About to Graduate from Medical School? Seven Steps to Start on your Journey to Financial Freedom

So, you’re about to graduate from medical school, congratulations!  What an amazing achievement.  You will always look back at this time with pride and an incredible sense of achievement.

You may be dreaming of transitioning from the world of study and awkward loitering around the ward to the world of a “proper” job, a sense of responsibility, your own patients, and finally a regular paycheque.

Beyond the amazing opportunity to make a positive impact on your future patients, your colleagues, and the future of medicine, you have incredible financial opportunities too.

Medicine is well compensated.  You will likely earn above average income within a few years and could fairly easily achieve financial freedom to do what you want, travel, and make the world a better place with donations or charitable work.

It is easy to assume these privileges will be yours no matter what you do with your modest first paycheques.

But the small choices you make with your money add up to define your financial future.  You cannot, even on a doctor’s wage, have everything you want without planning for it.   Many of your colleagues don’t understand this until they are nearing their desired retirement date.

Those of you with good financial intentions may have noticed financial planners sponsoring medical school events, graduation balls, or sending you invitations to join their privileged group.

Doctors are usually time-poor and known for their ineptitude with money.  We also tend to be a little too trusting, assuming other professions follow a similar ethical code to our own.

Be aware that these companies are interested in you because of your potential to pay them lots of money over the next forty years.

Be very careful who you get advice from – you should contact them (not the other way around) and pay for advice upfront, rather than let them earn through commission or management fees, which is likely to cost you multiples more in the long-term.

An average adult’s full-time earnings were $82,752 in 2018.  The average full-time intern earned around $70,000 in 2019, and earnings increase quickly over the first ten years.  But many specialists end up with no idea where their high income goes, and lack the freedom and choice they desire in life.

Here is a step-by-step guide to getting your finances organized for a bright future. 

  1. Work Out Where Your Stand at the Start:

    a. Student Loans

I want you to log in to your student loan accounts and work out how much you owe.

Many people bury their heads in the sand (OK, I did this) and try and avoid acknowledging how much debt they are in.

You are going to have to pay these off one day.

You need to work out how much you owe, how much interest you will be charged, and how much of your intern wage is going to go towards paying these off.

Whether to pay off your student loans aggressively is something to be considered carefully.  Often, it is more beneficial to invest that extra money for a potentially greater return.  But knowing how much you owe (and your net worth) will help you get a realistic grip on the situation.  And this may stop you from getting overexcited and splashing the cash about like a drunken gambler during your first year of work.

b. Bad debts

You may have built up some of these towards the end of medical school (ahem, OK, again I’m guilty!).

Credit and store cards are likely to be charging you a should-be-illegal interest rate of 20-30% so are going to be a top priority to pay off as soon as possible.

Pay off any debt with interest over 5% before investing.

c. Necessary Debts

Perhaps you are already committed to a mortgage.

Now is a good time to review things.  How much do you owe?  Do you have any equity?

Was the property a good investment and will likely grow more equity over the years, of which you can leverage for further investments?

Are you being charged a competitive interest rate?  Do you have offset accounts set up that your payment can go into, and your savings stored in, in order to minimize interest paid?

A note on applying for credit.  An intern reached out to me after being declined for a credit card (not great for your credit score) due to a lack of work history.  He had worked for only a few months and in retrospect, should have waited a few more months.

The concept of good debt vs bad vs tolerable debt is really important.  Read more about it here.  No matter the debt, make sure you always make the necessary repayments (automate everything possible) to build a credit score.  

d. Investment Debts

Maybe you’re well ahead of the pack and have already got investment loans.

Or perhaps you’ve made some ill-advised choices over the years.

Time to face up to the situation, whatever it is.

Similar to your principal place of residence, is this a good investment, can you manage the debt, what interest rate are you paying?

e. Your Expected Living Expenses

Hopefully, these will be fairly low.  Sit and work it all out.  The amount to which you can control your regular living expenses will determine how much you are able to pay down debt, save and invest.

f. Work out your “Gap”

The gap between your income and expenses is going to define your future wealth. Even if its only a tiny amount at the moment, as long as it’s a surplus you’re on the right track.

The aim is to start with a small POSITIVE ‘Gap” and increase this every time you get a pay rise.

You can use this “Gap” to save up your emergency fund, pay down extra debt and then roll them into investing for the long term.

Even if it’ ‘s only $10 per pay, make a plan for it and automate it.  Increase it when you can.  It will grow into something meaningful.

2. Emergency Fund

Work out how much emergency fund you need, and work out how to save it up.  What sort of emergencies can you see cropping up?

