Data-driven Personal Finance Takeaways

Some interesting passages and food for thought from Just Keep Buying: Proven Ways to Save Money and Build Your Wealth by Nick Maggiulli (a personal finance book with much more data behind its analysis than average for the genre).

On saving:

And one of the most common financial stressors is whether someone is saving enough. As Northwestern Mutual noted in their 2018 Planning & Progress Study, 48% of U.S. adults experienced “high” or “moderate” levels of anxiety around their level of savings. The data is clear that people are worried about how much they save. Unfortunately, the stress around not saving enough seems to be more harmful than the act itself. As researchers at the Brookings Institute confirmed after analyzing Gallup data, “The negative effects of stress outweigh the positive effects of income or health in general.” This implies that saving more is only beneficial if you can do it in a stress-free way. Otherwise, you will likely do yourself more harm than good.

That’s a counterintuitive claim: stressing about not saving enough does more harm than not saving enough.

On spending:

Researchers at the University of Cambridge found that individuals who made purchases that better fit their psychological profile reported higher levels of life satisfaction than those who didn’t. Additionally, this effect was stronger than the effect of an individual’s total income on their reported happiness.

For example, it has been well documented that people get more happiness buying experiences over material goods. However, what if this is only true for a subset of the population (e.g., extroverts)? If so, then we may be generating spending advice based on the 60%–75% of people who are extroverts to the dismay of introverts around the world.

I suspect Maggiulli is right to point this out. Just like scientists get annoyed when news media take a small experiment or a mild trend in the data and throw up a big bold headline, the idea that all humans benefit from the same things in the same sorts of ways doesn’t pass intuitive muster. For many people, I suspect there are probably plenty of high-impact ways to spend on some things and dumb ways to buy experiences.

On valuing an educational/career investment:

The proper way to find the current value of these future earnings is to discount this payment stream by 4% per year. However, there is a simpler way to approximate this—divide the increase in lifetime earnings by two. This will be roughly equivalent to a 40-year payment stream discount by 4% per year. I prefer this shortcut because you can now do the math in your head. Therefore, a $800,000 increase in lifetime earnings over 40 years is worth about $400,000 today.

Value of Degree Today = (Increased Lifetime Earnings/2) – Lost Earnings While things like taxes and other variables can affect this calculation, it’s still a simple way to check whether a degree is worth the cost.

Food for calculus when considering not just expensive degrees but also lengthy medical training or an additional fellowship.

On the health impact of debt:

For example, research published in the Journal of Economic Psychology found that British households with higher levels of outstanding credit card debt were “significantly less likely to report complete psychological well-being.” However, no such association was found when examining households with mortgage debt. Researchers at Ohio State echoed these findings when they reported that payday loans, credit cards, and loans from family and friends caused the most stress, while mortgage debt caused the least. On the physical health front, a study in Social Science & Medicine found that high financial debt relative to assets among American households was associated with “higher perceived stress and depression, worse self-reported general health, and higher diastolic blood pressure.” This was true even after controlling for socioeconomic status, common health indicators, and other demographic factors.

What makes buying a home even easier is if you can afford it. This means being able to provide 20% as a down payment and keeping your debt-to-income ratio below 43%. I chose 43% because that is the maximum debt-to-income ratio you can have for your mortgage to be considered qualified (i.e., lower risk). As a reminder, the debt-to-income ratio is defined as: Debt-to-Income Ratio = Monthly Debt / Monthly Income

Part of what makes mortgage debt less impactful to mental health is presumably the fact that mortgages feel universal and almost no one you are likely to know (at least early in your professional career) has the money to buy a house with cash.

Nonetheless, I suspect I will have a measurable well-being boost when mine is gone.

On why to invest:

In essence, by investing your money you are rebuilding yourself as a financial asset equivalent that can provide you with income once you are no longer employed. So, after you stop working your 9 to 5, your money can keep working for you. Of all the reasons why someone should invest, this might be the most compelling and also the most ignored. This concept helps explain why some professional athletes can make millions of dollars a year and still end up bankrupt. They didn’t convert their human capital to financial capital quickly enough to sustain their lifestyle once they left professional sports. When you make the bulk of your lifetime earnings in four to six years, saving and investing is even more important than it is for the typical worker.

Fund the life you need before you risk it for the life you want.

The conversion of human capital to financial capital is an excellent way of looking at/arguing for investing.

On being realistic about wealth:

For example, research in The Review of Economics and Statistics illustrates that most households in the upper half of the income spectrum don’t realize how good they have it…households above the 50th percentile in income tend to underestimate how well they are doing relative to others…even households at the 90th percentile and above in actual income believe that they are in the 60th–80th percentile range.

