Recent grads, how are you handling debt?

[iMedical]

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Any recent grads want to share their experience with debt? I just want to know what to expect coming out of med school and residency. Everyone who knows nothing about the path to becoming a doctor think it is all money money money. My parents and classmates think it is like this. It is not true at all right? I am expecting to live frugal for about 10 years after residency. That is the true reality of it right?

 

[Otoscopic]

Current debt load for graduates is discussed extensively in other threads. To sum it up, most are finishing med school with anywhere from 100k to 300k+ in debt (especially if they borrowed heavily for undergrad). While it is possible to make small payments during residency (especially if you have a working spouse), most probably don't since it would involve sacrificing that extra little bit of income that makes residency life a little easier than when you're a med student living off the scraps the school determines for your "living expenses." In other words, a lot of residents forbear on their loans, which continue to accumulate interest for the 3-6 years of training. At the end of your training, your debt may have grown substantially.

When you finally enter into the job market, you're probably approaching 30-35 years of age and are likely searching for a place to live, wanting or needing a new car, starting a family, starting to pay for your own malpractice coverage, etc. If you start out with a reasonable salary ($150,000-250,000, sometimes more or less depending upon the specialty), subtract taxes, and adjust for lifestyle changes/upgrades as a new practicing physician, then it may take a while to pay back those student loans. If your spouse doesn't work, it may take decades. Monthly payments on $300k+ worth of student loans are going to take a huge dent out of your monthly income.

So yes, to answer your question, current and future graduates with ever-increasing debt burdens are going to struggle with paying back student loans more and more as the cost of tuition rises and the reimbursement rates continue to fall. This could very well mean having to live frugally for years even after you finish your training. However, it will differ for everyone depending on your situation, and in the end should be worth it if you're pursuing medicine because it makes you happy (and not necessarily financially successful).

 

[yadayadadude]

Asking for other people's experiences is pretty pointless because a) financial situations vary wildly and b) you're premed. That means you'll be graduating from medical school in what? five years or so? The medical school tuition and consequently medical student debt has been increasing at a very rapid pace over the past two decades or so and shows essentially no sign of leveling off. Your debt will look very different from the debt of people who have already graduated. You really, really, really need to educate yourself about how federal student loans work, then crunch your own numbers. If you're going to attend private medical school and need to borrow the entire expense, you're easily looking at > $300K in principle borrowed. Remember that this accrues interest during medical school (and during residency ... and during repayment, of course).

To illustrate my point: I graduated from private medical school in June. I owe $55K which I will consolidate once the grace period on my Perkins loans is up. My debt is low because I got great financial aid in the form of grants, I entered medical school with savings and my partner worked throughout medical school, so we didn't need to borrow so much. The weighted average interest rate for my debt is around 5% and I'm betting on inflation on the horizon, so I'm going to pay this debt back as slowly as I can. My payments will be $300/month or so for the next 25 years. Right now I'm an intern, but again, my partner works, so my household income is around $180K/year. $300/month is basically a small inconvinence in my budget. We basically don't notice it.

Similarly, my co-intern last month on the wards ... her parents paid for every single penny of her medical school expenses, then bought her a new Lexus SUV when she graduated. (Lucky her!)

This is why quoted averages for medical school debt are useless. You really have to ballpark your own situation.

 

[notinkansas]

I disagree with the previous poster. It is wise to consider how a large debt will impact your life, especially when you are early enough in the process of incurring debt to impact the total amount.

I wish I had been wiser about my debt. I would have done small things, like have a roommate during medical school, in order to reduce my total debt load.

It is a huge burden. The larger your debt payments, the more you are limited in search for a job and the more salary becomes a factor. Does anybody think that doctors' salaries are likely to increase by the time OP starts practice? NO, didn't think so.

I have about $250K in student loan debt. It makes everything more difficult. It impacts your credit score because it makes your debt to income ratio lower. It limits investments you can make.

I would advise you to limit your debt as much as possible. Being more frugal now will pay off in the long run.

And finally, when you finish all your training and are finally an attending, don't run out and buy the house you can "afford" based on monthly payments. Don't run out and buy a brand new car. Continue to live on your resident salary (or your resident salary plus 10%) for the first year at least. Put a big pile of cash away. Don't take out a 100% financed mortgage, ever. Pay at least 20% down.

Our society values consumption and encourages everyone to spend at least as much, or more than you make. Living like this is disaster waiting to happen. This is not how to build wealth.

I recommend reading two books: The Millionaire Next Door, and Your Money or Your Life. These books will help you figure out what you value and will want to spend money on.

I'm doing my best to pay off my debt as quickly as possible. It's not easy, and i live pretty frugally. I can't wait for the day when I'm debt free. That will be true freedom, because then I won't have to work as much, and I will get to spend my money on things that are truly important to me, rather than paying back debt with interest and helping someone else build wealth faster than me.

 

[exPCM]

I disagree with the previous poster. It is wise to consider how a large debt will impact your life, especially when you are early enough in the process of incurring debt to impact the total amount.

I wish I had been wiser about my debt. I would have done small things, like have a roommate during medical school, in order to reduce my total debt load.

It is a huge burden. The larger your debt payments, the more you are limited in search for a job and the more salary becomes a factor. Does anybody think that doctors' salaries are likely to increase by the time OP starts practice? NO, didn't think so.

I have about $250K in student loan debt. It makes everything more difficult. It impacts your credit score because it makes your debt to income ratio lower. It limits investments you can make.

I would advise you to limit your debt as much as possible. Being more frugal now will pay off in the long run.

And finally, when you finish all your training and are finally an attending, don't run out and buy the house you can "afford" based on monthly payments. Don't run out and buy a brand new car. Continue to live on your resident salary (or your resident salary plus 10%) for the first year at least. Put a big pile of cash away. Don't take out a 100% financed mortgage, ever. Pay at least 20% down.

Our society values consumption and encourages everyone to spend at least as much, or more than you make. Living like this is disaster waiting to happen. This is not how to build wealth.

I recommend reading two books: The Millionaire Next Door, and Your Money or Your Life. These books will help you figure out what you value and will want to spend money on.

I'm doing my best to pay off my debt as quickly as possible. It's not easy, and i live pretty frugally. I can't wait for the day when I'm debt free. That will be true freedom, because then I won't have to work as much, and I will get to spend my money on things that are truly important to me, rather than paying back debt with interest and helping someone else build wealth faster than me.

This is an excellent post. Agree100%.

 

[Law2Doc]

I disagree with the previous poster. It is wise to consider how a large debt will impact your life, ...

The previous poster didn't say it wasn't wise to consider how a huge debt was going to impact OP. He was simply saying that it's a waste of time for the OP to ask people at the residency stage now about their personal debt management situations because that won't be a good comparison to what OP will face. Nothing wrong with OP using his/her own guestimates and plugging them into interest calculators. Debt is something to be very wary of. But the starting point for these guestimates isn't going to be what others are dealing with, unless they are similarly situated (i.e. having borrowed what the OP plans to borrow at interest rates OP expects to be hit with, and future incomes comparable to what OP expects, and the same spouse earnings, etc -- too many variables that won't line up). You are better off starting with your own numbers and ignoring the plights of others. That's what I think the prior poster was saying, not that it's unwise to think about debt generally.

 

[Law2Doc]

...
And finally, when you finish all your training and are finally an attending, don't run out and buy the house you can "afford" based on monthly payments. ...

This is extremely market dependent, and a lot of financial gurus would disagree with this statement. Paying rent is a big income drain. Obtaining equity in an appreciating asset, such as a home is a huge step toward wealth. If you can get a good deal on a home (granted that what you can "afford" is a debatable term) it benefits you to pay into equity on that home starting at the earliest time you can afford it, rather than pay a similar amount out in rent. You are "richer" if you have equity, even if saddled with a large mortgage if that means you have an asset that is growing, and mortgage interest deductions you can take from your taxes, than if you stay in your residency lifestyle and pay out rent for another 12 months with nothing to show for it.

 

[babel]

Another +1 for notinkansas's post. 👍

Here's my situation-
Graduation: $270K in debt

Residency: Est. take home pay of $2600/mo. (From salary of $45K/yr). Interest payments alone will be $1200+/mo, which I might be able to make if I really penny-pinch.

Post-Res: Let's assume I make partial interest payments during residency, leaving me with $300K debt at the end. I'm not going into a very high paying specialty, so let's say I make $150k/yr starting out = $7500/mo post-taxes. A ten year repayment on $300K = $3500/mo, leaving me with $4000/mo to live on. Not bad, but not great by any means. Hard to imagine being able to buy a house, and start saving for retirement, and start a family etc. etc. So really, I'm going to be in my early 40's (!!) before I am student loan debt free and actually able to appreciate making a doctor's salary.

