Showing posts with label Personal Finance. Show all posts
Showing posts with label Personal Finance. Show all posts

Wednesday, June 9, 2021

Medical School Debt: Best practices when paying it off

Taking on medical school debt can be a smart investment to increase your future earning potential. However, you still need to pay off that debt in a smart way to make sure that it doesn't cost you any more than it needs to.

1. Don't Throw All Your Cash at Your Debt


This may seem counter-intuitive, but don't throw every last cent from your paycheck towards paying your loans off early. It's always important to keep some cash on hand in an emergency fund, to cover unexpected events like car repairs or health expenses. You don't want to turn relatively inexpensive student loan debt into credit card debt because you had no cash savings to cover an emergency.

Next, think about other goals you have, such as buying a home or getting married. Again, not keeping extra cash to cover these expenses could lead to you feeling pressured to take out new debt at a higher rate.


2. Consider Income-Driven Repayment


Income-driven repayment programs, such as ‘Pay as You Earn’, cap your monthly student loan payments at around 10 percent of your income. While you might want to knock your student loans out as quickly as possible, trying to do so during residency or even the first few years of your career could put you in a needless cash crunch.

If you're worried about interest, remember that federal income-driven plans cap the amount of interest that can accrue while you're in the plan. Finally, you can always make extra payments above the minimum when you can comfortably afford to do so.


3. Use Caution When Refinancing


You'll likely be bombarded with offers from private lenders offering to refinance your federal student loans at a lower rate. If these loans were equal, it would be a smart move, but that is not always the case.

Federal student loans have several benefits including income-driven repayment options, public service loan forgiveness opportunities, and a more forgiving way of dealing with financial hardships (such as long-term disability). Therefore, if you refinance to a private loan, you're taking on added risk for the lower rate.


4. Avoid Lifestyle Creep


When you start getting a bigger paycheck, avoid the temptation to dramatically increase your spending. Some people say to keep living like a resident, but you don't even need to take it that far.

Prioritize building an emergency fund, mid-term savings goals, maxing out your retirement accounts, and paying down your student loans. Once those goals are met, you can treat yourself a little for your hard work.


5. Budget Your Salary, Invest Your Bonuses


It's a good idea to create a budget based on your fixed salary. Treat any signing bonuses, annual bonuses, or overtime compensation as an unexpected windfall. Use them towards an extra student loan payment or as a way of meeting your savings goals faster.


6. Pay Off Higher Interest Student Loans First


There is no benefit to paying off smaller student loans first, and most of the time you'll only have one monthly payment even with multiple loans. Pay off the highest interest rate loans first to pay less in interest over time.

When you're doing this, watch how your payments are applied. If you set a monthly automatic payment higher than the minimum, it may be divided between all of your loans. The same thing applies if you make an extra payment without specifying the loan it should go towards. If you pay online, there should be an option to select the specific loan you want to make a payment on.


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Sunday, March 28, 2021

Passive real estate investing is ideal for physicians

How can a successful physician with countless demands from patients, employees, physician groups, etc. create a work-life balance? How can you create the financial independence, wealth and prosperity without dedicating 15-hours a day, working multiple jobs, and offering additional products, services and treatments?


Based on my 20+ years of neurosurgery experience, when combined with my 30+ years of real estate experience, I prescribe passive real estate investments to my fellow physicians to achieve financial independence, wealth and prosperity.


Building wealth through real estate


Every investor has one goal: wealth creation! If that’s what you want too, real estate is your best bet.

The overall process is quite simple. If you acquire a rental property by putting up a small amount of money as your down payment, and the bank puts up the rest, then the rental income from the property should provide net cash flow that pays for all related expenses. You become the rightful owner of a valuable piece of real estate whose value appreciates significantly over time, yet the senior debt will have been reduced because of your principal payments.

This concept is so straightforward that we can summarize it into a simple formula:


principal reduction + property value appreciation = long-term wealth creation



Here’s something else you have to keep in mind: Each year, rental rates tend to go up by approximately 2 to 3 percent, depending on inflation, supply and demand, etc. So, your property’s value is likely to increase each year because of the expanding net cash flow.

Now, the exciting thing is that by year five, you will typically find that your equity has more than doubled (equity is the difference between the property’s value and the mortgage balance you owe the banks).

If you’re wondering why the value of your investment will increase that fast, it is because while your property’s value will likely rise, the balance on your mortgage will be reduced because the rental income you are receiving covers everything including the interest and principal on the mortgage.

Another attractive benefit to real estate investing is that it can provide an ever-rising passive income. In other words, hire the professionals to provide property management, collect rent, pay bills, etc. This form of income is attractive because it doesn’t keep you from practicing medicine. The money keeps rolling in, even if you’re sleeping. This is not to be confused with what my father told me as a kid, “Never invest in anything that eats while you sleep!” Therefore, investing in racehorses, llamas, and chinchilla farms is off limits!


Real estate is not subject to the vagaries, emotions, and political whims


As you probably already know, there are many ways of building a passive income source. Some people invest in the stock market, US Treasuries, automated businesses, while others lease or license intellectual property, and still others create online businesses. These are all great strategies.

