13 Mistakes Young Physicians Make With Student Loans

13 Mistakes Young Physicians Make With Student Loans

Student loans have quickly become the most complex financial issue facing young physicians. The average physician in training owes well over six figures. And these aren’t your normal run of the mill loans. Student loans today come with high interest rates and 100’s of options to analyze – all of which end up intertwining into personal and professional planning. The additional complexity paired with massive balances dramatically increases the potential for costly errors.

As financial planners for young physicians, student loan planning has become a big part of our business. I can tell you first hand that we see an alarming volume of errors occurring. Even those people I would consider “on the ball” are missing opportunity to the tune of tens to hundreds of thousands of dollars.

I’ll share 13 of the most costly errors we see young physicians making with student loans. My hope is that you can learn from the mistakes of others instead of making these mistakes yourself.

Forbearance

Student loan forbearance is tempting during residency and fellowship. What’s the harm in delaying payments when finances are tight? It’ll be easy to make up on the back end when the big bucks start to come in. After all, student loans are “good debts”. Many young physicians use logic like this to justify entering into forbearance during training. But they’re failing to figure up the true cost of this decision!

Forbearance sets off a number of negative triggers with opaque costs. Collectively these negative side effects make forbearance a terrible idea for anyone with the means to make payments.

Not Going For PSLF

Let’s look at how this might affect someone with $300,000 of unsubsidized federal student loans at 6% coming out of medical school that’s not going for PSLF. To simplify, we’ll assume Income-Driven payments are $0/mo. (which is reasonable for the person legitimately considering forbearance because they lack discretionary income). Forbearance payments are also $0/mo. Check out how the balance grows over time.

Residency Student Loans

Total balance at the end of 4 years of residency:
Forbearance – $378,743.09
IBR/PAYE – $372,000 ($6,743.09 savings)
RePAYE – $336,000 ($42,743.09 savings)

Medical School Loans During Residency

Total balance at the end of 8 years of residency and fellowship:
Forbearance – $478,154.42
IBR/PAYE – $444,000 ($34,154.42 savings)
RePAYE – $372,000 ($106,154.42 savings)

When PSLF isn’t in play, total balance owed is critical because 100% must be paid back. If you come out of training owing $100,000+ more because of poor decisions, you must own it.

Going For PSLF

Forbearance is also terrible for the PSLF crowd but for totally different reasons. PSLF makes total balance much less important. Instead, it’s all about making qualified monthly payments that are as small as possible (lower payments = greater forgiveness). Let’s use the same loan scenario and consider PSLF.

Say Dr. Davis originally plans to go into private practice and chooses to forbear on loans during residency. Then midway through, she realizes the hospital she’ll likely work for is a PSLF eligible not-for-profit. At this point, she starts the PSLF clock by signing us for RePAYE. But what’s the cost of missing two years? Let’s assume her payments would have been $0/mo. for the first two years of residency. When she is in practice, payments max out at $3,000/mo.

With PSLF, you clock in 120 qualified payments and then you’re done with the loans. As far as PSLF is concerned, $0/mo payments are equal to $3,000/mo payments. She misses the opportunity for 24 “free” PSLF payments and is forced to make them up in practice at a cost of $3,000/mo. In just two years, this mistake costs her $72,000 ($3,000 times 24 months) in future wealth.

In these examples we looked at extended periods of forbearance during training. It’s also common to see intermittent forbearance periods (many of which are a surprise to borrowers). We’ll cover these more in mistake #4.

The only way forbearance makes sense is when you truly have a major financial hardship – obviously it’s more important to feed your family than to make payments on student loans (when you could otherwise forbear). I get that. But if you’re fortunate and have enough to cover life’s necessities, don’t forbear. Get rid of your cable TV or your decked-out cell phone plan so you can make the minimum student loan payments.

Wrong Repayment Plan

With so many options on the table, this is bound to happen. You have PAYE, RePAYE, IBR, new IBR, 10 year standard, graduated, extended graduated… and several others.

When PSLF is off the table, student loans act more like traditional debts. In general, it’s wise to minimize interest and maximize payments. Ideally, you pay off debt with the highest interest rate first.

