Hey everyone, it’s Finance Fridays again and I’m going go back to the basics again. Most of Finance Fridays is geared toward securing a stable retirement. However, the more immediate goal is to establish Positive Net Worth.

Stock Photo from: Pexels

What is Positive Net Worth?

Well, it’s not too difficult to understand. You tally up all your financial assets that you have and subtract your liabilities (debt).

As a physician, this is important because the majority of young physicians have a significantly negative net worth.

Remember that your financial assets are not how much you bought them for, but how much they are worth if you were to liquidate them right now.

Here’s an example:

Sensei, circa 2008

In 2008, I had just moved into my apartment in Albany and was starting my radiology residency.

My assets were:

Car
2008 Rav4 V6 Limited – Still being financed, probably only had $10000 in actual equity

Entertainment
Vizio 42″ – cost me $1000 at the time, could maybe have sold it for $700
Playstation 3 Metal Gear Solid Bundle – cost me about $500, might be able to sell for $300
Dell Laptop – cost me about $1000, might be able to sell for $500

Clothes
A mishmash of clothes I used as an intern, not worth much, maybe worth $500 for all of it

Bank Account
I think I had about $10000 in my bank account at the time, mostly from money saved from internship.

And that’s it… at that time I had very little to my name.

Adding up the above you get a grand total of: $22,000

Net Worth

So, after 4 years of undergraduate, 4 years of medical school, and 1 year of internship, my total assets were worth $22,000.

However, it doesn’t end there:

My medical school debt was probably right around $275,000. I was lucky that I was able to forebear my loans for the first few years of my residency. But then had to defer for the second half of residency (let interest accrue), to then begin paying them during the second half of fellowship.

I did not have any credit card debt, mostly because I didn’t have any major expenses and my credit card balance was always auto-paid in full every month.

Don’t carry a credit card balance, it is cancerous to your wallet.

So all said and done, my assets ($22000) minus my liabilities ($275,000) = -$253,000

As a 1st year radiology resident I had a negative net worth of ~ $253,000.

This actually probably got worse by the time I finished fellowship. I did not get much more in terms of assets, while my loans increased (from interest).

Ignorance is Bliss

I think as a resident it is important to be aware of your net worth, which for most of us, will be negative. However, I think we as residents are just trying to survive and try to pretend like our loans don’t exist. It’s a problem so large that we can do so little about as residents that we try to be blissfully ignorant of it.

Here’s an illustrative example, except the dude with the laptop bag is a resident with a $-250,000 over his head:

Also this:

But then this is you a few years as Dr. Yoloswag:

Positive Net Worth

So what’s the best way to establish positive net worth? It’s actually relatively easy (in concept):

• Save money
• Pay down debt
• Don’t buy depreciating assets
• Don’t add any more liabilities

Let’s break this down a little more:

Save money

As a resident, try to save as much as you can, but not just into your bank account. You want your money to make money (compound interest). The best way to do this is to put money into a Roth 401k/403b in Residency, as I’ve stated before.

Pay down debt

This is the big one.For many, student loan debt will be the driving force behind their negative net worth. However, there isn’t that much you can do on a resident’s salary while you are using RePAYE. Make the payments like clockwork. If you have extra money from moonlighting, throw it at your loans or add it to your Roth 401k/403b in Residency.

Don’t buy depreciating assets

Pretty much any car you buy is a depreciating asset. As soon as you buy it and drive it off the lot, a car can lose up to 30% of its value. This is especially true for expensive German luxury cars:

Here’s a good example:

True Cost To Own for a BMW 3 series – 2016 328i (I used the 12208 zip code for Albany)

This car depreciates $24,747 in 5 years… and $10,432 was in the first year.

Now, I won’t deny you that having a nice car is an enjoyable experience. However, just make sure that the experience you’re getting is worth it to you, especially if you have a lot of negative net worth. Remember that while the Value Cost Ratio is relative, you need to try to keep it reasonable.

Don’t add more liabilities

The major liability that young physicians like to add is a house. Many will argue that having a house is an asset and not a liability (usually financial advisors, bankers, etc.). Others will argue that a house is always a liability and never an asset . However, I think this is another one of those “it depends” kind of things.

Asset

Let’s say you buy a house for $300,000 and put down a healthy $100,000 down payment. That’s a 33% down payment. Then you have $100,000 of equity in the house to start off with.  You’ve converted $100,000 of an asset (money) into your house. In this case, it’s probably reasonable to consider your house an asset, assuming the housing market is stable. In the worst case scenario, you should be able recoup at least some of that $100,000 you had.

Liability

However, if you buy the same $300,000 house with no down payment, and you start off with $0 in equity in a house. (Physician Home Loan) Then that’s definitively a liability. You are upside-down on the house from the beginning because you have no equity in it. If you were to sell the same day at the same price (or even slightly higher), you will likely be taking a loss because of closing costs.

Asset/Liability

To me, the gray area is when you buy the same $300,000 house on a conventional mortgage of 20% down, $60,000. So you start off with $60,000 in equity in the house. However, if you were to sell the same day at the same price (or even slightly higher), closing costs would still hurt you. You could lose a lot of the equity you had.

The longer your own a house, the more equity you put into it, and the more likelihood that it is an asset and not a liability.

However, for a young physician with the huge liability of student loan debt and the high likelihood of moving for a first, second, or third job, I don’t think it’s wise to add another potential liability.

What about you Sensei… what’s your net worth?

Me? Well, I’m probably at about zero (finally).

Over the last few years my wife and I have paid down some of our student loan debt, it’s on auto-pay and just vanishes from our bank accounts every month. We’ve also managed to put away money into your 401ks the last few years and have a little bit of equity in our house. So we’re at about zero I’d say.

It doesn’t feel like it though.

As long as those student loans still hang over my head, I will still feel like I have negative net worth.

But mark my words, once the kids are in public school and I have that extra money to throw at my loans, I will make them disappear quickly. I’ll keep you guys updated.

TL;DR

Net Worth = Assets – Liabilities

• Save money
• Pay down debt
• Don’t buy depreciating assets
• Don’t add any more liabilities

Try to get to Positive Net Worth as soon as possible.

Do As I Say Not As I Do

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

You don’t need to fill out your email address, just write your name or nickname.

Like these posts? Make sure to subscribe to get email alerts!