Quick Guide For Managing Loans, Insurances, and Budgets

Of note, this article was originally published on Doximity’s Op-Med for resident physicians.

As resident physicians who work crazy hours, we have a lot on our plate. With so many competing responsibilities, it can be difficult to balance our personal lives with our careers and some things may inevitably fall by the wayside. While there are many things we can put off for another month or even another year, our finances shouldn’t be one of them. Here’s a financial check list of three things you must do to make sure you’re on the right track: 

Have a concrete plan for your student loans

Figuring out what to do with your student loans can seem a bit overwhelming. Here are a few steps to help you navigate through the madness.

1. Decide whether or not to consolidate or refinance your loans. Consolidation is when you combine all your loans into one giant loan and this can usually be done through the federal government. Refinancing is when you combine your loans with a private company outside of the federal government. Refinancing your loans usually allows you to get a lower interest rate on which can save you money over time but it makes you ineligible for several government loan forgiveness programs like public service loan forgiveness (PSLF). Since I’m enrolled in PSLF, I chose to consolidate my loans through the government instead of refinancing them with a private company.

2. Pick a repayment plan that you can afford. If you have federal student loans, you will be automatically enrolled into the standard repayment plan. This plan may require a higher monthly payment than you can afford. If this is the case for you, as it was for me, switch into one of the income driven repayment plans that cap your student loan payment at 10-15% of your discretionary income.

3. Sign up for public service loan forgiveness if your residency qualifies. Enrolling into the program isn’t binding and may give you the chance to get tens of thousands of dollars in student loans forgiven, tax free. Take five minutes out of your day and submit the form to officially enroll, if your resident program meets the qualifications.

Make sure you have insurance

Many of us didn’t think much about insurance in medical school. We probably had health insurance from our parents or our schools and didn’t worry about anything else. Now that we’re out in the “real world,” here are three things to do to make sure we are thoroughly protected in residency: 

1. Verify that you have medical insurance. Even though most of us are young and healthy, we still need health insurance. Whether it’s for yearly checkups, acute illnesses, the birth of a baby, prescriptions, or unforeseen injuries, we have to make sure we’re protected and have an affordable way to cover these costs. As residents, most of us should get free or low-cost coverage through our programs. Just make sure you’re enrolled.

2. Get disability insurance. After taking out loans and spending most of our 20s in school, let’s make sure that our income is protected. If we get in an accident, are diagnosed with an illness, or simply have an injury that prevents us from working to our full capacity, disability insurance will kick in and give us money to replace the income we may have lost. Group disability insurance policies through our residencies usually don’t have enough coverage or adequate protection. I purchased an individual specialty-specific disability insurance policy that will pay out $4,000 a month if I am unable to work at 100% capacity as a resident. The policy will increase and pay out $12,000 a month when I become an attending.

3. Decide if you need life insurance. Life insurance pays money to our families if we were to pass away. While many of us have a life expectancy well into the 80s, life can be unpredictable. If something were to happen to us, we’d want to make sure our family was taken care of. As a resident, many of us have a small life insurance policy from our employers, but if you have a spouse or kids who depend on your income, that group policy may not be enough. You may need to purchase additional term life insurance.

Create a monthly spending plan

As resident physicians, life is much different now than it was when we were medical students. Instead of getting one lump sum of money each semester, we now get paid on a consistent basis. In order to make sure we’re not spending too much money and are actually saving a decent amount for emergencies, paying down debt, retirement, and vacations, it’s imperative that we implement a spending plan. I categorize my spending into 3 buckets: 

1. Things I need to buy, which are necessities like rent, bills, and food.

2. Things I want to buy, which are discretionary entertainment expenses like concert tickets, movies, books, meals at restaurants, or clothes.

3. Things I should buy, which are investments I make to increase my net worth whether that’s by paying down debt, saving money into a separate account, or investing toward retirement.

Simply allot a percentage of your check to each of these three buckets to make sure you’re living within your means and making responsible spending choices. 

To summarize, getting your finances in order doesn’t have to be difficult. Have a concrete plan for your student loans by deciding whether or not to consolidate or refinance your loans, enrolling into an affordable repayment plan, and signing up for PSLF. Next, make sure you have all the insurance you need like medical insurance, disability insurance, and life insurance. Lastly, create a spending plan to ensure that you’re paying your bills, increasing your net worth, and investing in your own self-care. 