With PSLF, the goal is to make qualified payments at the lowest amount possible. One of the requirements of a “qualified payment” is being on a certain type of repayment plan. If your repayment plan is not qualified, those payments don’t count toward the 120-payment clock. If you are using a qualified repayment plan, the key is to pay the least amount possible. Each payment has the same net effect no matter the amount. Therefore, it’s absolutely critical to make sure your repayment plan offers the lowest possible payments for your circumstances.

For example, many young physicians can qualify for PSLF under RePAYE or IBR but aren’t eligible for PAYE based on the dates their loans were taken out. Most of these physicians are using IBR because it was the original option. However, in many cases, RePAYE provides a payment that’s 30% lower. This easily results in $10,000’s in additional forgiveness. Many are missing this opportunity.

Failure to Consider Tax Implications

Taxes used to be independent of student loans. Today, though, that’s not the case with “income-driven” repayment, PSLF and income-driven forgiveness.

Student loan decisions can affect taxes. If you’re going for income-driven forgiveness (20 or 25 year), you better be prepared to pay income taxes on the ultimate forgiveness amount.

Tax decisions also can affect student loans. Lower PSLF qualifying payments = greater forgiveness. One simple way to lower your PSLF qualifying payments is to make decisions that lower your Adjusted Gross Income – “AGI”. If you save in pre-tax retirement plans like the 401k, your AGI will be lower and, therefore, income-driven payments will be lower. This can ultimately increase the amount forgiven under PSLF and income-driven forgiveness.

Another example… if you’re married and elect to file taxes separately, IBR and PAYE payments only consider one borrower’s income. If the tax cost of filing separately is less than the increased projected forgiveness caused by lowering payments, this strategy can add value.

Income-driven Application Procrastination

We regularly see NSLDS student loan reports showing periods of forbearance around the time people file for income-driven recertification. Often the borrower has no clue that the forbearance periods exist. They submitted the forms before the deadline and never missed a payment. Often, that’s not enough.

Loan servicers need time (apparently a lot of time) to process the application. If you submit the income-driven application a couple weeks before the deadline, it’s likely they will not finish “processing” until after the deadline. The average student loan report we see has intermittent forbearance periods sprinkled into repayment that the borrower was totally unaware of.

Let’s look at an example – Dr. Smith is going for PSLF and his student loans have a 10 year standard payment of $2,500/mo which he expects to begin paying after a few years in practice. During his 5 year training, he has the opportunity to rack up 60 PSLF qualifying payments that average $200/mo. Although he successfully makes all 60 payments, to his surprise, he only gets credit for 50. The 10 non-PSLF payments were actually periods of forbearance he wasn’t aware of. At a net cost of $2,300 per payment, we’re talking $23,000 of total additional costs.

To counter this, submit the application as soon as you receive the annual letter. Fax in the paper version and follow up weekly until you receive confirmation that it’s complete. This may sound like a hassle, but for the average physician with six figure loans going for PSLF, it’s worth thousands to get right.

Failing to Verify Employment

According to the US Government Accountability Office Student Loan Research Report from August ’15, about 147,000 borrowers had employment and loans certified in anticipation of PSLF, and 4 million current direct loan borrowers may be employed in public service. Essentially, less than 4% of those likely eligible for PSLF are proactively positioning themselves for approval. The problem is that people have a choice: Verify now – or – verify later.

“Employment verification” is not required until you apply for PSLF (after 120 payments). You can either verify when you apply or as you progress through time. It seems most people are opting to verify later. They choose to work for 10 years “unverified” and then go back and verify all 10 years at once. This is all happening while they’re waiting to see if they qualify for $10,000’s and sometimes $100,000’s of forgiveness benefits.

Based on my experience helping people apply (over time) for employment verification, I expect this to be a huge mess for some borrowers opting for the procrastination method. I see the challenges and surprises that pop up going through this process year by year. Mistakes are made, people get confused, the process gets dragged out. I can only imagine what that might look like when you try and verify 10 years all at once.

Paying too much Interest

This is mainly for the non-PSLF folks out there. When you’re not going for PSLF, student loans are more like a typical debt. The higher your interest rate, the more you end up paying back. What’s interesting with student loan interest rates is that they vary considerably. There are loans out there with interest rates in the 2% range and others with rates over 10%.

As a general rule of thumb, if you’re not going for PSLF or any other forgiveness program and your rate is above 5%, you should be considering refinance. The higher your rate, the more emphasis I would put on this. Failure to refinance into a lower rate can easily cost $10,000’s in extra interest payments.

