Hey everyone, it’s Finance Fridays again. Today is just going to be a short post about “Damage Control“.
Damage Control?
Yea.
So, a lot of what I talk about when it comes to finances is having an investment thesis and planning ahead of time, etc. Basically you have an idea of where you want to be for retirement and the steps you need to take to get there.
However, as Mike Tyson says:
“Everybody has a plan until they get punched in the mouth.”
How you can apply this to financial plans is everyone has a plan until something unexpected happens… and then you need to re-evaluate things.
I like to call this particular concept “Damage Control”.
If you already have $5 million to your name and you’re on the verge of retirement, there is very little that can happen to you that would throw you off from your track.
However…
This is different for a young attending straight out of fellowship who just started their first job with $300k of debt to their name.
I’ve talked about buying a house before, and how I recommend not buying one at least for 3-5 years after starting your first job. However, I am sure that many people will disagree with me — which is fine.
That said, I want to illustrate a point here. If you’re a young attending making $250k a year with $300k of debt to your name, you’re not exactly very stable financially. Then if you add on a house payment to this, then you’ve just added another liability to your name — not an asset.
There are a whole host of unexpected “problems” that can arise. However, for this case we’ll just make it a house issue. Let’s say the house you bought actually has more problems than you thought it did. Perhaps fixing these problems will cost $30k or something.
What do you do?
Obviously, you would hope that your emergency fund can help ease this blow. However, you may already be stretched thin from your student loan payments and now this new house payment. So let’s say your emergency fund isn’t enough.
So now you’re in damage control mode. How do you pay for this unexpected, unforeseen cost? Well, you need to step back and try to see the whole picture first.
Aside from this unexpected, unforeseen cost —
were you even doing ok before?
Most likely, the answer is no.
In general, with the salary of a physician, you shouldn’t ever feel overextended. There was something that occurred which pushed you over the edge. In this particular case, it was buying the house which ended up needing work. In other cases it could be buying a car or some other large expense before enough of an emergency fund was built up.
Either way, you’re in damage control now. So how can you fix this situation. Well, can these home repairs be done in sections, or does it all need to be done at the same time? In other words, can we spread out these payments a little? If no, then the easiest solution is just to take out a 2nd home loan, like a home equity line of credit (HELOC). Obviously, this is not optimal, but it may need to be done. There are other options, like you can take out a loan from your 401k as well… but this is also not optimal.
Ok now what?
Ok, now that we’ve taken care of the immediate problem — what’s the best we can do with the current situation?
Well, if you were able to pay in installments, then you needed to save money over the course over that course of a few months… and then you should work on increasing your emergency fund. I’ve talked about the emergency fund before… and how I am planning on decreasing mine. However, if you have enough equity in other things, your need for an immediately available emergency fund decreases. That said, when you’re just starting out as a young attending… you have no assets and just heaps of liabilities.
If you had to go the HELOC or 401k loan route, then hopefully the interest rate wasn’t too bad. Additionally, make sure there is no penalty for paying off the loan early — because that’s what you should do, as soon as possible. That becomes your highest priority, paying off this new debt you owe. After that, like above, rebuild your emergency fund until you’re comfortable again.
Then after all that — examine what unexpected, unforeseen expenses your budget can bear. Only you can know what you are comfortable with.
However, what you are comfortable with will change as you gain more more assets and build your retirement portfolio. It’s really those first 3-5 years as an attending that can put you in difficult situations.
Is this really all that important or common?
I think it happens more often than we think. Also, it’s kind of what happened to me…
I bought my house a little too early for my comfort. Then I had to find money for a new roof and solar panels. These were unforeseen expenses on top of me already being somewhat strapped for money with our student loans and this new house payment. Unfortunately, these were costs that couldn’t wait and these expenses all happened at the same time. So I had to find some extra money — and I opted to get a small loan from my 401k — which is a TSP Loan. This is not optimal, but it was the best option that was available to me in order to “get over” this particular time.
Since then we’ve built up our emergency fund again — maybe a little too much. It’s only been a few years since I’ve bought this house, but financially we are significantly more stable than before. We have a very good understanding of the money flowing into and out of our accounts on a monthly basis. Additionally, we have an excellent understanding of what unexpected/unforeseen circumstances we can endure. In other words, I sleep a lot better nowadays than I did the first few years after being the house.
I guess the take home point is that a few years can make a lot of difference, especially for a young attending. I know that once you get your first job you feel the need to rush into “everything else” — but take stock of where you’re at first before you add more liabilities.
TL;DR
Emergency funds exist for a reason.
But what do you do if your emergency fund isn’t enough?
You need to figure out how to do Damage Control.
Then after that… try to figure out how to prevent it from happening again.
Emergency funds are very important early in your career — but less so as you gain more assets and your retirement portfolio increases.
-Sensei
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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