Finance for Physicians

When people talk about marriage and finances, they tend to only focus on the positive and optimistic side of the conversation.However, we have found that studying the potential pitfalls can be just as valuable as narrowing down and focusing on the positive side effects of sharing finances with your significant other.On today's episode of the "Finance For Physicians" podcast, Daniel is joined by his wife Alison Wrenne to chat more about: - What the ups and downs of financial management are as a family - How to work better as a team when it comes to communicating financial decisions/struggles - Why discussing finances can often cause significant hardship and heartache to many loving couplesWe're so excited to present to you this episode and explore the important topic of family finances! Links: Contact Finance for Physicians Finance for Physicians

As physicians, it's easy to feel like there are too many people to help with not enough time. On top of that, most physicians have other responsibilities at home, plus passions they pursue to fill their own buckets. But just because you're extremely busy, doesn't mean you need to sacrifice your joy or risk burning out. That's why we're bringing on a physician with multiple businesses and hobbies that is an expert in avoiding burnout, Dr. Diana Londoño. Dr. Londoño is a female urologist, a speaker, a certified life coach, a writer, and a podcaster. On top of all that, she runs a successful business that helps physicians deal with two of their biggest risks: burnout and stress overload. In this episode of the Finance For Physicians Podcast, with guest Dr. Diana Londoño, we're going to cover: - What inspired Dr. Londoño to become passionate about physician burnout, and the journey that made her an expert. - How to deal with information overload and burnout in a way few of us in the industry are aware of. - Why your mindset affects burnout, and how underestimating its importance leads to underperformance in day-to-day life. This will be a fascinating conversation between Daniel Wrenne and Dr. Diana Londoño full of practical tips to help you get the most out of your career, enjoy your time off, and be happier at home. Don't miss a chance to get personal advice unique to your situation.  Links: Dr. Londoño's Website Free Support Services For Physicians  Contact Finance for Physicians Finance for Physicians

Burnout is tough, especially for physicians. But you don't have to be a victim of it. There are ways to combat burnout.It's not this unfixable or unmanageable thing. There are steps you can take. This is why, for this episode, we're interviewing Dr. Sapna Shah-Haque! Dr. Sapna Shah-Haque is a primary care physician who's had numerous battles with burnout, even losing a friend to it, which is part of the reason she started her own podcast and started talking more about it! In this episode, we're going to cover: - How Dr. Sapna Shah-Haque overcame her numerous fights with burnout - Why she feels her lowest moments were a result of her extreme levels of stress as a physician. - What actionable steps you can implement to manage and beat burnout. We're so excited to present to you this conversation and can't wait to explore the important topic of burnout in the medical industry even further! Links:   Physicians Anonymous Physicians Coaching Support Tend Health Dr. Sapna Shah-Haque's Practice Dr. Sapna Shah-Haque's Podcast Dr. Sapna Shah-Haque's LinkedIn Improving Medicine With Vulnerability Contact Finance for Physicians Finance for Physicians

Physicians are often associated with burnout. And there's a reason why.There are arguably few professions that rival the stress a physician has to endure throughout their career.But the stress isn't always at the hospital or the private practice. Financial matters can cause distress for physicians, but they can also be the solution.On this episode of the Finance for Physicians podcast, we're going to talk about:- The sneaky nature of burnout.- How medical professionals are prone to burnout from college.- Upward mobility in medical professions and how this addicts the physician to a more stressful lifestyle.- How to not miss out on family experiences as an ambitious professional- And so much more! Links: Contact Finance for Physicians Finance for Physicians

We went LIVE with our show, Finance for Physicians! We're over 100 episodes into our podcast, Finance for Physicians, and we've got the chance to learn great lessons together with our audience. But it's time to turn this audience into a community. That's why we did our first LIVE show! For this world premiere, Daniel Wrenne talked about: - What are the key lessons have been from the first 100 episodes- How Daniel realized that what is missing for physicians is a community of peers they can count on- Why the show is expanding beyond financial advice in order to make you smarter with your money- And much more! This is an interactive conversation that will shape the future of a community we'll build together.  Links: Contact Finance for Physicians Finance for Physicians