Be extremely cautious when refinancing – especially if you or your spouse (see #10) have any chance of going for PSLF or income-driven forgiveness.

Poor Refinancing Decisions

If you or your spouse are eligible for PSLF, refinance is almost always a really bad idea (see #10). You must maintain qualified federal loans in order to maintain eligibility for PSLF. Some borrowers unknowingly refinance when they are qualified for PSLF. Others aren’t confident in PSLF panning out and refinance. Either way, it’s going to cost you.

And for those who aren’t eligible for PSLF, you have to watch out for bad refinancing deals. Many lenders offer student loan refinancing deals that are not in your best interest. Do your homework and make sure you understand the options. Here is more info on several of the lenders offering student loan refinancing.

Bad Consolidation Decisions

Some borrowers fail to consolidate loans they should have consolidated, and others consolidate loans they should have never touched. Still others wait to consolidate and miss out on valuable cost savings. Either way, consolidation mistakes are very common.

Dr. Turner is finishing up medical school, has lots of Direct federal loans and plans to go for PSLF. When she goes through loan exit counseling, she’s confused by all the options. Ultimately, she decides to go for PAYE and will fill out income-driven paperwork before her grace period is up to get the PSLF clock started. Consolidating her loans never crosses her mind – why consolidate two loans? What she doesn’t realize is consolidating into a Direct Consolidation loan immediately after graduation allows income-driven payments to begin much sooner by side-stepping the grace period. If she were able to get payments started six months earlier, it would have increased her projected forgiveness amount by $12,000. For most recent medical school grads, these early payments are very low or even $0.

Dr. Baker is also going for PSLF. He has some Direct Loans and some older FFEL (or non-direct) loans. FFEL loans were very common federal loans before 2010 and aren’t PSLF qualified unless you consolidate them into a Direct Consolidation loan. Dr. Baker chooses to leave the FFEL loans as is because he doesn’t want to mess up his PSLF progress. When you consolidate, this starts your PSLF 120-payment clock. A big misconception is that when you consolidate, you must wrap all loans into the new consolidation loan. Naturally this would discourage someone like Dr. Baker with Direct loans well on their way to PSLF from consolidating an old FFEL loan. Fortunately, it’s not true. You can leave the current Direct loans as is and consolidate the FFEL loans into a separate Direct Consolidation loan. This allows the otherwise non-PSLF loans to joint the party.

Dr. Jones has a similar loan profile to Dr. Baker – mostly Direct loans with some older FFEL loans – except he’s not as far along with PSLF. He hears somewhere that it’s smart to consolidate FFEL loans so they become PSLF qualified. Like Dr. Baker, he believes consolidation is an all or none deal. After running the numbers, he decides it’s best to reset the PSLF clock on all his loans to allow the FFEL loans to be included on PSLF. So he does the full consolidation. This comes with a major cost – all those PSLF payments made on the already qualified loans are lost when he “resets the clock”. Instead, just like Dr. Baker, he should have consolidated the FFEL loans only.

Either one of the above consolidation mistakes eaisly cost tens of thousands of dollars. Be extremely cautious with consolidating your loans. Make sure you have a good reason for each loan you choose to consolidate. And always keep PSLF qualification in mind before making decisions.

Reactive Income-driven Verification

Young physicians, like many people, tend to make reactive decisions. Income-driven verification is no different. They receive the annual notification that it’s time to re-certify and they knock it out. And that’s about the only time they think about it each year. What people don’t realize is they always have the option to volunteer income verification outside the normal annual timeline.

This can prove extremely valuable when income verification results in lower PSLF qualifying payments. This might occur if your income decreased as a result of changing your filing status, going back into training, or reducing moonlighting. Or maybe you’re expecting a pay increase or bonus before your next recertification date. Why not recertify now at the lower income level. If your income decreases or is about to increase, don’t wait until your next verification. Apply now.

Not Considering Spousal Student Loans

For many physicians in private practice, refinance may seem incredibly obvious. Why hang onto your 7% interest rate student loans when lenders are offering 4%? Especially if PSLF is off the table. But what if your spouse is going for PSLF? Many physicians fail to consider the impact a refinance has on their spouse’s federal loans.

