Good Debt vs Bad Debt

 
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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.

 

The Power of Focus: Pick your ONE thing

 

As young professionals who have overcome the post-grad struggle and are finally starting to build our careers, we understand the value of money. It may not be the only thing we care about, but having enough of it to live well and enjoy life with our loved ones is essential. Instead of mindlessly spending money then awaiting our next paychecks, we should re-examine our habits and utilize the power of focus.

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Step 1: Determine your top 5 “big” goals.

While the devil is in the details, it’s often helpful to start by looking at the bigger picture. A few times a year I sit back and think about my overall financial goals. Although this can seem a bit esoteric initially, it doesn’t have to be. Simply identify your most important financial goals. As a young resident physician my top 5 goals are to:

1-Be completely debt-free;

2-Own a home;

3-Take international vacations;

4-Give to charity;

5-Be financially independent (aka have the flexibility to work less without worrying about money)

What are your top 5 financial goals?

Step 2: Write down a few things you must do to achieve them

Once you determine the financial goals that are most important to you, write down ways you plan to achieve these goals. For me, that means tracking my spending and sticking to a budget. It means saving a percentage of my income each month and investing money towards retirement. If I’m being honest, it also means staying away from the mall so I’m not tempted to buy cute clothes and new dresses whenever my favorite stores are having a sale. It even means forgoing the temptation to buy things online after seeing new home décor ideas on Pinterest. Most importantly, it means eliminating any consumer debt and having the self-control not to accumulate more in the meantime. What are some things you must do to reach your larger financial goals?

Step 3: Choose one thing to change about your finances over the next 6 months

To be honest, I’m eager to become financially independent. I wish I could snap my fingers and erase my massive student loan debt and have millions saved for retirement. Don’t we all? Unfortunately, life doesn’t work that way. Realistically speaking, it will be about 10 years before my student loans are paid off or forgiven. I’ll be well into my 30s before I can comfortably purchase my dream home and in my late 40s before I can truly become financially independent. Although both of those goals can seem far away, there are several things I can do now to put myself in a great position going forward. However, trying to do all of them at once can be daunting and unsustainable.

I’m the type of person that needs to see progress. I need to feel as though the sacrifices I’m making (aka the cute clothes I’m not buying and lavish vacations I’m trying hard not to book) are actually worth it. Thus, I find it helpful to focus on one thing. Choose one change you want to make in your finances over the next 6 months, whether that’s trying not to spend more than $100 on take-out, putting $300 into a savings account every pay period, or contributing 10% of your salary towards retirement. Choose one thing to stick to over the next 6 months. My one thing is eliminating the credit card debt I accumulated in grad school.  What is your one thing?

Step 4: Laser focus on that one thing

Once you pick your “one” thing. Laser focus on it. Since I’m someone who loathes consumer debt, I’m laser focused on eliminating it. How? By literally throwing money at my credit card balance each month. As a resident physician, I’m definitely not making the doctor salary people google online, just yet. I don’t drive a Tesla, own a large home, or spend money frivolously without remorse. However, as a single person with no kids, who is an employed physician, I make enough to pay off my credit card debt. In fact, despite having a negligible “minimum payment,” I send in a several hundred dollars each month and should be credit-card debt free by the end of the year. I realize everyone’s financial situation may be different, but we should all laser focus on one thing. In what way do you plan to do this?

My point? Instead of getting bogged down by large goals that seem far off, I have found it helpful to focus on one small goal every 3-6 months. I like to see progress and achieving these small goals will give me the momentum needed to continue along the journey to reaching my larger goals. What do you think? Is this a strategy you believe will work for you?

 

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:

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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.

 
 
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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? 


 

What it was like attending my first real estate meetup group

 
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I’ll be honest. When I showed up to my first real estate meetup group in Atlanta, GA I was extremely nervous. I was still fairly new the world of real estate and didn’t quite know what to expect. The idea of going to meetups was first suggested to me by some real estate blogs and other investors I was following online. Many people mentioned them as a great way to make connections with like-minded people who could help me reach my goals faster. I didn’t have much to lose by checking out the group, especially since it was free, but as I pulled into the parking lot, I was definitely nervous. Normally I’m pretty fearless and assertive but moments before I walked into the meeting there was a small voice of doubt I had to suppress and a glimmer of courage I had to cling to in order to actually walk into the meeting. Here are 5 things I was thinking during the meeting:

 

1. “There aren’t a lot of people who look like me.” When I entered the room, one thing became immediately apparent – there weren’t many people who looked like me. As I scanned the room, I quickly noticed that it was dominated by white men. As an African-American female I stood out like the lone chocolate chip in sea of vanilla. The demographics weren’t exactly shocking to me, but I’d be lying if I said I didn’t feel out of place initially. About 5 minutes later a couple women walked in the meeting. Soon thereafter, the room became a bit more diverse and I became a lot more comfortable.

2. “Wow. There is a lot I don’t know.” The meeting started with an introduction and quickly transitioned into a deep-dive on how to flip houses in a cost-effective manner. I found the material interesting, but several of the details were a little above my head. Although I knew some of the basics, many of the terms have subtle differences which can be a bit tough to keep straight for anyone who isn’t as familiar with the vocabulary. Understanding the difference between an Internal Rate of Rate and the Cash-on-Cash return, definitely caused me a bit of confusion. At first, I was alarmed, but as I continued to sit there and listen to the speaker, things started making a little more sense. I didn’t grasp everything, but I understood a good portion of it and certainly gained more knowledge than I had before I walked into the meeting.

