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Episode 2928:
Dr. Jim Dahle offers practical advice on financial decisions that can lead to wealth-building instead of debt accumulation. By choosing used cars, index funds, and experiences over flashy purchases like new cars, actively managed funds, and expensive homes, Dahle highlights the importance of strategic spending for long-term financial success.
Read along with the original article(s) here: https://www.whitecoatinvestor.com/buy-this-not-that/
Quotes to ponder:
"Building wealth is about buying assets, not stuff."
"The purchases that bring the most happiness are shared experiences with people we care about, not the stuff that fills our houses and garages."
"You shouldn't buy a brand-new car until you're a millionaire."
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[00:00:00] Have you ever noticed how a calm mind can really set the stage for a good night's sleep? That's the idea behind our new podcast, Good Sleep. Greg, our host from Optimal Relationships Daily, is here to help ease you into a peaceful night's rest with some positive affirmations. And these affirmations aren't just comforting. They can help ease anxiety and nurture positive thoughts, setting you up for true good sleep.
[00:00:25] So press play on Good Sleep Tonight, because a good tomorrow starts with a good night's sleep. Just search for Good Sleep in your podcast app, and be sure to pick the one from Optimal Living Daily.
[00:00:39] This is Optimal Finance Daily. Buy This, Not That by Dr. Jim Dahle of WhiteCoatInvestor.com. And I'm your host and personal finance enthusiast, Diana Merriam.
[00:00:52] Now let's get to today's post as we optimize your life.
[00:01:00] Buy This, Not That by Dr. Jim Dahle of WhiteCoatInvestor.com.
[00:01:07] Number one, buy a used car with cash, not a new one on credit.
[00:01:12] The amount of money that Americans throw away on transportation is unbelievable.
[00:01:18] I'm a firm believer that the reason most middle-class folks are not wealthy is sitting in their driveway.
[00:01:25] Cars depreciate rapidly, and more expensive ones cost more to finance, insure, maintain, and repair.
[00:01:32] When I see someone with a five-figure car loan, I just shake my head, and honestly feel sorry for them for not understanding this principle.
[00:01:41] Few of us agree with everything Dave Ramsey says, but he's got two auto rules of thumb that I think are pretty darn good.
[00:01:48] The first one is that you shouldn't have cars and other things with motors, like boats, planes, motorcycles, snowmobiles, RVs, etc.
[00:01:58] that are worth more than half of your annual income.
[00:02:02] If you make $200,000 a year, you should have no more than $100,000 in cars.
[00:02:07] If you're a resident married to a stay-at-home spouse, that limit is going to be $30,000.
[00:02:14] Maybe a $10,000 car and a $5,000 car would be even better.
[00:02:19] The second rule of thumb is that you shouldn't buy a brand new car until you're a millionaire.
[00:02:24] At that point, it becomes a relatively trivial part of your financial world,
[00:02:29] rather than something that's preventing you from building wealth.
[00:02:32] Both of Ramsey's rules of thumb are worth following.
[00:02:36] I would also add my own rule to the collection.
[00:02:39] Never have a car loan of more than $10,000, even if you're a doctor or expect a high income later.
[00:02:47] Get used to paying for your stuff with cash, using saved money.
[00:02:51] Number two, buy index funds, not actively managed funds.
[00:02:57] The data showing that you should invest in low-cost, broadly diversified index funds
[00:03:02] instead of actively managed mutual or exchange-traded funds is overwhelming.
[00:03:07] Yet only half of the money in mutual funds is in index funds,
[00:03:12] and plenty of those are not low-cost or broadly diversified.
[00:03:18] Why buy something that's almost guaranteed to underperform?
[00:03:22] The benefits of index funds are even more pronounced in a taxable account.
[00:03:27] And actively managed funds will have higher management fees,
[00:03:31] more bid-ask spreads,
[00:03:33] higher commissions,
[00:03:35] more short-term capital gains,
[00:03:37] more non-qualified dividends,
[00:03:40] and more manager failure.
[00:03:42] Who needs it?
[00:03:44] Number three,
[00:03:45] buy term life insurance,
[00:03:47] not whole life insurance.
[00:03:49] Life insurance is designed to treat the financial catastrophe
[00:03:52] of having a breadwinner die young.
