Your salary. Your life.

I'm sure most of us met quite a few burnt-out, disenchanted and disinterested docs. All that makes them go through their clinical routine is their paycheck.
They (and a lot of their more cheerful colleagues) are trapped in what we can call a high wage trap: despite of being utterly dissatisfied with their current situation they make a decent salary, and to start something new and (possibly) exciting, which may or may not lead to a higher income, is outright scary, since we all developed a high dependency of this paycheck. Most of us would never go for it, because the more you earn, the more you have to loose. However, in a great scheme of things it's your life experience that matters (or should matter).

It's much easier to start something new when you really have nothing...

Living happily... and simply?

There was a good article in NY Times today about people discovering their true happiness through simple living and spending most of their money on what makes THEM happy.

As in my previous post about "liquid life", it seems that the tide has turned and more and more people discover that "stuff" doesn't make them happy.

The whole notion, once a very underground and "subculture" type is now getting traction in such well-know publications as NYT. Corporate America is also taking notice and is adapting their sell pitches accordingly.

The only "stuff" that might contribute to your happiness is actually sports equipment - golf clubs ( I don't play golf, but I do know Costco sells them!), fishing rods and surf boards (can get one used for not so much money). What really makes us happy is money spent on our experiences, be it around the world tour or a backyard "staycation"

What I hope will start happening to us is that we start asking ourselves this trivial, but hard-to-really-answer question "what truly makes me happy?". For a lot of us, it will be "vacation".

So what's a point of getting that shiny Bimmer and paying for it through the nose?

http://www.nytimes.com/2010/08/08/business/08consume.html?src=me&ref=business

Taxes and doctors

Today there was a very good op ed in the Wall Street Journal about actual observed drop in tax receipts while raising taxes on the wealthiest. ( one of the examples being John Kerry who bought a $7 mln. yacht not in his own state of Massachussetts, but in RI whereby saving in exsess of $500,000 in taxes). The reason being that wealthy people have so many "advisors" that they won't pay those taxes anyway.
I was thinking about the doctors, who , by enlarge, make just enough money to be fleeced by uncle Sam because they are "rich", but usually not nearly enough to do the "creative" tax reporting by using those financial/tax/legal/estate etc. advisors. In the end, they probably end up paying for the poor, who completely depend on the government (i.e. taxes) and the truly rich who are smart/savvy/well connected enough to avoid paying those taxes...

Liquid life

Recently I saw this wonderful presentation on ted.com about the new economic reality and new business and consumer trends. Although business in nature, this presentation really struck cord in me, especially when it came to a concept of a "liquid life" ( no, it's not a liquid lunch for you college frats)

This new emerging phenomenon has something to do with people realizing that there's no intrinsic value in "things" ( i.e. houses/cars/that new set of golf clubs etc.), and choose to lead the things-free life, being ready to move to new, better and bigger... not things, but opportunities unencumbered by huge mortgages and deep entrenchment in your particular place of work or residence. This emerging class of people believe in liquidity of their life and money.

And (I would add ) it would be increasingly difficult to sell these people the good old Wall St. notion of giving someone all of their actual hard-earned "retirement" money for 30 years for the promise to be "prepared" for the old age.

Most doctors I know are far from any kind of unconventional thinking, so I won't expect this idea to grasp most of us any time soon.

Time will tell..

Will be happy to know your thoughts on that.

Madoff's auction

More on Mr. Madoff who seemed to become an epiphany of the Wall St. tycoons of late- recent auction of his personal possessions gave us a glance of his hyperexuberant lifestyle. Among other items is his wristwatch worth of $85K.

What I don't understand about all this is why people like him needed to keep on buying these items? He proved that he is "wealthy" many times over to all of his acquaintances and to himself many, many years ago, so no matter how he dressed, where he lived or what wristwatch he wore he still would've been thought of as the financial titan. I can't explain this by any rational means. I guess, it was pure greed...

Recently I visited that part of Europe that never been rich, and just recently became flush with cash. There most of the people would judge the degree of your success purely by the clothes you wear, the car you drive, and... you guessed right, the wristwatch you wear! Stories of your interesting, challenging , accomplished and, overall, happy life matter not to them. And I sort of understand them- they grew up in abject poverty, and now all the external attributes of wealth are perceived as success in life.

