Speaker 2 (00:02.658)
Welcome to the Physician Family Financial Advisors Podcast, where physician moms and dads turn today's worries about taxes, investing, and extra money into a comfortable feeling of financial security. I'm Ben Utley.
And I'm Nate Rennecke. Today's question is, what should doctors do with an extra $1 million? Whoa. Whoa. Yeah, Ben, we have seen this. In fact, we've seen it a couple of times recently. But whether or not, I mean, most often times it's less than that. It's what do I do with my extra money? So 50,000, 100, 200, all the way up to a million dollars. We get this question a lot. Like, what?
What series of questions do we need to do to figure out what the best thing to do with this extra cash?
For that pediatrician who's working at Kaiser Nate, let's talk about where this magical extra million, extra 500,000, extra 100,000 comes from. Like, where are we seeing this money coming from?
Right. Recently what I've seen is when people get on track and when I say on track, mean they have a plan. So they have a plan for college. They have a plan for retirement. And then the plan asks them to save and invest a certain amount. They do that. And then they sort of wake up several months from then and look at their bank accounts and realize they still don't spend all their money.
Speaker 2 (01:30.026)
Okay, so that's the ENT from Virginia. Like I know about that. I'm talking about like where do regular people see like extra six figure money? Where does that come from? Yeah, so we've seen inheritances. I got one for you. So we saw somebody who got bought out by private equity.
Inheritance would be one.
Speaker 2 (01:52.588)
Seems like Optum's been busy these days. UnitedHealthcare has been buying out practices and we've seen some good size six figure chunks come out of that.
I've seen big bonuses or even just, we call it chunky cash flow. some physicians get paid pretty, maybe half their income comes at the end of each quarter, let's say, in chunks.
So self-employment chunks sometimes. But it's funny because it's not always a million dollars. In fact, it seldom is as a million dollars, but it's easily an extra 50 grand. Right? We do see that. Usually out of more like docs that are in their 40s, because when you're in your 30s, it's like that money's kind of spent. You start your college fund or...
You know, you've got some home improvements that you want to do or some super delayed travel gratification, you know, where you want to spend that money. So I think that answers where it comes from. But the question is, you know, and this is what we, we internally call extra money, you know, so when clients are like, Hey, I've got this extra money. I do with it? I'm like, well, let's have the extra money visit. Right. So, kind of walk us Nate through some of the things that we think about and talk about when we were having the extra money conversation, regardless of how much it is.
Right. Well, yeah, I think the the there's some fear that sometimes is involved when people have this question because you can get used to have an extra money laying around and get starts to feel real comfortable.
Speaker 2 (03:12.514)
Where do we start?
Speaker 2 (03:22.914)
You can, yeah.
Yeah, sometimes we get new clients who, you know, maybe they didn't know what to do with their extra money. Like maybe they paid off all their student loans and maybe their house has paid off and the money's just been kind of piling up in their bank account for a while. And they come to us and we see these huge chunks of money in the bank and, you know, they're wondering like, what do we do with it? So that's new money sometimes. We plan a lot of it away, but then there's...
extra money but you know what I see a lot of times when I have this conversation with clients is that the amount of money that appears to be extra money is not actually like client will say I have an extra hundred fifty thousand and by the time we're done having the extra money conversation there's you find there's really only like thirty thousand because it gets tucked away in right places where oh yeah I forgot about that tax bill you know like oh yeah I need to do that thing so
Yeah, and so that's one side, whereas you kind of really think it through and you realize there's not as much as you thought. And then the other side is if you really do have the million dollars, which is less often, the only way I've seen people be comfortable with doing something, let's say, good or wise with the extra is by coming to a real solid answer about how much you actually need in cash. Yeah.
First, think you start off with you kind of have a rough idea of how much you spend in a month and I think for us we generally say have a couple months worth of expenses in your checking account.
Speaker 2 (04:55.466)
Right, because you don't want to spend all your extra money or save all your extra money and then like bounce a check. Doctors are not supposed to bounce checks, right? This is not something that's in their world.
Yeah.