As a doctor, you begin your professional career as a high-income earner. But many people don’t talk about the cost of this achievement. As you know, medicine is a demanding field that requires a lengthy, expensive education and rigorous hours of training. When you spend that much time studying and working, you don’t have the time for side jobs to offset the cost, or the mental space to learn about anything else other than how to treat patients. This means most physicians, like you, end up having to take out huge loans to survive, without time to get a proper financial education. But by the time you start to earn income, you begin to feel trapped by “the system”. You start to feel behind in life - forcing you to continue to sacrifice your quality of life and your patient quality of care starts to decrease. This leads to poor health, stressed relationships, and a propensity for burnout from a vocation you worked so hard to achieve. We have a solution: we believe control of our finances leads to having control of our life. Welcome to “Finance for Physicians” a show where we teach and empower doctors, like you, to practice medicine the ways you always dreamed you would- free of financial worry to provide the best level of care for your patients, your family, and yourself. Don’t believe that “burn-out is a necessary myth.” You don’t have to sacrifice your health, relationships, and your career to live the life you want. If you want to learn how to have better control of your finances and more control over your life, this show is for you! “Finance for Physicians” is hosted by financial expert, Daniel Wrenne, of Wrenne Financial. Links: Contact Finance for Physicians Finance for Physicians

The pandemic in America is starting to look like a memory of hard days gone by, but the effects can still be felt throughout our country. That reason is, probably, why the Biden Administration has decided to extend their Covid 19 Forberances to the end of this year. In this episode of the Finance For Physicians Podcast, Daniel Wrenne will go into detail with Jeff Wenger about the situation surrounding Covid Forbearances while also taking a look at the currently shifting loan-giving and forgiving policy of the Biden Administration. Topics Discussed: How to financially plan in accordance with the extended forbearance period if you have mortgage payments on the way. Student loan forgiveness: Are you eligible? Is it useful at all? The Federal Pell Grant. How it works and how to know if you’re eligible. Links: Updates On 4 Big Changes To Federal Student Loans Contact Finance for Physicians Finance for Physicians

Does it take you hours and hours to count and track every single expense, every single month? How can you monitor your spending without spending too much time that you do not have and cannot afford to waste?  In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about how busy physicians can monitor spending without wasting hours by using a basic system that he developed to keep a pulse on cash flow and total household expenses. Topics Discussed: Goal: Make sure you’re not overspending or that your spending is aligned Cash Flow Tracking System: Shows if you’re on track or you’re slipping up Do’s and Don’ts: System only works if you do pay off credit card debt monthly Cash Balances: System watches them over time based on your spending Numbers: Starting cash balance, income, ending cash balance, and expenses What do your expenses need to be? What if they aren’t what they should be? Financial Plan: Decide how much for your lifestyle vs. spending vs. values/goals Categorization: Come up with categories that you want to sort everything by Expense Audit: Identify and plan what to cut/reduce by stopping/changing habits Links: Contact Finance for Physicians Finance for Physicians Full Episode Transcript: What’s up, everyone? I am recently returning from a podcast conference. Basically, a bunch of people like myself got together, shared ideas, and talked about how to improve. My goal up to this point has been just to basically produce episodes and share as much value as I can. Now that I’ve been at it for (I guess) a little over a year, maybe close to a year-and-a-half, the goal going forward is to start to proactively grow and really fine-tune the skill. This conference was super helpful in getting some ideas. I want to fill you guys in on that before we jump into the episode today, and share a couple of other things I’m going to be working on. Like I said, the big goal going forward is to really focus on growth and adding value, which has been my primary goal all along, is how do I get as many people listening as possible, and make sure it is valuable as possible. I got a lot of ideas from the conference. I’ll share those over time and you’ll start to see those come out over time as we implement them, but there are a couple I’ll throw out today. In terms of value add, a couple of ideas that I took away from that conference was along the lines of improving engagement. A couple of other things I’m thinking about is maybe doing some live format, where we allow the ability for guests to participate more in-shows, throw out questions, and just make it more interactive, with the goal being to make it more community-focused. Or maybe having a Facebook group where we’re doing form-type setup and having conversations. I have a lot of different ideas along the lines of building community and improving the interaction among you guys, so if you have ideas along those lines please share those. Ultimately, this show is for you guys, so I want to hear if you guys have ideas for how to provide more value and be more engaged. Ultimately, I want to know what you guys are looking for and what’s what we’re after. That’s the first big thing that I’m working on. The other big thing is growth. The goal there is to naturally grow through providing maximum value. Plus I think I’ll try to do a little bit more promotion, maybe on social media, although I’m not the most engaged. I’m not the social media type. Another big thing is potentially getting on other people’s podcasts. If you know of people that either might be good guests for this or podcasts that might be good for me to attempt to get on, please throw those out as well because we’ll be looking to do that in the future. More info to come. I just want to throw you guys in on that. Super exciting to see how many people are working in that space, and there are a lot of people with great ideas. The goal is to work through these things to continually improve on what this podcast is providing ultimately for you guys. The goal today was to talk about expenses and monitoring expenses  