How to pay off your loans: Debt Snowball vs Debt Avalanche

Those of us who took out student loans for school or weren’t as diligent about our finances in our younger years, may have accumulated some debt. Now that we have started our careers and are trying to follow a budget, one of the things on our to-do-list is paying off debt (or at least making payments towards it). When it comes to paying down debt, there are 2 main ways to do it: the debt snowball and the debt avalanche.

Debt Snowball:  

With the debt snowball method, you organize your debt by the amount you owe on each loan and prioritize paying off the loan with the smallest amount first. One you pay off the loan with the smallest amount, you use the money you were putting towards that loan and stack it onto what you were paying on the next highest loan until you pay that one off too. You keep stacking payments and paying off loans until all of your debt is gone.

Example of the Debt Snowball:

Let’s say you owed $5,000 on a credit card, had $20,000 left on your car loan, and $40,000 in school loans. With the debt snowball method, you would prioritize paying off the credit card debt first, then the car loan, then your student loans. Specifically speaking, you would make the minimum amounts on all loans (say $100 each) and any leftover money you have (say $500) would go towards the smallest loan (in this case it would be your $5,000 credit card debt). Once you pay off the credit card debt, you would stack the money that went to that debt onto the next highest loan, which in this example is the $20,000 you still owe on your car. Once you pay off the car loan, you would take the money you were paying on that loan and add it to what you were already paying towards your $40,000 student loans. With the debt snowball, you end up stacking money on each payment as you pay off each debt (like you creating a snowball that stacks ice as it rolls).

Why the Debt Snowball works:

Paying off debt is mental. When you see yourself pay off the small loan, you may be even more encouraged to pay off the larger loans and more likely to eventually eliminate all your debt. The disadvantage of this method is that paying off loans with the smallest amounts first may cost you more money overall (since there may be other loans with higher interest rates). Despite this disadvantage, there are many advocates of the debt snowball method. Supporters of the debt snowball say that most people don’t end up paying off all of their debt because they get discouraged along the way. However, when they see themselves pay off one of their loans, they are more likely to pay off additional loans and eliminate their debt altogether. Thier point? People may pay more money overall with the debt snowball method, but they will eventually get it all paid off.

Debt Avalanche:

With the debt avalanche method, you organize your debt by the interest rate on each loan, (not by the amount you owe on each loan). You prioritize paying off the loan with the highest interest rate first (even if you have other loans of smaller amounts).  

Example of the Debt Avalanche:

If you had the same loans from the previous example: $5,000 from your credit card with a 15% interest rate, $20,000 from your car loan with an 5% interest rate, and $40,000 in student loans with an 8% interest rate, then you would organize your loans by their interest rates and prioritize paying off the loan with the largest interest rate first. In this case, you would pay off the $5,000 loan, then the $40,000 loan, and end with the $20,000 loan (as if you are an avalanche that starts at the top of mountain and increases in speed as it travels downward).

Why the Debt Avalanche works:

The advantage of this method is that you end up paying less money overall because you get rid of loans with higher interest rates first. The disadvantage of this method is that oftentimes the loans with the highest interest rates are some of our larger loans. Thus, it may take awhile to actually pay the loan off. It may be harder to feel as though you are making progress towards debt repayment since paying off that first loan could take years. Many people may lose their zeal for paying off debt and get tempted to use that money for other things. Nevertheless, many financial advisors still recommend the debt avalanche for people who are dedicated to becoming debt-free, since it saves them hundreds, if not thousands, of dollars in the long-run.

Which method is better?    

It depends. There are pros and cons to each method so you should choose the method you think you can stick to the best. If you know you are the type of person who needs to see small victories to stay encouraged along the way to becoming debt-free, then perhaps the debt snowball method is right for you. If you are the type of person who is more diligent about paying off debt, doesn’t rely on small victories, and has fully committed to paying off debt in the shortest amount of time, then perhaps you would do well with the debt avalanche method. I myself, have used each of these methods in the past and they both have worked well. For example, I used the snowball method when paying off my car note and credit card bills. I then used the debt avalanche method when paying my student loans.

Which method do you think would work best for you?

Are you debt-neutral, debt-averse, or “debt-particular?”

Most of us have financial goals we’d like to achieve, whether that’s owning a home, earning a certain salary, or having a set amount of investments and passive income. We may even desire to become debt-free. When it comes to debt, most people fall into 1 of 3 categories: Debt-Neutral, Debt-Averse, or Debt-Particular.  