Speaker 1 (05:08.11)
Especially ones with extra money. okay That's a set aside and then the next big one is and this tends to be the something that Many families get hung up on it, which is their emergency fund. Mm-hmm And it's like how big should this emergency fund be and I've seen this when the emergency fund number is an arbitrary number Which is human of all of us to just pick a number and try to have this goal
So that's like a set aside, right?
Speaker 1 (05:36.536)
But what it's this arbitrary number, that arbitrary number tends to get bigger as your pile of money gets bigger. So family with an extra few hundred thousand dollars, they can imagine having a $50,000 emergency fund. Even though they only spend 10 grand a month and that would cover them, you know, their two months worth of expenses and their checking, plus emergency fund would cover them for half a year.
Yeah. Yeah. It's, it's, you know, I think there's this, you know, and we know from, psychology, there's a thing called the anchoring effect, which is where you, hear one number and then all of your other numbers kind of revolve around that number. But, know, I see this in bank accounts. It's like, I get used to seeing a hundred thousand dollars in the bank. And then, you know, I had some more to it and it's one five, one 10, one 20, and then it's one 50. And now I'm comfortable having one 50. Cause every time I look at it, it's there.
you know, even if someone writes a check for say $50,000 and they, maybe they buy a car or something, whether they improve their home, now it's a hundred thousand and there's actually a feeling of loss. And we even see this with investments, you know, someone will, will invest a big chunk of that money and it's not like the money's gone or spent. mean, it's, you know, it's in a mutual fund someplace and they, they have this feeling of loss. So now my bank balance is lower.
Right, the only way, there's always gonna be a little bit of that I think, and I think that's just fair to accept that you're gonna feel that loss if you go from a couple hundred thousand dollars in the bank down to 60. But the only way that I have found clients be able to combat that feeling of loss is through sort of a different way of thinking, which is the logical side, to say, how much do I really need it for living expenses?
and do the planning. How much do really need for living expenses? What's my worst emergency that could happen? Maybe losing your job. Physician losing their job and you just ask yourself how long does someone with my specialty, how long would it take for me to get my credentials and get another job?
Speaker 2 (07:44.782)
Sometimes that answers. I think the worst emergency is disability because then you lose your job, you lose your earning capacity, and then you got bills to boot on top of that. yeah, disability is worse. Disability on kids, get your disability insurance.
Yeah. So that is a tough.
That's certainly true. Yeah, get as much as you can and then that won't be, at least that will be maybe your worst thing that could happen to you other than death, but it won't be the most expensive. But yeah, get a well-thought-out emergency fund in place that's not bloated to the point of hurting your future because you can't do something really good with the rest of the money. And then there is a variety of ways to spend the money.
Okay, just tell me how do I get to spend it? I got my extra mill still well save for like hundred fifty K so now I'm down to 850.
So at this point I see there's such a big pile that it starts to get scary like I Want to spend some of it? We have maybe some home improvements. We want to go on a nice vacation. We need to replace our cars There's a variety of ways you could kind of divvy up this money. But once again There's some this is what I see I don't know exactly why it is but there's some guilt around spending the big pile of cash, right?
Speaker 1 (09:04.588)
Okay? So the only way I've seen to combat the guilt is to make sure you're on track for everything else. And this is something that, I mean, this is just boring old finances like the rest of it, but you get on track and then you know really what's left. So that's one way to go with the big pile of money. So you look at your retirement plan, see if you're on track. And if you need to make a big contribution, maybe you do that.
Be responsible basically.
Be responsible. It may be big contribution to college.
It reminds me of this time I was paddle boarding with my wife out on the lake and we're just floating around as one of those days and Talk about vacation and she's like Yeah, we should take a vacation. I was like, you know, I studied Latin when I was in high school and I've always wanted to go to Rome you know, I would love to see the antiquities and You know mess around where Pompeii was and just see all that stuff, you know, she's like, yeah We should go to Italy and I was like, but you know what? She would really do and she said what I said, we should really finish paying for college
we should finish stocking away money for college. And so we did that. We finished saving for college and then about a year later after that we took our very first European vacation, we went to Italy. I did feel great about it, but I would have not had a good time in Italy. think all that food would have made me barf if I'd known that my kid's college still wasn't paid for. I just could not have digested it.
Speaker 1 (10:15.102)
I probably feel great about it.
