Car Buying Philosophy That Saves Money

If you graduated medical school or any college with tons of student loan debt, chances are you have little extra money to purchase a new car. Most people are still driving their car from undergrad, with the sole purpose of getting you from point A to point B. Once you start making a salary, and that car is beginning to reach the end of its life you may be in the market for a new car. Here I will provide five tips that helped me secure reliable transportation without the huge car payment. 

I do not share the same views as some who believe you should be able to buy a car for $2500 and allocate the money saved elsewhere. Sure, a case can be made for a beater that you use to commute back and forth to work. It will save you money provided the car continues to run reliably and doesn’t require a major repair such as a transmission. I believe the success of this plan depends largely on how far you commute to work and whether or not you can live with poor reliability. I was tired of driving a car like that, and while I see no reason to purchase luxury model cars for commuting purposes, I knew I wanted something with good reliability ratings, good gas millage, and some functional features like hands free calling. 

Tip 1: 

Never buy new. One of the main reasons financial gurus recommend you do not buy new cars is they depreciate in value rapidly beginning the moment you drive the car off the dealer lot. Most cars from reliable brands like Honda, and Toyota will run from 0 to 100,000 miles without any major mechanical failures. If you do the routine maintenance and replace parts that are subject to wear such as tires and brakes, you should be good. Most new cars lose 20% of their value in the first year, this has been fairly consistent over time. It makes far more financial sense to buy a certified used car from places like CarMax, or the local Honda dealer. Most of these cars have been on the road for 2-3 years and have less than 30,000 miles. They have already suffered the initial depreciation and can be purchased for much lower prices. The dealers usually replace many of the commonly worn parts such as brakes, filters, and tires. All of these cars go through a thorough inspection process and are carefully selected for quality. If the car has 25,000 miles on it, you still have 75,000 good miles before you have to worry about major mechanical problems. Most of the maintenance items were already performed by the dealer prior to the sale. The fact that many of these cars have been on the road for a few years, allows organizations like consumer reports to gather data on the reliability, safety, gas millage, and customer satisfaction. This lets you make a more informed decision. The long-term reliability of a brand-new car will not be available since there is no road time for that year. You are stuck basing your decision off of the initial road testing which clearly cannot provide data on long term reliability. I would suggest getting the consumer reports, and looking up the models you are interested in, and seeing how they fared over time. 

Tip 2: 

Spend the extra money for a 100,000-mile warranty if it’s a reasonable price. Normally I would say this is a mistake, but the warranty is further protection, and if reasonably priced might save you in the future. Since many of these cars do have more road time, some of the non- maintenance items have the potential to fail. Things such as third brake lights or starters can cost several hundred dollars out of pocket. If it fits your budget it’s not a bad investment, if it doesn’t it’s not essential either. 

Tip 3: 

This tip involves gap insurance. Gap insurance is another debatable point. I believe it depends on how fast you plan to pay the car off. Gap insurance provides protection if the event you are in an accident, and the car is totaled. The insurance company will give you the value of the car at the time of the accident which may or may not be what you owe on the loan because of depreciation. If you are like me, and you pay your car off in one year, gap insurance is an unnecessary expense. The risk is low enough to take the chance and save the $600. However, if you plan to take a 5-year loan to pay the car off, there are far more opportunities to be in an accident, and the car will lose most it’s value over that length of time. In this case it’s best to protect yourself with gap insurance. 

Tip 4: 

Avoid luxury, and performance cars. Luxury brands like BMW, and Mercedes Benz make cool cars, with the driver’s comfort in mind. However, the prices are significantly higher and the maintenance over time will continue to cost you throughout the life of the car. If you are on a budget, it’s going to be hard to afford a car like that, and the overall reliability on some of the cheaper models is actually poor when you read through consumer reports. Performance cars are not built for reliability or practicality, they are intended to go fast, and handle well often at the expense of these things. This was a hard-learned point for a person who built several Ford mustangs over the years and wasted countless amounts of hard-earned money. From a financial, and daily driver standpoint it makes no sense to buy one of these cars until you have saved enough money to comfortable afford a weekend car. 

