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The past few months have had me witness financial hits to my wallet the likes of which harken back to the days when I was going through my brutal divorce and subsequent $4M civil lawsuit.
The only difference was back then I was hemorrhaging money out due to my exorbitant legal fees (over $425k) while maintaining a high income.
The current situation was more akin to having not enough blood through the financial circulatory system in the first place as my primary source of income was placed in jeopardy.
As mentioned previously with the precipitous drop of patient volume due to the COVID-19 pandemic, I was facing a 60% reduction in my income draw based on my 2019 W2.
There are several factors that have helped me maintain my financial sanity during this current pandemic.
Factor 1: Being Debt Free.
Out of all the factors, this truly deserves the top spot.
Not having a student loan or mortgage payment weighing over my head provided a lot of financial peace of mind.
Granted some lenders were generous enough to waive late fees or gave extended grace periods during this pandemic.
But bypassing this step altogether was by far the least mentally taxing scenario.
Factor 2: Very Low Burn Rate.
Again Factor 1 is a major role player here.
Prior to becoming debt free, my monthly mortgage was around $4300 (30 year fixed mortgage at 5.625% and 10 year 2nd mortgage at around 7.5%).
I made the horrible mistake of continuing to postpone paying off my student loans via deferment and forbearance for as long as I could.
Prior to me paying off my student loans, approximately 22 years after I first signed on the dotted line, my monthly payment was around $900.
Knocking these debt repayments essentially saved $5200/mo alone, which was vital in allowing me to tolerate the 60% decrease in my income during the pandemic.
I use an app on my phone, Spending Tracker, that allows me to estimate “bare bones” expenses.
Even though several of these expenses are only annual or semi-annual, I chose to have them spread out over the year in the app to give me an idea of my current monthly burn rate if I cut out luxury line items such as vacations, etc.
So without going totally Mr. Money Mustachian, and still actually living quite comfortably, I estimate an approximately $6k monthly burn rate.
Expense items I have not included in this total:
- Federal Income Tax.
- This is by far the largest expense I incur each year, dwarfing all the other expenses combined.
- However the majority of this money typically does not pass through my hands as it is withheld from my wages.
- College 529 funding.
- Ever since I regained custody of my daughter I have been funding the maximum I can each year ($15k).
- I do not include this expense as there are only a finite amount of years remaining and it is discretionary and can be cut if I ever found myself in true financial dire straits.
As you can see, the largest expense is private school tuition (my daughter just completed 9th grade) which is paid semi-annually but works out to around $1775/mo.
Although it seems outrageous to have 30% of a monthly budget go towards high school tuition, I have previously justified/rationalized why I have decided to send my daughter to private school.
Because of this very low burn rate, even with a 60% decrease in my physician draw, I am still able to put a mid 4 figure amount into savings with each paycheck.
Factor 3: My Emergency Fund.
I am going to confess about my emergency fund.
Yeah, I would love to say I was smart and had built an Emergency Fund for situations just like the one I am currently experiencing courtesy of COVID-19.
But that would be an untruth.
You see, up until this point, I thought that the reasons for having an Emergency Fund did not apply to me.
I, after all, was a physician, practicing in a specialty with high demand, and with an incredibly reliable income that would deposit sizeable paychecks into my bank account like clockwork.
The delta between my monthly income and expenditures was so large, courtesy of factor number one, that it was almost unfeasible to think of an emergency that I could not just cashflow it.
Up until this point, I hated having cash just sitting in a savings account/emergency fund, creating a substantial cash drag given the low interest environment.
So instead I created a “Pseudo Emergency Fund” which really was a temporary holding spot to accumulate cash to a level where I could then deploy it when investment criteria were met (such as the minimum funding required for real estate syndication deals).
For over 2 years this setup worked out perfectly, like a well-oiled machine.
By the time I had built up a sizeable cash holding, a real estate opportunity would invariably present itself and I would then deploy the majority of my free cash to take advantage of it and then start the cycle all over again.
One thing that worked out well in my favor was the timing of the pandemic.
It just so happened that I was rapidly approaching an amount in my savings account that would have traditionally caused me to look for deployment opportunities.
Had such an opportunity presented itself, I could have headed into the pandemic with near-zero cash reserves, which no doubt would have increased my financial angst.
I was also fortunate that there was another factor that had my cash reserves quite high during this timeframe.
I had previously set aside $250k from the proceeds of my medical office building sale, where I had been a ground floor investor, to account for a worst case scenario capital gains tax hit.
[I knew the worst case scenario would not come to fruition as I knew I would offset this amount courtesy of depreciation from other real estate holdings.]
Although it may have been a bit tempting to try and arbitrage this money to gain even more, especially since I had at the time about 10 months before the tax bill came due, I did not want to risk it and put it in my online savings account earning just minimal interest.
The depreciation credits, coupled with extra federal tax withholdings I had indicated to do in a W-4 form last year, will “only” have me owing around $145k extra in taxes.
Where I stand today and what my plans are for the future.
At the time of writing this post, I a have about 20 months of living expenses in savings, earning a paltry 1.14% APR.
I feel like I will no longer be cavalier about an emergency fund and would like to keep it between 8-12 months worth of “Level 2” living expenses at all times, which I define as basic necessities plus an additional 5% for the occasional discretionary items.
I feel like I have either won or about to win the game and it does not make sense to jeopardize it by feeling obligated to capitalize on every investing opportunity I will be presented with in the future.
They say “Cash is King” and it really is.
You can have an incredibly high net worth but if it is tied up in illiquid assets you may not have funds immediately in case a true emergency pops up.
If you are indeed forced to liquidate these assets in order to generate the necessary cash, you may be locking in marked losses if whatever market that asset happens to be in is depressed during your time of crisis.
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I have to be honest that I thought similarly to you.
For my business account I kept about 9 months of cash on hand at our previous burn rate.
I never envisioned business going down 70% at its lowest and PPE costing us about 10 to 20 times what we were previously paying for it.
I think everyone got hit with a punch to the gut.
Well it makes me feel better that I was at least in the presence of some smart company doing similar things 🙂 I personally think I would have been a little more on edge and the news of mandated draw cuts would have stung much more had I not been sitting on a decent cushion of what was quickly became my de novo Emergency fund.
I luckily had funds set aside for other investments that quickly morphed into adding to my emergency fund since no one had any idea how bad things were going to get.
In the past 2 weeks we have seen business pick up again so that has been welcomed news as all our of visits are for typical primary care visits and no COVID cases in my clinic.
Glad to see things picked up. My radiology department is almost back to pre-COVID levels in terms of volume which is a good sign that this was a temporary hiccup in the finances of my workplace.
I am worried a 2nd wave might hit hard and with a vengeance with all the protests going on, etc. Don’t want to take 1 step forward and 2 steps back.
Between capitalizing on your strengths and getting lucky with your ready-to-deploy stash, I’m grateful things worked out in your favor. We are also starting to see volume increase in the ED as our hospitalized numbers of COVID patients stabilize regionally. But that second wave is in the back of my mind, too. Who knew cash drag would ever be considered less of a drag than the alternative?