Speaker 1 (10:27.374)
And sometimes, like in your situation that you just described, there wasn't enough to go around. The extra money was done. mean, you put it in college and that was it. You had to start saving for vacation again.
and before that it was carpeting and before that it was, you know. Yeah.
It can always be something depending on the amount. And I think that for many families, like the single-doc families that maybe aren't in the top echelon of earning, they make plenty to replace the carpets and save for college, but maybe not go to Rome every year. So you do the long-term thinking first, what's gonna bring you happiness and security in the long run.
That's probably better than that experience. But once you're on track, then you get to go look and spend the money with pure joy. Go buy a new car, go on a vacation to Rome, and you can feel happy about it.
Well, okay, so let's go back a step. we, I've got my mill, I socked away about a hundred thousand from my emergency fund and it's gonna be a different number for everybody. So that's not a recommendation. I've got my $50,000 sitting around on my checking account so that I don't overdraft. Okay. And so I gotta be adult with the rest of it. So first thing I'm gonna do is I'm gonna save for my kids college. And so let's say that I've already saved for college. Like I'm on track, I'm saving the required, oh gosh, thousand plus dollars a month that it takes to,
Speaker 2 (11:56.696)
put one or two kids through a good school. then I look at my retirement and if I'm on track there, you know, then I got some choices, right? could apply some of this and maybe retire earlier, which I don't recommend go back to the fire episode or, maybe I could plan to spend more in retirement.
Or I could take less risk. That's the other thing you can do when you have some extra money is you can put it towards your investments and take on less risks than what you've done before. So you don't have to worry so much about a market crash. But beyond like, you know, basically doing these ultra responsible, super long-term don't necessarily feel good now things like what else, what are, what are some other things that I can do with this money?
Mm-hmm. Well, so I talked about vacation and in the car. Okay. Replacing your car. think a big one that there's there's two other big ones that contended gobble up a lot of extra cash and that usually has to do with either debt or your housing situation.
wait, you mean I could actually pay off my student loans? or I could pay off my mortgage. But is that the smart thing to do? I mean, do I qualify for PSLF or should I refinance? I mean, the government's been playing these jinky games about, you don't really have to pay this and we're going to keep extending it. Right?
Yes.
Speaker 1 (13:23.319)
Yeah.
And then mortgage rates are super low right now. And so, know, do I want to, do I want to extinguish that debt or do I want to let it ride? And when do I pay it off? And then secretly every month I'm squirreling away another couple, two, $300 towards my mortgage. Like that's kind of extra money, but it's not extra money. Can you tell we've had these conversations? I'm not making this up. It really happens. I have these conversations and it's like, I don't have any extra money. Then I've got extra money. And then, you know, like,
Yeah, do I pay off my mortgage? I pay off my student loans? I just rip off the band-aid or do I wait for the PSLF thing to run out? Like what do we do with that Nate? Like how do we how do we guide them? Not like what should they do with it? But like how do we actually work that? Right that conversation. How's it go?
Yeah, the way that it goes the housing and the student loans are tend to go a bit differently and the way that it goes for student loans is usually you have to just like with lots of things in personal finance it is really personal with how much risk you want to take so that can be with investments and it's also with student loans. There is some even if it's small level of risk in going for public service loan forgiveness.
Okay, forget about the whole, what if the government goes back on their promise? Forget about that. What if you want to change jobs?
Speaker 2 (14:49.959)
Like, I don't want to be a doctor anymore.
Or you want to not work at a nonprofit. Right? There is some level of freedom that comes with paying off your loans. So generally when, when people have, there's a minimal amount of savings in going PSLF versus going, private. I mean, I lean toward private, but at some point there's a tipping points and it's different for everybody. Sometimes the tipping points, if I could save 20 grand, I would do PSLF.
Okay.
Speaker 1 (15:20.726)
Sometimes it's 200 grand before they want to lock themselves into a certain type of employment, a certain area of the country maybe. And so the key is to find out what the savings is and then kind of search within about what your tipping point is and the risks involved. Now, a lot of people, they are going for PSLF because they couldn't imagine working anywhere else and it doesn't really save them that much, but you might as well.