without spending hours and hours. I know that is a common issue. You’re probably thinking of budgeting when we talk about budgeting. We kind of are, but when I think of budgeting, I’m like, gross. That sounds terrible. I don’t really want to budget. Budgeting sounds painful to me. I think of counting every single expense every single month and hours and hours of time. That is commonly what it turns into, especially when you’re tracking every single expense. It’s also a common cause of arguments with couples when you get into the weeds. Not that budgeting is always bad, but I don’t think it’s a great starting point. So we’re going to talk about how to monitor your spending without getting into the weeds, and without spending hours and hours of time. Through my work with physician families one-on-one, and also just with my own personal finances, I’ve developed a system. It’s very, very basic. It’s nothing. I’m sure tons of people have used this before, but it’s a system that really works well for just keeping a pulse on cash flow and total expenses. For most people, that’s really all you need to do most months. I’ll talk about my experience with this as we go through this because I’ve seen the ups and downs in this. I think the goal is most people just want to make sure they’re not overspending or make sure their spending is in line with what they want it to be. This system will (at minimum) show you if you’re on track. It’ll also give you awareness if you’re slipping, if your lifestyle is starting to creep up. I’m going to talk through this cash flow tracking system. Basically, the system involves monitoring your total cash balances between your checking and savings account over time, and your income, and then using those values to back into what your expenses are. First of all, this is not going to work if you have consumer debt that you’re not paying off every month. If that’s you, you have to take care of that first. This is just not going to work for that. But assuming you’re paying off all your credit card debts every single month, this system to monitor will work. We’re looking at cash balances. Really the system is watching those cash balances over time and backing into what your spending is based on that. The way I do it is monthly. You could do it at any frequency, but I like monthly. It’s how I track everything else. Let’s say we’re looking at May of 2022. What I’m going to do is—I use a spreadsheet, but you could use paper—I’m going to look at May. The first number I’m going to write down is my starting balance between all my cash accounts—checking account, savings account—total them up, that’s my starting cash balance at the start of the month. Let’s say it was a thousand, so I started May with $1000. The next number I figure out is how much income came in. The reason we’re using this approach is because it’s simple. Hopefully, you have much less, much fewer transactions for income. For example, between our accounts we only have three or four income-lined items each month. With our clients, we typically see anywhere from a couple of transactions to maybe 15 at most. All you’re doing is totalling up all the income that came into your accounts for the month. Let’s just (for example) say that number is $5000. The third number you’re looking at is the ending all cash balance. So same thing as the first number, except we're just looking at the end of the month total between all the accounts cash balance. Let’s say that number is $1100. You started the month with $5000. Five thousand dollars came into the account and now you have $1100. That would mean that your expenses were $4900. In other words, your surplus was $100. The reason I love this approach is because it allows you to back into this total number, in this example $4900. It allows you to back into what your total expenses are very easily. It takes me 10 minutes a month to update these numbers. I know what that number needs to be for us. I can do a quick check and see if it’s in the range of what I want it to be, I just write down those four numbers and I move on. Usually it’s over for us and most people, but if it’s over or under, you can take action based on that, so I’ll talk about that in a second. I have gotten in the habit of doing this every month, just once a month. I write down those three numbers, starting cash income, ending cash, then I back into the expenses so it ends up being four numbers, and I just document it for June, July, August, September. The other thing is after you’ve been doing this for a while, you get a nice rolling tally of what your lifestyle is, and it’s just a much more accurate representation as opposed to just looking at one month. That’s my simple system for tracking cash flow or total household expenses. Another common question—probably the most common question—that comes up as a result to this, is what if my expenses are not what I want them to be? Or maybe even before that, the question is what do my expenses need to be? That’s a personal question and I think the best thing to do is have a financial plan. Part of the value of a financial plan is deciding how much your lifestyle should be versus how much you should be spending versus how much you should be giving away and tying that into your values and goals. Ideally, you have a financial plan and can use that to drive what your expenses should be. If you don’t have that, that’s got to be step one, because otherwise, you’re just flying blind. Once you have a plan and you know what your expenses should be, then that’s what you’re going to be using as a benchmark or a line in the sand. Going back to the example I just gave, say your number needs to be $4000 of expenses. We just saw it was $4900 or maybe the past 3 months it’s been averaging $5000 or $4900 or somewhere in that range. In other words, you’re over by close to a thousand dollars. What