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The Complete Every Mistake In The Book Series:
“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.
Mistake #5 (One House):
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 3 years or more because, “It doesn’t make sense to pay rent to someone else if you can be paying down mortgage and gaining equity for yourself.”
As I had just accepted a position in a general surgery residency in South Carolina (a 5 year program), I thought that this 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 as 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 25 min drive) so factor increased commuter costs into this mistake.
For those readers following along, because of mistake #3 my tenure at this residency was abruptly cut short at 2 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.
Having changed career paths I headed north to Ohio to join a radiology residency program (which required 4 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 7 years (4 years residency, 1 year fellowship, 2 years as an attending).
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
- Potential pitfalls:
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 5 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 3 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
Lifestyle creep part II was when I convinced myself I needed to buy a boat.
With a lake just 3 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 3 years I believe we ended up using it a grand total of 20 times. I ended up selling the boat at a loss of $7,000. That, plus 3 years of winter storage ($1,800), 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.
The series, “I Made Every Mistake In The Book,” continues with Part IV
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We all fall for the house issue. It’s like an innate need. I really like Cory’s take. I like this series of your because it is great proof of concept material.
I appreciate it greatly. I had toyed with this series in my head for a couple of years and thought it would be a great way to start a blog but I never took the initiative to start one. It was actually Passive Income MD’s post about starting a blog that made me dive in. Very happy I did, this has been a very enjoyable endeavor and love the interaction with other bloggers/commentators. Just 2 more to go in this series and then I will start documenting my financial 180 🙂
Hehe Xrayvsn, it’s nice to hear from you! Here are my thoughts while leisurely having green tea and sushi. It’s a nice blog, I can see your personality coming through and it’s written in a refreshing honesty which I like a lot. The one feeling that came up while reading was that you are probably a bit too hard on yourself in all this and the mistakes you made. I could be completely wrong, maybe it’s just a review, a sort of taking account in order to learn and make things better in the future. In fact the keyword “learning”… Read more »
I love this comment. Thank you for taking the time to put it to words 🙂 I love your take on this as viewing this as operational costs rather than true mistakes (using my retro-scope and 20/20 hindvision I can see where if “I only did this rather than that” where I could potentially be.) Well I hope that someone reads this fairly early in their medical career and have some examples of what can create obstacles in path to financial success. Definitely hope you continue to enjoy the blog and look forward to more discussions 🙂
Thanks for the honest approach to your financial blunders. The house one is very expensive. If a doctor gets too much house too early, it can ruin their finances for decades. But the right house at the right time can be a true joy.
Dr. Cory S. Fawcett
Prescription for Financial Success
Thanks Cory. I think what you do is wonderful with your book series helping young residents avoid these types of pitfalls. My next upcoming post unfortunately is the mistake that truly brought to the brink (financially and emotionally). Hope you continue to follow to see the conclusion of this saga 🙂
I don’t believe anyone comes out of the past without missteps. The best lessons can only be learned through experience. Unfortunately. If that was not the case, all our children would be perfect. I am sure we have ALL told our kids not to do things but they still do…
Absolutely true. The person I am today is completely shaped by making those mistakes and picking myself off the floor. I don’t think I would have even come across this wonderful community of financial bloggers if I wasn’t in the predicament I was in at 40. I probably would have been fine with status quo before this. Now I want so much more and it definitely is in my grasp. Thanks for the comment.
Enjoying your blog. I too have had real estate on the East Coast and in the Central/Midwest,the markets are very different. We couldn’t lose money in the 1990s East Coast, but our Midwest City near Ohio is not a real estate money maker. Live and learn. I agree with your previous poster that you are somewhat hard on yourself, we physicians need to be gentle on ourselves and obviously you have bounced back incredibly from these setbacks! Congratulations!
Thank you so much for the comment and compliments. Yes Ohio real estate was a very tough market during the time I wanted to sell and can’t imagine it has changed much. Well I hope you continue to enjoy the blog, once I get this financial mistake series out of the way (2 more posts (which are the two worst experiences I have ever had to go through) I have several in the line that I am very proud of and hope are received well. Thanks again for dropping by. I really enjoy reading all the comments
Really good series. Self-reflection is very cathartic. I could do similar posts about inappropriate cars (a porsche) and houses and a boat. We all make mistakes. The key is to pick yourself up and keep going.
Thank you for the kind words. Starting this blog and then deciding to do this series first was actually quite cathartic. It was a bit painful to relive some of the things I had pushed far behind (the next post dealing with my divorce was the one that was the biggest financial and emotional mistake I made and still carry a lot of scars from that). But in end it makes what I have accomplished now much more meaningful and really revealed my character under the tough times.
You could retitle this to “mistakes we have all made…” Boats….I only did that one once…thankfully I was still a resident, and it was a cheap boat. Still, lost money on it, but the lesson learned probably saved me from a lot worse…. You want to see money vanish quickly? Try planes…..although, now that I’ve made my mistakes with them, I’ve found a niche that my losses are small, and the rewards are great. As for a house…I’m finally mortgage/debt free….it is amazing. I wish more people would blog about paying off the mortgage. Cory and I had a brief… Read more »
True I think planes (or yachts) are reserved for ultra high net worth individuals who don’t care about losing money for either the status or time benefit gained. I will never reach that level. As for paying off mortgage and you wanting to see more blogs on that, don’t want to do a spoiler alert but I have a post on that in 2 wks (right now I have I believe posts written out till November). So hope you subscribe and continue to follow this blog and at least catch the mortgage one. Thanks again for stopping by