What's hard is that you really have no idea what you are getting yourself into when you're a pre-med. If you end up really loving medicine as much as you think you will, it will be doable. So, as the others have suggested, make sure you research your situation well and crunch the numbers for yourself.

 

[babel]

This is extremely market dependent, and a lot of financial gurus would disagree with this statement. Paying rent is a big income drain. Obtaining equity in an appreciating asset, such as a home is a huge step toward wealth. If you can get a good deal on a home (granted that what you can "afford" is a debatable term) it benefits you to pay into equity on that home starting at the earliest time you can afford it, rather than pay a similar amount out in rent. You are "richer" if you have equity, even if saddled with a large mortgage if that means you have an asset that is growing, and mortgage interest deductions you can take from your taxes, than if you stay in your residency lifestyle and pay out rent for another 12 months with nothing to show for it.

I think that notinkansas was just saying to make sure you don't get into more house than you can afford, not that renting was necessarily better than buying. I agree with this sentiment - I think that people often get approved for larger loans than they can really afford, and forget about other expenses involved with having a home (property taxes, utilities, repairs & maintenance etc.)

 

[exPCM]

This is extremely market dependent, and a lot of financial gurus would disagree with this statement. Paying rent is a big income drain. Obtaining equity in an appreciating asset, such as a home is a huge step toward wealth. If you can get a good deal on a home (granted that what you can "afford" is a debatable term) it benefits you to pay into equity on that home starting at the earliest time you can afford it, rather than pay a similar amount out in rent. You are "richer" if you have equity, even if saddled with a large mortgage if that means you have an asset that is growing, and mortgage interest deductions you can take from your taxes, than if you stay in your residency lifestyle and pay out rent for another 12 months with nothing to show for it.

Sorry this is nonsense in USA 2009 just as it was nonsense in Japan in 1990.

How much appreciation has a typical homeowner in Japan had since 1990?

How much appreciation has a typical US homeowner had since 2004?
As unemployment continues to worsen and foreclosures continue to rise housing will continue to depreciate overall.
The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value
http://online.wsj.com/article/SB125903489722661849.html?mod=rss_Today
Note: 11% of those who bought houses this year (2009) are already underwater on their mortgage.
Rent is NOT THROWING MONEY AWAY. It is providing you a place to live and gives you better mobility should you need to move. Many medical groups are unstable right now and I have seen many physicians who have had to move and change jobs. With many states in deficit owning a big home is like wearing a property tax target on your back that says "TAX ME". Many property owners are actually renting homes for less than the mortgage and taxes in this current economy.
Anyone who thinks that they will buy a house today and thereby become wealthy due to price appreciation is a fool IMHO. We are very likely to see the same situation as Japan - 20 years of stagnant prices. Any meager price rises will only be due to inflation and not any real gain in wealth. However when inflation starts taking off and the Fed starts raising interest rates mortgage rates will spike as well. Do you know that higher mortgage rates put a huge downward pressure on home prices as people having to pay more interest can afford less principal? The best way to buy a house is to wait until interest rates are super high (because that is the time when housing prices become the lowest) and then pay for the house in cash. This way you get the benefit of the lowest price without the penalty of the higher interest payments. This has been the tried and true method of getting the best deal on housing for decades.
Even if you can not pay 100% cash it is often still beneficial to buy at peak interest rates as you can still take advantage of the lower prices at the higher interest rate and then refinance later when interest rates drop.
P.S. A lot of what the NAR puts out is hype. Just like it is hype to say that being an MD automatically puts you on easy street and into a life of luxury, it is also hype to say that prices have hit bottom and you must buy now or be priced out later. However if you ask Joe6pack he will say all doctors are rich and that now is the time to buy a house because the NAR has called the "bottom".

 

[Law2Doc]

...
How much appreciation has a typical US homeowner had since 2004?...

Rent is NOT THROWING MONEY AWAY. ...

Um, first I said it was market dependent. Second, your choice of 2004 is arbitrary. Homes are not short term assets -- you invest for the long haul, swapping up and rolling over basis as you go. Folks who bought their first houses in 1970 made very significant appreciation by the time they ultimately sold in this decade, much as folks who purchase in 2004 will make when they ultimately sell in another 35 or so years. Even on your graphs, if you sold a home in the US in 2006 you did very very well. Did the market do poorly in the last few years? Sure. Do you have reason to believe it will continue to do so for the next several years to decades? I doubt it. Your charts and perspective are very short term, but real estate isn't that sort of asset (TV shows about "flipping" aside). The benefit of real estate it that it's a finite resource, and so over time if you choose well, you probably will see appreciation. There will always be ups and downs, so you have to time it right and not be forced to sell when the market is soft, as it has been the last couple of years, but certainly wasn't in, say, 2006, and probably won't be in say, 2016. As for comparing buying in the US at a low point to buying in Japan at a high point, that's kind of silly. Sure folks who bought in Japan at the top of the market in 1990 lost money at the bottom of the market today. They may still come out ahead in the next couple of decades, but if you overpay for something sometimes you lose out. By contrast, the folks who bought real estate in Japan in 1980 made a ton if they sold in 1990, and if not, they really haven't lost anything as of today on your graph. If you pick select windows in any dynamic process you can capture ups or downs, so that misses the point. This is a long term, appreciably asset. The owners of those homes have paid into equity for however many decades, and so they own X% of an asset that can go up or down. And if it goes up they make a lot. If it goes down, they still have X% of equity they can get back on a sale or refinancing. PLUS they get a tax break on mortgage interest they pay.

Rent, however is always a negative cash flow -- you get no equity for those payments. Sure you preserve your mobility, which might be arguably important during schooling/training, when you know you are likely to have to move in a couple of years, but the second you are done with that and likely to remain someplace for a significant period of time, perhaps forever, there is value in doing away with rent as quickly as you can because it costs you. You are paying a very steep price for mobility by not getting any equity for your payment. Home values can go up and down, but your net worth can never go up by paying rent instead of gaining equity. So that is why I was saying that spending another year paying eg 20k in rent to "live like a resident" when you could be getting equity on those payments is not something most financial adviser gurus would advise.

Looking at the stretch from 2006 to 2009 as the reason real estate is a bad investment ignores the other, literally thousands of years when real estate was the absolute best investment -- even on the chart you posted we can find ranges where you would have made a killing far in excess of the losses many people had over the last 5 years. And if nothing else, your charts suggest that looking at the cyclical nature of the market today is actually a good time to buy -- you are unlikely to overpay like the folks may have in 2004.

Also bear in mind that chart averages lump in bad home selections with good. If you choose wisely (re-marketable house in good neighborhood with good local school system, access to public transportation, etc), you can sometimes do a bit better than average. I'm not saying that buying property at random is the right move. But I am saying that delaying home investment to live like a resident for another year is not what the financial planners would advise if it means paying another year of rent in a locale that you know you are planning to stay in for decades.

 

[exPCM]

You need to save the spin for the NAR.
The typical person who bought a house in Japan in 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, or 2009 and stills owns the house has seen no appreciation in the home value - That is 25 years! Seems long term to me.
Real estate in the US went up in a bubble that is never to return - all those subprime loans are dead and buried. So people who bought in the last 5 years have not seen appreciation and they will likely not during the next 20 years- this is long term. As the baby boomers retire they are more likely to downsize rather than upsize on housing and the gen X and gen Y group doesn't have the wealth to fuel big home prices.
So save that response for an NAR commerical.
The idea of picking the "right house" is kind of like picking the "right horse" at the track. Neighborhoods change - some areas become gentrified and others move downhill - You can buy houses for 5k in Detroit now that sold for 100K 20 years ago. Who had their crystal balls working to predict that.
I may invest 200K in a house and be lucky to have a house worth 200K in 20 years.
I can invest 200K in many other ways and have a lot more than that in 20 years.
The mortgage tax break is overblown. As the standard deduction has gone up drastically many people do not have enough deductions to be able to itemize and claim any mortgage interest deduction at all. The President is also bent on eliminating the deduction for high income households (e.g. MDs) anyway.
Tell the people who bought houses for 750K in Scottsdale that are now selling for 350K that buying has been better than renting. We are talking 400k losses.
You really need to learn the reality of real estate. Here is a good place to start: http://www.doctorhousingbubble.com/
A picture is worth a 1000 words:

Tell me how many years it will be before the buyers who have lost 50% of the value of their homes will see the prices rise enough to just get back to even?
The Pontiac Silverdome cost over $50 million to build in the 1970s and the Silverdome and its adjacent 127 acres just sold for $583,000. That is about 1% of the price to build it.
http://detnews.com/article/20091117/METRO/911170327/Silverdome-sale-price-disappoints
So anyone who thinks real estate is a golden road to riches may be in for a rude surprise.
Your net worth may not go up by paying rent but it is often cheaper to rent than buy and you can invest elsewhere.
Also your net worth can certainly go down big time with a house - look at all those 2004-2008 home buyers who have lost huge sums of money and now owe way more than their homes are worth - they have no equity - it has been wiped out. In fact they have negative equity which a renter does not risk.
Here is another good interview on the topic: http://www.youtube.com/watch?v=YL10H_EcB-E&feature=fvw

 

[Law2Doc]

...
Tell me how many years it will be before the buyers who have lost 50% of the value of their homes will see the prices rise enough to just get back to even?...