[00:03:55] Term life insurance is pure insurance.
[00:03:58] You're paying for only what you need.
[00:04:01] Young,
[00:04:02] healthy people can buy millions in term life for a two-figure amount per month.
[00:04:07] Whole life insurance,
[00:04:09] on the other hand,
[00:04:09] is a combination of unnecessary insurance and a poorly performing investment.
[00:04:15] No wonder such high commissions have to be paid to get it sold.
[00:04:20] Number four,
[00:04:21] buy a house in a good school district,
[00:04:24] not private school tuition.
[00:04:26] If you live in a good school district,
[00:04:28] you can send your kids to the local public schools for free.
[00:04:33] Well,
[00:04:33] not for free,
[00:04:34] but it might as well be,
[00:04:36] since you're going to pay the property taxes supporting those schools either way.
[00:04:41] Private school tuition can be as much as $40,000 per year.
[00:04:44] From kindergarten,
[00:04:46] $40,000 times 13 years is $520,000.
[00:04:51] If you have four kids,
[00:04:53] that's over $2 million in private school tuition.
[00:04:56] You're telling me you couldn't find a decent house
[00:04:59] in a decent school district for $2 million?
[00:05:02] I'm skeptical.
[00:05:03] A house might be a consumption item,
[00:05:05] but it's the least bad one to buy.
[00:05:08] Not only does it shelter your family,
[00:05:10] but it generally appreciates over time.
[00:05:13] If you have school-age kids,
[00:05:16] owning a house in a good school district
[00:05:17] pays two kinds of dividends.
[00:05:20] It pays you saved rent dividends,
[00:05:22] and it pays you saved tuition dividends.
[00:05:26] Number five,
[00:05:27] buy individual disability insurance,
[00:05:30] not group disability insurance.
[00:05:33] Well,
[00:05:34] the most important thing about disability insurance
[00:05:36] is to have something in place.
[00:05:38] Some disability insurance
[00:05:40] is clearly better than other disability insurance.
[00:05:43] An individual disability policy
[00:05:46] generally has premiums
[00:05:48] that do not go up over time.
[00:05:50] It can go with you
[00:05:51] when you leave your current employer,
[00:05:52] and it's more likely to pay out
[00:05:54] and for longer
[00:05:55] in the event of a disability.
[00:05:57] Group life insurance policies
[00:05:59] have escalating premiums.
[00:06:01] They're not portable,
[00:06:02] and they can be filled
[00:06:04] with so many holes in coverage
[00:06:05] that they resemble Swiss cheese.
[00:06:08] Number six,
[00:06:09] buy retirement accounts,
[00:06:11] not annuities.
[00:06:13] Retirement accounts
[00:06:14] are products made to be bought.
[00:06:16] Annuities are products made to be sold.
[00:06:19] The tax breaks available
[00:06:21] in a 401k or a Roth IRA
[00:06:23] are dramatically better
[00:06:25] than those available in an annuity.
[00:06:27] Both retirement account money
[00:06:29] and annuity money
[00:06:30] grow in a tax-protected way,
[00:06:32] but that's where the similarities end.
[00:06:35] Both annuities and Roth IRAs
[00:06:37] are funded with after-tax money,
[00:06:39] but the earnings coming out
[00:06:41] of a Roth IRA are tax-free.
[00:06:43] Those coming out of an annuity
[00:06:45] are taxable
[00:06:46] at ordinary income tax rates,
[00:06:49] and the earnings come out first,
[00:06:51] and the fees are significantly higher.
[00:06:54] Retirement accounts
[00:06:56] often provide better asset protection,
[00:06:58] better estate planning benefits,
[00:07:00] and better investments.
[00:07:02] While annuities have their uses
[00:07:04] for some people late in life,
[00:07:07] funding one before maxing out
[00:07:08] your retirement accounts
[00:07:09] is almost surely a mistake.
[00:07:12] Number seven,
[00:07:14] buy experiences,
[00:07:15] not stuff.
[00:07:16] The data in the happiness literature
[00:07:19] is very clear.
[00:07:20] In general,
[00:07:21] the purchases that bring
[00:07:22] the most happiness
[00:07:23] are shared experiences
[00:07:25] with people we care about,
[00:07:26] not the stuff that fills
[00:07:28] our houses and garages.