Right.
because there's no real risk there. And there's some that are killing themselves to live in, you know, some podunk town where they can qualify and the savings isn't big enough. And by the end of our conversations, they're moving, they're moving to, you know, the totally different part of the country because they can make up the money elsewhere, working in a private practice. And the difference is just not large enough to make an impact in their life.
So, like many of these things, it's personal, but the key is to understand yourself and understand the risks.
What about my big mortgage, What do do about my big mortgage? Then I just refinance it like two and a half percent, but now I've got all this extra money. I'm on track for college, I'm on track for retirement, I just paid off my student loans. I've satisfied any upcoming tax liability that I might have, I set some money aside for that. Like, what about the mortgage? Should I just rip out the bandaid and pay that off or what?
Speaker 1 (16:53.006)
Yeah, and then there's another angle on the house that I want to talk about after that. But let's say you just got this new mortgage or you're five years in and you're staring at it in the face and everybody's making you feel bad about wanting to pay this mortgage off because why would you do that? It's two and a half percent.
Because you can go out and parlay the money, right? I'm borrowing Seinfeld here, but yeah.
Yeah, so so in This is whenever I have this conversation I don't think people are expecting the answer that I give them because it's sort of financial It's math blasphemy and we're supposed to be math guys. Yeah, But the reality is there is some let so first of all, there's some level of risk There's some level of risk with having any type of debt Right interest rates you're paying interest
on a big pile of debt and you're taking that money and essentially leveraging yourself in the market.
You have to be careful. I mean, so when you're choosing not to pay off your mortgage and you're choosing to put that money at risk and investment You are in fact leveraging it's imagine like you had a paid off house Right now and you borrowed against the house and you took that money you put it in the market, which sounds like idiocy, right? But that's not a whole lot different than having a pile of cash you could use to pay off your house and then putting it in the market So, you know when you choose not to pay off your house, you are in fact leveraging
Speaker 2 (18:22.536)
and you're bearing some risk in that. and you know, something, it's like, if everything plays out the way you imagine in your head, that might work out fine, but, and what if you have some crippling disability that comes along, or you you get nailed in a lawsuit, and maybe some of that equity that's in your home would have been protected, like, hello, Florida, you know, it's a good way to go down there. So, you know, I agree with you, you're taking some risk.
Yeah, for all the people that feel, let's say there is, mean, again, there's a lot of guilt in these conversations that I just feel radiating off of people. For all the people that have asked me, should I take this extra pile of cash and pay off my mortgage or get ahead by investing, none of them asked me, should I do a cash out refinance to take even more out of my house?
Yes, should I enhance this stupidity?
Yeah, none of them asked me that because that like you said that sounds pretty risky and crazy. Yeah.
this is the kind of thing that is a financial advisor you think would get you fired but right but when you when you when you take money that you could use to pay down debt and you invested in said you're in fact continuing your leverage
Speaker 1 (19:28.3)
Right.
Speaker 1 (19:37.302)
Mm-hmm. So once again that back to the boring answer of balance I mean there's a balance to all this you need to be on track for retirement sometimes that level of risk basically Viewing your mortgage as some level of risk, even if it's a lower level of risk Sometimes you have to take that risk in order to get some return and be able to retire So you have to be investing But if you have extra money that truly is extra like you're on track for everything
I think paying down the mortgage many times is a great idea.
It is and I've seen it quite a bit and here's the thing that I know about paying off a mortgage. It feels weird the first time you think about it and then as you do it, it feels weird. But the next day after you see that money, leave your bank account, you see your mortgage go down to zero. The feeling that you get is like bulletproof. Right? It's like.
wow. I actually own that chunk of carpet. I own that piece of wall. I own that light fixture. Wow. I'm touching the faucet handle. I actually own this faucet handle for the first time in my whole life. I have achieved this level of freedom and it does really come and your brain gets rewired a little bit. You don't think about like the mortgage. You everybody says, you wouldn't do that except you have a mortgage, right? Well, you don't have to feel that way anymore because you don't have a mortgage anymore, but there's a risk. Okay.