do you do then? What I would suggest at that point, that’s when you dig deeper. Lately, I have had that happen with my own tracking. I think everybody, a lot of people that I’ve talked to lately had had this happen. It seems like people are spending money plus things are getting more expensive. There’s been all this COVID travel pent-up lack of spending. I’m one of those people. Our lifestyle has creeped up the past six months to a year. And now it’s gotten outside the bounds that I would like it to be. What we do in this situation is that’s when we dig into the expenses. At that point, I would do what I call an expense audit. Basically, you’re just going to dig in a little bit more. I just did it earlier today, so it’s fresh. What I basically did is—I’m recording this June 2022—I looked at April and May, and I’m auditing those two months. First thing is what period of time are you going to audit or dig into? I typically suggest two, maybe three months at the most. You don’t want to make it too intense. I took April and May. First step is I’m going to go to all the accounts that I spend money on and log into them. For us, there are three different credit cards and one checking account where transactions happen. I logged into all four of those accounts and downloaded my transaction history in an Excel spreadsheet for April to the end of May, so for the two months. I just downloaded all those accounts into a spreadsheet and then I pull them all together into one spreadsheet. That’s the data. You pull all that into a spreadsheet. Then you have to take out the income and transfers. Sometimes, they’re just irregular things that you need to take out. Really, I’m focusing on expenses. If it’s a credit card payment, I take that out because that’s already going to be accounted for. I want to know what was swiped on the credit card. A credit card payment is not an expense. That’s just money moving places. I take the income out. I take the transfers from one account to the other out. I take the credit card payments out, that sort of thing. I got to take all that out first. Then for my account, I have to make sure some of the accounts show refunds as positive expenses. I had to add a negative to those because that’s a refund. We took something back and got a refund. I had to do some small corrections like that. Basically, you’re just reviewing your list of transactions from a high-level standpoint and saying, is there anything I need to take out? Is there anything I need to adjust? Ultimately, I made some tweaks to make it so that it’s strictly our transactions for expenses from those accounts for April and May. Then I’m going to go through and just categorize it. I would suggest using broad categories for categorization, like home or entertainment or travel or food. Food would be eating out, groceries. Or maybe you could use food/eating out and then food/groceries. Transportation is one I add. Basically, come up with the categories that you want to sort everything by. There’s always going to be an other or an unknown category. But come up with a big category that you’re going to sort everything by. Then go through the spreadsheet, identify which category all the transactions are going to be. Then total up by category. This is kind of painful, I’ll be honest. It takes an hour or two. The whole point of this is not doing this exercise every month. This would suck to do every single month. I’m sure you could come up with some automations or what not to make it faster. But either way, it’s painful to go through each individual transaction. The whole idea of this system is to track cash flow and get into the weeds every so often. For us, we’re typically doing this deep dig every year on average probably, or nine months to a year. It does take some time, maybe one or two hours. Ideally, you’re coming away with a very accurate representation of what your expenses are by category. Once you have it all categorized and you have summed up those transactions by category, then I would start to review the totals for each category, and maybe even review some of the individual transactions. This needs to be with your spouse or whomever you’re sharing your expenses with if you’re doing that. As a couple, you’re going through and reviewing each of these. You can’t be judgemental. You can’t be finger-pointing if there are two of you. You are going to review them and say, let’s start to highlight—maybe even do it on paper so you can literally highlight it—some of these transactions that we might consider cutting. Each of you go through and highlight as many transactions as you think might be transactions you cut, not that you will cut or change or something. As you do that, I think it’s important to remember what’s most important, your values, and your goals. You’re going to naturally go that direction, but I think it’s a good reminder to think about what’s most important. For example, for me, and this is where it gets tricky. I don’t really have a high value on clothes, for example. I don’t really spend anything on clothes. So when I see transactions for shopping at clothing stores, I’m like ugh. So that’s a low value thing for me. My wife is not super into that, but she definitely values that more than I do. She’s going to rank it a little higher, I’m going to rank it low. On the other hand, I definitely value traveling, so I’m going to be considering that a very high value expense. Ideally, you’re looking for things that you both don’t really value that high. Or even something that you completely don’t use. That’s low-hanging fruit. Almost always when we go through this, we’re going to see some just straight low-hanging fruit. Like a Netflix subscription that we never use, that’s low-hanging fruit. That’s an obvious one. Or maybe we’re getting carry-out food or something more than normal. Both myself and my wife don’t value that