The Broke Professional - Grow your money and yourself

Death by a Thousand Swipes

razor

Surprised it’s not made in China.

Humans are incredibly adaptable creatures, especially when it comes to money.  If we only have a little bit, we can make do and find ways to survive.  The median household income in the United States is about $51,000.  For those in the upper class, it is almost unimaginable to be able to live on that type of income.  But it is being done by thousands of families all over the country, even if they may be living on the edge financially (paycheck to paycheck).

On the other end of the spectrum, you have athletes and celebrities who make millions upon millions of dollars and still manage to lose it all when the money stops rolling in.  While most people won’t weep at someone who blew millions of dollars, they can have the same condition as a family living on median household income: putting themselves on the financial edge by living a paycheck to paycheck lifestyle.

 Self Inflicted Wounds

So what does death by a thousand swipes have to do with anything?  Death by a thousand cuts refers to a particularly gruesome form of capital punishment practiced in ancient China.  The convicted criminal would be tied to a wooden stake and would have numerous small cuts inflicted upon them until they died.  It was a form of torture/execution that was eventually banned.

Death by a thousand swipes then is when someone slowly and methodically destroys their finances by making many little purchases that add up to their financial demise.  Making one or two purchases doesn’t result in anything serious, but they build up and can eventually kill your financial life.

(Tangent:  With all this new financial technology coming out, what if there was an app that would shock a person every time they swiped their credit card?  I think a cut for each swipe may be a little too much.  But that would definitely keep people from overspending!)

While not as sadistic as the literal from of torture, death by a thousand swipes is equally deadly on your finances.  And it can afflict everybody from the average family of four to the million dollar athlete (Vin Baker for instance).  It can be something as simple as eating out way too much or having one too many Ferraris in the driveway.

The Cure

Financial death by a thousand swipes has a pretty easy fix.  It’s a 2 step process that sounds easy but takes discipline and some life hacking to pull off.

First step is to let the cuts you already have heal up.  This means that you acknowledge that you made some possibly dumb purchases, but you’re not going to make them anymore.  And you might have to trick yourself into doing this.  If your major vice is grabbing coffee twice a day from the local coffee shop on your way to work, take a different route to work.  Overspending is literally an addiction, and after a few days of withdrawal, you should be able to control it.  Whatever it takes to keep you from making those unnecessary purchases and dying a slow and painful financial death.

After you wean yourself off of the mindless spending, the second step is easy.  And that is to pay yourself first and always.  Notice I didn’t say start a budget.  I have nothing against starting a budget, but if you automatically skim 10% of your take home pay off the top and put it in a savings or money market account, budgeting doesn’t become a big deal.  And since you hopefully ended your spending addiction in step 1, there is little chance you will spend more than you need to.

With these two steps, conquering the sources of your unnecessary spending and paying yourself off the top, you can dig yourself out of the paycheck to paycheck lifestyle in no time.  This will open up opportunities to do things that can super charge your journey to financial independence such as paying off debt quickly or increasing your investment contributions.

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Are Physician Loans a Good Idea?

Recent graduates of professional school (medical, optometry, dental or law school etc.) are in a unique position.  They usually have high amounts of debt and low savings. Not a good recipe to buy a home.  Almost everybody with high debt and low savings will get denied for a traditional mortgage.

But one thing almost all professional school grads have is high potential income, and this is why a number of banks offer Physician Loans (also called Doctor Loans) geared towards new professionals.  While most of these loans are geared toward those with an MD degree, professionals with other degrees, including myself, are able to take advantage as well.

Nuts and Bolts

I wrote about Doctor Loans in a previous post, but since I’m now a few years into having one, I wanted to revisit the subject.  Here are the key aspects of a Doctor Loan:

Pros

  • Requires little to no down payment
  • Doesn’t require Private Mortgage Insurance (PMI)
  • Doesn’t factor in student loan debt, which is usually high for professionals
  • Will accept a job offer or contract as proof of earnings

Cons

  • Available only to new grads, usually a maximum of 5-10 years out of residency or school
  • Can have higher fees and interest rates than conventional loans
  • Certain types of homes may be restricted
  • Some banks might require the customer open a checking or savings account with the bank

It’s also important to know why banks would offer a Doctor Loan.  Lenders are looking for customers who will make their payments on time and have a good relationship with the bank for years to come.  Professionals usually have high income potential, so they are looking to swoop in and offer mortgages to new grads since they will have a low default rate and more than likely stay loyal to the bank.

My Take on Physician Loans

Now that we have the pros and cons out of the way, let me give you my opinion of the Doctor Loan.  I decided to use the Doctor Loan because we wanted a house after renting for a couple of years but didn’t have the 20% down payment needed for a conventional loan.  By not having at least 20% for a down payment I would have to pay PMI, which would not be tax deductible in our case so it would just be wasted money.

After finally finding a bank that offered Doctor Loans for optometrists, I went thorough the usual ton of paperwork required for a mortgage.  I’ve heard some horror stories from others who went through the mortgage application process, but luckily it went pretty smoothly for us

I think this was because Doctor loans don’t take into account student loan debt and don’t require a super detailed employment history.  Whatever the case I’m happy the process went pretty smoothly.

I ended up selecting a no down payment Adjustable Rate Mortgage (ARM).  While this sounds scary on paper, I believe it was the best decision for us.  Doctor Loan interest rates are usually a little higher than conventional loans, but going with an ARM allowed me to get a rate in line with the average 30-year fixed at that time.

The interest rate on my ARM doesn’t increase until after 10 years, which is a few years longer than we plan to live in the house before selling.  Even if we end up living there a little longer than 10 years, we can still handle the maximum possible payments so it shouldn’t be an issue.

Our plan is to build up enough equity in the house to eventually get a conventional loan on our next home.  The Doctor Loan allowed us to take advantage of low current rates and have an affordable payment.  I don’t regret going with the Doctor Loan, but if we had waited a few more years to build up enough of a down payment for a conventional loan, we might have saved some money on the interest rate.

No Free Lunch

Not paying PMI and not having to fork over a large down payment sounds like a good deal, but the advantages of that can be erased if you decide to sell too early or you have to settle for a high interest rate.

So are Physician Loans for everyone?  Absolutely not.  Homes are expensive (taxes, maintenance, homeowners association fees etc).  If you rush into a purchase too fast and aren’t ready for the upfront costs, then a Doctor Loan is probably not a good option.  You would be better off learning the basics of home ownership while building up enough of a down payment for a conventional loan.

Mortgage lenders essentially work like see saws.  They can offer low down payment and no PMI, but will have to increase the interest rate.  If you want a lower interest rate, you should be able to offer a good down payment and maybe even pre-pay some of the interest.

There really is no one right answer.  Deciding if a Doctor Loan is right for you depends on your income potential and how long you decide to live in the house, among other things.  Run the numbers and ask those who have been through the mortgage process to see if it would be a good option for you.

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