The Ninth Philosophy: DIY Personal Finance

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With an assets under management (AUM) fee typically around 1%, the average fee-based financial advisor will cost you more than $10 million over the standard 30 year career and 30 year retirement (assuming an annual savings rate of $50,000 at 6% growth).  That’s a huge number that I learned from the WCI course!

I often ask people, “Do you think you are dumb enough, if you put just a little time in, to make 10 million dollars worth of mistakes?”  The point I am trying to make is that, with just a little bit of do-it-yourself elbow grease spent on personal finance education, you can be your own financial advisor.  Today we will discuss exactly how to go about this!

Much of this can be found on my Do-It-Yourself Personal Finance Page! Here are the steps (they are similar to medical training)

  1. Go to “DIY personal finance school”: Read one or two solid personal finance books to form your foundation. [No, this doesn’t imply that you will have the same amount of knowledge as a financial advisor, but you don’t need as much….you need enough to DIY].
  2. Continue your financial education:
    1. Keep up on the primary literature: Each week, follow a personal finance blog.  You can choose one that is focused on medical professionals, FIRE (Financial Independence Retire Early), or destroying debt.  Regardless, it is good to keep up on current actions.
    2. Keep your blinders on:  Read one or two more books each year on the topic to remind yourself why you are doing what you are doing.

Building Blocks

I could certainly give you a step by step guide as to what exactly you should do to start your personal finances for most students, residents, and starting attending physicians.  That won’t really get you to “buy-in,” because you won’t know the “why.”  [I do plan on making primers for each of these groups of people at some point on this website, though].

The briefest way to understand enough personal finance to advise yourself is to start with a solid book.  This will help provide you a firm foundation for your personal finance knowledge.  You don’t need to read a ton of books, but you do need to read one or two really good ones!  These will be your building blocks for your financial independence!

Books to Begin the Journey

A Random Walk Down Wall StreetFor most people that approach me about learning more about personal finance I recommend them to start where I started, which is with Boglehead’s Guide to Investing.  The reason for this is because most people asking me for information on this topic are in the medical field and don’t have a lot of time to commit to learning this stuff.  The Boglehead’s book is short (doesn’t take long to read) and to the point.  It is also written by the followers of John Bogle, the man who started Vanguard.  They have all reached financial independence and are just trying to spread useful knowledge. In fact, they encourage you to give your book to someone else when you are done instead of buying a new one.

If you want to tackle a more robust book that includes the historical perspective behind passive index-fund investing in addition to definitively convincing you that index-fund investing is the way to go, I recommend A Random Walk Down Wall Street.  This book has a ton of useful stuff in it (in addition to proving that Monkeys are just as good as hedge fund managers at picking stocks). My favorite chapter is on the behavioral science behind investing.  [Full book review to come later]. That said it is a book with a lot more depth and, as such, takes a longer time to read. It’s apologetics for index fund investing is impressive, though.

For a more physician specific book, I recommend reading The White Coat Investor Book.  I actually give this book to my resident advisees each year.  I want it to be straight away in their face that there is more out there to learn.  Medical school and residency do pretty poor jobs of preparing it’s trainees in matters of personal finance.  [These institutions are mostly terrible at teaching wellness topics, too.  Hence this website’s creation].

Continuing your Financial Education

Need a reminder why bitcoins are similar to tulip bulbs?  Why picking individual stocks is not the sure way to financial success?  What’s the difference between fee-based and fee-only advisors?  Need to know why checking your stocks more often actually leads to less financial success?

All of these questions can be answered by staying up on your personal finance education.  Here are two ways to do this:

1) Read an additional book or two each year

You don’t have to become a personal finance geek like I am.  You can read one or two additional books per year.  This will help answer many of the questions above.  As I read more of these books, I put the ones I recommend on my Recommended Books Page.  This page will continue to grow as I read books I think are worth recommending.  If they aren’t books I’d recommend (and some aren’t) they get left off of the page.  I’ll try and save you the trouble of sorting through the books.

2) Read some financial websites and blogs!

People often wander off and get tempted to do stupid things (like buy a bunch of bitcoin) after they have left the fold for a while.  While one book a year is do-able, it’s important to stay involved enough that you continually remind yourself what you are doing and why.  The simplest way to do this is by reading posts from reputable websites.  Most posts (on this website at least) take less than five minutes to read. Short and to the point, but remind you what you are doing and why!