The market, like most investment markets, is somewhat cyclical. It goes up and down over the shorter term, but up over the longer term. Even the Silverdome (which is about as far from comparable to residential real estate as you could choose) at its recent low point sold for hundreds of thousands more than what the land was worth back in the 60s before a stadium was planned. Those who have lost 50% will see it come back to even over time. Those who buy NOW will see appreciation over that same period of time. If anything, your table suggests an even greater reason to buy now, rather than sit out of the market another year. You guys keep missing my point that anybody can pick a window that shows decline, just as anyone can pick a window of time which shows increase. But that doesn't dispute the fact that (1) the asset can appreciate over time, (2) you can use the same money you would be throwing away on rent to buy equity, (3) there are tax advantages to mortgages that you don't get with apartment living. If you can buy for the long term, choose well, and pay your money into equity and use the tax deductions, you are enormously financially advantaged over just paying out rent over the same period. And the fact that you can show various windows of time whereby people lost money doesn't really make your point, it just shows that you selected the a window where a cyclical market was coming down and ignored the window in the other direction, and more importantly ignored the window to come when the market will work its way back up.

 

[exPCM]

The market, like most investment markets, is somewhat cyclical. It goes up and down over the shorter term, but up over the longer term.
25 years of Japan data shows this is worng
Even the Silverdome (which is about as far from comparable to residential real estate as you could choose) at its recent low point sold for hundreds of thousands more than what the land was worth back in the 60s before a stadium was planned.
Really - what do you think the 127 acres without the Dome itself would have sold for in the 1960s - in inflation adjusted dollars I am certain it cost more back then than today - the Motor City was still motoring back then.
Those who have lost 50% will see it come back to even over time. Those who buy NOW will see appreciation over that same period of time.
This is pure speculation and assumption by you. I have given links to very educated people who have data to suggest otherwise.
If anything, your table suggests an even greater reason to buy now, rather than sit out of the market another year. You guys keep missing my point that anybody can pick a window that shows decline, just as anyone can pick a window of time which shows increase. But that doesn't dispute the fact that (1) the asset can appreciate over time, (2) you can use the same money you would be throwing away on rent to buy equity, (3) there are tax advantages to mortgages that you don't get with apartment living.
Those "facts" are all in dispute as I submit they are not facts but your opinions. Many Americans have thrown away hundreds of thousands of dollars by buying homes and seeing their equity go to zero and then underwater as housing prices plummet.
If you can buy for the long term, choose well, and pay your money into equity and use the tax deductions, you are enormously financially advantaged over just paying out rent over the same period. And the fact that you can show various windows of time whereby people lost money doesn't really make your point, it just shows that you selected the a window where a cyclical market was coming down and ignored the window in the other direction, and more importantly ignored the window to come when the market will work its way back up.
Again - markets will always go up. Tell that to people in Gary IN- http://www.growingchicago.com/other/mypicsVI/
Tell that to the people in Detroit: http://www.youtube.com/watch?v=NL_YdRxBhzI

Is 120 years of data LONG TERM enough for you?

Watch the Detroit video - I rest my case.

 

[yadayadadude]

The previous poster didn't say it wasn't wise to consider how a huge debt was going to impact OP. [She] was simply saying that it's a waste of time for the OP to ask people at the residency stage now about their personal debt management situations because that won't be a good comparison to what OP will face.

Thanks, Law2Doc. That's exactly what I meant to say/think I did say.

Of course debt matters. It matters tremendously. This is why it's worth it to run your own numbers rather than rely on bogus approximations from strangers on the internet.

 

[Law2Doc]

Is 120 years of data LONG TERM enough for you?
...

It's still up pretty significantly in your graph here, if you ignore the dotted line for the years that haven't happened yet. Again, it's all about where you pick your window. If you pick low to high it goes up a lot. If you pick a higher starting point, it may go down. But over time it has gone up, even in the graph you just provided (especially if you ignore the depression to WWII era and the more recent artificial boom -- it's a very gradual, upward slope.).

 

[diosa428]

Is anyone doing the government's income based repayment program? I know that it's not necessarily likely that this deal will stick around for 10 years... but 15% of your income seems vaguely doable...

 

[medicinesux]

notinkansas- Love your post! We share many of the same ideas regarding debt management. I also would like to give a second shout out regarding the book, Your Money or Your Life. Highly highly recommend this one!!! It will open your eyes to the true value of a dollar and it may just transform your life. The best finance book I've ever read hands down. Advanced my life more than any book I ever read in medical school.

exPCM- I agree with you wholeheartedly regarding your thoughts on housing. You can argue with Law2Doc till you are blue in the face and you will never get the last word in but the graphs you have posted are so compelling that they are essentially total pawnage to your opposition.

 

[tennischamp822]

...

 

[michaelrack]

Those who have lost 50% will see it come back to even over time..

They will eventually come back to even in inflated dollars; I doubt those who bought at the peak will get back to even in inflation-adjusted dollars.

 

[notinkansas]

This is extremely market dependent, and a lot of financial gurus would disagree with this statement. Paying rent is a big income drain. Obtaining equity in an appreciating asset, such as a home is a huge step toward wealth. If you can get a good deal on a home (granted that what you can "afford" is a debatable term) it benefits you to pay into equity on that home starting at the earliest time you can afford it, rather than pay a similar amount out in rent. You are "richer" if you have equity, even if saddled with a large mortgage if that means you have an asset that is growing, and mortgage interest deductions you can take from your taxes, than if you stay in your residency lifestyle and pay out rent for another 12 months with nothing to show for it.

Housing values do NOT always go up, as many have recently, sadly learned. Buying a house is NOT always better than renting. When you factor in costs such as insurance, property taxes, repairs and maintenance, buying often costs more than renting. Being saddled with a large mortgage does NOT guarantee that you will have an asset that is growing. Millions of Americans are learning that housing values can, indeed, drop and are now saddled with large mortgages on "assets" that are less than the balance owned on the mortgage. In fact, I would submit that using the term "saddled" associated with a mortgage is a warning - if you can apply the term "saddled" to a debt, it is something perhaps you should consider not taking on.

I do realize that there are many versions of what financial "experts" would say that an individual can afford. And I'm not saying to never buy a house. But to buy one wisely (with at least 20% down, and a nice stash of cash to fix whatever it is that breaks in the first weeks after closing) is something that most people aren't equipped to do they day after completing residency.

I enjoy watching Suze Orman. Her shows are available for free on itunes. Every week, she has people on who were living right on the edge, doing "fine" but basically living paycheck to paycheck, then something happens and they are now struggling. Why put yourself so close to the edge financially?

Why is it so horrifying to live as a resident for a couple extra years in order to save up money and pay down student loan debt? Or even as a resident plus 10%? Shiny ball syndrome has gotten many, many people in this country into trouble!

 

[medicinesux]

http://efinancedirectory.com/articl..._Instead_of_a_House_Will_Make_You_Richer.html

"According to Robert Shiller, the well known Yale economist who predicted the stock collapse in 2000, the real return on housing between 1890 and 2004 was a very modest 0.4% a year"

0.4% a year. I can make more leaving my money getting 1.5% in some measly savings account! As far as I am concerned, housing is a lot like food. You need both to live. The money you use to buy food is transformed into **** by your body. Likewise, money put into shelter is evaporated by maintenance costs, insurance, property taxes, and utility costs. Americans waste an insane amount of money on food and shelter. I just heard on the news that 40% of the food produced in this country is thrown out. An immense amount of money can be saved over time if we all learned to live frugally with respect to both of these. Stop eating so much food and avoid turning into an unhealthy fat (which also rams up your health care costs) and don't buy a 5000 square foot McMansion in an exclusive neighborhood. Paying 25K a year in HOA fees and property taxes a year is a ridiculous drag on amassing wealth. Heating and cooling such an immense monstrosity is a horrifying waste of money IMO. I'd rather live in a cardboard box under a bridge doing a fulfilling job I love than finding myself trapped in a horrible job with toxic people just so I can live in a mansion anyday.

 

[NotAProgDirector]

Buying a house is an investment. Somehow people have equated investment with "making money", which is simply not true. Like investments in the stock market, you can make or lose money on a house. Problem is that housing was seen as a short term investment medium -- buy, live for 3-5 years, then sell and move -- and that's like daytrading.