DEBT-NEUTRAL:

Debt-Neutral is the category used to describe people who lack strong feelings about debt. I don’t think anyone likes debt, but some people may simply feel indifferent to it. Perhaps they view debt as a way to make things more convenient and use it to purchase things they wouldn’t ordinarily be able to buy.

Unfortunately, being debt-neutral, especially when it comes to consumer debt, can get us into trouble. Borrowing money to purchase things, especially items that decrease in value over time (like cars, clothes, and electronics), can can lead to bad habits that lower our net worth. While credit cards, equity loans, and financing deals can make things more affordable in the short-term, they often end up costing us more overall, especially when we consider the interest that is added.

DEBT-AVERSE:

Debt-Averse is the category used to describe people who hate debt. This category is usually full of young professionals who took out student loans or racked up credit card debt early in life. Now they may be in the repayment phase and likely loathe every second of it. They realize that the more debt payments they have, the less money they can use to save and invest the way they would prefer.

People who are debt-averse are usually “in tune” with their finances and have a budget or spending plan that allows them to pay off their credit cards, student loans, and auto loans by a certain date. They may even be hesitant to get a mortgage. While this may sound aggressive, it has several advantages. Being eager to pay down debt, will help you save money over time since you won’t have as many loans to repay. Plus, it also changes your spending habits and mindset. The process of paying off debt is a long-standing practice of frugality that makes you less materialistic and teaches you to live below your means. When you no longer have debt to pay back, you can be a lot more selective in the jobs you take, number of hours you work, and quality of life you live.

DEBT-PARTICULAR:

Too much of anything can be detrimental, so people in this group attempt to use debt to their advantage. They are usually experienced investors who know better than to purchase liabilities (things that decrease in value) with borrowed money, but may feel differently about assets. Instead of being indifferent to consumer debt or living a life of frugality to pay off their loans in record time, they have a different philosophy: use debt to increase your net worth by borrowing money to purchase things that increase in value over time.

Instead of simply paying off debt, they focus more on increasing their income. Many people in this group have read some investment guide or come across Robert Kiyosaki’s “Rich Dad, Poor Dad” and realized that purchasing assets is one of the ways the rich get richer. They may have even considered taking out loans to purchase real estate or invest in a business that could increase in value and create an additional revenue stream.

My point: There are 3 groups of people when it comes to debt. Those who are debt-neutral and have a decent amount of consumer debt with no realistic timeframe on when they will pay it back. Those who are debt-averse and have an aggressive plan to pay back their debt in record time. Lastly, those who are what I call “debt-particular.” They avoid bad debt (by not borrowing money to purchase things like cars clothes and electronics that decrease in value), but don’t mind good debt (taking out loans to invest in assets like real estate or businesses that may increase in value overtime or provide an additional revenue stream).

Which group do you think you are in?

Good Debt vs Bad Debt

As a young college student or post-grad, you may have accumulated credit card debt. I certainly did. However, somewhere in the process of “adulting” you may have realized that having lots of debt isn’t a good thing. You may have even heard investment gurus like Dave Ramsey preach that all debt is bad and insist that people do any and everything to rid themselves of the terrible “D-word” as fast as they can. This can be great advice in many circumstances, but some things aren’t so black and white.

If you’ve attempted to delve into the world of personal finance, you might have seen some investors adopt a more nuanced philosophy. They believe that there is “good debt” and “bad debt.” Let me explain.

What is “Bad Debt?”

Bad debt is usually consumer debt. It’s when you borrow money via a bank loan, credit card, or store financing to purchase things like cars, clothes, or electronics that lose value over time. Some people may even view some student loans as bad debt, especially if they have a substantial amount of loans that may take a long time to repay.

What makes it bad?

The things purchased with “consumer debt” usually depreciate or go down in value over time. Plus, the interest rate at which we borrowed the money to purchase these items is high. Because the item depreciates and the interest rate is high, you end up paying a lot more for these items than they are actually worth. Taking months or even years to over-pay for something that loses value is inefficient at best and a waste at worst. Plus, you exponentially delay your ability to build wealth since the money you spend making payments is money that isn’t going towards your investments or things that will build your net worth. Instead of earning 5-10% profit on your money inside of a retirement account or lucrative investment, you are instead paying an extra 5-10% on something that is now worth a lot less.