Car blowing up?  Needing to fly interstate in case of a family emergency?

What if you’re sick and unable to work before building up sick leave allowance?

Most financial experts recommend 3-6 months of expenses saved; this will take a while!

Start with a more achievable $1000-2000 depending on what emergencies seem possible to you.

Work out how quickly you’re able to save this by setting some money aside each pay.

  1. Insurance needs

Consider whether you need income protection, life insurance or total permanent disability insurance at this stage.   You will obviously need to have chosen the best indemnity insurance.

Do you have dependents? What would happen if you couldn’t work, or were permanently disabled?

Check what insurance is automatically included in your super, and whether this is appropriate for you and your stage of life.

Don’t cancel insurance unless you have carefully considered the long-term consequences.  In 10 years’ time, you may have developed comorbidities preventing you from getting cover.

  1. Long-term plans

This is really tricky!  If you already have a ten, twenty or forty-year plan – write it down, work out what your relevant financial goals are, and then work out how you are going to reach them over the prescribed time period.

If you have no idea, it is safe to assume you will want to do something with your life in the next twenty + years that is going to cost money!

You may want to buy a house, take time off to travel or work for free, pay off student loans or take time off to have children (and many doctors don’t end up qualifying for any paid parental leave).

Once you have paid off any high-interest debts and got an emergency fund, the extra money freed up can be immediately redirected (by direct debit) to savings before it disappears.

Options initially include savings accounts, share investment (including micro-investing), superannuation (including first home savers scheme).

It may seem the amount you can put aside is too small to be worthwhile.

It’s not, and you have to start, and will be surprised after a couple of years by the significant amount you’ve built up if you stick with it.

5. Superannuation

Surely I’m too young to think about this I can hear you moan!

I hate to break the bad news to you, but you’re years behind in starting to contribute given all those years in higher education.

At a bare minimum, make sure you tick the box that means you contribute enough to get the maximum amount paid into your super account from your employer.

After your debts are paid off consider why you would make voluntary contributions.

Check out more super for interns here.

6. Buy your first car – or better, don’t

Consider whether you really need a car straight away, and what you should buy.  Cars are a big factor in your future financial success.  Cars depreciate in value from the moment you purchase, the exact opposite of buying assets that increase in value to build wealth.  A flash car early in your career is going to make a big dent in your financial future (far more than the cost of the car due to compounding).

7. Buy and read “The Barefoot Investor” by Scott Pape.

For a few, his advice is insultingly obvious.  For most, it’s life-changing.

Definitely the book you are likely to be recommended by a doctor if asked for financial advice.

Worth buying a paper or kindle copy to refer back to over the years as your circumstances change.

It will have you organizing your money and building investments automatically -which really is the secret!

If you’re feeling overwhelmed by so many goals competing for your savings, read about how to get over money challenges.

I wish you all the best in your first year of practice.  I hope your patients are the right balance of interesting and challenging.  I hope you’re well supported by your superiors and peers.

Your learning curve will be sharp.  Make the most of all the wonderful opportunities you encounter.

Good luck!

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Why I sucked it Up and Paid for Professional Property Advise

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Why I Sucked it Up and Paid for Professional Property Investment Advise

Everyone I know who has invested in property has horror stories to tell.  They warn me “You can’t make money in property”.  Problems ranged from having no growth or worse, ending up in negative equity, tenants maliciously damaging properties and never-ending, expensive maintenance issues.  One unlucky investor was trying to offload the nightmare investment, and right as the open home started, police performed a drug raid on a neighbour’s house!

But I was intrigued by the contrast between these terrible experiences and the incredible growth reported in the Australian property market over the previous decade.  Below is a graph from the Reserve Bank of Australia demonstrating house price growth over the long-term.  The gradually widening gap between the Consumer Price Index (CPI) and house price suggest (as does widespread media coverage) that property has been a fabulous investment over the years.

If you are interested in why I chose to invest in property rather than just index funds, check out my take on whether to invest in property or shares.

The problem was, I didn’t know anyone who had “got it right” in property.  There are property advisers everywhere, adverts pop up every time I’m on line and I’m receiving constant emails and occasional cold calls from companies I have never heard of. 

I am starting to suspect I am the actual product on sale here! 

The experience I’ve (and most of my specialist colleagues) had with financial professionals so far have demonstrated that they do not work to an ethical code comparable with what, as doctors, we would expect.  The Royal Commission suggests that financial advisers have often not put the clients’ interests first.