really at all. If we’re going to eat or spend money on food, we want to go to a nice restaurant. Carry-out is not that valuable to us. Really, we do it a lot of times when we get busy or lazy or whatever. So that’s something we definitely will often identify as something to cut, just that carry-out type. Or spending in a super convenient grocery store right across the street, but it’s way more expensive. Those are the types of things that typically get highlighted on my list, but everybody’s list is going to look different. Once you’ve identified all of those or highlighted all of those, then you talk through those with your spouse and star the things you’re going to cut or work on reducing. Once you star all the things you’re going to work on adjusting, you have to make a plan to do it, especially if it’s an entrenched habit, like dining out or carry-out can become a super entrenched habit. You have to focus on how you’re going to stop or change the habit. Habit change is not easy. You have to remember to make a plan. Sometimes, it’s as easy as just going online and canceling the Netflix subscription. Other times, it’s like how are we going to not eat out as much? Well, I don’t know. You can come up with something creative, say maybe if we spend less than $100 dining out next month, we can buy ourselves a treat or something. You can use some of those habit tricks to encourage or incentivize yourself to do it. Or you could just stop using your credit card because that makes it easy to swipe for certain things. The key is to make a concrete plan for changing it. Going even further, as you free up money you want to make sure it does its thing. If you’re freeing up money, it’s going to have to go somewhere. Think about where you would like it to go. Maybe you’re spending in a different category. Maybe you’re giving it away. Maybe you’re saving or investing it. Whatever it is, ideally you’re making a plan for that to happen. For example, if you need to save more for education for your children, the key is to cancel the Netflix subscription and at the exact same moment, like in an ideal world, you adjust the 529 contribution up by that exact amount. The dollars have basically just gone from one category to the other. That’s how the expense audit works. It worked well for us. Myself and my wife have had good results doing that. It is painful, but it’s not something we do every month by any means. We’ve had a lot of clients that use a similar approach. The key is it doesn’t need to be perfect. This temptation with budgeting is if you’re going to budget, you need no other expense. But I don’t think that’s the right way to look at it. Knowing what your total expenses are is very valuable and is much better than knowing nothing. A lot of people are like, I’m going to budget perfectly. Then they get into it and they’re like, this sucks. I’m never budgeting at all. Knowing your total expenses is much better than not budgeting at all. Ideally, you’re keeping a pulse on total expenses. And that’s keeping you out of the weeds. But then you know when the alarm bells are sounding and you can jump into the weeds every once in a while, and make some adjustments so that you’re not having that lifestyle creep we talk about a lot. That’s what happens pretty much for everybody. If you’re not looking at this, it’s happening for me right now. We’ve had lifestyle creep just over the past six months to a year. What’s important, though, is I’m aware of that. I see it happening, so that’s why I’m jumping into the weeds. I hope this has been helpful, and as always, I enjoy chatting with you. We look forward to talking next time.

Have you maxed out your 401(k) or 403(b)? What should you do now? There are a lot of different options—what do those look like, what might be a good out, and what to pass on.  In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about  401(k)s and what to do after you max those out. Topics Discussed: Max Contribution Amount: $20,500 for an employed physician Financial Plan: Allows you to match your goals with dollars to put them to work Is the 401(k) enough? If not, how much do you need to save? Assume more What’s the next best option? Maximizing tax shelters for added tax benefit HSA: Use as healthcare savings account instead of healthcare spending account Backdoor Roth IRA: Fund a traditional IRA and then convert it into a Roth More Options: 457(b), cash balance, deferred compensation, and after-tax 401(k) What to consider? Complexities, different structures, expenses, and side jobs Tax-Loss Harvesting: List of things you can do to minimize taxation Alternative: Investing in real estate business can be active or passive income Short- vs. Long-Term Capital Gains: Which are least and most tax-efficient? Links: E*TRADE Robinhood Using Your HSA To Build Wealth Why the HSA is a Hidden Gem Everything You Need To Know About Backdoor Roth IRA with Jennifer Quire Are You Saving Enough For Retirement Digging Into Tax Loss Harvesting Before You Buy Into Passive Income Why is Permanent Life Insurance Such a Terrible Short Term Investment Contact Finance for Physicians Finance for Physicians Full Episode Transcript: Hey, guys. Hope you’re having a great day. I am planning to talk about 401(k)s and what to do after you max those out. That’s a pretty common question that comes up, and I think there are a lot of different options after that, so we’ll talk through what those might look like, what might be a good out and what might be options to maybe pass on. Before we get into that, I want to give you guys a quick update on just the podcast in general and tell you a couple of things we’ve been working on. If you’ve listened awhile, you know my goal is really to help physicians (in general) use money to live better. I think what’s different about us is we’re focused on the ‘live better’ part and not necessarily the ‘more money’ part. That’s been great to focus on that in this avenue. In my day job, I work with a lot of individuals. It’s more of a one-on-one basis. Our planning firm—Wrenne Financial Planning—have several financial planners, including myself, working one-on-one with physician families. This has been a really great way for me to work more in a one-to-many avenue. It seems like, so far, we started to gain some traction. Surprisingly, it’s been almost two years. I think it was October of 2020 when I started this, maybe more like a year-and-a-half since I’ve been recording. At this point, we’re averaging about 5000 downloads a month, which I still really don’t know what to compare that to other than the past, and it’s going up consistently. To me that’s great news, but I have no frame of reference of what to compare that to. Based on the past, it does look like we’re getting some traction, so that’s always good to see. More people are listening, which is awesome. Thanks to you guys that are listening; that’s great to see. My plan going forward is to start promoting the podcast a little bit. Up to this point, we’ve not promoted it at all. My goal has been to just produce content, record shows, get in the routine, and give it a try. So going forward, my goal is to start promoting it a little bit more, start to get the word out and that sort of thing. A lot of it probably will be online and that sort of avenue. I’m actually going to a podcast conference this weekend. I’m recording this in late May, but I’m going to a podcast conference this weekend. It’s like they’ve got conferences for everything. This is apparently a big conference and it is where you go to learn the art of podcasting. Hopefully, I can learn some things. I’m still an amateur. I really don’t exactly know what I’m doing. I’m just kind of rolling with the flow, so hopefully this conference will allow me to pick up some new strategies I can pass along to you guys. In the future, the goal will be to get a little bit more tactical with trying to grow this thing. Always continue to provide great content and even better content in the future. At the end of the day, that’s what this is about, is we got to add value for you guys, and that will allow us to grow. I also wanted to say again thank you for listening. You guys are the reason I’m doing this. And thanks for the feedback that some of you have given and for sharing. Also, keep the topic suggestions coming. That’s been helpful. Any of the questions you have are great, going to be great topics for us to cover in the future. All right, so 401(k)s. We’ll say 401(k)/403(b). I’m sure many of you have those plans available, and if you’re in practice or you have a spouse with a higher income, odds are you’re getting close to or have already maxed that account out.  As of this recording in 2022, the max is $20,500 for an employee contribution. If you’re self-employed, that’s going to be quite a bit higher, but for the employed physician, you max that $20,500 out and you’ve filled the bucket up. A lot of you guys in that situation might be asking what’s the best next step. I think the first question to ask yourself is whether that 401(k) is enough. I would never assume these things. Some people assume it is enough or maybe they assume it’s not enough. First takeaway is don’t assume either way that it’s enough or not enough. You got to always go back to your financial plan. I’ve said this a bunch of times, but that’s part of the value of having a financial plan. It allows you to match up your goals with the dollars, and you could put those dollars to work to help you move towards those goals. A financial plan should help you get an idea of how much you need to be saving for whatever long-term goal—retirement is a big one. It’s going to help you get an idea how much you need to save to reach the goal. In some cases, it might be that your financial plan is indicating that maxing out the 401(k) is perfect, but that’s you’re on track. In that case, you don’t need to do anything. That’s all you need to do. In other cases, you need to save a lot more. For the average physician in practice, the latter is going to be the case just because your income is higher than average, and typically you need to save more than just your 401(k) or 403(b). I’m wrapping the 401(k) and 403(b) together as one. They are two different types of plans, but they both have that combined total limit. Anyway, first question is, is the 401(k) enough? If not, how much do you need to save? There’s a good chance most of you are going to need to save more than your 401(k), so we’re going to assume today that you do need to save more than your 401(k). In that case, the question is what’s the next best option. The second thing to focus on is really about maximizing tax shelters. What I mean is putting it in vehicles that provide some added tax benefit. The first tax shelter I’ll point out, which is actually the best tax shelter (really) of all of them that we’ll talk about, is the HSA. I’m going to link to some shows about the HSA because some of you that haven’t heard those are going to be like, what are you talking about HSA? The stooge is crazy. Check those out to get more on this. Basically, you have to have access to an HSA with your health plan through work. That qualifies you to be able to fund an HSA. If you’re able to access the HSA, then you can fund this fantastic tax shelter. Not everybody’s going to have access. But assuming you do have access or have that choice and you end up choosing it and funding the HSA, then the second part of the equation is you’re using it as a wealth-building vehicle as opposed to just a healthcare spending account. I guess you’re using it as a healthcare savings account instead of a healthcare spending account. By using it as a wealth-building account (or in other words, investing it)—most HSAs allow