[00:07:29] Not convinced?
[00:07:30] Go to an estate sale sometime.
[00:07:33] Nobody wants
[00:07:34] the deceased's old stuff.
[00:07:36] What isn't being thrown away
[00:07:38] is sold for pennies
[00:07:39] on the dollar.
[00:07:40] The average estate sale
[00:07:42] brings in $18,000,
[00:07:43] and the estate sale company
[00:07:45] takes 30 to 40%.
[00:07:47] How many years of your life
[00:07:49] did you work
[00:07:50] so you could get
[00:07:51] $12,000 worth of stuff?
[00:07:53] And number eight,
[00:07:55] buy a practice,
[00:07:57] not a doctor house.
[00:07:58] Young dentists
[00:08:00] are often faced
[00:08:01] with the choice
[00:08:01] to buy into a practice
[00:08:03] or get a big mortgage
[00:08:04] on a fancy house.
[00:08:05] Buy the practice first.
[00:08:08] The practice is an asset
[00:08:09] which may double
[00:08:10] or triple your income.
[00:08:12] The house
[00:08:13] is a consumption item.
[00:08:14] The same principle
[00:08:15] applies to many physicians
[00:08:17] buying into a partnership
[00:08:18] or purchasing shares
[00:08:20] of a surgical center,
[00:08:21] dialysis center,
[00:08:23] endocospe center,
[00:08:24] lab,
[00:08:25] radiology center,
[00:08:26] or practice real estate.
[00:08:28] The doctor house
[00:08:29] will be just as enjoyable
[00:08:30] at 40
[00:08:31] when you can afford it
[00:08:32] as it would be
[00:08:33] at 35
[00:08:34] when you can't.
[00:08:39] You just listened
[00:08:40] to the post titled
[00:08:41] Buy This,
[00:08:43] Not That
[00:08:43] by Dr. Jim Dolly
[00:08:45] of whitecodeinvestor.com
[00:08:47] and I'll be right back
[00:08:48] with my commentary.
[00:08:50] I think this article
[00:08:51] makes a great point
[00:08:52] that not all consumption
[00:08:54] is created equal.
[00:08:56] The typical way
[00:08:57] we've been conditioned
[00:08:58] to spend
[00:08:58] is to accumulate
[00:09:00] material possessions
[00:09:01] like homes and cars
[00:09:02] using debt.
[00:09:04] This makes us look like
[00:09:05] we have more money
[00:09:06] than we actually do.
[00:09:08] The reality is
[00:09:09] we've simply convinced
[00:09:11] a financial institution
[00:09:12] to loan us money.
[00:09:14] There isn't anything
[00:09:15] particularly impressive
[00:09:16] about this.
[00:09:18] Building wealth
[00:09:19] is about buying assets,
[00:09:21] not stuff.
[00:09:21] We still need cars
[00:09:24] and homes,
[00:09:24] but we can be strategic
[00:09:26] about how we deploy
[00:09:27] our resources
[00:09:28] to get those things.
[00:09:30] And if we care more
[00:09:31] about actually being wealthy
[00:09:33] versus looking rich,
[00:09:34] we will have a much
[00:09:36] easier time of it.
[00:09:37] Also,
[00:09:38] the more we invest
[00:09:39] in our financial literacy,
[00:09:41] the more likely
[00:09:42] we won't make the mistakes
[00:09:43] described in this article.
[00:09:45] We won't buy annuities
[00:09:47] and whole life insurance
[00:09:48] because we won't allow
[00:09:49] a salesperson
[00:09:50] to convince us
[00:09:52] that these insurance products
[00:09:53] are investments.
[00:09:55] And we won't overcomplicate
[00:09:57] our actual investments.
[00:09:59] We'll just buy index funds
[00:10:00] and pay as little
[00:10:01] in fees as possible
[00:10:03] by self-managing
[00:10:04] our portfolios.
[00:10:06] And that'll do it for today.
[00:10:08] Have a great day
[00:10:09] and start to your weekend.
[00:10:10] Thank you for listening.
[00:10:11] And I'll be back here
[00:10:13] reading for you tomorrow
[00:10:14] where your optimal life awaits.