Your spouse’s income-driven payment calculation uses income to set payments. The resulting payment then gets prorated between ALL household FEDERAL student loans. In many cases where loan balances are high, the total payment will not be affected when the total federal loan balance decreases as a result of private refinance. Therefore, the income-driven payment due for the family stays the same after refinance. Effectively, the PSLF spouse’s payment increases substantially to compensate. This comes with massive PSLF costs to the total household that typically dwarf interest saved from a refinance.

It may be a good deal for you, but if your spouse is going for PSLF, refinance can end up costing them 10’s of thousands in the missed PSLF benefit. Before refinancing, consider your spouse’s PSLF impact. In many cases, it’s better to keep both spouse’s student loans with the federal government, and save the additional desired payments into a side account. Then as soon as the PSLF spouse qualifies for forgiveness, the non-PSLF spouse refinances (assuming rates are still favorable) and pays a lump sum using the side account.

Not Fighting Servicer Errors

Loan servicers will inevitably make errors that negatively affect unfortunate borrowers. As student loans become even more complex, this will likely increase. It’s a mistake to assume the loan servicer will always look out for you.

You should be keeping an eye on your progress and make sure your records match the loan servicer and NSLDS records. When you spot errors, they should be addressed immediately.

As you submit paperwork and have interactions with loan servicers, it’s important to document everything. Save copies of all paperwork and correspondence (like annual income driven applications and confirmation letters). Write down notes from all calls you make that include the name of the people you talk with and the date of the call.

Taking Bad Advice

As a result of growth in student loan balances and complexity, companies are popping up everywhere claiming to be student loan experts. Be extremely cautious taking advice from a student loan advisor. Figure out if they Fee-only (100% of revenue comes directly from clients) or not. Many of the student loan companies aren’t fee-only and get compensated from student loan refinance companies to send business. That’s a major conflict of interest that can cloud their advice.

Student loan planning today is very different from traditional debt planning. It’s much more complex and traditional rules of thumb don’t apply. As a result, many financial advisors, accountants and other advisors are unknowingly providing the wrong advice.

Improperly Negotiating Student Loan Stipends

Every year, not-for-profit 501(c)(3) hospitals all over the country hire thousands of young physicians. Many offer student loan stipends and repayment packages for new hires. These hospitals agree to pay annual lump-sum student loan payments for new physician hires. Normally these payments are made directly to the student loan servicers.

On the surface, this seems like a fantastic benefit. However, it’s often an absolute waste of resources when PSLF is in play. With PSLF, the goal is to pay the minimum payment. Lump-sum extra payments end up providing no economic benefit as they end up reducing total forgiveness dollar for dollar. On top of that, it’s typically a taxable benefit. So you pay tax on money you effectively give right back to the government. We have seen cases where people are better off not receiving anything at all. It’s a mistake to let this happen without intervening.

A better route would be to negotiate a salary increase instead of student loan payments. Or have the payments paid directly to you. Most hospitals are happy to make the adjustment once they realize it helps you and doesn’t affect them. However, some hospitals won’t allow this even though it’s an absolute waste of money.

Bringing It All Together

As you can see, student loans have become pretty intense. To help you simplify this concept and wrap your head around the best path to take, we created this student loan flow chart you can see below.

Also, if you’re interested in our student loan advising services, check out this page for more info.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Why Using Your HSA Balance Now Is Not Always Smart

Why Using Your HSA Balance Now Is Not Always Smart

Most people assume it’s best to use their HSA for out of pocket healthcare costs. But the math says otherwise.

How The HSA works

Contributions are pre-tax or tax-deductible in the year they’re made. The balance, which is NOT required to be used each year, grows tax-free. And qualified withdrawals are also tax-free.

Most people think of their HSA as a health “spending” account when in reality it can also be a long term wealth building account. HSA’s commonly offer a variety of mutual funds you’re able to select based upon long term goals.

Common HSA Scenario

You go to the doctor and eventually receive the bill after your insurance has paid its share. You can either pay the bill with cash savings or use your HSA. Like most people, you assume the HSA is best, but let’s check out the numbers first.

The HSA is likely the most tax sheltered account you own. It’s certainly more tax sheltered than your savings account. If your $50,000 savings account earns 1%, that’s $500 interest. If you’re marginal income tax rate is 50%, you’ll pay $250 in taxes leaving $250. Therefore 1% ends up really being like 0.50%.