For example, you would need a net worth of $11.1 million to be in the top 1% of U.S. households in 2019. However, after controlling for age and educational attainment, the top 1% varies from as little as $341,000 to as much as $30.5 million. For example, to be in the top 1% of households under 35 that are also high school dropouts you would only need $341,000. However, to be in the top 1% of college educated households aged 65–74 years, you would need $30.5 million.

It’s incredibly easy to find some Joneses to keep up with.

On green grass:

But why does happiness start to decline in the late 20s? Because, as people age, their lives usually fail to meet their high expectations. As Rauch states in The Happiness Curve: “Young people consistently overestimate their future life satisfaction. They make a whopping forecasting error, as nonrandom as it could be—as if you lived in Seattle and expected sunshine every day…Young adults in their twenties overestimate their future life satisfaction by about 10 percent on average. Over time, however, excessive optimism diminishes…People are not becoming depressed. They are becoming, well, realistic.”

Part of the curse of medical training is to coincide with this natural stage of disillusionment.

Biden and Student Loans: Cancellation and The Final Payment Extension(?)

Big long-hinted-at news in the world of student loans this week. Please peruse the Biden Student Loan Fact Sheet. The Official FAQ is short and very readable.

Here are some highlights:

Student Loan Pause

  • Payment pause extended “one final time” through Dec 31, 2022. This is again a massive benefit to current borrowers and especially those going for PSLF. For example, each month of $0 payments that qualify is often a four-figure subsidy to an attending physician.

Debt Cancellation

  • Up to $20,000 in debt cancellation to Pell Grant recipients and up to $10,000 in debt cancellation to non-Pell Grant recipients. Pell Grants are for undergraduate loans only, so most young physicians will be in the second camp.
  • To be eligible for cancellation, your annual income must be below $125,000 (for individuals) or $250,000 (for married couples or heads of households). It is unclear how exactly they will define and what they will be using to verify income at this time (probably AGI from last tax return?), or for example, if people utilizing the married filing separately loophole to reduce IDR payments may finagle some free money (e.g. the resident married to an attending loophole; I suspect not).
  • Current students are eligible for this relief. If you are a dependent for tax purposes, then it’s your parents income that will be used.
  • The process should be automatic for many folks, but some may need to apply. If you’d like to be notified about news, sign up for the DOE’s “Federal Student Loan Borrower Updates” here.

This is obviously a one-sided easy-to-deploy benefit to borrowers that does nothing to address the underlying program of skyrocketing tuition. There has been an incredible amount of hand-wringing and teeth-gnashing about this on the internet. The irony of most of that discussion, particularly those against forgiveness, is that the government subsidizes and gives money to a variety of citizens for a variety of things (owning a home, having children, investing in long-held assets). There is no neutrality to any status quo either. People pick and choose where to aim their indignation on a daily basis but often do so in an isolated out-of-context fashion. Mostly, people respond to every event in the predictable ways of their camp.

So, this is the functional equivalent of a big tax cut for mostly young, mostly college-educated (or often college-attempted) Americans. Now, politically that camp pretty firmly supports democrats, so trying to appeal to that already strong base may not be a very savvy move in the current political climate, and it may not be very well-timed given the current inflation issues, but it’s not as though we haven’t injected money into the economy through similar (or even probably less effective) means before. It just so happens that this is targeted to have a clear disproportionate impact on a smaller subset of Americans than, say, the tax cuts of the Bush and Trump eras (which had a substantial disproportionate benefit for wealthy Americans but was perhaps less obvious to a casual observer).

Everything is political, and this is no exception.

PSLF

  • The application for the temporary PSLF expansion expires on October 31, 2022. See the White House page here.
  • Again, this was designed to temporarily remove some of the fine-detail barriers to achieving PSLF by allowing past payments using the wrong payment plan (e.g. extended, graduated) or ineligible loan type (e.g. Perkins, FFEL) to count.
  • You don’t need to have fully earned forgiveness to benefit from this program, this is to codify credit for past payments.
  • This is mostly a boon for older borrowers (i.e. mostly people who started school before 2009).

The New Payment Plan

  • A light-on-details proposed (not final) plan to further reduce payments on undergraduate loans to 5% and fully cover unpaid monthly interest for everyone.
  • For borrowers with original loan balances of $12,000 or less, IDR-based forgiveness after 10 years. Currently, for undergraduate borrowers in PAYE, that’s 10% and 20 years.
  • Raise the discretionary income floor so that more people will have $0 payments.

