XRAYVSN

Johanna’s Take:

In the last couple of years, the Tesla brand seems to have muscled its way to the head of the line for “Doctor Cars”.

Or maybe it’s just that it seems to be the fav on the WCI forum.

So it was exciting to get a request to analyze a good old classy Porsche. (Or maybe excitement was simply in short supply during tax season.)

But, honestly, when you see a Porsche, especially with vanity plates, don’t you immediately think DCTR-CR?

This week’s physician, Dr. Carr, a car enthusiast living in Boringville, rates having a 6-figure Porsche in his garage at an 8.

Is this dream going to be PAID4 or YSOBLU?

The positives:

· High income

· Long career planned

· No student loans – has paid off $317k.

The negatives:

· Low savings rate

· Lot of debt

· Taste for expensive cars

Assumptions (I will use conservative estimates wherever there is an uncertainty.)

· 6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)

o By my calculations, you will have between $9M and $9.5M at retirement

· Average inflation

· No more children

· You have plenty of appropriate life and LTDI in place.

· No divorce

· Savings of $108,750/yr for 28 years

· No private school tuition

· No significant financial assistance for other family members

· Reasonably good health

This one should be easy: if all of the above works as planned under current assumptions, Dr. Carr can afford his Doctor Car.

But is that a thumbs up?

I’ve chosen this week’s candidate to focus on an issue that nags at me:

Is it okay to borrow for consumption?

This issue is a common theme with doctors who are a few years into their careers.

I’ll review the net worth of a doctor who has been in practice for 5 – 10 years, take the history, and wonder where all the money went.

Why is the consumption of some doctors so high?

I believe it’s because it takes a long time before it hurts.

While spending can be a giddy feeling, knowing that you have set yourself back 5 years from FI can be very painful.

Some doctors don’t calculate the collateral damage because they’re just too busy and it’s easier not to do so when the money is rolling in.

Could this be Dr. Carr?

Dr. Carr stated he is earning $750k/yr, spending $150k, and saving ~$110,000 (15% rounded up).

I estimate taxes are ~$270,000.

$750,000-$150,000 (spending)-$110,000 (saving)-$270,000 (taxes)= $220,000 balance.

A balance $50k or so wouldn’t bother me, as I’m just estimating, but $220k is a big gap.

I’m going to go out on a limb and guess that $220k is going to debt.

If so, 30% toward borrowing with no school loans is a pretty hefty debt burden.

I recommend:

· They reverse the percentages: 30% to saving and 15% to debt

Dr. Carr is saving $500/mo per child for school.

A degree costing $50k/yr (today’s dollars) for the children leaves the 4-y.o. at 46% underfunded ($169k saved) and the 6-y.o. 54% underfunded ($138k saved).

In addition to the $500/mo, I recommend:

· Contributing a lump sum of $50k into the 6-y.o.’s 529 in 2020 (83% funded) and

· Contributing a lump sum of $50k into the 4-y.o.’s 529 in 2021 (88% funded).

The Carr’s have 2 other vehicles costing $75k each.

Not a big deal for a high-income doctor except they owe $80k (over 50% of the original purchase) price.

I recommend they either:

· Pay off their vehicle debt before buying another car or

· Trade one car in for the Porsche and pay cash for the balance of the Porsche or

· Buy the Porsche with cash.

Dr. Carr plans to work another 28 years before retiring at 67.

I’m concerned he will not be able to sustain this pace for ~ 3 decades, that reimbursements will drop, or a combination.

I also am concerned that boredom + high income has given Dr. Carr “permission” for a high-cost hobby.

I recommend:

· Setting a goal to get to FI in 10 or 15 years (definitely possible at $750k/yr, especially since you’ve demonstrated you can pay off debt) and take the pressure to work down to 0 and

· Memorialize a solid financial plan before any large purchases.

The above recommendations address early symptoms of future problems I believe are on the horizon along with recommendations to treat them.

This situation is representative of physicians who earn enough to make some big mistakes and look back 10 years later to wonder why they can’t cut back.

On one hand, we have a physician who plans to earn $750k/yr for decades and has paid off hundreds of thousands of dollars in debt in only a few years.

That physician should be able to afford and enjoy a Porsche without guilt.

On the other hand, we see the same physician leveraging depreciating assets and not investing enough in appreciating assets.

This physician earns $750k/yr but is still working on his emergency fund.

While Dr. Carr can afford a Porsche without worrying about a payday loan next week, he would have to finance it heavily.

That, to me, makes it unaffordable.

Xrayvsn’s Take:

Growing up, one of the first cars that I saw in person and wanted to have was the Porsche 928.

Porsches have an iconic look that you can spot a mile away and they are renown for their handling capabilities.

It is easy to see why this young surgeon is enamored with adding this luxury vehicle to his stable of cars.

This physician has paid off a substantial amount of student loans ($317k) in a relatively short time which is quite remarkable.

However, unlike me where paying off student loans flipped a switch and I became debt averse, this physician has no qualms about financing his way through life.

Therefore there are quite a few red flags that were previously touched upon in Johanna’s discussion:

• Already sizeable balance with the financing of the current two cars as well as a HELOC for a pool installation.
• A low overall savings rate of 15% despite a very high income.
• Banking on the fact that he will enjoy/last another 28 years of being a surgeon.
• Banking on the fact that he can maintain current income levels despite history showing continuing reimbursement cuts across all specialties.

Another inference from the information provided is that this doctor likes to cycle through vehicles fairly quickly (otherwise there would not be a large balance remaining on the current vehicles).

There are those individuals that have the new car novelty quickly fade away and they are then compelled to get into the latest model.

As most of the car’s depreciation happens early on, this is an overall poor financial strategy.

If you can hold onto a car for 7 years or longer, the financial pendulum swings in your favor as that large initial depreciation hit gets a chance to spread out over many more years.

The biggest red flag is the need to finance an automobile to make this work.

Financing a $100k automobile for 60 months at 5% interest rate will end up adding over $13k to the sticker price.

Johanna makes the wonderful distinction on when it is proper to use financial leverage and that is for appreciating assets.

Consumption/depreciating items, which include non-collectible automobiles, falls into the wrong category to be leveraging oneself.

Sam from Financial Samurai makes a compelling case that you should not buy a car that is more than 10% of your gross income.

This proposed purchase, and the method provided for this purchase, places this doctor at risk for stepping onto the hedonic treadmill.

There are already countless stories of physicians, and other high income individuals, that found themselves on the highest treadmill setting.

I do not want to add another one to that number.

The Decision:

Johanna:

Thumbs Down

Xrayvsn:

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