If you earn the same 1% inside an HSA, it’s not going to incur taxes. Therefore, your after-tax return is also 1%. In this scenario, the HSA income is double the savings income. This compounds over time as you begin earning interest on interest.

The HSA advantage increases even more with longer time periods, higher expected returns and higher tax rates. All things being equal, the HSA always outperforms cash savings or any other taxable account because of its more favorable tax treatment. So why in the world would you choose to spend out of the better performing account first?

The HSA Advantage

If we’re assuming:
– you have plenty of money to pay for healthcare even if you don’t use your HSA.
– your financial ducks are in a row (emergency savings good, no credit card debt, good insurance coverage, etc)
– you have enough future qualified out-of-pocket healthcare expenses during your lifetime to eventually spend down your entire HSA balance

Using the cash now instead an HSA will yield better results. This occurs simply because of the tax benefits associated with the HSA. Tax-free accounts (like HSA’s) will grow faster than taxable accounts (like cash savings accounts). The actual value generated depends upon factors such as time, rate of return, tax rates, and health care costs.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

Incentives and Behaviors:  What We Can Learn From the Wells Fargo Scandal

Incentives and Behaviors: What We Can Learn From the Wells Fargo Scandal

If you want to understand a person’s behavior, look no further than at what they are incentivized to do. In fact, this is perhaps the only way to understand how, over the course of the last 5+ years, more than 5,300 Wells Fargo employees managed to open over 2 million unauthorized accounts for their customers. Given the overall scale of the operation (5,300 employees!!), it is not surprising the attention this story has received. But how did the world’s largest bank by market cap find itself under such intense scrutiny? The answer is in the incentives created by the bank’s “boiler room” sales culture.

Any time you tie someone’s pay, or their career, to a certain outcome — you can be certain you will receive more of that outcome. In this case, high sales targets, paired with the disincentive of corporate shaming, led to what sums up to be consumer fraud. And while this rightfully has received a lot of publicity, Wells Fargo is far from the only guilty party. In recent months, Morgan Stanley, American Century, and Ameriprise all have received negative publicity for similar practices. To be clear: it’s a problem.

As a consumer, what should you take from this? The answer begins with awareness. Be aware of what conflicts of interest may be present in any business arrangement. Understand that employee incentives can sometimes cloud objectivity. Don’t take anybody’s word as truth without first asking the tough questions — “Why are you selling me this?” “Why is it the best solution?” “What conflicts of interest exist in this relationship?”

And this goes far beyond finance and banking. Car salesmen, real estate agents, and even your waiter at dinner last night, each has their own set of incentives driving their behavior. By taking proactive measures, you can protect yourself from making costly decisions. At the end of the day, you are the one facing the consequences of the decisions you make — don’t let someone else’s biases dictate those decisions.

I do believe that people are generally good-natured. The problem lies in our incentive based culture and the blinders these create. In fact, I haven’t met a single financial advisor who would say they don’t put their client’s best interests as top priority. But as time passes, and people forget about the Wells Fargo scandal, there will undoubtedly be another occurrence of consumers getting the short end of the stick. And once again, the ultimate root of the problem could be traced back to incentives and conflicts of interest that arise from them.

As a fee-only financial planner, we pride ourselves in the proactive measures that we take to reduce these conflicts of interest. By eliminating product based sales, we can see the client’s situation clearly, and without blinders. We have no financial incentive to do anything other than serve our clients, and in the best way possible. But until the rest of the industry follows suit, you owe it to yourself to ask the tough questions and ensure that you and your family do what’s in your best interests, not somebody else’s.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

3 Ways Doctors Can Increase Their Savings Rate Without Cutting Expenses

3 Ways Doctors Can Increase Their Savings Rate Without Cutting Expenses

Building wealth is simple: make more than you spend and invest the difference.

There are two ways to increase your savings rate: spend less or make more. There are also two ways to earn more income: work more hours or earn more per hour. Many of you already spend enough time working, so let’s start by talking about how you might go about increasing your hourly rate.

What’s Your Hourly Rate?