that—you’re able to leverage that fantastic tax shelter. I would consider it the best tax shelter (like I said) of all these that we’ll talk about. Like I said, I’ll link to the other shows where we talked more about what that tax shelter is and why this is a beneficial strategy. I would rank the HSA, using it as a wealth-building vehicle, as probably the number one alternative tax shelter beyond just maximizing your 401(k). So that’s the first one. Second one to potentially consider tax shelter–wise, would be the backdoor Roth IRA. Backdoor Roth IRA is actually just a made-up term. Technically, that doesn’t actually mean anything. What’s technically happening is you’re funding a traditional IRA and then converting it into a Roth. It’s a way to fund Roth IRAs no matter what your income is. This is kind of a multi-step strategy. The key is you have to understand the rules. There are some hurdles or problems that can crop up in funding a backdoor Roth IRA that you have to be aware of. But as long as you’re following the steps correctly and taking into consideration all these potential issues, it’s a fantastic tax shelter that allows you to save in addition to your 401(k), and save those dollars very tax-efficiently. I’ve covered backdoor Roth IRAs a few times in prior episodes, so I’ll link to those as well in case you want to dig into how the backdoor Roth IRA works. Going back to point number one, if the answer to that question is yes, you do need to save more than just your 401(k) to reach your long-term goals, then you should be considering backdoor Roth IRA as a really good alternative to start filling those buckets up to get you on track for that long-term goal. Beyond that, other options that work would be worth considering. Oftentimes, the question is raised to us, like what do I do? I’ve already maxed out all my work retirement plans, but I know I need to save more. Where do I save? What people sometimes don’t realize is there are actually other work retirement plan options available through their employer. Some examples that come to mine are 457(b) plans, cash balance plans, deferred compensation, after-tax 401(k). Those are just some of the more common options. But a lot of you will have additional options where you can save on top of that max from the 401(k) or 403(b). The 457, let’s look at that example. The 457 has a completely separate limit. The dollar is the same for employees. You can put in the $20,500 this year (2022) in the 457, but it’s a completely separate limit beyond the 401(k). In other words, you can max out both at the same job. The thing to watch out for 457 is there are two main categories of them—governmental or non-governmental. Governmental 457s are fantastic. They’re basically like the 403(b)/401(k) but a little bit better, typically. Non-governmental 457 is the second category. They’re not nearly as awesome. Especially if you have a non-governmental 457, you want to be a little cautious with that. Understand how it works and dig into it before you start funding that kind of a plan. But it’s definitely an alternative tax shelter to consider. Cash balance plans, I mentioned that. That’s an additional bucket to fill up beyond the limit of the 401(k). That type of plan, similarly to the 457, you really need to understand how it works because they’re a little more complicated and there are a lot of variances that you’ll see. The most common negative with a cash balance plan is no flexibility on how it’s invested, and you’re limited to a conservative investment option. If you’re really young and getting started, that’s not great because you can take risk and it’s going to lower your expected return and ultimate efficiency by being super safe with the money. But it’s definitely still worth considering, especially the more you need to save in the higher tax bracket. The other one I’ll mention just for today would be the after-tax 401(k). That’s a provision that your company’s 401(k) would sometimes offer and allows you to fund more than just the $20,500 employee limit. It’s a separate bucket that they allow you to fund as an employee, and it’s more like the employer part of the equation. It’s not Roth. It’s after-tax 401(k) funding. This is another one you have to look into and understand how it works, and see what your specific company allows or offers. If that is an option, that can be an additional bucket to save into. I think the big consideration I would start to throw out on these other options through work you got to look out for is first of all, some of the complexities I’ve already thrown out. You got to understand these. There are a lot of different types of structures. You have to understand the pros and cons. The second thing is expenses. Sometimes, the expenses are extremely high on these add-on plans, to the point where it even eats into the tax benefits. Sometimes, it completely eats into it to where it’s not even worthwhile. They can also get really complicated. As you start to consider these options, you want to be aware of the expenses, the complexity, what type of plan, pros and cons of that specific plan that you’re offered. Other options through work can be fantastic, but you really need to look at the specific plan that is available. There’s also another category of options I would consider for those of you that have second jobs or even side hustles where you’re self-employed. This gets even more complicated in terms of the rules that you have to be aware of, especially for the self-employed setup. But it’s definitely something we advise often with our one-on-one clients, and it’s something I know many of you would potentially benefit from. If you have two jobs (for example), you can often fund both company 401(k)s. But you have to be aware of how that coordinates. I’ll give you just an example of one that might come up. Let’s say you’re a partner in