So this is tricky. In the past, I've seen clients who paid off their mortgages. And I think there's something in us that gets accustomed to having a certain level of debt. And when that debt is gone, we feel like a vacancy inside. And I've seen a number of clients who paid off their mortgages go out and buy a bigger house. And now they have a new mortgage. It's, mean, as crazy as that sounds, I wouldn't be able to say it if I hadn't seen it a dozen times.
Speaker 2 (21:30.53)
it really does happen. you know, the key to happiness is wanting what you already have.
That is tricky though because even maybe I'm remembering a family here in Oregon and They had hit this point where they had extra cash. They're on track forever. They've done everything right for 20 years Mm-hmm, and then they I don't think they had a mortgage but they were ready to upgrade in-house after much deliberation they took on a small mortgage and
on how sort of like their dream home, but they'd been living in a very reasonable home for so many years. we actually guided them through that process. It was a really fine decision for them. They were both still working, still gonna be working for 15 years, double doctor family, they had extra cash, and they still felt nervous about taking on a mortgage, because they were used to not having one.
Yeah, it's kind of the opposite effect. It's the thing that we're accustomed to having. We get used to having it. Sometimes we seek to, you know, re-get that position. So, yeah, the thing I know is that when you pay off your mortgage, you're really reticent to go back out and take on other debt. Like, once you're debt-free, most people fight like hell to stay that way, to stay debt-free.
Yeah. it's always a balance.
Speaker 2 (22:56.28)
Do you think we've done this topic justice or is there more?
I feel like the only thing I can think of, this is kind of the nuance. So when people come to me with this question, there's this underlying feeling of, should I just give it to you and let you do something with it? Right? And I think that's in this industry. Oftentimes that's what it's expected.
And Nate, how does that make you feel? I mean, it's all about the client, right? But I mean, we can talk about what we want to, cause it's our podcast, but how does it, how does it make you feel when somebody says, can I just give it to you? Like, what's the first thing that goes through your head?
alarms?
Yeah, alarms. That's like scary.
Speaker 1 (23:43.894)
Yeah, not because I don't think I could make a really good decision with the money as far as numbers go. Yeah. But if you don't, if you aren't involved with what impact this pile of cash is going to have on your own life, you won't even care about it. You won't care about the impact because you don't even know what it is.
That's right. I also want to say that right now, you know, the, federal reserve is doing everything in their power to make, to make cash deposits taste icky. know, the interest rates are super low. They want you to invest it. They want you to spend it. they want you to buy a house with it. And the reason they do that is cause it drives up the prices of everything. People feel what's known as the wealth effect. They spend more money that heals the economy ultimately. And then we kind of rinse and repeat, go through the whole thing again.
there is some wisdom to just holding cash and waiting for an opportunity or, you know, waiting until let's say maybe you want to buy a home five years from now. Well, five years might or might not be an investable time horizon. I mean, you could, you could have a, could invest in something and lose the money and it might take five years for it to come back. So there is some money that really does truly belong in the bank, FDIC, NCUA insured kind of stuff.
I know it feels like you're going backwards due to inflation, but sometimes that's the right thing to do. So I'm, since you've said your last piece, Nate, I'm going to take us out with this, with this Ben Utley original. Okay. So I want everybody to hear me. Remember this cash makes you stupid. Cash makes you stupid. Cash makes Ben stupid. Cash makes Nate stupid. Cash makes you stupid unless you have a plan for that cash, in which case you don't really have extra cash. So what you need is a plan.
All right, so hey, I want to say thank you to the last couple of people who sent us questions via email. We had one caller call into the answer line. So for those of you who have question, particularly about taxes, investments, what to do with extra money in the physician's world, preferably one that has kiddos, you can call us at the physician family answer line. It's 503-308-8733.
Speaker 2 (25:58.926)
You can email us at podcast at physicianfamily.com. can visit us at physicianfamily.com slash podcast or physicianfamilypodcast.com. And the number once again is 503-308-8733. Keep your questions coming. Thanks a bunch.
Thank you for listening to the Physician Family Financial Advisors Podcast. Is there a question you would like answered on our next show? Go to PhysicianFamily.com to record your question. While you're there, sign up for our newsletter and gain access to tools you can use to turn worries about taxes, investing, and extra money into a lifelong feeling of financial security. That's PhysicianFamily.com.
