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Avoid The Big Financial Mistakes In Life

Anyone With $200k+ of Annual Income Will Be Filthy Rich – As Long As They Avoid Major Financial Mistakes

This post is about how financial success is achieved in high income individuals. It will likely be a fairly boring one, the concept is simple… don’t make any major mistakes in life. Your income alone will push you into great wealth, you would have to work hard to negate your income’s power. Yet doctors are great and squandering wealth, we get mentioned in quite a few financial articles.

I was surfing with 2 friends in San Diego a few years ago and we ran into this retired general surgeon at a local surf cafe. He decided to share his financial life story with us. Back in the 80’s some dude hit up a bunch of docs for cash investments in some guaranteed business venture and he got quite a few docs to buy in. I don’t recall all the details, but the investor lost everyone’s money. This surgeon then goes on to say that following that disaster he lost half of everything to a divorce, after being married for 25 years. So he was retired on half a pension and somewhere around $750k at age 65. For the average doctor I would guess that’s pretty shitty (my frugal ass would be doing the chicken dance with that kind of loot).

Avoid any more debt than you already have. 

You go into debt in medical school, sure you may have accumulated a little more than another medical student but that’s not even a big deal. But if you pile other debt on top of this debt, especially credit card debt, making minimum payments then you are making a huge mistake. If you buy stocks on margin or gamble with borrowed money then you are definitely tempting fate.

There is something about debt… when you have it then adding more debt to your life just doesn’t seem quite as bad. It’s like an STD, once you got genital herpes who gives a shit if you get chlamydia… Azithro baby! So student loans are like getting the herp, and credit cards and mortgage debt are like chlamydia and gonorrhea, respectively.

Understand that divorce is expensive, no matter how much you love each other now. 

Sign a pre-marital agreement with your partner.

If you didn’t sign a pre-marital agreement sign a post-marital one.

Divorces are expensive, cheating is fucked up and hit-men are not trustworthy.

You’ve heard this one plenty of times…  a divorce can ruin your finances. I’ve been divorced once (so far), so I have some perspective on this. First of all, marry someone for all the right reasons, if you have any doubts don’t listen to the cold-feet theory, trust your instinct. If you do get married then you should consider signing a pre-marital agreement. Even that won’t save you much when it comes to a divorce. In my opinion a PMA just keeps your time in the court system to a minimum and keeps the 2 parties from making emotional decisions. I signed one with my ex-wife but fortunately neither of us was the vindictive sort, we parted ways amicably.

Don’t raid your retirement accounts.

Avoid borrowing against them, too. But that’s the lesser of 2 evils.

Don’t do it for anything other than turning the loot into more income. Not only do you lose the power of compounding but you are also hit with a 10% penalty on top of owing both federal as well as state income taxes on that withdrawal.

I cashed out my retirement accounts… twice. And borrowed against the once (I know I sound like I had a gambling habit) The first time it was only $14k, the second time it was nearly $50k I think and I got this really nice older man on the phone who, short of telling me that I’m a complete idiot, was trying to get me to reconsider by appealing to the older retired Dr. Mo.

Don’t buy too much car.

An expensive car needs expensive accessories. It has costly repairs and maintenance.

This is an obvious one too. There are plenty of nice cars you can drive that don’t have a $100k price tag. A time will come when you won’t even have to worry about how much you spend on a car, be patient, build that stash first. The whole point of not making big financial mistakes is that you amass enough wealth later on in life that you won’t have to worry as much about making mistakes.

Don’t buy too much house.

A house which you live in is not an investment, don’t confuse an asset for a liability.

In the US you can get a 3 bedroom, 2 bath house with some land for either $150,000 or for $3,000,000, gentle extremes of the spectrum. If you’re a doctor you might think, well fuck, I make 10x what the poor sap makes who has to live in the $150k house. Since the bank approves you for nearly $1 mill then you might as well get close to that. However, you know damn well that you could get something for far less and still be happy, fulfilled, and safe.

I know what you’re saying, that there are no affordable homes in your area. Though it’s not an easy option, consider moving to other locations, maybe even another state.

When you think of a $500k house which you might decide to pay off in 15 years, don’t just think of the one-time price tag of $500k, think of those monthly payments for the next 15 years… $4,000 every month which you could invest at say 7% per year for 15 years… that’s $1,275,000 you would be giving up. I’ll admit, there are those who cash out of their house and actually come out ahead, for some reason I always hear of those folks but haven’t met one yet.