Pro Tip on Bad debt: Get rid of it. Since bad debt, causes us to overpay for things that decrease in value, we should get rid of it and stop accumulating more. We should work to pay off our car loans, credit cards, and other high-interest debt as quickly as we can.

What is “Good Debt?”

Good debt is usually “investment debt.” It’s when you borrow money via a bank loan or private loan to purchase things like real estate, businesses, or commodities that increase in value over time. Some people may even view some student loans as good debt if the degree they obtained with the student loans allows them to get a high-paying job they wouldn’t have gotten without the taking out loans.

What makes it good?

You were able to borrow the money at a low interest rate and purchase things that appreciate or go up in value over time. Getting a loan to purchase assets (things that increase in value) is considered good debt because you can theoretically sell the item, pay back the money you borrowed, and make a profit in return. In fact, this is one of the main ways people build wealth through real estate investing. Many investors borrow money to purchase a home (by taking out a mortgage) and use the tenant’s rent payment to pay off the mortgage over time. Some experienced real estate investors may even secure investment loans that allow them to purchase an entire apartment complex or commercial building. They work to increase the value of the building (by renovating it and raising the rents), then sell the building to another investor a few years later at price that allows them to pay back the money they borrowed and keep a large profit in return.

Pro Tip on Good Debt: Be cautious. While it may make financial sense to accumulate good debt to increase the number of assets you own, make sure you are in a financial position to do so. Having too much debt, good or bad, can put you at risk of defaulting on loans if unexpected events occur. Good debt is something to consider once all of the “bad debt” is gone and an investment opportunity you have studied extensively is presented.

My Point? Bad debt is bad because you borrow money at a high interest rate to purchase liabilities (that decrease in value over time) which can decrease your net worth. Good debt is good because you are able to borrow money at a low interest rate to purchase assets (that increase in value over time) which can increase your net worth. Get rid of bad debt, be cautious about good debt.

Resident Physicians: 6 Questions To Ask Yourself Before You Spend Your First Paycheck

I originally published this article on Doximity’s “Op-Med" tailored for medical doctors. Check it out below:

As resident physicians, we work a ton! Fortunately, it’s not all in vain. Unlike our life as medical students, we finally get paid! But before we spend all the money from our first checks and start treating ourselves to over-priced dinners, let’s stop and think things through. Despite the temptation to spend what we have and wait for the next check to appear, let’s set some financial goals and create a spending plan.

Since everyone’s priorities may differ, it’s important to tailor your spending plan to your own individual needs. As you think about getting your finances in order, you must first determine what’s most important to you by answering these 6 questions:  

1. Do you have an emergency fund? Those of us who are just entering the workforce may not have started saving money just yet. However, building up an emergency fund is something we all may want to prioritize sooner rather than later. If our car breaks down or a family member gets sick, money in this fund gives us the means to pay for these events without relying on a credit card or accumulating debt. Although the amount of money in this fund may vary from person to person, having anywhere from $1,000 to 3 months of expenses is a decent starting point. 

2. Do you want to be debt free as soon as possible? Some of us are debt-averse. We can’t stand the thought of having a credit card balance and loathe our student loans more than anyone could imagine. Other people are more debt-neutral. They feel that debt was a necessary expense to get to this point in their lives and are in no immediate rush to get rid of it. Regardless of which camp you’re in, it’s important to have a plan. If you are debt-averse, you may want to decrease your living expenses and allot a larger portion of your budget to paying off credit card debt. If you are more debt-neutral you may simply aim to meet the minimum payments on your student loan balance and spend your money on other things.  

3. Do you want to save money for retirement? As young adults out in the workforce, it’s important to think about retirement. No matter how invincible we feel, we likely won’t work for the rest of our lives and will need a plan in place to support ourselves during that time. Although retirement can seem a long way away, we have to start planning for this period as soon as we can. It often takes 20-30 years to accumulate enough money for retirement and as doctors who have spent the majority of our lives in school, we have some catching up to do. While some residents may prioritize paying off debt, providing for their kids, or managing expenses in a high-cost-of-living area, others of us may able to set aside 5-10% of our income for retirement. Although we may be tempted to hold off on retirement savings for a few years, the sooner we start contributing to retirement, the sooner we can allow the magic of compound interest to work in our favor and build our net worth.  