No matter how you’re compensated, everybody has an hourly rate. Knowing this rate can help you make better financial and professional decisions. Take your total pre-tax compensation (income before anything is taken out) and divide it by the number of hours you typically work. The resulting dollar value is your hourly rate for the period. Here’s a quick example:

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Negotiate More Income Per Hour

Build your case before asking for a pay increase. Start by learning about the market pay rates. Find out how much your colleagues are paid. Check salary studies for your area and specialty. Learn the going rate for locums in your area.

Once you’ve built a compelling case, meet with the decision maker and confidently share what you’ve found. And make the ask. If they say no, ask them what you can do for the practice to make it happen.

Also, be cautious with new job responsibilities. Your employer may agree to your request in exchange for you taking on more job responsibility. That’s not what you were asking for initially, so take some time before saying yes.

This doesn’t have to be purely tied to your primary job. Maybe you’re an emergency room physician who works extra shifts from time to time, and in your market research you determine your employer pays locums far more per hour than your typical overtime shift rate. Knowing this, you now have the opportunity to begin asking for a higher rate on overtime shifts – especially those that are last minute.

Change Your Hours

Look at the hours you’re working. Identify what your hourly rate is for the different hours/tasks you’re performing. Work on cutting the low rate work and increasing the high rate work. For example, you might give up your management role that pays a lesser amount, and instead moonlight more for a higher rate.

Or maybe you can negotiate for less contracted shifts and agree to working more overtime shifts, since you now know those pay rates can be higher.

Outsource Jobs And Work More

Take some time to make a list of all the unpaid work you do, and estimate the time you spend on each task. Next, find out how much it would cost someone else to perform these services. What is the opportunity cost of doing this work yourself vs. working more in your profession and outsourcing the unpaid work?

Consider, for example, yard work – many of us are faced with this time-consuming chore. Let’s say you take 5 hours each month to mow, trim & fertilize your yard – plus the cost of equipment (let’s say $50). On the other hand, your hourly rate as a physician is $200. Doing this yourself essentially costs you $1,050 per month ($200 per hour x 5 hours + $50).

On the other hand, your research shows you can hire the best lawn care company in the area for $300 per month. This saves you $750 per month when you compare it to the opportunity cost of your potential earnings. On top of that, they do a better job than you. And you enjoy your work more than mowing. It’s really a win-win situation.

Then the final (and most important) step is to make sure you actually save the increased cash flow. Set up an automatic savings program so you don’t get used to having the extra money in your bank account. And as always, we would love to hear how our tips worked for you, and how your hourly rate negotiations worked! Please share your experiences!

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

The Most Important Money Habits To Teach Your Children

The Most Important Money Habits To Teach Your Children

Kids are like sponges. They’re ready to soak up whatever we’re willing to teach. Now is the time to be teaching our children about money.

Excess money mixed with lack of money maturity can ruin lives. At its extreme, money can be the difference between life and death. On the other hand, money can be a wonderful tool – controlling it can provide opportunity, security and flexibility. It allows us to do what’s most important in our lives.

So where do we start with the little guys and gals we love?

It’s All About Cash Flow

Controlling your money starts with managing cash flow. These critical cash flow habits start at an early age. Most young people never receive any education on this subject and tend to default to spending what they make. You can see these habits start to show up in the college years when people begin managing any amount of income and outflows.

Why not have an impact on how your children view cash flow from the get-go? It’s never too early to begin teaching. Start by figuring out what your children have to work with as far as money. Maybe you provide an allowance or maybe you provide payment for chores provided above and beyond a baseline household requirement. Or maybe your children receive cash gifts at holidays or birthdays. It doesn’t have to be a lot of money. The key is determining what they might have to work with as far as income.

Next, talk with your child about the responsibility of managing where their money goes. This conversation would obviously vary based upon ages. Either way, discuss the major categories of where people can choose to direct their income. The main categories are taxes, savings, giving and spending.

Taxes

Share with your children how taxes work. Tell them they must set aside a certain percentage for taxes, maybe 20%, for this future potential obligation. Odds are they won’t really owe any tax on their income, but if that’s the case, maybe it gets transferred over to their savings for the time being. Nonetheless, it’s about becoming familiar with the concept & developing the discipline.

Saving

Next comes savings. Discuss how important it is for people to set aside a certain percentage for short and long term savings. Talk about the benefits that come with this. For certain personalities and ages, it might help to share how their balance can grow if they start early. Maybe you suggest they set aside 20% for savings. Help them set up a system for directing this 20% into a separate account. As their savings grows, you could begin talking to them about investing. Encourage them to do it themselves with your guidance so they can acquire valuable experience. Establish goals and targets for short and long term savings to make it more exciting.