Don’t view your debt as a failure.

Develop an exit strategy out of all debt. I personally haven’t been able to convince myself of good debt vs bad debt.

It’s easy to look upon your financial situation as a mess just because you have an ass-load of student loan debt. It may seem that the $375,000 will never, ever be paid off. The truth is that if you develop a plan of attack then you will annihilate your debt with your high income. It always seems daunting but if you just try, it will disappear sooner than you think.

I know I already covered this but adding debt on top of debt is a common phenomenon for young doctors. They view their debt as insurmountable and therefore assume that a little more debt won’t make a difference. Wrong, way wrong. If you haven’t lived a debt-free life you haven’t tasted freedom. And if you haven’t had a chance to get your nose above water even for a couple of months then you don’t know what it’s like to set aside nearly $9,000 every month just towards your savings/investments.

What would you tell your young child if they had nearly $500k in student loan debt and decided to add an equal amount of mortgage debt to their portfolio?

In 2012 I had a little under $200k in student loans and credit card debt. I owed about $9,000 on my car and I decided to buy a $475k downtown penthouse with 5% down. With one decision I added nearly $4,000/mo to my already thin-stretched overhead and guaranteed myself another 30 years of debt payments… why … the … fuck did I do that? Dunno, but I realized it was a mistake quickly, sold the fucker,  and well this is where I am at now, thankfully where I want to be.

Carry adequate and appropriate insurance.

Don’t dismiss disability insurance.

Don’t mix investing with life insurance. Only a very select few of us stand to benefit from whole life, universal life insurance.

It’s easy to get sued in America. Driving your car without insurance, running a business out of your house without insuring yourself, trying to save on disability insurance and buying a house and not insuring it are all great ways to screw yourself.

Now, if you can self-insure then you don’t need insurance. If you own your house free and clear and could pay for another one 5x over then you may have no need for insurance. If you have enough income to support your current lifestyle in case you become disabled then disability insurance is of no use to you.

Don’t invest in a business with all your livelihood.

Don’t invest in friend’s or family’s businesses unless you are willing to chance the complete annihilation of that relationship (and investment).

Invest in what you understand. Read everything about why a certain investment is good, then immediately read why the same investment is bad. Follow your gut, it will lead you down the right path.

You may have an idea, a hunch, a passion. Pursuing a business idea is what defines success in America. Statistically you will fail, as I have probably 4x in the past trying to make a business profitable. There is nothing wrong with failing, every failure is one step closer to success.

Starting a business is a big enough undertaking, undoubtedly you will learn something from doing that. Succeeding is of course the ultimate goal but don’t forget the statistics. Keep enough of your savings to cover your ass in case you fail. Be wise, be cautious but don’t be timid.

Capitalize on a good business opportunity.

Be greedy when others are fearful and be fearful when others are greedy (yes, I stole this quote).

If you have the fortune of going through a down-market where you could capitalize on some cheap investments or undervalued real estate then do so. Don’t let such opportunities pass you by.

I’m not saying you should dive into such things headfirst with blinders on. You’re a doctor, you can ask someone with more experience than you to hold your hand through it. People are willing to help their doctor friends. Like my buddy Bryant always says, in life try to always know a doctor, a lawyer and a mechanic… the savvy business person will gladly do you a favor if it means you’ll return the favor.

When can you capitalize? Well, it seems that whenever everyone is buying real estate it’s the shit-worst time to buy it. Whenever people are leaving their jobs to trade stocks/options for a living it’s the wrong time to buy stocks. So, wait for the reverse of the above and make a small investment.

Don’t go broke spending on your kids.

I think of myself as a good guy. I think I am this way because my parents loved me and gave me positive attention – the money didn’t have anything to do with it.

My parents loved us but spent way too much money on us. Granted, they didn’t have a very good grasp of managing their own personal finances. They did well through several inheritances and good business decisions. Unfortunately, they failed to capitalize twice in their wealth building years. The first time they lost out on investing $300k and letting it grow to nearly $3 million. The second time they failed to cash out of a house that could have netted them close to $1 million.

I love my parents and they did a lot for us, but they gave up too much trying to provide for us.

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