Continuing From Last Week
Welcome back to the next installment of The Average Doctor Blog.
Looking around, it seems like while Covid-19 is still around, there’s a bit more hope in the air. Depending on where you’re looking, of course. These days there’s a lot more talk about opening up the economy again and some return to normalcy. Although I’m not so sure how that ends if everything reopens soon.
For now, I’m still practicing my new normal. Staying at home when I’m not working as an essential employee. Checking the covid numbers frequently. Washing my hands endlessly. And writing more blog posts!
In today’s post, I’d like to continue where we left off last week. If nothing else, this Covid-19 outbreak has been a rare opportunity to learn a number of financial lessons the tough way, and there’s definitely room for a few more.
Last week we covered how medicine isn’t recession-proof and how predicting the market is tough. This week we continue with…
Lesson 3: Cash Is (Not) Trash
Earlier this week I had the pleasure of listening to one of the greatest financial minds of the current era, Ray Dalio. You may know him as the guy in charge of Blackstone, one of the world’s largest hedgefunds. Or maybe as the guy who keeps hounding you about principles. To me, he’s the creator of one of the greatest introductions to understanding economics and one of the biggest players in the market.
As someone interested in these kind of things, I went ahead and clicked on this Dalio interview when it showed up on my list.
The entire interview is worth a listen, but one of the key takeaways is this idea that Dalio’s been preaching for a while. That “cash is trash”.
In some ways, he’s not wrong. For a hedge fund manager, holding onto cash is a losing game. As we’ve discussed previously, every year inflation causes money to lose its value (usually by 2-3% per year). If your job is to manage billions of dollars of other people’s money while promising them that you’ll beat the market, hoarding cash probably won’t get you there.
But if cash is trash, then why was I relieved to find a little over $100,000 in my online savings account? Money uninvested, but also unaffected by the massive market downswing from Covid-19?
Because sometimes, cash is not trash.
Here’s two reasons why
Reason Number 1: Short Term Savings
Why did I have $100k sitting in a savings account, you might ask? I am the same blogger who told you just a few weeks ago that you make money owning assets, not cash, right?
Well, that $100k is my short term savings account. Money I set aside for major purchases I’m planning to make in the next 2-5 years. Money that I don’t want exposed to the volatility of the stock market. More specifically, that $100k is money for a down payment for my first house.
Traditional investing principles tell you if you put your money in a low cost index fund, you’ll make an annual average return of 8% per year. That means I could turn $100k into $108k, $116k, $126k in just a few years and get a much bigger house, right?
But the key word there is average, not 8%. Those average market returns are actually spread across decades. Some years you’re up >20% like in 2017 or 2019. And sometimes you’re down 30% like in 2008, or…well…now.
If you’re saving money for a down payment on a house, to buy a car, to pay for your wedding, or any other major expense in the next 2-5 years, you’ll be happier not sweating over fear of it dropping >30% in the stock market.
Now, my friend Jake, the day trader, would argue, and has argued, that in this high volatility Covid-19 stock market you could turn $100k into $200k easy.
But that’s not me. I know I’d just lose it. Most of it…all of it…or at least some it.
Then I’d have to live in a much smaller house.
Reason Number 2: Emergency Fund
The other part of my savings account, that “little bit” over 100k, is my Emergency Fund.
I mentioned before that I’m not great at predicting the future. But I do know that anything that can go wrong will go wrong. Flat tire. ER visit. Covid-19. You know, all of those unexpected things that seem to come out of nowhere that you can’t really plan for. You can plan for them. That’s why I keep an emergency fund.
You might say that a doctor’s salary is an emergency fund of its own. Or that any emergency fund money is better off invested anyway, making that sweet sweet 8% per year. Or maybe, like a certain youtuber, you plan take out a loan on margin against your investments in M1 finance to build a 100k emergency fund instantly.