However, if you really want to compare buying vs renting, you need to compare real, longterm costs, which are difficult to estimate. Everyone has housing costs -- you need to either rent or buy something, you can't avoid it (or at least, not easily).

So, let's compare (as best possible) buying and renting. Let's assume that someone will rent you a house for their mortgage + tax payment combined (that's a big assumption, more later).

Let's say you buy a house for $200,000, mortgage at 6% for 30 years. Total payments would be $231,700. You'd need to add maintenance to that, not sure how much to add. At the end of 30 years, you'd own the house. Even if it lost value, you'd have something. You';d also get the tax deductions for interest paid.

Instead, if you rent the same house for 30 years, you'd have paid the same $231,700 in rent. And own nothing.

If you magically have a free place to live, then you might be better off investing your "rent/mortgage" payment every month if you find something that's likely to outperform the housing market.

So, in the long run, owning a house is usually the better investment if you plan to keep the house right to the end of the mortgage, UNLESS the rent is very low. But, if you're forced to sell in any short time frame, it's quite risky. In this case all you'll have paid is interest, you'll have no equity unless the price rises and if it falls you'll be underwater. This is essentially identical to borrwing money and investing it in the stock market.

In a down market it's safer to buy, but who knows how low the market will go?

Owning also gives you some financial stability -- you know exactly how much it will cost you to house yourself each month. Renting gives you flexibility to move, and lack of stability (i.e. you can be forced to move, or your rent could skyrocket (or fall) at any time).

 

[3dtp]

Law2doc,

I think a reality check is in order here. First much of the housing situation came about artificially. We have the type of speculation you are advocating on nearly every front in our society. I heard a wall street banker tell me that Las Vegas is for poor people. The real gambling is done here in Manhattan.

Housing was a sure thing in 1926. Until 1931, when foreclosures ruled the day. Did housing come back? Sure they did, a generation later in the post-war period. That's 20 years. And for those who needed to move, this is a huge problem.

Today, the problem is far worse and I suspect it will get much much worse. First, nothing down, teaser rates, interest only "creative financing" mortgages allowed many who could not otherwise afford a house bought, and oh how they bought, until the pyramid collapsed. As exPCM states, it may take much longer.

The dynamics now are far worse than they were in '29. We have undone the protections that prevented the kind of unprecedented margin speculation in the housing market based on precisely your logic. A friend of mine, a very prominent philadelphia lawyer told me he was asked by a friend if he should allow the bank to foreclose his southern CA home and buy another one next door for nearly $350k less than he owes on his present home? My friend told him, morally it was a bad idea, but financially/legally, if he could take the credit hit, it was in fact a wise decision. Imagine this spreading outside of LA/Coral Gables/etc?

It's a real concern. There are thousands of houses like this, and we are way overbuilt. Right now, the trickles in real estate are largely due to President Obama's 8K give away, on top of the Trillion Dollar Bailout which will have to be paid back.

APD, I respectfully beg to differ with your numbers. The $231k is interest. Your calculation neglects the opportunity cost of the $450k in total outlay, not including taxes, maintenance and improvements. $200k invested conservatively 30 years will likely do better than having a place to live, worth $20k in 30 years in constant (inflation adjusted dollars).

My first year out, I rented. I looked at housing. I was told repeatedly by realtors that I was in a "buyers market." I made a realistic offer on a parcel, based on county assessor and an independent appraiser. I was laughed at and thrown out of the house by the owner.

In the year that I rented, the same parcel foreclosed and sold not for $899,700 asking price, but $217,340, which was about 40k less than I offered. This story is repeated throughout the nation. I heard this same pitch when I was about to accept an elite faculty position in New England. Watching the real estate there, same story.

So, my $12,400 in rent, saved me at least $770k based on the difference in pricing I was able to save on the house I did ultimately buy. Owner financed, 5% 30 year, with an iron clad escape clause at 24 months. I can walk away, call my payments rent and move on if I have to. With the balance of that money, I paid off my wife's car and mine, retired nearly $50k in student loan debt and will have the balance retired by May. And, I lived in a fine lakeside manor, at someone else's expense.

We are in the midst of what I think will be a "dead cat bounce" in the markets. NOTHING has changed, here, except bankers are no longer speculating on freewheeling housing deals. We will be lucky, repeat lucky if consumer purchasing equals 2008, one of the worst years for consumer purchases since the Great Depression.

We have eliminated risk from banking. The Glass-Steagall Act stopped bad bank behavior following the bank holiday in '31 and in 1993, we ended it so that greedy banks could go back to the business that nearly brought us down a century ago. The only difference between now and then is we will all pay for it through a bankrupt FDIC, federal deficits beyond comprehension and no way out.

The fed can't fix it now. Too big to fail? I doubt it. If the USSR was not too big to fail, neither are we or our big banks.

Housing is not an investment, not any more, and probably not for the rest of our working careers. APD is correct we will have a place to live, but will it be where we want to be?

 

[lowbudget]

Note: 11% of those who bought houses this year (2009) are already underwater on their mortgage. "

Way to go 89%!!!

Do you know that higher mortgage rates put a huge downward pressure on home prices as people having to pay more interest can afford less principal?

Few people can afford to pay for a house with cash sitting in a liquid asset ready to go. Even if you could, your asset appreciation from rising interest rates in risk-free savings accounts ends up being eroded by capital gains & interest income taxes.

The best way to buy a house is to wait until interest rates are super high (because that is the time when housing prices become the lowest) and then pay for the house in cash. This way you get the benefit of the lowest price without the penalty of the higher interest payments. This has been the tried and true method of getting the best deal on housing for decades.
Even if you can not pay 100% cash it is often still beneficial to buy at peak interest rates as you can still take advantage of the lower prices at the higher interest rate and then refinance later when interest rates drop.

*eye roll* Come on. Who's capable to timing the market like that? You're still speculating on asset prices.

Even if you're that great of a market-timer, buying houses isn't like buying stocks. You can't just log on to your brokerage account and click buy. It takes time and transaction costs are high. Plus, every house is different making it hard to price out and prices tend to be sticky, i.e. people generally don't like to cut deep discounts on prices because they'd rather hold.

Or... or, you can buy a house when interest rates are at their historically lowest point and housing prices continue to plummet, which includes buying up distressed houses going through bankruptcy. So long as you have access to credit and aggressively negotiate a low/affordable price, borrow that cheap debt, lock it in at a fixed rate, take the tax deduction, and take the first time homebuyer tax credit. Sounds familiar? Well, that's the environment we're in TODAY.

 

[lowbudget]

"According to Robert Shiller, the well known Yale economist who predicted the stock collapse in 2000, the real return on housing between 1890 and 2004 was a very modest 0.4% a year"

0.4% a year. I can make more leaving my money getting 1.5% in some measly savings account!

No you can't. You can't compare the quoted 0.4% in real return with 1.5% in nominal return. That's basic Fisher equation.

 

[lowbudget]

It's still up pretty significantly in your graph here, if you ignore the dotted line for the years that haven't happened yet. Again, it's all about where you pick your window. If you pick low to high it goes up a lot. If you pick a higher starting point, it may go down. But over time it has gone up, even in the graph you just provided (especially if you ignore the depression to WWII era and the more recent artificial boom -- it's a very gradual, upward slope.).

How you interpret random price movements depends on your initial assumptions. Chaos Theory. Very nice.

 

[medicinesux]

No you can't. You can't compare the quoted 0.4% in real return with 1.5% in nominal return. That's basic Fisher equation.

i am aware of inflation and taxation, but for simplicity's sake it was more of making a point about how absurdly little one "makes" money by mortgaging a home to live in. Actually, factoring in all the other costs of home ownership that 0.4% is quickly pulled under zero. My folks paid more a year just in property taxes (I keep telling them to move but they don't listen) alone on the modest home I grew up in then I payed in rent for the whole year! And that doesn't include interest on the debt, the roof that needed to be replaced, and the boiler that needed to be fixed. In most circumstances, unless your home is bought on land with undiscovered oil underneath you will not be "making money".

My advice to the OP: Buy a home in a low tax burden community with CASH small enough to meet your needs with no wasted space. Even if you only have 50K saved, there are many parts of this country now where you can buy a 1 or even 2 br condo for this price. You can always upgrade in the future. Not only will you avoid paying interest on mortgage debt and sky high property taxes (tax on the rich), but you can stash the difference and build wealth THIS way. If you are frugal and disciplined you will have the CASH available to do this (I concede most super sized Americans have been "programmed" not to do this and will be forced to mortgage).

 

[Neuronix]

A neat calculator here: http://michaelbluejay.com/house/rentvsbuy.html. It takes into account all the factors being discussed and decides whether it's worth it to rent or buy.

 

[mdterps83]

Home interest mortgage deduction is a big one I don't think anyone has mentioned here. I don't know if anyone makes enough in residency wise to make it worth it (itemization/or paying a high enough %), but probably worth considering.