4. Do you want to have money for vacations? As resident physicians we are often over-worked and under paid. I’m in family medicine and even I average around 60 hours per week, so I can only imagine how what life is like for some of you surgeons. Since we work so many hours with so few days off, it’s important for us to take advantage of our vacation time. While laying in bed for a week may sound like heaven on earth, we may actually want to consider taking a trip away from home. In fact, it may be a good idea to prioritize putting a couple hundred bucks a month into a “vacation fund” so that we can afford to travel the world or have a relaxing vacation once or twice a year. Many of our residencies emphasize self-care, saving up for a much-needed vacation may be the perfect idea. 

5. Do you want to live comfortably? As young professionals who have sacrificed most of our 20s to practice medicine, we can get a bit overwhelmed. While self-care for some people may involve an expensive vacation once a year, others of us may need to find more frequent sources of enjoyment, one of which may include our home environment. Instead of saving hundreds of dollars each month to take a vacation, you may instead choose to spend that money living in a nicer place. Or, perhaps you’d rather spend that money on personal massages, monthly concerts, or fancy gym memberships. Regardless of your version of self-care, you must decide how big of a priority it is for you so that you can make room for it in your budget. 

6. Do you want to give money away to others? I know this last question may seem a bit out of place, especially for us residents barely keeping our heads above water, but let me explain. Oddly enough, many people find that they get more enjoyment out of life when they give to others rather than spend money on themselves. It’s as if the act of generosity has a boomerang effect that blesses our own lives as much it does the recipient of our gift(s). For many Christians, this may mean giving 10% of their income to the church as a tithe. For others, it may mean donating to charity, supporting a cause with which they most identify, or perhaps sharing resources with someone less fortunate. Regardless, of your method, you may find that setting aside money to give to others adds more value to your life than you expected.

What am I doing? A little bit of everything. I don’t have an emergency fund, so setting aside at least $1,000 in a savings account is a top priority for me. Since I’m enrolling in a student loan forgiveness program (aka PSLF) I am in no rush to pay them down. However, I do have some credit card debt from my days in graduate school that I plan to pay off as quickly as possible. Once that debt is gone, I’ll start putting 5-10% of my income into my job’s 403b retirement plan. While those are my financial goals for this year, I also have some financial priorities for each month. I set aside a couple hundred bucks for self-care, have a separate vacation fund, and carve out a certain amount for charitable donations. Choosing these financial priorities has made budgeting so much easier and also ensures that I maintain a decent quality of life.

What about you? What are some of your financial goals and monthly priorities?

How to get ahead in your finances: Pay yourself first.

If you’ve ever delved into the world of personal finance, you might have heard of the phrase “pay yourself first.” In fact, many investment gurus mention this approach as one of the keys to getting your finances on track and building your net worth.

What does “paying yourself first” mean? This concept can seem confusing initially, so let me break it down. Paying yourself first simply means making yourself a priority. It’s actively choosing to invest in things that build your net worth before you spend money on anything else. 

Pro Tip: This can be hard to do at first. As responsible adults, our first inclination may be to pay our bills, buy necessities, and use whatever is leftover to “invest in ourselves.” The problem with this approach, at least for me, was that there never seemed to be any money leftover. Some unexpected expense would occur or I’d end up spending money on something else that didn’t even need. I never seemed to have money leftover to save or invest. “Paying myself first” helped me change that. Now, instead of spending the majority of my check and wondering where my money went, I do things differently. I invest in myself first, then use the leftover money to pay my bills, reserve money for food and transportation, and spend the remainder on entertainment and incidentals. 

How is it done?  Do exactly what it says. Pay yourself first. In other words, the very first thing you do when you get paid is use a certain percentage of your check to build your net worth.  This means having a set amount of money reserved for the sole purpose of paying down debt, saving for retirement, or investing in other types of lucrative deals. When you reserve money for these purposes, you are actively investing in your future in a way that builds your net worth and puts you in a better position financially. 

Pro Tip: Make this automatic. Outline a budget of your monthly expenses and estimate how much you can afford to save for retirement or use to pay off debt each month. This can be anywhere from $5 to hundreds of dollars each pay period and beyond. Once you have a set amount that you can spend on investments and debt pay down, go into your mobile banking app and get this amount automatically deducted from your check the same day you get paid. Doing this ensures that you are “paying yourself first” and makes building your net worth a priority. It also prevents you from spending your “extra” money on things you don’t need.   