Giving

Next, talk about giving. Talk about your values and share your experiences with giving to others. Talk about a good percentage to target – maybe you agree to set aside 10% toward giving. So every dollar they have come in, 10 cents gets directed to an account which will ultimately be given away. As their “giving” account builds, have conversations about choosing where to give. Talk about what’s important to them and get them involved with choosing where to give. Since it’s their money, they’ll be more likely to buy into the cause if they have input.

Spending

At this point, 20% has been deposited into the tax savings, 10% into the giving account, and 20% has gone into short and long term savings. The key is to prioritize in this order: tax, savings, and giving first. And then you can spend the remainder. This leaves 50% to spend on whatever they’d like.

If you’re feeling ambitious, you could also throw “debts” into the mix. Every young person will eventually be forced to learn about how debt works – why not teach them your philosophy at a young age? You could tell them they are able to spend more than 50% of what’s leftover, however, it will require they take out a debt from you. Explain the basics of how debt works. Set an interest rate on the debt, like 10% to keep the math easy. If they want to take out debt, keep track of it and set up repayment plans. Maybe you direct the 10% interest you charge to their 529 or savings. Or if you’re really hard core, keep it. Hold them to repaying the debt.

Takeaways

The key is creating an environment for them to learn real life lessons. This will prove to be extremely valuable as the stakes increase for them. Money failures and mistakes are great learning experiences and will inevitably occur – why not let them figure it out while it’s easy to fix? Put your children in position to fail forward at a young age under your oversight and at much lower dollar amounts.

Also, as any parent knows, your children are always watching. As you introduce these concepts, be prepared for questions on how you manage these things yourself. Use this as motivation to lead by example and practice what you preach. If you’re struggling with managing cash flow yourself, work on improving your habits to help lead your children in the right direction & help them put their best foot forward.

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

5 Hidden Taxes Physicians Unknowingly Pay

5 Hidden Taxes Physicians Unknowingly Pay

In 2014, there were approximately 123 million households in the US. This means that for every one household, the government collected over $49,000 in total taxes. I don’t know about you, but that’s WAY more than I expected. As a naturally curious person, I wanted to know more.

Did you know that in 2014, income taxes accounted for only 34% of total US government tax collections ($2.1 trillion $6.1 trillion)? Where did the remaining 66% ($4 trillion) come from?

This especially alarming for physicians if you consider that 97.2% of all income taxes are paid by the top half of income earners. Odds are your household is paying much more than an evenly distributed $49,000 share of taxes. So, how can you find out how much tax you’re really paying?

The Truth Behind Taxes

Initially, my plan was to figure out exactly how much I had contributed to the government’s tax collection. I started my research by reading on the internet and digging into my own tax records. Income taxes were simple. The issue began as I attempted to quantify my share of all the other non-income taxes. How do I quantify how much more I paid for goods and services as a result of companies passing through taxes? After some wheel spinning, I realized it would be nearly impossible to figure out my exact contribution. Lack of transparency is primarily to blame. It’s nearly impossible for me, a financial planner who’s familiar with taxes, to figure out how much total tax I paid. Sad!

So what are these hidden taxes I speak of? Unfortunately, the list is long. I’ll focus on 5 of the most alarming hidden taxes.

1. Corporate Income Taxes

The US government has, for many years, taxed corporations. In 2014, our government collected over $1.1 Trillion in corporate income tax. But what’s the purpose of a corporation? They exist to provide people with products and services, jobs, and profits. And additional corporate taxes will always result in one of the following occurring:

1) Increased customer prices
2) Reduced stockholder payments
3) Reduced employee compensation and capital investment

All three of these options result in Americans indirectly footing the corporate tax bill.

It gets even more complicated when you start drilling down into the details. How can you tell exactly how the taxes are passed through? Maybe it’s always passed through to owners and you’ll never see any of it. But maybe it’s not. And that’s crux of the issue. Nobody really knows.

What if every company in America was a pass-through business? Pass-through business income is taxed on the business owner’s individual tax return. Pass-through businesses currently employ more than 50 percent of the private sector workforce. If every business became a pass-through, it would eliminate corporate income tax and force companies to pass-through everything to owners, employees or customers (which they already do, but it’s opaque).