 

[WhoisJohnGalt]

This is wrong. You are not compounding interest properly. See: http://www.bloomberg.com/invest/calculators/mortgage.html

Actual total payments is $431,677.

While you are correct, it still doesn't change the argument that at the end of the 30 years the buyer is out $430k but own a house while the renter is just out $430k with nothing to show for it (as the renter still has to pay AT LEAST the amount that the mortgage holder has to pay, though in reality a landlord is going to ensure he makes some money in the deal, so the renter will actually be out substantially more than that).

 

[Neuronix]

as the renter still has to pay AT LEAST the amount that the mortgage holder has to pay

This is not true in my experience. The amount I've paid in monthly rent for the apartments in my city has been far less than I would have to pay monthly for an equivalent condo in mortgage and condo fees. This doesn't even take into account tax, assessments, and repairs, which makes owning a condo significantly more expensive. The fact that ownership makes such a poor return on investment has led to an extreme crash in prices, mortgage availability, and oversupply in my city. I'm very glad I didn't get in when everyone else was telling me I was a fool for not buying something.

Again, buying vs. renting is a complicated multi-factorial decision based on the factors in the link in my previous post. It is not nearly as simple as you are describing it. In this case, you are assuming the renter pays the same for the space they are renting as an owner would, which is often false, at least in my market.

 

[3dtp]

Home interest mortgage deduction is a big one I don't think anyone has mentioned here. I don't know if anyone makes enough in residency wise to make it worth it (itemization/or paying a high enough %), but probably worth considering.

You do make enough in residency to get some back. The problem is when you get to attending salary, you are going to get hit with a little present from the IRS called the Alternative Minimum Tax (AMT) which devalues the value of the deductions.

Neuronix, APD is correct. APD correctly quotes only the interest paid on the property. You are correct in that the Principle + Interest is $431k. APD's analysis is based on a stable property value, with no changes for the principle, which is what I guess the long term will bring, adjusted for inflation.

APD's analysis considers the $200k principle as an "enforced" savings account, which holds true only if the property value, corrected for inflation is stable or earns a modest return.

When does it make sense to buy? If you want/need to lock in fixed costs. I did exactly what medsux says: bought a house in a relatively low tax area, outside of a major university community with good schools, at a fixed low interest rate. Due to the present economy, sales are slow and prices are lower still. Yet, I am well above water, having bought the house in and it is now nearly paid for. This is an advantage to doing UG/Med/Residency in the same community. It is now rented which covers its costs and then some, but also has its risks. Could I sell it? Yup. Could I use the "enforced savings" to reduce the mortgage on my present place? Yup, but the interest rates are the same, the rental income is helpful and the tax savings from the depreciation are significant.

The risks: you may not be able to find a tenant. The tenant you do find can be a disaster, and you have to hire someone to do maintenance since you will likely not a.) have time to do it yourself and b.) will not live in the same community. IF a tenant doesn't work out, at best they will just not pay the rent, and at worst they could trash the place. In my state, an eviction takes about 4 months, the tenant lives there rent free, and when the eviction order is finally served, they have moved out to screw the next landlord.

In my present community, I am not assured a steady supply of potential tenants and could get stuck with an unrentable property if I decide to change my mind and go after that academic dream job. So, my fall back is keep my old house, rent it, and if the worst of the worst happens, I have a paid for place to move back to someday, in a community that I am happy to retire to.

In the meantime, I rented until an exceptional deal popped up.

 

[3dtp]

While you are correct, it still doesn't change the argument that at the end of the 30 years the buyer is out $430k but own a house while the renter is just out $430k with nothing to show for it (as the renter still has to pay AT LEAST the amount that the mortgage holder has to pay, though in reality a landlord is going to ensure he makes some money in the deal, so the renter will actually be out substantially more than that).

But, this may not be true. Prices are still falling in this area, anyway. I could have easily passed on my present deal, which I bought only because my risk is low, and likely found another one, for equally good deal. If you buy today, spend $431k on a house over 30 years, the house is then worthless and you don't want to live there any more, you are no better off than the renter, and in fact worse off, since you will have paid to maintain a place.

Consider Detroit: in 1960, a modest home cost $18,000 ($127,500 in 2007 adjusted dollars). The 30 year mortgage was paid up on 1990 with a total cost of $41000 (78,000 in 2007 adjusted dollars). That house, once in a posh neighborhood of Detroit, near the river and Belle Isle, is now worth maybe $20,000, probably less which in 1960 dollars is $2,800. This is a net loss of $21,000 in 2007 dollars.

If you rented and invested in conservative investments (savings, T-notes, CDs) during that time, your returns were around 5% in the 1960s-70s, 12% in the '80s, 8% in the '90s-early 2000's and 0% now. Amortizing this out based on minimal additional monthly contributions (est. $50/mo '60-80, $100/mo '80-90), returns $298k.

The differences are $298-(-$21000)=$319k. While the recent (15 year) trend has not been this bad, one must consider the opportunity cost of buying v. renting. Granted, Detroit may be a bad example as it suffered race riots in the '60s and never recovered, the decline of automobile manufacturing in the '80s and never recovered, it could happen anywhere. Including Westchester County or Long Island or Boca Raton or LA or Boston.

Of course, in our present economy, interest rates and returns on conservative investments are near zero, many have also lost big in stocks and commodities futures markets (and I suspect much more is coming), so there are few alternatives.

Buy a house to live in it and enjoy the view, if you want, knowing that you are paying for just that. Consider it an investment is a fools errand. You might make a bit of money, but then it might just bite you. The old saw that there's a finite amount of real estate available is correct. But there is a finite amount of ready willing and able buyers too.

 

[Excelsius]

I am going to have to agree with L2D and aPD. Why is it that not all doctors are wealthy? It's because most are usually clueless about investments. You go to HS then to college then to MD and finally 3-8 years of hard labor at minimum wage. By the time you get out, you don't have much experience with money. I agree that bringing down your debt is important, but it should NEVER be your primary concern. I would also add that you will never become wealthy on your salary alone. You need investments - stocks and yes, real estate. So if you are going to wait until you pay off your half a million dollar debt - don't forget to include the compounded interest because your debt is not just 250K - then you might have to work for a while neither enjoying your life not making financial progress.

Anyway, you can't get all your information from one SDN thread, but some of the things you did not consider:

1. Right now the market is pretty much at the bottom. In many locations you can buy a place for 100K or even 50K and fix it up (I am talking some locations even in SoCal). Even if the prices do fall a lot, you will lose very little and whatever you do lose will come back in time.
2. Interest rates are at an all time low. Will it ever be like this again? Yeah, wait for the next depression in 100 years or so.
3. There are first time home buyer programs: federal AND local. You can get up to $8K federal and/or $20K local help.
   
4. You forgot the other aspect of owning property - cash flow. What this means is that you can buy a property and rent it out. Don't want to go into logistics, but yes you CAN. You either buy two places if you have a large family, or you buy a one 3+ bedroom place and rent the other bedrooms to students/others. Even if you have an SO, you can still manage to live in a single room for a while if you're talking about frugality. Your tenants will pay your mortgage and in many cases you'll start generating income right away since that payment might be higher than your mortgage + association/maintenance fees.
5. Right now the main mystery about housing prices is the shadow inventory. Unemployment is also important, but if the predictions are right and unemployment will be reversed starting this summer, you will already have missed your train. In some areas of CA the prices have gone up 26% since last year. That's right, twenty six.

So, be parsimonious, but don't just be parsimonious.

 

[Bobblehead]

So, let's compare (as best possible) buying and renting. Let's assume that someone will rent you a house for their mortgage + tax payment combined (that's a big assumption, more later).

What if it costs much more to buy than it does to rent, which is commonly the case with the higher density coastal cities? If the price to rent ratio is heading towards or has blown past 30 the assumption becomes quite dangerous in that your monthly fixed costs from carrying a mortgage are now far in excess of your fixed costs of a monthly rental payment.

The other elephant in the room, is of course maintenance. While everyone has various tolerances for what they will and will not accept in a home, some issues will come around sooner or later (roof, siding, windows, furnace, etc.) for every home owner. And these issues must be addressed even if you're only planning on living in your home, let alone trying to sell it.

I think the bottom line is, if you want to own a home and can afford it (by whatever measure you use to determine affordability) go ahead and do so. But buying under an assumption of renting always being a losing game is an overly simplistic viewpoint, not that I'm claiming you're making this point.

 

[Excelsius]

What if it costs much more to buy than it does to rent, which is commonly the case with the higher density coastal cities? If the price to rent ratio is heading towards or has blown past 30 the assumption becomes quite dangerous in that your monthly fixed costs from carrying a mortgage are now far in excess of your fixed costs of a monthly rental payment.