Why does it work so well? Most of know we need to invest in ourselves. We realize that having money is important and that spending all we earn isn’t the wisest thing, but sometimes life can get in the way. Either that or our bad habits can stop us from doing what we know is right. It’s this reason that the concept of paying yourself first was born. It forces us to implement the strategy of investing in ourselves before we do anything else, especially when set up this automatic withdrawals. Unlike other strategies, this method doesn’t rely on our own self-control or fail due to our lack of self-discipline.

Pro Tip: Before I got my first paycheck as a doctor, I set up the payroll from my job in way that would virtually ensure that I achieved my financial goals. The first thing I did was determine what percentage of my income I wanted to store away for retirement and choose the index funds I wanted to invest in to help my money grow. Then, I went to the “banking” part of my work payroll website and decided that I would have 25% of my check directly deposited into an entirely separate savings account. I use the money in this separate account to pay down debt and save up an emergency fund. Because I don’t have a debit card for this account, it’s almost impossible for me to spend this money. Since I don’t really “see” this money in my main checking account, I’ve gotten use to living on the remaining 75% of my take-home pay. 

My point? Paying myself first has helped me in so many ways. I’m investing in my retirement without even thinking about (since my retirement contributions are deducted before I ever get my check). I am also saving more money than I ever have before. I have a separate account for travel that I can now use to pay for my future vacation(s) in cash. Plus, I have paid off a substantial amount of credit card debt that I had from my years as a graduate student. This combination of paying off debt, saving money in separate accounts, and investing for retirement is helping me build my net worth faster than I ever would have thought. As my net worth increases, my credit score gets better. Paying myself first has given me reassurance that I’m on track to reach my financial goals.

Tell me, in what ways do you “pay yourself first?” If you haven’t yet started, is this something you’d be willing to try? 

I’m a Doctor Who Drives a Toyota Corolla, here’s why:

1. It was cheap. Let’s just call a spade a spade. When I first got the Toyota, my life was much different. I was 24 years old and nearly broke after spending two years in Washington, DC. I used public transportation (and rides from friends) to travel around the city but things were about to change. I was moving to Florida to begin medical school and needed a car of my own. Considering my subpar savings rate, I also needed one that was affordable. This Toyota was about 3 years old with only 30,000 miles and in my price range. I bought it for $10,000.

2. It’s reliable. During my time in medical school this car was extremely reliable. It never broke down, overheated, or required expensive maintenance. I got oil changes every 3 months and was able to move from point A to point B with zero complaints. As a current resident physician, I feel the same way. Whether it’s to and from the hospital or back and forth to my family’s place, I can easily drive around the city with no problems.  

3. It allows me to be discreet. Although I love my Corolla, it looks a little dated. As a 2012, it has an older body style and doesn’t shine like it used to. There is no camera screen for me to look at when the car is in reverse. There is no blinker on the side mirrors to alert me when someone is driving in my blind spot. While the older look and lack of updated features may be deal-breakers for some people, I’ve gotten used to my car the way it is. Driving it around allows me to fly under the radar. No one assumes a doctor would drive this car, so being in it gives me a chance to be a little more discreet. It also allows me to resist society’s expectation of doctors that causes physicians to inflate their lifestyles too quickly.

4. It saves me a ton of money. Driving an older car has its perks. Perhaps the biggest one is that I don’t have a car note. While many people spend $400-600 on their monthly car payment, I don’t. This means I have an extra $5,000-$7,000 each year that I can use on other things like saving for retirement, paying down student loans, or splurging on an expensive vacation. Along with not having a car payment, I also save money in other ways. Since my car is older, I’m not as concerned with how it looks. If I happen to discover a minor scratch or small dent, I don’t feel compelled to spend extra money getting it fixed. Plus, I never have to worry about anyone trying to steal it or anything in it.

5. It keeps me humble. If I ever start to think more highly of myself than I ought, I’m often quickly humbled when I look at my car next to the rest of the vehicles in the physician parking lot. While some doctors may start to feel a little envious, I’ve taken a different approach. Humility and gratitude. Despite its outdated look, my car is a constant reminder that I drive a vehicle that is completely paid off. It’s a reminder that I’m driving this car to pay down debt, save money for retirement, and increase my net worth. This attitude of humility and gratitude has also enhanced other areas of my life. It removes any roots of arrogance and gives me the “drive” I need to work even harder, treat others with respect, and maintain better relationships with those around me.

