By Lauren Law, Financial Advisor at Larson Financial Group
What do you think the biggest mistake is that I see physicians make just coming out of training? I’ve met with many physicians who have navigated this transition from training to practice on their own, and the biggest mistake I see from physicians early on in their careers is that they purchased too big of a house. Because there is only so much money to go around, often this one decision affects the entire rest of your financial life – one being how much money you have to spend on your lifestyle, and the more important one in my eyes being how much you have to save for retirement and college funding. I haven’t gone into this in past posts, but the amount of time you guys spend in training equates to quite a bit of lost time in the realm of your long term investments. You have to save more than the average Joes out there to reach the same goals, simply because you’re not beginning to save until your 30s, whereas most begin with a 401k in their early 20s. Every dollar bill that goes into your pocket is going to be spent on savings, debt repayment, or your lifestyle. In my opinion, YOUR HOUSE IS NOT AN ASSET if you are carrying a mortgage balance or if you never actually intend to sell it. The more you spend on a house, the more you have locked in to making your mortgage payments monthly, therefore the less you have to save to grow the asset column of your balance sheet.
So – how much should you spend on a house, and when should you be looking to purchase it? To answer the first question, I would not spend more than 2-2.5 times your gross income on a house. So, if you’re the urologist starting in the 50th percentile of the MGMA at $295k (if that’s new to you, check out my last post on contract negotiation), then you should be looking to spend no more than $737,500 on a house. This is the sweet spot that allows you to put a nice chunk toward housing, but for most physicians isn’t breaking the bank as far as saving for the long term. There are exceptions to every rule, but I would be sure to know EXACTLY what you need to save for retirement and college and then be sure that you can make the bottom line mortgage payment work without sacrificing any of that savings. One of my favorite stories actually is a physician couple that I work with who a couple years ago decided they wanted their dream home – price tag $1.4 Million. Knowing this couple and the money they needed to have for leasing nice cars, paying for kids’ private schools, and generally supporting an expensive lifestyle, I urged them not to spend this much – they were pushing close to 3 times their gross. They did not take my advice, and purchased the house anyway. I actually went to visit them to see the new place, and it was the total package – wine room, game room, custom stone patio, movie theater – very impressive. Want to know what was missing from that house? FURNITURE! They broke the bank on the house to the point that they couldn’t afford to furnish the place and continue their long term savings. Just some food for thought.
Continuing here, I would not purchase a house upon first moving to your new city. Rent for a year. That will give you time to scope out the area and decide where you want to be. You most likely won’t know much about the different areas of town, the schools you want your kids to attend, etc when you first set foot in the city. It will also give you some time to save up money and have some down payment funds. Most importantly, you won’t be stuck with a house if the job doesn’t work out. Close to 50% of physicians don’t make it past 2 years in their first practice. If that’s you, do you really want to be stuck with a house to unload or be forced to become a landlord? Probably not. I have another physician I work with who took what he knew would be a temporary job (3 year contract) so that his daughter could finish high school in the area that they had lived for his training. After her graduation, they planned to move to the other side of the country back to where they had more family. He came to me wanting my blessing to purchase a home simply because the mortgage payment on the size house they wanted would be less than what they could find to rent. I actually hear this reasoning a lot. The truth is, when you take out a mortgage and begin making payments, very little of what you pay each month is going toward principal. Most is being applied toward interest. As the principal balance decreases, more of your monthly payment is going to be credited to principal, but it takes around 5 years to really start to see any significant money applied to principal. Moral of the story? If you are going to live in a house for less than 5 years, you don’t have enough time to make enough dent in the principal for it to be worth it – meaning you would have to come to closing with cash in order to sell the house. If you have specific questions, get in touch and I can help you run real numbers. These are all valid considerations that I want you to be thinking about.
Final thoughts – many banks have loan options for you to obtain financing with less than the traditional 20% down. Look for a loan that does not require you pay Private Mortgage Insurance (PMI) premiums. Many physician-specific loan programs available through the bigger national banks will give you this option. The closer you can get to 20% down, the lower your rate is going to be. Obviously there are more details involved, but my goal was to give you an overview of items to consider. I am happy to talk with you more if you have specific questions about your situation – I can be reached via email at [email protected].
Stay tuned – next month I’ll be covering physician disability insurance, and that’s an important one you won’t want to miss!
Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.