Part 3 of a 5-part series. If you’d like to review past mistakes, here are parts 1 and 2.
“One house, One Spouse, One Job”
That is one of the basic tenets of financial teachings by the FIRE (Financial Independence, Retire Early) community and its rationale is wonderfully summarized here by WCI. Even if one’s goal is not to retire early, it is wise to follow.
So please continue to follow this story as young, naive Xrayvsn proceeded to commit financial cardinal sin by breaking each and every component of this primary FIRE doctrine.
One House — or Three
Somewhere along my journey in becoming a resident I was told that the best thing to do is buy a house if you are going to live there three years or more. That was because, “It doesn’t make sense to pay rent to someone else if you can be paying down mortgage and gaining equity for yourself.”
House #1:
As I had just accepted a position in a general surgery residency in South Carolina (a 5-year program), I thought that this advice made complete sense and went about purchasing my first home with my first doctor loan.
Although I was heavily burdened with student loan debt and carrying credit card debt, I easily got bank approval for a 30-year mortgage. Apparently they were betting on me as an MD and not my awful income to debt ratio.
The purchase price of the house was $89,000 in 1997, but in order to get an “affordable house”, I had to live further away from my work (about a 25-minute drive), so factor increased commuter costs into this mistake.
For those readers following along, because I switched jobs, my tenure at this residency was abruptly cut short at two years. I was incredibly fortunate, however, that the market had appreciated enough that I was able to sell the house for $109k, and after real estate costs I believe I pocketed close to $8k in profit.
House #2:
Having changed career paths, I headed north to Ohio to join a radiology residency program (which required four years of additional training).
Feeling confident about my real estate prowess after making the largest profit I have ever made at that point from the sale of my first house, I went all in and purchased a second home, this time for $109k.
Again I had to live far away from my residency program with a commute of almost 30 miles in order to get into neighborhoods I could “afford” (again increasing my commuter costs).
A little bit of saving grace was that I did stay in this house for a total of seven years (four years residency, one year fellowship, two years as an attending).
House#3:
After some brutal winters in 2006, I decided that I wanted to head below the snowbelt and found my current house that is indeed my forever home with no more plans of moving.
Despite the move, House #2 was still giving me a lot of trouble.
I put that house on the market expecting to get a similar result to house #1. However, the real estate market softened quite a bit and initially I had no offers.
I didn’t want to be an accidental landlord, especially an out of state one, and decided to keep it on the market.
For a period of almost a year I carried two mortgages and had to carry increased property insurance for House #2, as it was considered a vacant home and more of a risk for the insurance company.
I finally found a buyer that took house #2 off my hand with about a $15k loss incurred after transaction costs. Despite the loss I was thrilled not to have this financial anchor tied to me anymore.
Dr. Fawcett does an excellent article on why should not buy a house when you get a job.
Estimated Hit to Net Worth:
- The combined effects of the two houses I have owned during residency was a net loss approaching $12k when all said and done.
Superpower Take-home points:
Buying a home is ill-advised for a medical resident no matter the length of the residency training.
Potential pitfalls:
- change in career path
- increased commuting expenses as more affordable housing tends to be further away from residency locations
- real estate market fluctuations hard to predict in such a short overall time period
- may have to undertake role of inadvertent landlord or carry two mortgages if unable to sell home in a timely fashion
Premature Lifestyle Creep
Jim Dahle from the White Coat Investor has one of the most important tips for residents to set them on the correct path to financial success: Live Like A Resident.
I wish this advice was around when I needed it, but alas it was not.
The allure of a fast approaching attending level salary (an increase of almost five times what I was making as a fellow) and what I could buy with it was too strong. In fact I couldn’t even wait till then.
In my last month of fellowship I promptly visited a Mercedes dealership and “bought” a brand new Mercedes.
I used bought in quotes because technically the bank bought it, as I completely financed the car with a 5-year term and I believe an interest rate in the 7–9% range.
“Never spend your money before you have it.” — Thomas Jefferson
It is amazing how your mind finds ways to rationalize any unsound purchases. “You deserve this. You have been studying and sacrificing for years (11 years post college). Go on, treat yourself.” It doesn’t take much convincing when the audience wants it as well.
I was going to be an attending, and I needed to look the part. I was sick of driving 2nd hand cars. What’s the point of becoming an MD if you can’t reap the financial rewards?
I didn’t need the car, as the car I had owned at that point was fully serviceable. But I really wanted the car and the perceived status I thought would come with it.
A very small saving grace was at least it was the cheapest Mercedes class (2004 Mercedes C class, C320) with a sticker price of $42k.
A much larger saving grace was that this vehicle was my primary vehicle for 11 years when I finally upgraded to my current car after putting 235,000 miles on it.
I did pay off the loan a couple of years early so only got hit with around three years of interest.
Estimated Hit to Net Worth:
- Estimated interest paid $(8500), increased insurance cost, and sticker price of car probably pushed the mistake into the $51k range
And, a Boat
Lifestyle creep part II was when I convinced myself I needed to buy a boat.
With a lake just three miles from my current/forever home, I envisioned the jet set lifestyle, which included cruising on the lake with family and friends.
I lessened the potential impact of this mistake by buying a 2nd hand boat for $9500 but had to put another $2000 to bring it up to speed (boat truly stands for Bring On Another Thousand).
And all those wonderful trips to the lake that I had envisioned? Well after owning the boat for three years, I believe we ended up using it a grand total of 20 times. I ended up selling the boat at a loss of $7000. That, plus three years of winter storage ($1800), made each boat trip cost at least $440, not including gas and insurance.
It is true that the happiest days of a boat owner is the day he or she buys it and the day he or she sells it.
Estimated Hit to Net Worth:
Factoring in insurance costs, $10k
Superpower Take-home points:
- The longer you avoid lifestyle creep and the longer you stay off the hedonistic treadmill, the better chance at success you have at financial well being.
- Be wary of attempts to rationalize an ill-advised purchase.
Stay tuned for parts 4 and 5.
The author has chosen to remain anonymous. They recently launched a finance and lifestyle blog called XRAYVSN: https://xrayvsn.com.
https://www.doximity.com/doc_news/v2/entries/12348596