I felt vulnerable and inexperienced approaching a financial professional.  How on earth would I find someone I could trust?

I was introduced to “The Property Couch”.  I have a 30 minute each way commute, it sounded up my street, so I started listening on the way to and from work.  The Property Couch is free and very easy to listen to, but extremely educational.  I planned to save a 20% deposit over three years, so I had plenty of time to educate myself.

As I listened to 100+ episodes, I began to understand why those horror stories had occurred.  Poor capital growth and even negative equity, was relatively predictable in an off the plan house and land package.  Especially so in a town with low, or a single source of employment.

Poor quality tenants who trash properties are largely predictable, and therefore avoidable, by selecting good quality properties that will attract great quality tenants, and by using professional screening and rental management.  And buying a house in the cheapest street in town is probably not going to end well!

A common theme among the property investors I knew seemed to be a lack of time invested in learning about property investment.  Also, the source of advice seemed to be an issue, with investors being “advised” to buy a property when in reality the “adviser” was a salesman making a commission, or following a friend’s hunch about the next property “hot spot”.

The hosts of the property couch run a property investment firm in Melbourne, but aim with the podcast to share free information to encourage investors to make more logical, informed choices.

Although I’m sure the podcast is great advertising for Empower Wealth’s services, there is definitely no hard sell and the hosts are happy for you to use the information to purchase without professional assistance if you want.  I thought this was pretty awesome.  I was working hard to save all the cash I could – I didn’t really want to lose a chunk of it in fees, and hoped to use all this valuable information to work it out myself.  I consider myself reasonably smart and was keen to learn.

I listened to the property couch for around a year, as well as reading every relevant book and internet article I could find! I narrowed my search to Brisbane, and started buying Your investment property magazine.

I geeked it up, attempting to analyse data including historical suburb median value growth, rental vacancies, days on market, yield, percentage owned vs rental, household income trends and public transport links.  I rather enjoyed constructing large and complex excel documents in an attempt to narrow down suburbs in a logical and strategic way, but that’s probably just me!

I felt a bit confused by contradicting data, and not really knowing how to weigh one factor against another, but eventually constructed a list of suburbs in Brisbane I thought looked promising.

Over the next six months, at every opportunity I would explore these suburbs on foot when I had time, to get a good feel of the area.  For those of you not familiar with Brisbane, it is very hilly! And hot!! I bordered on heat stroke several times and had to call an uber to rescue me to the nearest air-conditioned shopping centre!

Even when I hired a car for my exploration, I was completely bewildered. One street would look great, well-kept cars, house proud occupants, but I’d walk around the corner to find boarded up windows and toys left to rot in the front yard.

You might have guessed by now; I do only work part-time! I don’t imagine many would have the time, patience or be downright odd enough to take on this ridiculous quest!  I did enjoy checking out all the gorgeous Queenslander houses, though!

With the start of 2019 came the impending election, and labour were threatening to abolish negative gearing benefits for property investors, one of the factors differentiating this investment strategy to me above others.

There was a lot of doom and gloom around the effects this would have on property prices.   Is it just me, or are the media always predicting the end of the world, and it (luckily!) never turns out that bad in the end?  I suspected this was the case this time, still wanted to invest in property (possible at least in part due to the amount of effort invested so far AKA Sunk Cost bias), and I definitely wanted to get in before negative gearing was abolished.

I had managed to save more than 10% deposit plus costs at this time, so decided to go ahead with my purchase sooner than planned.

It was clear to me by now that my attempts at “research” were fairly hopeless!  I was like a fourth year medical student on my first clinical placement (Or a patient who has been extensively googling their symptoms)– I had read all the books and knew a lot of the lingo, but had no idea how to synthesis the enormous amount of data to make anything resembling a sensible differential and management plan. At least I now knew what I didn’t know!

It took a while to come around to the idea, but I was going to pay for professional advice.  I now had a company I had developed some trust in, and had a way forward.  If I didn’t bite the bullet and accept professional help, I was going to be stuck in “Analysis Paralysis” forever.  I was fearful of making a mistake, and damaging my family’s future.

I reached out to the Empower Wealth team, and started the process to become a property investor for the first time.

Do I come to regret investing in property?  Check out my reflections after six months of being a property investor.

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Property vs Shares: Why I Chose to Invest in Property

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My Background with Property

Here is my detailed analysis of whether to invest in property vs shares.

I, like many Aussies, am a bit obsessed with real estate.  Buying an investment property was always something that interested me.  Browsing the local real estate paper is a holiday highlight no matter the destination!