But to see the same logic emanating from the educated, albeit criminal, financial tycoons of the modern Western world??

The only saving grace in all of it is that Wall St. is not Main St.

http://www.msnbc.msn.com/id/33917333/ns/business-us_business/

Madoff fallout

Mr. Madoff, as we already know, might have ran a criminal enterprise. I don't believe, though, that he started his fund in the 60's having a Ponzi scheme in mind. It's just when the things started to get bad, he wanted to keep up the play.
What is interesting, though, that people were lining up to give him their money without questioning his investment strategy. It was the "in" thing, only for well-connected. On the other side, however, Mr. Madoff was almost as Alan Greenspan as far as his reputation ( before the collapse, of course) and credentials were concerned-who could possibly question him? This is what we called "eminence-based practice"!

Yet another confirmation of the fact that few financial advisers keep their clients' interest at heart. The issue is that of financial education. Yet again!
I wonder how many doctors were among Mr. Madoff's unfortunate investors....

Do you have 401k?

Most of us who work for a salary have (or should have) 401k's. Now, obviously, the old advise was to contribute to it as much as you can. And I think it's still a valid advise. The problem I always had with my 401k is that is so overpriced. Even index mutual funds in it had an expense ratio of at least 0.25%, while the same can be had for 0.17% if you would go to, say, Vanguard. Oh well, I thought, that's a price of having a 401k with the 401k provider (which is one of the bigger ones, too).
However, recently several big players started offering( gulp..) ETF-based 401k. ShareBuilder, for example (which merged with ING not long ago). With ETF-based 401k potential savings on expense ratios, 12b-1 fees etc. etc. are just mind-boggling.
So if switching from traditional mutual fund-based 401k provider to ETF-based one is a possibility, I would grab it!

Lessons of IndyMac

Now that the big banks started to fold, the word FDIC came up. It is a federal entity insuring your bank deposits. Insurance is up to $100k PER DEPOSITOR. That is , if you had multiple accounts within the same bank, only $100k out of all of them will be returned to you ( the limit for bank IRA is $250k- I guess, some people still have those). By the way, it is said that by bailing out IndyMac depositors, FDIC used 10% of its reserves. Is it possible for FDIC to run out of money while bailing out banks that will be folding in the near future?

Now, with some brokerage houses potential to fold, I did some investigation about their insurance. They don't have FDIC, but they are insured by SIPC (Securities Investor Protection Corporation) It has a website www.SIPC.org Brokerage accounts are protected for up to $500k in case of a broker-dealer insolvency( limited to $100k for claims for cash) Also, a brokerage might have some extra insurance from private sources (say, Lloyd of London)
That, to me, means you shouldn't really hold more than $500k( hats off to those who have that much in retirement funds) at any particular broker-dealer, no matter how reputable and old that broker is.
Market forces have no regard to reputation

Educate thyself, part 4: Expenses of investing

Now, there are all kinds of expenses when it comes to investing, expenses that you have to pay no matter whether you're up or down.
Here's an incomplete list of them:
1. Expense ratios of mutual funds and ETF's- these are percentages of the money invested that are deducted by mutual fund companies to compensate themselves ( from 0.18% for Vanguard S&P 500 Index Fund to 2-3% for actively managed mutual funds, and from 0.09% for S&P 500 ETF's to... I don't really know what is the highest)
3. Additional fees on certain mutual funds ( 12b-1 fee, for instance, is paid by a mutual fund to whatever organization is selling this fund to an investor, but these fees are coming out of investor's pocket)
2. Brokerage fees. These are paid for a transaction (buy/sell) only if you have a real brokerage account.If you invest directly into certain mutual fund , those fees are not paid. ( these brokerage fees can be as low as zero, yes, nil with certain discount brokerages, esp. on a limited number of trades and as high as $50 with so-called "full -service" brokerage.)
4. Custodial fees for IRA accounts. Sometimes they're waived for accounts with higher balances.
All of the above mentioned fees are going to financial industry.
5. Taxes for taxable accounts. Sometimes taxes are due on mutual funds even though you as an investor didn't sell your shares. These are , obviously, Uncle Sam's cut.

So the easiest and the surest thing in investing is to minimize all these multiple fees so it will be more left for us to really invest.
In the next posts I'll try to describe what I did to cut these costs.