The other elephant in the room, is of course maintenance. While everyone has various tolerances for what they will and will not accept in a home, some issues will come around sooner or later (roof, siding, windows, furnace, etc.) for every home owner. And these issues must be addressed even if you're only planning on living in your home, let alone trying to sell it.

I think the bottom line is, if you want to own a home and can afford it (by whatever measure you use to determine affordability) go ahead and do so. But buying under an assumption of renting always being a losing game is an overly simplistic viewpoint, not that I'm claiming you're making this point.

Read what I said above. And yes, renting is almost always a losing game. The only time when that is not the case? When the prices are spiraling downwards out of control (or upwards in some cases). I don't know where you live and what your market is like. Usually if the prices of homes stay expensive even in such a downturn like this, it should give you a clue about their stability. So unless you have a strong reason to believe that your affluent neighborhood real estate prices are suddenly going to significantly decrease after the worst in the stock market has passed, renting is not a good option.

And it's all about how badly you want to manage your money properly. Why do you live in a coastal city? If you think your neighborhood is so risky in terms of real estate, go and live in a nearby city and drive that 30 minutes or so to work. At least you'll buy a place and get tax deductions from your not so insignificant income.

Maintenance? If you're afraid of it, don't buy a house. Get a condo and pay fixed association fees. You won't have to worry about any maintenance then.

And you're right, this is not as simple as you'd think. You need to be informed about these things before jumping in. It is never simply rent vs ownership. At the same time realize that the slower you move and the more you vacillate, the less is left for you out there. I know several people who made over 260% in investments in the last year. I wish had a large capital to deal because then I wouldn't be making little money here and there because I can't invest a lot on my student income. I was able to double my money as well, yeah, but what is a few thousand dollars? You need to have money to make money. As a doctor, you have that luxury. If you can't make it, it is your decision.

 

[exPCM]

The Fiserv Case-Shiller Home Price Index forecasts that average single-family home prices will fall another 11 percent over the next twelve months, with declines expected in about 90 percent of the more than 350 metro areas tracked by Fiserv. Steep home price declines are expected to continue in markets that have been hurt most by the housing crisis, including metro areas in California, Nevada, Arizona and Florida.

“Large supplies of foreclosed properties and extremely weak job markets will continue to put downward pressure on home prices,” said David Stiff, chief economist, Fiserv. “Many temporary factors that were partly responsible for strong spring and summer real estate markets, including the first-time homebuyer tax credit and Federal Reserve actions to drive down mortgage interest rates, will no longer be bolstering demand. Consequently, home prices will resume falling again before they stabilize in 2010.”

One-time bubble markets in Florida, California and Arizona, which have already seen home values fall 40 percent to 60 percent since prices peaked in 2006, are showing no sign of moderation in declining prices.
http://finance.yahoo.com/news/Fiserv-CaseShiller-Home-Price-bw-3674401879.html?x=0&.v=1
Comment: So if you buy a house today and it goes down 11% in value and then appreciates at 0.4% (long term trend line) then you will be back to even in just 28 years.

 

[3dtp]

I have stable renters for the moment, but that could change with the stroke of the layoff pen. My present neighbor sold his house only to have the couple that bought it get laid off two weeks after they bought it, $8k federal stimulus bonus (which we will have to pay for somehow) and all, and they can't afford the house without a job. The house is now being repo'd and the couple is living in their parents' basement.

These are not high school educated blue collar workers, these are MS prepared highly skilled people in diverse fields, and they cannot find a job locally.

Rents right now are lower than they have been in a decade. Why? because there is a glut of these "shadow" houses right now, and everyone who owns them is renting them, and there is a finite supply of renters too.

Don't be so quick to claim that docs aren't rich because they don't invest wisely. This applies to a great many, including Wall Street Investment Bankers. One physician I know is trapped in his job and cannot retire because he handed his money over to well established investment firms and is now highly backside on his retirement income.

And this does not happen just to us. The State of Indiana lost a huge investment in its state employee pension fund when Chrysler's bankruptcy was railroaded through the Court, denying secured creditors their security interests as required by law. This single act, under political pressure from Washington, in my mind undermined a key element of our financial stability. And don't think that the rest of the world didn't take note of this.

You could be right. It might be better to borrow as much as you can, at as low an interest rate as you can, for as long as you can and die as deeply in debt as you can. A third and more interesting issue is the matter of the aging population. The first of the baby boom crowd is retiring and will be withdrawing money from investments soon, if they have not already. This will certainly have an impact on the markets for a generation. Job security for us, to be sure, but will we be paid for the work?

I prefer to have cash/liquidity on hand for those good opportunities that arise when they arise.

 

[notinkansas]

Why is it that not all doctors are wealthy? It's because most are usually clueless about investments. I agree that bringing down your debt is important, but it should NEVER be your primary concern. I would also add that you will never become wealthy on your salary alone. You need investments - stocks and yes, real estate. So if you are going to wait until you pay off your half a million dollar debt - don't forget to include the compounded interest because your debt is not just 250K - then you might have to work for a while neither enjoying your life not making financial progress.

Anyway, you can't get all your information from one SDN thread, but some of the things you did not consider:

1. Right now the market is pretty much at the bottom.
2. Interest rates are at an all time low. Will it ever be like this again?
3. There are first time home buyer programs: federal AND local. You can get up to $8K federal and/or $20K local help.
   
4. You forgot the other aspect of owning property - cash flow. What this means is that you can buy a property and rent it out. Don't want to go into logistics, but yes you CAN.
   [

So, be parsimonious, but don't just be parsimonious.

Agreed, most doctors (in fact most Americans in general) are pretty clueless not only about investments, but about basic money management in general. I am totally amazed at how many educated Americans have been happily spending $1500-2000+ more than they make every month, thanks to the miracle of credit cards, and don't have any clue until they are forced to stop by reaching the maximum of their credit cards and are unable to obtain any more.

Even more people are clueless about investments, be it real estate, stocks (two forms of investments that have performed very poorly over the past several years) bonds, and other types of investments.

The US education system does a very poor job of providing any type of financial information, possibly by design.

Again, those of us on this forum who advocate frugality aren't saying never buy a house. We are saying that the conventional wisdom of buying one immediately after starting a job as an attending, buying one with a 90-100% financed "doctor" loan, buying one with no money in savings, etc isn't necessarily the wisest course of action. HOW DO YOU KNOW that the real estate market is at a bottom? And just because the are government programs to try to get people to buy houses doesn't mean that it's the right time for everybody. (why does the government want to bribe people to buy)

Also, by paying only the minimum on your student loan debt, you will wind up paying the maximum interest over the life of the loan. The sooner debt is paid off, the more money one has to invest. AND the less money one requires to live on each month, which is a form of freedom that is PRICELESS!! (if you've never been trapped in a job you hate by having to make debt payments, perhaps you can't understand the magnitude of this)

Buying rental property CAN be done, yes. Absolutely. But it's not as easy as it sounds. Finding the right tenant is difficult. Finding property that can be purchased at price low enough to allow market rent to cover all associated costs, repairs maintenance, court costs for evicting bad tenants, etc and still turn a profit is not so easy. It takes time to learn all the ins and outs. In fact, I owed a piece of rental property for a couple years and sold it earlier this year because the maintenance continually ate up all my profit plus some. (Roof, furnace, water heater, and finally the $1000 water bill in one quarter because the tenants never told me about a leaking toilet. Water bill should have been $60 for that quarter)

I find it interesting to see how many people are seem to be adamantly opposed to the choice of living more frugally. I think it's important for more people to be aware that is it an option, that living frugally is not inconsistent with living happily (and often produces less stress). Living frugally is often more environmentally friendly (as someone who lives frugally consumes fewer resources than someone who doesn't) and is often less stressful. I used to be of the same mindset.... buy the biggest house you can afford, pay min on debts to free up monthly cash flow for other things, etc. Leverage works great when times are good but it is equally deadly (if not more so) when things aren't gong so great. You can lose all your gains and more. Events in my life and the economy have caused me to re-evaluate. I wish I had made different choices with my money. I've never heard someone who is debt free say they wish they had a bunch of debt.

Don't get me wrong, I want to get fithy, stinking rich. I have come to the conclusion that it will be much easier to do that in the long run by eliminating all debt, (except perhaps a mortgage debt), and choosing to live a little smaller now (I'm still living better than I did in school!). I'm choosing to rent (current rent includes heat and hot water, cable and internet in the northeast US- I'd be spending a lot more than that for even a $50K house considering everything). I choose to drive an economical vehicle. I'm choosing to pay down my debt. Does every penny I make go toward debt payment? NO! Am I only eating rice and beans? NO! I don't care that much about where I live, the car I drive or stuff in general. I do want to spend money on experiences, though. I'd love to be able to just go spend a month at a fantastic ski resort, or a beach resort.