Tip 5

The final tip is to make sure you do all the routine maintenance at the dealer specified times. The easiest way to figure out when you need to change the transmission fluid, or cabin air filter is to look at the owner’s manual. The philosophy is simple, $140 for transmission fluid is a lot cheaper than precision machined parts. 

Millennial Doctors Financial Woes Continue

Introduction

All millennial physicians had a lot to process over the last several weeks. The coronavirus rapidly spread across the United States leading to the worst financial crisis since 2008. No generation in history has had to deal with two major events that ravished the economy in a relatively short period of time. It started with the financial crisis of 2008, and now a coronavirus pandemic that once again threatens the financial future of many people. At this point no one knows the full impact this pandemic will have on the economy.

The current crisis presents a number of concerns for young physicians. The primary concern of many recent graduates, or early career physicians is taking care of patients and remaining safe. A big part of what happens to the economy over the next several months depends on the work of public health officials, hospital systems, and healthcare providers.

Understandably, financial well-being is not the primary concern for many. Most physicians make a big financial sacrifice early in life, forgoing the earnings of our early 20’s in favor of education. Once you navigate medical school successfully, you enter another period of low earnings in residency. There is no doubt that our career choice and the multiple financial crises altered the lives of young physicians permanently.   

Financial Tips for a Recession  

It wasn’t too long ago when I received the first paycheck I ever made as a physician. It was a big moment for me, I received $763.26 for doing the work that I loved. I even have the paycheck framed on my wall. After eight years of not making a single dollar and taking out a six-figure loan to fund my education, I finally felt like this was my time. There were many things I neglected over those eight years that I needed to address. Most of my friends and family who chose different career paths were buying houses, saving for retirement, and not driving an old car. My initial goal was simple, I just wanted to stop worrying about how to pay my monthly bills. Below are several strategies I used over the last three years to save money, pay debt, and improve my financial health. 

Living with Family to get a Jump Start  

The first choice which helped me immensely was selecting a residency program close to home which allowed me to move back in with parents for the first year. A goal of mine was to practice in the community I grew up in, and when that opportunity presented itself, I could not pass it up. It also allowed me to live rent free for one year to help pay for transportation, build a small emergency fund, and pay off the one private loan I took out for residency applications and travel. I realize this is not possible for everyone and my situation is unique, but if an option like this is available to you, consider it.

Secure Reliable Transportation 

I started with selling my old Honda and looking for reliable transportation. I eventually settled on a Honda which I purchased used for $16,500. I know it seems pricy for a person with limited resources, but the investment felt worthwhile due to my expected commutes. I like Honda for their reliability, low cost maintenance, and fuel economy. The other car company that fits into this category is Toyota. 

Have a Small emergency Fund

Next, I opened a high interest savings account with the goal of having $1,000 in it for emergencies. I wanted a small amount of cash available to cover any unforeseen expenses.

Develop Good Financial Habits and Protect Your Family

I focused on developing good financial habits, learning to save, and started thinking about how to invest a portion of my earnings in the next few years. Financial education became a big part of my study plan because it’s not taught in any medical school. I also secured own occupation disability insurance, and term life insurance. It’s important to protect yourself and your family in the event you are unable to do your job or pass away unexpectedly. This is even more important with the COVID-19 pandemic.

Housing Is a Major Expense 

One of the keys to my success was low cost of living. I made the decision to move out of my parents house 2nd year. This required some significant out of pocket expenses including a security deposit, some furniture, and costs associated with setting up a new place. The biggest impact was related to the monthly rent payment. Although it was reasonable for the location it was still a significant portion of my monthly income. Finding ways to reduce your housing costs may be the single biggest benefit to your financial future.

Investment Options:

From all my research, it was clear that index fund investing was the best method and produced reliable returns over time with minimal management on the investors part. The real decision was between opening a personal retirement account like a ROTH IRA or opening an employer sponsored account such as a 401k or 403b. Most advice you will find recommends the ROTH over the employer account given the eventual higher earnings and tax bracket most doctors will be in after completing residency. I have since found that it really depends on your individual situation. If you have a high student debt burden and want to reduce your adjusted gross income, or your employer matches contributions you may want to opt for the 401k or 403b. I settled on the employer-based retirement plan. I was able to select several low-fee index funds and was happy with the options provided. The automatic deductions made the process simple, and helped me reduce my adjusted gross income and thus my student loan payments.