But this was a massive financial decision, important to make based on logical analysis, not emotion.

My parents followed a traditional plan of buying as much house as they could afford and paying down the mortgage.  They eventually realized a wonderful capital gain that helped fund their retirement.

Dad worked six days a week for years and mum was a shrewd household money manager, working as an enrolled nurse.  They worked hard for years, and money was always tight.  I didn’t want to be so tied down by a huge mortgage.  Buying two less expensive houses, and renting one out, was an idea that appealed to me from my teens.

Many years have passed since that time, between exams, work, having kids, and taking time off to travel, we didn’t get further than paying down the mortgage, and then borrowing heavily to make it into our dream home (oops, but no regrets!)

Time to Get Serious

In 2017, the house was freshly renovated, and with a much bigger mortgage, it was time to get serious.

I returned to work after a wonderful six months of traveling with my family.  I wanted the freedom to take more time off holidaying with the kids, freedom to volunteer, and freedom to take on new challenges without money being a barrier!

I set my goal of reaching financial independence (not needing to earn income through work) within 16 years.

Whether to Invest in Property vs Shares

Whenever there is an endless debate like whether to invest in property vs shares, there is not an easy answer.  There are fierce champions of each investment approach.  The right answer comes down to what’s right for your individual situation.  Below is a summary of the pros and cons in general for property vs shares.

Property Shares
Barrier to entry Need a substantial deposit or equity (paid off value in home loan) Invest via Robo-advisors from as little as $5.  Invest via a broker from $500
Returns Long term returns ~7% but extremely variable Long term returns ~9% but extremely variable
Power of leverage Can leverage up to 90% turning 7% returns to potentially 90% (minus interest) Can leverage up to ~70% turning 9% returns to potentially 63% (minus interest)
Volatility (stress from prices moving up and down) Low volatility High volatility
Liquidity (ability to sell quickly in an emergency) Low liquidity High liquidity
Potential for investors to speed up growth Possible through smart renovations Not possible
Hassle Reduced by property manager, but still some hassle Minimal hassle
Effect of economic crisis May reduce tenants’ ability to pay rent Often crashed stock market prices
Unexpected expenses Can occur and can be financially crippling Don’t tend to happen apart from if leveraged and stock market crashes – margin calls
Buy and sell costs 5-6% purchase cost & 2% selling cost Can be $10 / $10,000 (0.1%)
Management costs 8-9% of rental income if use a property manager.  Plus maintenance and repairs 0.1-0.3% considered reasonable for passive ETFs
Ease of entry into investment Slow, need mortgage application, asset selection Asset selection after financial education can be made within hours, and purchased in minutes
Diversification “Lumpy asset”. Large amount of net worth tied up in a single property (if renters turn to squatters that’s bad news!).  However a rental property does diversify away from stock market risk exposure with superannuation Can build a diversified portfolio quickly, easily and with little cash.  Once the US stock market crashes, the ASX follows suit.

Can diversify into Real estate investment trusts (but these act more like volatile shares due to liquidity)

Tax Tax incentive of negatively gearing for capital growth properties.

Can be hugely advantageous, but also a distraction that can lead people to buy terrible assets for a tax deduction.

Asset selection critical

Rental income taxed as income not capital gains so not maximally tax efficient.

ETFs are tax efficient.  Franking credits with Australian shares mean no double taxation (taxed at your marginal rate

Can deduct interest used to buy income producing shares, similar to negative gearing property

The Options: Invest in Property vs Shares

I had a $2,200 surplus cash to invest every month.  That’s a great starting point (although I wish I had started a decade earlier with less!).  I decided I had three options:

  • Use it to pay down the mortgage and be mortgage-free in around 7 years
  • Dollar-cost average into ETFs to reach investment goal and then pay down the mortgage to finish by my goal date in 16 years
  • Invest the surplus in a high growth property to grow my wealth in a tax-free environment and receive a tax benefit (negative gearing) that could also be used to pay down the mortgage in about 10 years

I went round and round these options in my head for many months, I have considered eight factors below: Risk, Volatility, Return, Liquidity, Transaction costs, Tax, Diversification, and emotions.

RISK

Pay off mortgage ETF Inv Property
As close to risk-free as possible

Minimizes risk if interest rates were to rise significantly

No Debt used (Our risk profile is not appropriate for margin loans) Leverage – can magnify gains but also losses.

More debt – without careful management could threaten our family home.

Total debt (PPOR + IP) repayments (if investment property remained untenanted) work out ~ 30% of net income

VOLATILITY

Pay off mortgage ETF Inv Property
Low volatility High volatility

Can I stomach the volatility or will I sell (the worst possible action!)