If you’ll notice, the generous forgiveness terms in this setting are on very small loan amounts. The goal here is in large part to make local education, and specifically community college, affordable for all Americans such that low-income families will have small or no monthly payments and then forgiveness after 10 years. This will, again, not really do much to deal with students borrowing for more expensive schools (except potentially make long-term loan forgiveness more attractive thanks to low monthly payments and a smaller tax-bomb thanks to a better interest subsidy).

As in, this would have a relatively small impact for most doctors except for preventing negative amortization during residency (effectively lowering your interest rate and making private refinance during training less competitive). One clever possible benefit would be to waive the in-school deferment and enter repayment for undergraduate loans while in medical school to enjoy $0 payments and 0% interest via IDR, effectively granting you subsidized loans in a world where many loans have been unsubsidized.

Earning the Bare Minimum

From the (the free or inexpensive) The Almanack of Naval Ravikant: A Guide to Wealth and Happiness:

If you look at even doctors who get rich (like really rich), it’s because they open a business. They open a private practice. The private practice builds a brand, and the brand attracts people. Or they build some kind of a medical device, a procedure, or a process with an intellectual property. Essentially, you’re working for somebody else, and that person is taking on the risk and has the accountability, the intellectual property, and the brand. They’re not going to pay you enough. They’re going to pay you the bare minimum they have to, to get you to do their job. That can be a high bare minimum, but it’s still not going to be true wealth where you’re retired but still earning.

The problem with employment: “They’re going to pay you the bare minimum they have to, to get you to do their job.”

It’s always in the interest of the suits to pay you as little as they can get away with. It’s always in the interest of the hospital, the university, or the company to either pay you less, push you to produce more, or both. It certainly seems to be a very hard temptation to resist at the moment.

Speaking of retirement:

What is your definition of retirement? Retirement is when you stop sacrificing today for an imaginary tomorrow. When today is complete, in and of itself, you’re retired.

…one way is to have so much money saved that your passive income (without you lifting a finger) covers your burn rate. A second is you just drive your burn rate down to zero—you become a monk. A third is you’re doing something you love. You enjoy it so much, it’s not about the money. So there are multiple ways to retirement.

but…

Lusting for money is bad for us because it is a bottomless pit. It will always occupy your mind. If you love money, and you make it, there’s never enough. There is never enough because the desire is turned on and doesn’t turn off at some number. It’s a fallacy to think it turns off at some number.

When it comes to helping people turn their jobs from just the income-generation game or the I-need-a-passive-income-side-hustle game, we need to move more industries (and here I’m thinking about healthcare) into more of a cooperative venture and less of a competition.

My co-founder Nivi said, “In a long-term game, it seems that everybody is making each other rich. And in a short-term game, it seems like everybody is making themselves rich.”

I think that is a brilliant formulation. In a long-term game, it’s positive sum. We’re all baking the pie together. We’re trying to make it as big as possible. And in a short-term game, we’re cutting up the pie.

The scarcity mindset sours the calling.

WCI Course Sale +CME

The folks at the White Coat Investor are doing one of their rare course-wide sales. Code BIRTHDAY2022 is good for 20% off any course from June 28th-July 11th.

Also worth mentioning: their flagship course, Fire Your Financial Advisor, was totally revamped last year, and there is a now CME-eligible version for those with education funds to burn at the transition of the new academic year.

The COVID-related PSLF boon continues

You probably know by now that the pandemic student loan payment pause was officially extended through Aug 31, 2022. Given midterm elections in November, I suspect there will be one more round of good news announced this summer and payments won’t actually start until–for example–January 1.

So that 0% rate continues to save people lots of money, and those $0 payments still count toward loan forgiveness including PSLF. There is probably no group this helps more than attending physicians.

But for anyone with rising incomes and especially more recent attendings, the additional pause extension news is likely even better than you’d think. From the recent announcement:

You won’t be required to recertify before payments restart, and the earliest you could be required to recertify is March 2023.

You may still see a recertification date that is earlier than March 2023 on your account Aid Summary. We are working to get those updated, and we thank you for your patience. If your recertification date falls between now and March 2023, it will be pushed out by one year. For example, if your account says your recertification date is Dec. 1, 2022, that date will be pushed out to Dec. 1, 2023.

For many borrowers, the next recertification deadline will be pushed even further into the future, potentially way past the point when student loan payments start again. Even if payments begin in August (or January), a lot of doctors will enjoy months if not almost a year of payments based on their last recertification from years ago, which means that a relatively recent graduate may enjoy trainee-sized payments for that much longer, and some residents may enjoy $0 payments for a while even after repayment restarts.

So a lot of folks–especially a lot of attending physicians–will get to benefit from significantly suppressed payments after the $0 period ends, likely resulting in thousands of dollars of additional eventual PSLF savings.