So yes, I’m a medical doctor who still drives a Toyota Corolla…and I plan to keep doing so for the near (and distant) future.

Tell me, have you ever considered driving a different type of car to save money and meet your financial goals faster?

6 Reasons I’m Not Buying Whole Life Insurance (and you shouldn’t either)

If you’re a physician or high-income earner, you’ve probably been approached to purchase whole life insurance. While many of your fiscally responsible colleagues may warn you not to buy it, many other financial advisors seem convinced that whole life insurance is a must-have. With such conflicting advice, you may be confused on who to listen to and unsure about what to do. Several of my physician friends are in the same boat. In fact, many of them have asked me to help them understand why “whole” life insurance is so bad and “term” life insurance is ideal. Here was my response:  

Most whole life insurance policies, universal life insurance policies, indexed life insurance policies, (and basically anything other than term life insurance) is sold to us under false pretenses. These policies are branded as a way to “guarantee” our family money when we die. However, if you delve into the fine print of these polices you will see that they aren’t nearly as good as they sound. In fact, there are 6 main problems with whole life insurance:   

1.     You don’t need it. Unlike disability insurance, where we insure against the unpredictable risk of becoming disabled, life insurance is different. We already know that we will “pass away” at some point. Thus, dying isn’t necessarily a “risky” event, it is an EXPECTED event. Any event that you can expect to happen, you can plan for yourself. Since you can plan for this event yourself, you only need to insure against the risk that you could die before this plan is fully carried out. In other words, you don’t need life insurance for your “whole” life. You only it for a certain period of time or “term.”

2.     It’s inefficient. In order for whole life insurance companies to guarantee your family money after you die, they must have money to give them. Insurance companies aren’t charities, so they definitely are not giving your family money out of their own pocket. What they do is collect a large amount of YOUR money to pay into THEIR system. In fact, the financial advisors who sell you whole life insurance put a large portion of your money into their own pockets as profits, then take the rest and “invest it” into low-yield accounts. If you die young, your family may not get much of anything at all because you’ve haven’t paid into the system for long. If you die old, your family won’t get nearly as much as they should because the insurance company still needs to make a profit. With whole life insurance, you end up paying a huge chunk of money to an insurance company that will give you and your family much less in return.

3.     It’s expensive. Whole life insurance policies pay out to your dependents after you pass away. Thus, insurance companies will want you to pay for the cost of that benefit upfront. Paying for this benefit is insanely expensive. In fact, whole life insurance costs about 10x more than term life insurance. This means you could easily be paying hundreds if not thousands of dollars each month for this policy. That’s a lot of money to spend on an inefficient insurance product you don’t need.

4.     There are lots of hidden fees. The vast majority of whole life insurance products have a slew of hidden fees. These expenses take away from the value of the product and drastically decrease the benefit your dependents receive when you die. In fact, most of the money you pay the insurance company for a whole life insurance policy is paid directly to the agent who sold you the policy as “commission.” I can think of many more ways you can spend your money, than to pay tens of thousands of dollars in commission fees to an insurance agent.  

5.     The benefit isn’t as good as you think. If you look at the fine print of these whole life insurance policies, you’ll see that the benefit it provides to your family isn’t very good. In fact, the “returns” are actually negative in the first few years. This means that if you die shortly after you purchase a whole life insurance policy, your family may not get anything at all, even though you’ve paid thousands of dollars in premiums. If you die much later in life, the average returns on your money are only 2-4%. In contrast, average returns from the stock market are 7-10%. This means that if you had simply placed your money into an index mutual fund, you’d have been able to give you family drastically more money and paid much less in fees.

6.     There’s a better alternative. The biggest reason I’m against whole life insurance is that there is a much better way to proceed. You can save money for your loved ones without ever having to purchase whole life insurance. How? By maxing out your retirement accounts so that you can save and invest money in a tax-efficient way. By converting money each year to Roth accounts (like a Roth IRA) so that your family can inherit the money you save tax-free. By purchasing a “TERM” life insurance policy so that if you happen to die before you’ve been able to pay off your student loans and stack enough money for your family, the insurance company will provide a hefty benefit to your family.

My point? As busy young professionals, we already sacrifice a lot. The last thing we need to do is to get tricked into purchasing an insanely expensive insurance product that has lots of hidden fees. There is a much better alternative. Save money for your family yourself and purchase a “term” life insurance policy to cover yourself in the meantime. Don’t buy whole life insurance.