We are bombarded with messages from all media sources encouraging us to buy, buy, buy.... ever really stop to think why? Who is really getting wealthy off our consumption?

For those of you reading this who have never tracked what you spend in a month versus what you make, I suggest you give it a try for one month. You might be surprised. Ongoing deficit spending is unsustainable, especially on the personal level since you can't just print money or go take money from others. How much money can you simply not account for every month? That alone may be an eye opener!

 

[michaelrack]

Comment: So if you buy a house today and it goes down 11% in value and then appreciates at 0.4% (long term trend line) then you will be back to even in just 28 years.

I believe that the .4% figure is inflation adjusted; I think that you are right that a house buyer would be back to even in approx 28 years in real dollar terms; it would be much sooner in nominal dollars.

 

[exPCM]

I believe that the .4% figure is inflation adjusted; I think that you are right that a house buyer would be back to even in approx 28 years in real dollar terms; it would be much sooner in nominal dollars.

Agree👍

 

[babel]

I am totally amazed at how many educated Americans have been happily spending $1500-2000+ more than they make every month, thanks to the miracle of credit cards, and don't have any clue until they are forced to stop by reaching the maximum of their credit cards and are unable to obtain any more.

Someone watched Suze Orman last night, didn't they? 😉

I'm still in med school now, but I wish I could get her to look at my finances once I'm out of residency - I'm still uncertain of how I will balance student loan payments vs. retirement vs. buying a home etc. etc. Oh well, got another 5 years or so to figure it out.......

 

[Excelsius]

Agreed, most doctors (in fact most Americans in general) are pretty clueless not only about investments, but about basic money management in general. I am totally amazed at how many educated Americans have been happily spending $1500-2000+ more than they make every month, thanks to the miracle of credit cards, and don't have any clue until they are forced to stop by reaching the maximum of their credit cards and are unable to obtain any more.

Even more people are clueless about investments, be it real estate, stocks (two forms of investments that have performed very poorly over the past several years) bonds, and other types of investments.

The US education system does a very poor job of providing any type of financial information, possibly by design.

Again, those of us on this forum who advocate frugality aren't saying never buy a house. We are saying that the conventional wisdom of buying one immediately after starting a job as an attending, buying one with a 90-100% financed "doctor" loan, buying one with no money in savings, etc isn't necessarily the wisest course of action. HOW DO YOU KNOW that the real estate market is at a bottom? And just because the are government programs to try to get people to buy houses doesn't mean that it's the right time for everybody. (why does the government want to bribe people to buy)

Also, by paying only the minimum on your student loan debt, you will wind up paying the maximum interest over the life of the loan. The sooner debt is paid off, the more money one has to invest. AND the less money one requires to live on each month, which is a form of freedom that is PRICELESS!! (if you've never been trapped in a job you hate by having to make debt payments, perhaps you can't understand the magnitude of this)

Buying rental property CAN be done, yes. Absolutely. But it's not as easy as it sounds. Finding the right tenant is difficult. Finding property that can be purchased at price low enough to allow market rent to cover all associated costs, repairs maintenance, court costs for evicting bad tenants, etc and still turn a profit is not so easy. It takes time to learn all the ins and outs. In fact, I owed a piece of rental property for a couple years and sold it earlier this year because the maintenance continually ate up all my profit plus some. (Roof, furnace, water heater, and finally the $1000 water bill in one quarter because the tenants never told me about a leaking toilet. Water bill should have been $60 for that quarter)

I find it interesting to see how many people are seem to be adamantly opposed to the choice of living more frugally. I think it's important for more people to be aware that is it an option, that living frugally is not inconsistent with living happily (and often produces less stress). Living frugally is often more environmentally friendly (as someone who lives frugally consumes fewer resources than someone who doesn't) and is often less stressful. I used to be of the same mindset.... buy the biggest house you can afford, pay min on debts to free up monthly cash flow for other things, etc. Leverage works great when times are good but it is equally deadly (if not more so) when things aren't gong so great. You can lose all your gains and more. Events in my life and the economy have caused me to re-evaluate. I wish I had made different choices with my money. I've never heard someone who is debt free say they wish they had a bunch of debt.

Don't get me wrong, I want to get fithy, stinking rich. I have come to the conclusion that it will be much easier to do that in the long run by eliminating all debt, (except perhaps a mortgage debt), and choosing to live a little smaller now (I'm still living better than I did in school!). I'm choosing to rent (current rent includes heat and hot water, cable and internet in the northeast US- I'd be spending a lot more than that for even a $50K house considering everything). I choose to drive an economical vehicle. I'm choosing to pay down my debt. Does every penny I make go toward debt payment? NO! Am I only eating rice and beans? NO! I don't care that much about where I live, the car I drive or stuff in general. I do want to spend money on experiences, though. I'd love to be able to just go spend a month at a fantastic ski resort, or a beach resort.

We are bombarded with messages from all media sources encouraging us to buy, buy, buy.... ever really stop to think why? Who is really getting wealthy off our consumption?

For those of you reading this who have never tracked what you spend in a month versus what you make, I suggest you give it a try for one month. You might be surprised. Ongoing deficit spending is unsustainable, especially on the personal level since you can't just print money or go take money from others. How much money can you simply not account for every month? That alone may be an eye opener!

I don't really disagree. Frugality is indeed very important. I know a grad student who owns a place and makes money every month by charging rent. However, he also flies to the other side of the coast regularly to see his recent GF and goes on European tours several times a year. Is this the guy who will get rich even though he has made some very good decisions about real estate? No. It doesn't matter what you do, frugality should always be part of the equation. So I agree with you there. All I am saying is that you should not allow your frugality to be your only weapon to achieving wealth.

You're generally right about student loans too, but the reason these things are so hard to generalize is because each of us has a different financial profile. How much you pay you debts off on a monthly basis greatly depends on 1.interest rates and 2.amount. Right now I have some debt (educational) that some time ago transferred to a credit card. It is fixed at 1.99%. Do I make almost a minimum payment on that? You bet.

It's not that hard to find a tenant. You obviously interview them. But the most important part of that is your contract. You could pay a lawyer a one time fee and get a good contract out of it to cover your arse. But even here you can be frugal. Gather 5-10 other contracts, read them over, scavenge what you need, and woala, you got a contract. If you want, you could still have it reviewed by a lawyer for a far cheaper price than if you had drafted one from scratch. And if you're actually living in the same building or apartment, then there is no problem at all. You do have the right to regular entry (weekly if you need to) to check up on the property to avoid any long term issues like a toilet leak. Just have to reflect it in the contract. One contract I was reading was 27 pages long! I am not kidding.

Also think about this - you say you rent now. Well, what do you think? Is your landlord running a charity? No! He is making money off of you and his other tenants. And as far as the house prices go (or anything else), no one can ever be 100% sure where the bottom is precisely. However, you can make an educated estimation. Even in 2007, I heard many experts say that the housing won't stabilize until 2010. Many other sources have said that unemployment won't stabilize until the summer of 2010. So it is very likely that the bottom is going to be in the first half of this year. Though like I said, many affluent neighborhoods have not lost that much value in this downturn and have already rebounded, while some other places, like Chicago, are unique due to various circumstances and might not follow the rebounding national trend until much later.

Finally, good financial decisions start when you are leaving high school (preferably before). You must try to accumulate as little debt as possible in undergrad. You can do this by always having a job and living frugally. Also choosing your school wisely. I have done that and there is a chance that I might leave undergrad with no debt at all. Yet what do most people do? They buy a fancy car, get in the debt row of conspicuous consumption, never work, and graduate with debt and without clue about money management. When these people are allowed to go straight to medical school, their life can end up being a disaster. It's like those prisoners who do time 11 to 16 years (UG+MD+PGY) and then are let out. Most of them just can't deal with the society and end up going back. It would help a lot if medschools did not concentrate so much on some useless volunteer work in some uber-conservative hospital and rather required their students to have some work experience, in addition to just a little volunteer work. No wonder we have so many dissatisfied doctors. And to add insult to injury, many people end up being social invalids as well - unable to attract the right girl due to zero skills, lonely, depressed...

I am glad to see how difficult it is even for attendings to make it. The premeds must really see this thread. I used to not want to do MD/PhD because of the extra time involved and because the main theme in that subforum is that it does not make financial sense to spend those extra three years just to get out of school debt free since you can make more money as a doctor in those extra three years. Correct me if I am wrong, but that seems to be the wrong advice. And are you really wasting those three years? For some subspecialties you most definitely are not because it seems that some of the fields almost require you to take a year or so off after medschool anyway to do research before you can be competitive for residency. So then why the hell not do it as part of the MD/PhD program and kill three birds with one baseball bat? Half a million dollar debt is no joke, especially if you have never earned a dime in your life.