Need to commit to investing for 7years + to ride out potential volatility that does exist

RETURN

Pay off mortgage ETF Inv Property
Opportunity cost – other options very likely to outperform current interest rates (4%) Likely to be higher than 4% and historically around 7% but very variable with different time periods, return for next 16 years obviously unknown. Seems highly dependent on asset selection.  As a result, sinking >$500K into a single asset can be very risky

Capital growth can be trapped inside the asset – property in Australia is low yield so hard to build a significant income stream in the short term

LIQUIDITY

Pay off mortgage ETF Inv Property
Can redraw easily in case of emergency  But can also redraw easily in case or an “Emergency” temptation

If paid into an offset can act as an emergency fund for many years

Can redraw easily which is helpful in a true emergency, but investors are often their worst enemies Pretty illiquid.    A bad investment property could spend years on the market!

TRANSACTION COSTS

Pay off mortgage ETF Inv Property
Reduced by paying off early   Plan for ongoing management costs <0.5% plus brokerage $20 $6.33 per purchase (2022) High! 6% to buy, 3% to sell.  This is not an asset suited to trading

TAX

Pay off mortgage ETF Prop Inv
None! Depends on investors’ tax rate.  We have a stay at home parent, so returns would be tax-free for a long time Capital growth – which compounds untaxed unless it is sold.

Negative gearing benefit –I could invest my surplus into the investment property and use tax benefit to pay off PPOR mortgage faster.

However. this would require the property to be in the high-income earner’s name.  And it will eventually become positively geared – and taxed at potentially 45%

DIVERSIFICATION

Pay off mortgage ETF Inv Property
I already have exposure to the stock market in super, but the diversification within the equity class is good if I buy broad-based ETFs  If a GFC type event occurred during retirement, my rental income would shelter me somewhat from the fall in income from super

I would be relatively overexposed to property risks for the first few years

EMOTION (Many would say should play no part.  But in reality, there were huge emotions involved in these decisions…fear & excitement mainly, and implicit bias FOR property. I would rather acknowledge them so I am at least conscious of their effect on my decision making)

Pay off mortgage ETF Inv Property
Would feel so good to be debt-free! Could be a roller coaster! An asset that won’t “run out” to pass on to our children

More debt 🙁

“Always wanting to buy an investment property”

Invest in Property vs Shares: Why I Chose Property

The major deciding factor for me in deciding whether to invest in property vs shares was diversification.  If I could fund 30% of my desired retirement income with rental income, I would be less susceptible to changes in economic conditions both prior to and after retirement.

I also consider the potential positive effect of leverage to outweigh all the negatives listed above for property.  If I had not needed the leverage to meet my goals on time, I perhaps may have been more tempted to avoid property.

Everyone I knew who had owned an investment property seemed to regret it!

Their complaints ranged from the properties achieving no capital growth, or worse ending up in negative equity long-term due to massive house price falls.

Others told me of tenants destroying their property and maintenance issues and dramas being a hassle they could do without.

I suspect careful asset selection is where most of those family and friends have gone wrong.

If I had not identified an expert I felt I could trust I would have avoided physical property as an asset class.  A-REITs were briefly considered, but due to their liquidity, have far more correlation with the stock market than physical property prices – and so lacked the strong diversification I desired.

It also involved choosing an A-REIT, and that seemed fraught with risk as well!

Professional Help

In 2018 I stumbled upon the property couch – a podcast about property investment by the Empower Wealth team.

Through greedily consuming over 200 episodes in under a year, listening to helpful content rather than a sales pitch, and encouraging those wanting it to “do it themselves” to have some idea of what makes a good investment, I had built trust in the company.

This gave me the confidence to move forward and engage them to assist in buying my first investment property.  We closed on a property in July 2019, hired a rental agent, and had tenants competing to secure the property.

We have had that fateful 2019 federal election, a global pandemic with an unemployment crisis, and predictions of a 30% Australian property crash.  Find out if I regret investing in property here.

Conclusions

The age-old debate between paying off your mortgage, investing in the share market, and buying an investment property has still not been resolved!

Read about my experiences buying our first investment property. I hope reading through my own reasoning has helped you organize your own thoughts on the pros and cons of each.  Maybe there are factors you have considered that I have neglected?  Where do you sit on this debate?

Changes to the Victorian residential tenancy act are discussed here.

Do you have an overall investment strategy?  Take a step back and plan your wealth building strategy.

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