Building wealth part 4: educate thyself, part 3

Now, since the stock market is the way to go if I was to achieve my goal of being financially independent, while learning basics of investing, i came across the book of renowned John Bogle ( I quoted him and provided a link to his interview in one of my previous posts) called The Little Book of Commonsense Investing. The first most interesting thing I learned is that, per John Bogle, it's close to impossible to control your rate of return on your investments, since you can't control the market. But what you CAN do is to control your expenses, that is, the expense ratios of your mutual funds, if you have them, brokers' commissions, annual custodial fees for IRA's etc.
That made sense to me since if fell into this frugality category, which can bring substantial benefits whether you're investing or simply saving.
So I embarked on the search for minimum expenditures while investing, which I'll try to describe in my next posts.

Living rich without BEING rich

Now, foreclosures hit the Hamptons' properties. People face foreclosures on their $1-10 million houses. As it turns out, these people are (or were?) living like rich without being rich.
The Wall Streeters mentioned in the article might not have any wealth built during all these years of financial boom( the same Wall Streeters serve as financial advisers for lots and lots of people!)
Instead, they had a lifestyle of the rich.
http://www.nypost.com/seven/05122008/news/regionalnews/trouble_in_li_paradise_110497.htm

Educate thyself: mutual fund mechanics

Mutual fund was first created back in 1924, 5 years prior to the worst stock market crash (so far) in history. The idea was truly ingenuous- collect the money from investors, invest them in all kinds of securities, and issue the mutual fund shares to those investors in exchange for their money. What securities the investors' money will be invested into is entirely up to the management team of the mutual fund.

The upside of this idea was that all of a sudden, the average investor gained access to the very broad spectrum of securities-stocks, bonds, real estate etc., and all for a relatively small initial investment. Before this invention, you've got to buy individual securities to achieve diversification of this kind.
Now, the downside: the expenses. In an actively managed mutual fund, the expense ratio (percentage of the money under management that is deducted each year) can be as high as 2% annually (we're talking about mutual funds bought outside retirement vehicles like 401k, where you can find even more "expensive" funds). It means that no matter whether your investment goes up or goes down in price, you've got to keep paying these percentages to the mutual fund company. Billions of dollars each year are collected that way from investors.

How do they use all these money collected from investors? At least 70% of it goes toward managers’ salaries.

Building wealth part 4: educate thyself

Complete lack of even basic financial knowledge among doctors is nothing new. There's no better way of killing an otherwise lively conversation than mentioning the choices of mutual funds by a particular 401k provider.
However, what truly amazes me that despite of adverse economic conditions, increasing pressures from insurance companies and HMO's, diminishing wages and growing pessimism and dissatisfaction among many doctors and other professionals ( here's a link to a recent NY Times article titled "The Falling Down Professions" to illustrate the matter)http://www.nytimes.com/2008/01/06/fashion/06professions.html?_r=1&oref=slogin, they continue to be oblivious about their own financial matters. And we're talking about some of the most educated people in our society!
So for me, my journey to financial freedom started with education. Surprisingly, the good literature on the matter is not advertised on TV or radio. I had to really search for books, articles and blogs that would be useful for my financial knowledge.(I forgone the glossy booklets from major brokerage houses and 401k providers.)
Since the mutual funds are the main investment vehicle created for the middle class ( and we are the new middle class), I decided first to look into the mechanics of an average mutual fund. I'll describe my understanding of it in my next post.

Building wealth part 3: got some money saved,now what?

My savings started to accumulate bit by bit. But without some more powerful money growth solution financial independence was nowhere in sight. I did some "investing" in 2000-01( I use parentheses here because it was far from real investing-investing as I understand now) during the Internet stocks' boom(and bust!), and , sure enough, lost money . Back then, I was still in the fellowship, so by virtue of being a "subspecialty resident" I didn't have enough money to lose. However, stock market returns are about 8-10% annually( that is, obviously, over long stretches of time), so I saw it as a main vehicle to get to my financial independence, regardless of my prior painful experience.
Back then I was enrolled in the Master's of Science program in biostatistics. So as I was learning all these bivariate, multivariate and survival analyses , I was getting better at my recognition of quality from junk research papers and articles. But I needed financial education 101, too! Little by little I started using my new statistical knowledge to help me distinguish what I call a "financial propaganda" (the bulk of financial info unloaded into our ears/eyes every day) from the statements based on some real scientific financial studies.