In order to stay up to date on a more regular basis you should visit some financially minded websites or blogs.  Hopefully, one of them includes The Physician Philosopher, but if it doesn’t that’s okay too!  I’ve laid out some of my favorites on my recommended website page.  Ultimately, I just want you to reach your goals and maintain your wellness along the way.

Don’t forget your “Why”

The point of all of this is to remember what you are doing and why.  It is common to talk to someone at a party or at work that thinks they know a bunch about personal finance. They make it sound complicated and that they are making “huge gains with their ‘financial guy'”  These sort of conversations can drive you back to fee-based advising or even selling in a down market.  Such a mistake (selling in a down market) is a financial catastrophe!  Whether we like to admit it or not, people influence our decisions.  This is why it’s important to stay on track.

You don’t need a lot of knowledge to make a sound investing plan, but you do need some!  Read one to two books for a foundation. One book a year thereafter. And read a personal finance website post or two each week for five minutes.  That’s all it takes to stay “up to snuff” on your own personal finances!

What’s your routine for staying up on your personal finance education?  Any tips or tricks of the trade you’d recommend to others?  Leave a comment!

TPP

 

7 thoughts on “The Ninth Philosophy: DIY Personal Finance

  1. WCI sells his philosophy, not necessarily reality. I think his approach is sound and wholly adequate but not necessarily optimum. Jim is a smart businessman for sure.

    I have a paid adviser. My cost has averaged about $10K per year. It is nothing like 1% or even 0.5%. Over 20 years the cost compounded @6% is about $300K, and I get to write 100% of the cost off my taxes which further reduces the cost so my real 20 year cost is closer to $240K, nothing even remotely like that $10 million argument. I get very pissed off when I see people pedaling this $10mil argument as reality. It rips people off of the real data needed to make important financial decisions for their families. Last year through prudent tax maneuvering and retirement pre-planning I saved $121K in taxes in a single year. The improved efficiency of my portfolio on a risk adjusted basis is about 1% better than something like a bogelhead 3.

    My calculation of the cost of an adviser over 60 years is something under $2 million but the increased rate of return makes the deal cash flow positive by $1.5 Million. This doesn’t take into account tax planning. This is my real life experience, not just back of the napkin bla bla bla. I’m a financial geek, my wife is not. I spend my time worrying about and optimizing all the moving parts to make our family wealthy, she takes care of me and my children. I’m older than she is, she runs a 7.5 minute mile, and her people live to be very old. I don’t want to see the government become a unidentified SORR. If I box it, my adviser has her back and I’m pre-planning the tax consequence of my eventual demise which it turns out is not trivial from a tax, cost of medicare and SS perspective. A little hint: it’s all about controlling the AGI. Having an adviser who has fiduciary responsibility to me (and her) is well worth the cost compared to taking the advice of some weenie on the DIY bogelheads R Us list.

    To get started something simple is adequate. From that point of view DIY is excellent. It’s time in the market that counts and anything rational that buys you market return with market volatility like low cost indexing is a good vehicle TO START. It does not mean it is the most rational vehicle 5 years in once you have a couple million under your belt and things like taxes and estate planning starts to creep in. The government has rigged the system. It is their intention to pick your pocket in retirement. As a wealthy person you can make choices 10-20 years out that will make a difference but if you don’t know that: lamb to slaughter.

    • I hear ya. I certainly don’t agree with everything you are saying, but I do think that there are some situations where an advisor is worth while. Maybe I’ll write a post on that at some point.

      It sounds like you have a really good handle on finances based on this (and many of your other) comments. It does surprise me a bit that a financial advisor is doing anything for you that you couldn’t do for yourself given your knowledge base.

      I think where the 10 million dollar argument comes in is really in retirement. Your AUM is apparently very low or you are paying a fee only advisor. I am an advocate for fee-only advising and think that is a really good deal for many people. Unfortunately, most people are paying a fee-based advisor (often at 1%) without them ever really even knowing or doing the math because it comes out of their portfolio and not directly from their pocket. At that high of an AUM, it really will cost you North of 5 million dollars over a standard 30 year career and 30 year retirement.

      It sounds like your advising situation doesn’t quite fit that scheme, though, and that you have gained some benefit from yours that you wouldn’t have otherwise received. Could you not have received the same tax maneuvering using a solid fee-only accountant?

      I will be interested to see how creative your advsior gets now with the new tax plan given that the deduction for investment advisory fees is now no longer available in 2018. Also, how can you know what your future rate of return is with and without an advisor?

      P.s. that’s an impressive mile time! Pretty sure I couldn’t walk outside and run that right now and I played college soccer!

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