However, as a medical practitioner who is probably very busy helping people, it is vital that you choose investment options that don’t demand too much active participation. In my experience, there are very few available passive income opportunities that allow your income to increase over time the way real estate does. Rents generally go up to keep pace with inflation, and in particularly bullish economic times or because of other macro-economic and supply-and-demand factors, rental income can even double in a short time.

I don’t invest in cars, antiques, art, or collectibles as that is merely a hobby and does not bring me a sense of happiness. Yes, I do have investments in stocks, commodities, and bonds, but for the little guy like me, I feel like I am always playing at a disadvantage. Larger investors with wealth managers and investment bankers have access to far more information and investment opportunities that are not available to regular investors. As an equity investor, you must be smart, well diversified, and strategic.


The pros and cons of real estate investing


Like most other investment opportunities, real estate investing has some risk—life itself is risky. The primary risk attached to real estate investing is that there are no guarantees. Besides this main risk, what other risks are there, and how can you safeguard your investment against value decline?

General market risk are factors like the rise and fall of the general economy, fluctuating interest rates, recessions in correlated markets, natural disasters, and other market risks that are all outside your control. The only way to guard against total annihilation by such risks is to hedge your bets by diversifing your portfolio holdings. Do not put all your investment eggs in one real estate basket.

Asset level risk has more to do with the sensitivity of consumer demand associated with a certain property type. The demand for hospitality, retail, and office space has been adversely affected due to COVID-19. However, properties that have stable demand all year have little risk. For instance, multifamily residential properties are usually in demand, even during bad economic times, making their risk significantly lower.

Liquidity risk is another form of risk peculiar to real estate. Finding buyers is not always easy, especially during market downturns, and most often it takes experienced brokers and real estate agents to find willing buyers during such times. So, any investment in real estate should have a longer-term investment horizon.

When you borrow money from a bank to finance the purchase of real estate, you are leveraging. Virtually everyone in real estate operates with leverage. As you invest, you should watch out for the leverage you take on. A lot of leverage can magnify your returns, but it can also be risky. If you allow yourself to go in over your head with debt, you risk losing your initial investment and getting into an unending cycle of debt.

Remember, you do not have to keep working hard, paying huge taxes, and letting what you have left sitting in the bank doing nothing. That is a risky way of operating that could set you back financially in a few decades to come. It is a lot safer to park your money in real estate, an asset I became familiar with when I was a 15-year-old boy, where it will allow you to build wealth and retire rich.

If you diligently apply this knowledge, you could one day retire with a seven or eight-figure net worth, or perhaps more. Who in the world would not want a luxury like that?


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Saturday, July 27, 2019

Seasonal asset protection: Back-to-school risks for physician parents

We are the in the home stretch of summer break season, with many of you wrapping up family vacations. You’ll be returning to normal work and school schedules in less than 30 days. Some of the personal risks you face as a result of this seasonal reset are predictable and can be easily managed.


Here’s what you need to know to keep your children and your assets safe.


Parental liability, including your adult children


You may have children of high school or college age who may be living in your home and driving your cars. If your children are over 18 and living at a different address, seriously consider transferring title to their vehicle to them and having them separately insured to avoid being implicated in any liability for their accidents. Plaintiff’s attorneys always prefer having a successful physician as a defendant to a college student of limited means.

This title transfer is rarely practical for minor children, those under the age of 18, so monitor their use of your property carefully, as we are still in the 100 deadliest days of the year. Always be heavily insured on your home and auto coverage, including high limits of uninsured (UI) and underinsured (UIM) motorist coverage. Ideally, this should be in addition to a high limit personal liability umbrella policy of at least $1 million. It is your most basic, predictable and cost-effective line of defense against this common exposure earlier this year.

Also consider insurance coverage for a home you may have purchased or leased for your children. If you bought a home or condo for them as an investment, it should be heavily insured for loss and liability. If you are the lessee or a cosigner on a lease, you should be wary of any liability at the property and heavily protected with renter’s insurance at high liability limits. Your life savings can be jeopardized by every keg party, accident or assault on the property. I have seen a variety of such claims over the years.


Estate planning for everyone


You should obviously have your own estate plan that’s drafted (and actually fundedby transferring assets into it) more than 48 hours before you leave on an exotic vacation. That said, your children may need some estate planning, too. For example, an 18 year old with no independent assets of any kind may use a simple will if required to dispose of their personal property. However, a 21-year-old adult child with some combination of assets, real estate, savings, trust funds, spouse and children may need a full revocable trust.

It’s important to not just to plan for their possible death, but to also plan for life eventsthat may require help from others, including yourself as their parent. Once your children turn 18, they are no longer automatically subject to your legal authority. As an adult, their healthcare, financial, legal and other authority is no longer in your control. These are some basic essentials to have them complete now before your children enter adulthood (at least in the eyes of the law):
  • Durable power of attorney for healthcare and living will allows you to make healthcare or end of life choices for them if they are incapacitated or have a medical issue;
  • HIPAA release form grants you legal access to their healthcare info from various physicians and other providers;
  • General power of attorney authorizes you to help legally control and access info on various issues they may need help with, including private financial, legal and academic information.

Remember that each of these documents should be formally executed in a way that complies with your state law. Don’t expect a hospital, university, bank or landlord to release info or control because “I’m his parent” or because you are a fellow physician. Addressing these now, calmly and before an emergency, will protect both you and your children as the fall starts — and as they begin a new season of their life.

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