3. “The people here are really smart.” For the second part of the meeting we split into smaller groups of about 10 people. We then introduced ourselves and spoke about our previous real estate experience and our current real estate goals. It was during this session that I was literally blown away. As people introduced themselves, it became obvious that the majority of these people had years and even decades of real estate investing experience. Some of them mentioned previous deals and spoke about things they did to save money on costs and increase profits. I was amazed.  

4. “I’m making a lot of connections.” When it came time for me to introduce myself, I decided to take a leap of faith and be honest. Despite the myriad of investing experience that surrounded me in this group, I opened my mouth and admitted that I hadn’t actually started investing in real estate yet. I mentioned that I was, at that time, still a medical student who had a desire to use multifamily real estate investing to achieve my goal of financial independence. Much to my surprise, they didn’t judge me or give me condescending looks of disapproval. Instead, they all applauded my honesty and were extremely encouraging. Several of the investors told me stories about how they found their first deals, different ideas for how to find capital (aka using other people’s money to fund your deals) and a few even offered to walk me though the process. Going to this meeting helped me make several different connections that proved to be extremely valuable.

5. “I’m really glad I went.” Despite the initial nerves, feelings of being out of place, and the realization that I was amongst people who were way more knowledgeable than I was, I am so glad I went to that meeting. Not only did I learn a lot, but I also connected with several people that I never would have met otherwise. Overcoming my fears of going to that meeting, gave me the courage to go to even more meetings. Before I knew it, I became a regular attendee and gained access to exclusive deals and financing opportunities only reserved for people with certain connections. As the old saying goes, “To achieve something you’ve never obtained, you must do something you’ve never done.” Going to my first real estate meetup was a testament to this. Although my life as a resident physician working up to 80 hours a week can make attending these meetup groups a little challenging, I still go when I can and have never regretted it.

 

The Importance of Networking: Why I Starting Going to Real Estate Meetups

 

Last year around this time I had a lot on my plate. As a graduating medical student, I was making the finishing touches on my residency application and prepping for the mandatory hospital rotations needed to complete my degree. With all of that going on, I still made it a priority to attend real estate meetups once a month. I went to these groups for 5 main reasons:  

 

1. I needed to learn new skills. Unlike people who choose to focus on one job or skill for the majority of their lives, I want more. Instead of working a traditional job into my 50s I want to acquire passive income through real estate investing. Acquiring this passive income through real estate allows me to continue building wealth for my family while also providing me with the flexibility I crave, whether that means working part-time to have children or simply creating space for me to pursue less lucrative passion projects. Since I didn’t grow up around real estate investors, I needed to learn some background information and acquire a whole new skill set. Going to these real estate meetups put me in direct contact with people who had these skills that I could learn from.

 

2. I needed to expand my network. If I ever wanted to achieve my goal of building wealth through real estate, I had to start doing things I’d never done. This meant thinking differently and surrounding myself with people who had already achieved what I was looking to obtain. Along with learning new skills, going to these meetups gave me a way to expand my network so I could interact with real estate investors and emulate people who had already achieved these goals.

 

3. I needed mentors. My parents didn’t use real estate to build their retirement savings and none of my close family members had the experience needed to guide me through the process. Despite the numerous podcasts I listened to and books I read, I needed more. I still had questions that were unanswered and concepts I wanted clarification on. Going to these meetups were a great solution. They helped me find mentors who could “show me the ropes” build relationships with people who could serve as advisors. Because of these meetups, I met people who volunteered to teach me how to find, evaluate, and finance deals.

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4. I needed to change my thinking. Along with mentorship, my outlook on real estate reached a whole new level when I started going to meetups. The people I met at these groups kept me inspired in the midst of doubt. They gave me insight on how to invest in real estate in ways that could increase my monthly cash flow and help me save money on taxes. They also kept me optimistic about my goals and my ability to eventually create wealth. Being around people who were constantly discussing deals and sharing advice on pitfalls to avoid helped me learn more than I ever could have imagined. These meetups changed my view of real estate investing and made me even more committed to my goals.

 

5. I needed access to deals. The final reason I needed to expand my network was to actually NETWORK. Some of the best real estate deals are ones that take advantage of “leverage” and involve multiple investors. Companies raise money from rich investors and fund lucrative investments as a group. Unfortunately, it’s illegal to advertise these deals to the general public due to their high risk and buy-in costs. The only way to actually find out about these deals is to meet the people who create them or invest in them. Going to meetups played a key role in allowing me to cultivate business relationships with people who could give me access to those deals.

 

Long story short: the meets-ups help me expand my network. I needed to expand my network to continue to meet potential mentors and surround myself with people who could keep me motivated to reach my goals, safeguard against doubt, and get me to think more like an investor. Lastly, I needed to expand my contacts and cultivate relationships with people who could be potential partners in the future. 

Have you ever gone to a real estate meetup group? If so, what was the experience like for you?

 

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.

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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:  

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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.