COVID-19  Optimism

This is a work in progress as the year is ongoing. I’ve been looking at the entire COVID-19 situation in terms of the potential benefits that may arise. If you are still in training or an early career physician, the most important financial asset you have is time. Over the span of a 30-year career the economy will fluctuate, with some bad years and some really great years. Things were bad in 2008, but if you made saving a priority, invested your money wisely, and paid off debt by 2018 you were doing really well. Unlike those who are looking to retire, or are retired we have an opportunity to invest heavily in a down market. I believe it’s a prime opportunity to lay the foundation for your financial future.

We also have the added benefit of some student loan relief which was not an area of focus in 2008. It looks like the economic stimulus will allow for no interest and no payments on direct or federally held loans for the next 6 months. If you are on REPAYE, PAYE, or PSLF you don’t need to do anything to qualify for the payment and interest freeze. It’s refreshing to see the federal government acknowledge the need to provide student loan relief after failing to consider the long term impact it would have in 2008. 

We need to prepare ourselves for the next several months and continue to take the necessary steps to secure our financial future. We must believe in our own resiliency and capacity to grow during hardship. We’ve been through a recession before, and this is not likely to be the last. 

Steps For Young Physicians New to Managing Money

A quick Disclaimer before continuing: Obviously as physicians we do not enter into the field of medicine with the sole purpose of making money and buying stuff. If this were the case, I would have gone into investment banking, sales, or marketing where I would not have spent the last 8 years of my life taking out huge student loans to pay for the torture of getting through undergraduate and medical school. 

Protect the things that you have already worked hard for. You just graduated medical school and matched to the residency of your choice. Like many medical students you have received little if any training on managing your money or protecting your assets. At this point you may not feel like you have much to protect, but if you are like many medical students you just spent several hundred thousand dollars on your education and that is certainly something to protect. If you have a family, or children and a great deal of educational debt it’s equally important to protect them in the event of your death. The first two steps in this process will likely not bring you any wealth at all. They are simply there to protect you from misfortune which could potentially strike anyone at any time. The first recommendation is to obtain own occupation disability insurance from a quality provider such as Guardian. Basically, if there is any reason you become disabled and cannot do the job you were trained to do this policy is here to protect you. Most of the policies allow to increase the payout as you advance in your career. If you lock into a policy at a younger age you may be able to avoid the medical evaluation that often is required for these policies. The other insurance policy you want to have at the start of residency is term life insurance. In the unfortunate situation where you pass away before you make your fortune you will protect the people you love the most from financial hardship. I would suggest somewhere in the range of $500,000 to $1,000,000 depending on your debt burden. I will provide one additional tip here because I believe it’s important. If you have car insurance at the state minimum it’s a good idea to increase the rates. Again, this protects you from any potential issues in the event of a serious car accident. If people know you are a doctor they may assume you have a lot of money increasing the chances of a law suit. Bottom line make sure you are protected. 

My next point which may or may not be popular with some people is do not do a fellowship in psychiatry. A fellowship is not required to work in most areas of psychiatry, and residents often wish they did not do one after having the experience. Unless the fellowship provides you with skills no one else possess, it provides very little value. Maybe doing a child/adolescent fellowship is valuable but doing a consultation-liaison fellowship is not. It’s hard to see how doing one year of additional consult psychiatry would make you any better since most residency programs have multiple rotations on consult service, and additional time can be spent in consult 4th year. Consult work, emergency psychiatry, addiction, and forensic work can all be done without a fellowship and board certification. The financial aspect is equally important, another year making approximately $60,000-$70,000 is difficult to justify. As a fellow you are still a student, and you do not have full ownership and responsibility for your patients. You are still not learning what it is like to be an attending.  

There will be more to come in the next several posts.

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