 

[Excelsius]

I believe that the .4% figure is inflation adjusted; I think that you are right that a house buyer would be back to even in approx 28 years in real dollar terms; it would be much sooner in nominal dollars.

It would be even sooner than that if you include tax deductions and cash flow.

 

[Neuronix]

I used to not want to do MD/PhD because of the extra time involved and because the main theme in that subforum is that it does not make financial sense to spend those extra three years just to get out of school debt free since you can make more money as a doctor in those extra three years.

Extra four years on average.

Correct me if I am wrong, but that seems to be the wrong advice. And are you really wasting those three years? For some subspecialties you most definitely are not because it seems that some of the fields almost require you to take a year or so off after medschool anyway to do research before you can be competitive for residency.

You're comparing one year of directly clinically applicable research with essentially zero requirements versus a very stressful four years of basic science. There is no field where you're required to do research anyway. It may help for the most competitive residencies, but far more important are still clinical grades and step scores.

It's not that hard to find a tenant. You obviously interview them. But the most important part of that is your contract. You could pay a lawyer a one time fee and get a good contract out of it to cover your arse. But even here you can be frugal. Gather 5-10 other contracts, read them over, scavenge what you need, and woala, you got a contract. If you want, you could still have it reviewed by a lawyer for a far cheaper price than if you had drafted one from scratch. And if you're actually living in the same building or apartment, then there is no problem at all. You do have the right to regular entry (weekly if you need to) to check up on the property to avoid any long term issues like a toilet leak. Just have to reflect it in the contract. One contract I was reading was 27 pages long! I am not kidding.

You can take all the precautions you want, but you'll still have risk. When my father rented out his old house after he couldn't sell it because it depreciated so much, he rented it to a family he knew from a former job. They came with a glowing recommendation from the former landlord. It turns out the reason he came with a glowing recommendation is because that prior landlord wanted rid of him so bad. Months of past-due and missed rent later, eviction was attempted and completed, but during this time the house was completely trashed. Court of course settled in my father's favor, but this has been many years and he's yet to see a cent of the many thousands in damage it cost to repair the house.

 

[mercaptovizadeh]

With a salary of ~200K, even with a spouse who stays at home and perhaps young children, it should be possible to pay off ~200K of debt in a few years post-residency by living frugally. On the other hand, if right out of residency you start buying regularly $100 bottles of wine, eating out every other week and paying $500 in the steak house, one or two new cars (a lexus/bmw/mercedes at least), a big house, and go on vacations to Europe twice a year, children in expensive private school, it'll take you decades to pay off that debt.

 

[Excelsius]

Extra four years on average.



You're comparing one year of directly clinically applicable research with essentially zero requirements versus a very stressful four years of basic science. There is no field where you're required to do research anyway. It may help for the most competitive residencies, but far more important are still clinical grades and step scores.



You can take all the precautions you want, but you'll still have risk. When my father rented out his old house after he couldn't sell it because it depreciated so much, he rented it to a family he knew from a former job. They came with a glowing recommendation from the former landlord. It turns out the reason he came with a glowing recommendation is because that prior landlord wanted rid of him so bad. Months of past-due and missed rent later, eviction was attempted and completed, but during this time the house was completely trashed. Court of course settled in my father's favor, but this has been many years and he's yet to see a cent of the many thousands in damage it cost to repair the house.

There are always risks - that's why you run background checks, verify employment, and generally, stay away from "friends." Plus if you're dealing with students, it is the parents who will be paying for them. Less hassle.

Perhaps I should qualify my statement: when I said to go for MD/PhD, I obviously assume that the student already likes research. If he/she doesn't, then that's not the route to go. In fact, maybe he/she needs a reality check about the planned subspecialty.

As far as requirements for research, I remember reading a thread in resident or surgery forum where I saw a lot of surgical fields want to see at least a year of research. I can try to locate that thread later.

PhD can take longer and it was a concern. However, my situation is different because I am already getting publications out - including at least one first author pending - and am ahead of many grad students. I did have this discussion with my PI, and he assured me that with the amount of work I have already done, it would not take me more than three years to complete my PhD. It's not too difficult to assume that many students can do the same. But yes, if you don't like research and end up just washing glassware in the lab instead of doing real work, then four years won't be enough either.

As long as we're on the subject, I know you're pretty knowledgeable about this tract. At my school, I heard one student convince the administration to do his PhD before the MD, instead of interrupting MD in the middle. If I stay at this school, I know I'll do the same. But what do you think about this procedure in other schools? Is it flexible? I think there are many advantages to doing it this way, but if you know of any downsides, let me know. Thanks.

 

[Excelsius]

With a salary of ~200K, even with a spouse who stays at home and perhaps young children, it should be possible to pay off ~200K of debt in a few years post-residency by living frugally. On the other hand, if right out of residency you start buying regularly $100 bottles of wine, eating out every other week and paying $500 in the steak house, one or two new cars (a lexus/bmw/mercedes at least), a big house, and go on vacations to Europe twice a year, children in expensive private school, it'll take you decades to pay off that debt.

Agreed. Even without any investments and additional income, the salary alone should be sufficient to pay off your debt within a few years. Especially if you have a working spouse and no children.

 

[Neuronix]

In fact, maybe he/she needs a reality check about the planned subspecialty.

As far as requirements for research, I remember reading a thread in resident or surgery forum where I saw a lot of surgical fields want to see at least a year of research. I can try to locate that thread later.

Surgery is funny this way. Specialty programs often desire students with research experience and recruit MD/PhDs heavily to academic programs. Note that these students still need to be up to par with the high clinical grade and Step I expectations for all their MD applicants. To me this seems to be all a function of competition. For upper tier academic programs research is just one way to separate the field of extremely competitive applicants. Research experience and claimed love of research/academics is also an imperfect indicator of someone who's more likely to become academic faculty someday, which is typically the goal of big name academic programs.

Of course many programs also often have research built into residencies and place some value on research as a prestige generating unit. Of course it creates a pool of residents for emergencies and does create a cheap labor pool for the research faculty within the institution. But, a PhD seems to be extreme overkill for that residency work at least to me.

MD/PhD programs have the stated goal of producing majority career researchers. How many surgeons out there are majority researchers? There is data on this, and that data shows it's far less likely for an MD/PhD to pursue a majority research career in surgery than in most other fields. The pay just isn't there in grant money and it's too difficult for someone to keep up their skills in surgery if they don't operate frequently.

To me this all means to do a PhD just to try to get a more competitive residency is time wasted. Some programs may state they desire a year of research. Yet, most students will not have performed a year of research or more during med school at the vast majority of programs. It's far more common to just do some research during med school breaks and fourth year. Of course some students will have done a year out, but adding three years to that doesn't add much to your application compared to those year out students. The clinical requirements remain the same regardless and your medical school performance is still the major, overriding factor for residency programs.

PhD can take longer and it was a concern. However, my situation is different because I am already getting publications out - including at least one first author pending - and am ahead of many grad students. I did have this discussion with my PI, and he assured me that with the amount of work I have already done, it would not take me more than three years to complete my PhD. It's not too difficult to assume that many students can do the same. But yes, if you don't like research and end up just washing glassware in the lab instead of doing real work, then four years won't be enough either.

Time to PhD averages are averages for a reason. You can't assume your average MD/PhD student just washes glassware in the lab. Most MD/PhD students are very motivated, prepared, and intelligent individuals. If the average is eight years, you can't assume that you're smarter/harder working/better prepared than all the other MSTPs at top programs. They are the best of the best coming into the programs.

That being said, I've written about time to graduation extensively in the past and I'm not sure hard work has anything to do with time to PhD completion. See my blog entry: Just how long is a MD/PhD program anyway?

As long as we're on the subject, I know you're pretty knowledgeable about this tract. At my school, I heard one student convince the administration to do his PhD before the MD, instead of interrupting MD in the middle. If I stay at this school, I know I'll do the same. But what do you think about this procedure in other schools? Is it flexible? I think there are many advantages to doing it this way, but if you know of any downsides, let me know. Thanks.

Your plan is a great one if you can pull it off. However, most programs are not so flexible to allow you to do a PhD before a MD if you expect the MD to be fully funded. Also, most programs frown upon students continuing PhD work in the same lab they worked in as undergrads. Such plans are typically forbidden. Most PDs feel that a PhD is a time to start fresh on a new project. The type of PhD you're proposing would not be a "real" PhD in their minds. Besides, they have the work out of you that you did during undergrad. For all that med school tuition and stipend they want new hard work.

At my program I've seen students who did undergraduate research at the institution start here as PhD students, but the research they did as PhD students had to be with new labs and new projects. These students take just as long as everyone else. Maybe 15 years ago the program was more flexible to allow students to squeak through as 6 year MD/PhDs in their undergrad lab or a close affiliate, but that hasn't been true for a long time.