Wealth ≠ earnings: vivid example

This is sort of a follow up post on current real estate problems, but not only that: it illustrates that your true wealth has very little to do with how much you make.
This very well known professional athlete who made millions of dollars a year had to foreclose on his $2.5 mil. house. Unbelievable? Well, how about some well compensated doctors ( orthopedic and plastic surgeons, some ENT docs, etc.) who despite their OK income are in debt (credit cards, HELOCs) up to their eyes? How do you explain that?
All the usual evils are to blame, it seems: complete lack of even basic financial education, conspicuous consumption (I'm sure that above mentioned professional athlete didn't really lead a frugal life) and mental substitution of true wealth by high income. Very much applicable to all of us.

Here's a link to this article
http://ap.google.com/article/ALeqM5iXHQ2UrDf4uDtCVTVo85dGcxrjqQD90D82101

Building wealth part 2: tiny bit of money

So now I had maybe $250 or $300 dollars a month that we were not using. Back then I discovered ING( which was giving $25 for just opening an account, I don't think they're doing it anymore). I started transferring these money into savings account, thinking that I always can get them if I needed. Funny thing was I DID NOT need them. Whatever purchases we were making, I was able to pay for at the end of the month. ( after ING dropped their interest rate, I found other internet banks, like igobanking.com, countrywide.com and a few others)
Good, I thought, but these savings don't really bring you that much in terms of real appreciation.I saw gallon of milk ( and ,obviously, a gallon of gas!) going up steadily in price without interst rate increases in my savings account.

Building wealth part 1: my humble beginnings

After working for a while as an attending and making an OK salary, I started realizing that I'm not getting any richer as the days/months/years went by. We were still renting a small 2-bedroom apartment. Yes, we finally got rid of that clunker and bought 2 new mid-priced cars(one American made, and another Japanese). No, we haven't gone on those expensive vacations. And yes, we were maxing out our 401k's. But we had no savings or investments outside of our 401k to speak of.
So the only thing I was noticing was that I was getting older. And I didn't like that. Well, there's nothing you can do about flow of time. But I thought I should be getting richer while getting older and I wasn't. So, where did all that money go? We started monitoring our spending. Turned out, we didn't spend them on anything big. That was it, NOTHING BIG, but everything small. Expensive gifts for our friends' and relatives' birthdays. Nice dining out. Starbucks 3 to 4 times a week. And so on and so forth. So we started thinking every time we were about to swipe them credit cards: do we really need this? and if yes, how log do we envision using it? Would it really improve our quality of life?
Since we started doing that, I stared noticing more money left in our checking account at the end of each month. Still far from the riches, but it was a start.

Financial independence

For me, the true definition of wealth is financial independence.What does this mean? Well, if I can stop working for money (and may as well continue working just because I love medicine-taking care of patients-academic pursuits etc.), then I'll be truly financially independent.
Which means that whatever collateral income I have (retirement funds, savings, real estate etc.) should bring me exactly what I spend each month. How achievable this goal is depends on my financial needs and expenditures.
Therefore, I don't look at high income as a mesure of wealth. You can be poor even with the high income if you have no savings/investments and assets to your name. Stuff you might be acquiring with your high income (and that incudes nice cars and big houses, in addition to flat screen TV's and titanium golf clubs) does not bring you any closer to true wealth.

Conspicuous consumption

Conspicuous consumption pervades our society. You can see poor people wearing brand name clothing, listening to iPods and playing hand-held video games. You can see middle class people driving expensive cars, living in big houses in swanky suburbs.

Neither group can really afford those luxury items.Nevertheless, the message from the society at large is to maintain your status, to show(mostly to others, but to themselves too) that you've made it. This notion is what makes people to spend, spend at all costs. Take on those ARMs, consumer credits, HELOCs etc. Max out those credit cards. We live only once, you know.
70% of our GDP comes from consumer consumption. That is, our economy is totally dependent on it.

It's a small wonder that a notion of building of true wealth is more of a counterculture.
In a way, the beautifully wrapped box becomes in and of itself a goal instead of its contents.