2. Employer Payroll and Wage Taxes


Employers must pay the following taxes for employees… none of which never show up their pay stub.

1) Medicare
2) Social Security
3) Federal Unemployment
4) State Unemployment

For example, an employer in Kentucky will pay the following rates for each:

– Medicare – 1.45%
– Social Security – 6.2%
– Federal Unemployment – 0.6% (normal net tax)
– State Unemployment – 2.7% (standard new employee rate)

Image 1

This totals 10.95% in wage taxes. So let’s assume you own a small practice and are considering hiring a new physician. If the maximum salary you can afford is $200,000, you’ll only be able to offer them a salary of $180,261. The remaining $19,739 must be budgeted for wage taxes. Similarly to corporate income taxes, businesses simply pass taxes back down to the people involved. It might fall on the shoulders of the new hire, the owners or the patients. But either way, somebody pays it.

What if an employer was required to withhold these taxes from employee wages just like federal income taxes or employee social security? Or even better, what if it was all wrapped into income taxes as one simple line item? It would not affect employee take home wages. It would increase transparency and simplify tax reporting. People would likely be shocked at how much they really pay and demand answers from politicians about why taxes are so high. Who could argue with this outcome (besides politicians)?

3. Insurance Premium Taxes

Insurance premium taxes are like an insurance company’s version of corporate income taxes. Except, unlike corporate income taxes, insurance premium taxes are charged as a percentage of total premiums collected. Insurance premium taxes are often, but not always, fully disclosed to the customer. For example, if you buy an annuity in Nevada, it’ll cost 3.5% more as a result of the state’s premium tax. Nevada allows insurers to pass this cost through to customers (formally) and therefore it’ll show up on illustrations as a line item expense.

Here are several of the findings from the 2014 NCLS Task Force on State and Local Taxation:

  • All states (except Oregon and DC) charge insurance companies taxes on instate premiums collected.
  • Local governments also charge premium taxes in five states.
  • Premium taxes are intended to be imposed in lieu of corporate income taxes.
  • Premium tax rates range from 0.5% to 4.35% and average slightly below 2%.

When it’s disclosed, the insurance premium tax is less hidden than corporate income tax. At least people can find out what they pay. When it’s not disclosed, it’s basically just like corporate income taxes. Either way, it’s always passed down to the people in one form or another.

4. Fuel Taxes

When you fill up your car with fuel, you might think the price of gas is what the pump tells you it is. Say it’s $2.00 per gallon for gasoline and $2.25 for diesel. What most people don’t know is that 68.7 cents per gallon of gasoline and 89.5 cents per gallon of diesel goes toward state and federal gas taxes.

Let’s say you’re a resident physician working in Pennsylvania. Your family and girlfriend live in North Carolina so you’re constantly on the road when you’re not working. In an average month, you think you’re spending $500 on gasoline. But, in reality, you’re spending $328.25 on gasoline and $171.75 on hidden taxes. That’s a major tax hit – especially for lower income earners. You can see how much these taxes are in your state using this resource from API.

5. Sin Taxes

Alaska charges hidden taxes of $2.00 per pack of cigarettes, $12.80 per gallon of liquor, $2.50 per gallon of wine, and $1.07 per gallon of beer. The publicized idea behind these taxes is to discourage consumption of harmful products. Which do you think a lifetime Marlboro smoker hates more – taxes or Marlboro? Obviously taxes! If discouraging behavior is the intent, why not disclose taxes?

What if collecting more taxes was the intent? That would make more sense. Let’s add a hidden tax to something people are addicted to, market it as taxing bad companies, and watch the money roll in. As it stands now, the government loses money when people quit using such products. That seems like a pretty major conflict if you ask me.

Tax Transparency

For the record, this is not at all a political statement. I’m not against taxes. It’s a necessary part of running a country. What I am against is the lack of transparency. I believe US taxpayers should have a right to understand how much tax they pay. This creates a more informed population and increases our government’s accountability.

Were you aware that income taxes were less than 50% of tax collections? Do you know of any legitimate arguments against increasing transparency in our tax system? What can we do to improve transparency in our tax system?

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© Wrenne Financial Planning | Crafted by Harris & Ward

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser offering advisory services in the State of KY, TX, TN and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.