You could make those arguments, and I’ve heard them all. But I prefer simplicity and stability in my emergency fund. Making sure that my emergency fund doesn’t increase my risk profile. That way, when Covid-19 hits and stories come out about physician layoffs and pay cuts, I won’t be worried.
By holding enough cash in my emergency fund, I can financially survive anything for at least the next 3-6 months.
Lesson 4: Spending Less Is Better.
Does this sound familiar?
Covid-19 pandemic forced you to stay at home. Your governor ordered it. Movies theaters are closed. No more fancy restaurants. Your favorite bar won’t let you in. You’re in quarantine.
My parents are quarantined.
When covid quarantines started, my dad lost his job. And he’s not like me when it comes to money and finances. No emergency fund. I was worried.
“ASAP”, I told him. Apply for the PPP and EIDL loans as soon as possible. And save your money! Don’t spend it like you usually do. Otherwise he’d run out in a month.
He laughed.
“Average Doctor, there’s nothing to spend money on nowadays!”
Hm…
I thought about that for a second and…well…yeah. My spending is way down, too. And I hardly even noticed. I’m just as happy as I was pre-covid (minus the whole being a doctor during the highly contagious deadly virus pandemic thing).
As it turns out, money doesn’t buy happiness. Instead, creativity and personal growth does. And there’s nothing quite like being quarantined in your house during a global pandemic that gives you enough free time to do to just that.
Outside of working, I’ve spent some of my time in quarantine learning to draw.
Yep, those are my strawberries!
I’ve also spent time with my fiancé. Watching movies. Cooking new meals from budgetbytes. And of course, working on the blog.
Now, I’m an essential employee, so I still spend just as much time at work as I always did. I can’t really speak for those who aren’t “essential”, and who haven’t been able to leave their house in over a month. But I know that despite my limited options at home, I’ve found plenty of ways to stay entertained.
I’m nowhere near as productive my nurse friend from last week who taught himself music production in quarantine and made a music video that’s now all over instagram. But I’ve been productive enough to get the blog’s first E-mail subscriber.
Of course I miss traveling and experiencing new places and things. And I’ll get back to that as soon as I can. But I’ve learned that being productive and entertained doesn’t have to mean spending more money. I haven’t really spent anything extra since quarantine started. Didn’t need to. So hey, maybe after all this I’ll lower my FIRE number just a little bit.
Thanks, Covid.
Lesson 5: There’s Always Something Good.
Covid-19 is a unique challenge. The virus has ravaged the world and exposed all sorts of flaws in our systems. It’s caused death and illness. Lead to massive unemployment. Huge losses in retirement accounts. And more.
But despite all that, there’s still a lot of positive and good. Like everything we’ve already talked about..
Learning the value of holding on to cash for short term expenses.
To pay attention and find ways to get money through government stimulus programs.
And something I haven’t talked about, but tax loss harvesting when the market drops 30% in two weeks.
But beyond finance…
I’ve seen people stay connected and celebrate holidays on zoom.
Businesses have done the right thing and extended medical coverage to support their furloughed employees.
Physicians are coming together to create legislation aimed to improve the future of medicine.
Specialty societies are standing up for healthcare worker’s rights.
And much, much more.
The thing is…Covid-19 is bad. And there’s no way around that. It’s not normal to avoid human contact and stay at home. To turn on the news and see infection rates and death numbers climbing. Or to see doctors forced to work without proper PPE.
And even though a market crash of >30% is a chance to “buy low!”, nobody should be happy about people losing their retirements or the associated >20% unemployment rate.
But covid isn’t the first crisis we’ve faced, and it won’t be the last.
Just like every crisis before it, a lot is out of your control. But what matters is how you respond. That you face this crisis and find an opportunity to create some good. Others have. Why not you?
Thank you so much for reading this issue of The Average Doctor Blog! Don’t forget to leave a comment and subscribe to the mailing list on the right for the the latest Average Doctor news.
Until next week!
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