recommend visiting the White Coat Investor website. It’s a great source for guidance on how to acquire and manage the “good” forms of debt.

To Buy or Not to Buy: A Personal Challenge

Despite its appeal, buying a home in residency is usually a bad idea

By Christopher Rufus Sweeney

In residency, buying a home is most often not a wise financial decision. That said, the emotional appeal of owning a home is powerful and difficult to resist.

In my previous blog – Live Like a Resident – we looked at how living frugally for five to 10 years after residency is the fast track to financial freedom. Speaking of powerful, the emotional appeal of buying your dream car, taking high-end vacations, bringing your wardrobe up to a higher standard, regularly treating yourself to fancy restaurant meals (because after all, you deserve it!), can be all but irresistible.

Just like owning a home.

But, if you detach emotion from your reasoning, and rely solely on logic in your financial decision-making, you are likely to decide against buying a home in residency. Here’s why:

  • Closing costs associated with buying are on average 2-5% of the value of the home, which pushes the break-even point out quite another year or two
  • Residents often don’t have enough saved for a down payment. If you can only afford a down payment of less than 20%, you will need Private Mortgage Insurance (PMI), or a certain percentage to insure the loan
  • You could lose money if home values decline
  • There are extra expenses beyond mortgage payments
  • You are responsible for repairs, remodeling
  • No tax advantages because residents typically can’t afford an expensive enough home to exceed the standard deduction

On the other hand, renting a home has these advantages for a resident:

  • Far fewer upfront costs and paperwork
  • You have freedom to be more mobile
  • You are not responsible for maintenance, repairs
  • You can build your credit rating (if your landlord reports rent payments to the credit bureaus)
  • No property tax bills
  • And, there’s no need to worry about falling home values

Under certain circumstances, owning a home can make sense. For instance, if you have minimal student loans, are facing a long residency, and the housing market where you want to own is favorable, then it may make financial sense to own. If your residency is five or more years, the financial logic is sound as it is enough time for your home to appreciate beyond your costs.

If you are uncertain of where you will be attending after residency, you may think you can always rent your home if you move out of town. This is typically a bad idea. First, if you may end up in a different city, you will quickly learn that remote land lording is hard. If you do end up in the same city, you’ll be managing the place unless you hire someone to do it. Regardless, you’re still on the hook for any repairs you make to the home which can eat away at the amount of income you make.

If you do buy a home during residency, it’s usually a good move to sell when you’re ready to move on (hopefully for more than you bought it for).

A word of caution before you buy: Online services like Zillow provide a history of what the house has sold for previously. If you notice it’s cheaper than it was a few years ago, this could be a good sign… or a bad sign. The place could be cheaper because it has serious problems. Which is why you must always get the home inspected by a professional before purchasing.

It’s up to you. Whether or not you can apply Spock-like logic to your home buying versus renting decision, or find some sort of logic/emotion compromise, you need to always ask:

  • What can you really afford?
  • How long do you plan to stay in the home?
  • Do you want stability or flexibility?
  • Can you afford to be responsible for home repairs/maintenance?
  • What impact will this decision have on your long-term career, family and financial goals?

Here are some additional resources to help you make the best possible decision.

Next blog: Different Kinds of Debt: Knowing helps you choose the best repayment method.

Is Your Money Unemployed? Replace budgeting with goal setting and give your money a job

By Christopher Rufus Sweeney

“If you are willing to live like no one else will early in life, then you can live like no one else can later in life.”

James Dahle, MD, “The White Coat Investor”

As we developed our financial literacy course for medical students, my colleague Emma Crawford and I initially called the first module “Budgeting”.  We quickly realized no one likes to create a budget much less stick to it. So, we changed our perspective and called the module “Budgeting: Goal Setting”.

Goal setting is all about giving your money a job… a very empowering activity. And, to add a little sugar to the medicine, we’ve replaced the “b” word altogether and use “earmarking” instead.

Emma and I created this course to give medical students a scaffolding on which to build their futures… financial and otherwise. Goal setting and earmarking challenges you to do three things:

  1. Determine and rank the values that drive you
  2. Decide the goals that are most important for you to achieve
  3. Make sure your spending habits reflect your values and goals

These steps are simple to understand, but they are perhaps some of the most challenging to live by. There are plenty of studies about the psychology of why we struggle with these but one published in the Journal of Consumer Psychology is particularly helpful. It’s titled, “If money doesn’t make you happy, then you probably aren’t spending it right” and it is available on sciencedirect.com. The title speaks for itself.

When determining your values and identifying your goals, one key takeaway from the study may be very helpful: Buy experiences instead of things. Because we quickly get used to new things, the happiness we experience is fleeting. With experiences, new and repeated, the happiness we experience is much more enduring.

Another key takeaway is easy to say but extremely difficult to do: Pursue your own goals, not anyone else’s. This is where your values come in; when you are very clear about what they are, and you review them often, they protect you from getting caught up in someone else’s definition of what’s important in life. (The quote by James Dahle, MD at the beginning of this article speaks to the reward you can expect when you stick to your values.)

Once you have your values and goals, you need to decide how to earmark your money. Here is a simple table with my spending categories to help you get started.

  NON-NEGOTIABLE NEGOTIABLE
FIXED Housing
Transportation
Insurance
Savings 		Subscription streaming services
Amazon Prime
VARIABLE Food
Gasoline 		Hobbies
Nights out
Vacation

There are a number of very good online resources to help you set up, manage and stick to your goals. In the course, we run through a detailed explanation of how to use an app called Mint. Without actually going online to do so, here are some of the soundest steps you can take to give all of your money the job of ensuring you achieve your goals:

  • Look at your personal history of spending. (With apps like Mint, you track your credit and debit card activity)
  • Track your spending back at least a month… preferably six months
  • Assign categories of spending for all transactions
  • Once you know how much you spend on average, you can refine or create new categories of spending as needed
  • Set a monthly budget and identify where you can cut back if needed
  • Keep track of how you’re doing on at least a weekly basis

What do you learn from tracking your expenses? First, you learn where all your money is going. Without a doubt, you will be surprised at how many different ways you spend money and, most importantly, how little much of your spending contributes to the achievement of your goals. In other words, you learn how to recognize when you are spending money towards the achievement of someone else’s goals (increasing Starbuck’s income comes to mind).

The best result of earmarking is it gives you a clear picture of what you can do to accelerate your progress to your bigger longer-term goals. The sense of power and satisfaction even the smallest step towards those bigger goals is invigorating and an acknowledgement of your ability to be in control of your money instead of suffering as your money controls you.

Next blog:

Live Like a Resident: If you live and work like a resident, you can become financially independent in 10-12 years. That feels good.