a practice and you’re maxing out the 401(k) there. But let’s just assume that it’s all coming from your employer, which often happens. Let’s say you’re in a small practice and the “employer” (the practice) is funding all that 401(k) 100%. When the practice is funding, it is a much higher number than that $20,500. But let’s just say the practice is funding all of it. Let’s also assume on the side, you’re self-employed in an unrelated business. And let’s just say you’re making $20,500. In that example, you’re actually able to fund, through that side hustle, 100% of it to a solo or individual 401(k) as an employee contribution and max out that $20,500 bucket. The reason is because your practice was 100% funded by the employer. In other words, you’ve not yet filled up your employee 401(k) max bucket. That number actually can be even higher than the $20,500 if you’re making higher through the side hustle. That can allow you to fund a lot, but it gets complicated quickly. For example, if you have a 403(b) through your primary job, that messes with the rules here a little bit. It adds some additional limits that can often restrict us. Another thing when you’re looking at this situation is you want to focus on making sure you’re maxing out the matching dollars. Oftentimes, you’ll have a match with both employers. You have to coordinate the two together and make sure you’re leveraging that. The key when you start to get into this realm of stuff is hiring or leveraging advisers or consultants or those sorts of things, especially if you get into self-employed retirement plans. You’re going to be able to save quite a bit—tax sheltered when you have that setup—but you have to be really careful that you’re following all these extra rules between the two plans. The further we go down this list, you have to look out for expensive products. Salespeople start to come out the further we get down this list. You have to look out for expensive products that are overly complicated and potentially so expensive that they would eat into that tax benefit. Sometimes, there are products that are not even in these categories I’ve thrown out that are often brought up as these tax shelter alternatives. Some examples are annuities or permanent life insurance. They’re typically sold as the answer to this question. This podcast we’re talking about is like, I’ve maxed out my 401(k). What should I do next? Oftentimes, these financial services companies or salespeople will sell these vehicles, like annuities or permanent life insurance, as solutions in themselves to this issue of where to save next. The problem with them is they’re typically extremely expensive. Often, it’s very difficult or impossible to figure out the expenses. That’s always a warning sign. If you can’t figure out what’s going on, don’t do it. They’re typically sold as the Swiss army knife style, like this is going to provide this additional tax shelter. I’ll link to a podcast where we talk about some of these a little bit more. You’ll have to look out for those vehicles. I would encourage you to focus on the traditional vehicles first and not the products themselves. What I’m talking about is focus on the 401(k), 403(b), 457, like the IRS-blessed tax sheltered retirement plans, HSAs or those sorts of things. Those are vehicles that the IRS has signed-off on and created code around. On the flip side, I would be cautious with some of these insurance company–created products that are in themselves designed to be tax shelters. That doesn’t mean that they’re always bad. You just want to be cautious with those. In some cases, your work plans can be really, really expensive. Maybe you have access to a 457(b) plan as an alternative through your work. But it’s just really expensive funds in the plan. That can be a restricting factor, maybe even to the point where it’s not worthwhile. The further down we get on this list, you just want to be aware of the expense aspect and the complexity aspect. I think a good rule of thumb is you need to be able to explain it to somebody else, at least the general pros and cons, understand the expenses, and understand the basics before doing it yourself. If you don’t understand it, you don’t want to put your money into it. That’s a big, broad bucket. The second big point is maximizing the tax shelters. As I said, as you get further down the list, you want to exercise some caution. Once you max out that 401(k) or 403(b), typically the next thing you go to is what other tax shelters are available. In a lot of cases, many of you will max everything out. Let’s say you have a 401(k) through work. You max it out $20,500. Let’s say you have a 457 as well, but you’ve maxed it out $20,500. Let’s say you’re also maxing out backdoor Roth IRAs. And let’s assume again your plan says you still need to be saving more on top of that. Then, what next after that? If you maxed all of these tax shelters that are available, which often happens, then you go to things like non-qualified investments. Stuff like a non-retirement plan. I call them non-qualified investments. Sometimes, people call them a brokerage account. Basically, that’s just like investing in your name instead of investing in a tax-qualified vehicle that has some special tax treatment like a 401(k), IRA or whatever. Non-qualified investing is basically just investing outside of all these vehicles we were just talking about. A plain Jane brokerage account investing in your name. Technically, a savings account is a non-qualified investment. That’s typically the third thing to look at, is if you need to save more on top of the tax shelters, typically you’re going to start looking at some of these non-qualified or less tax-efficient investments. The vehicle itself is actually pretty simple. It’s just like invest in your name. What you have to keep an eye on when you get into this realm is when you invest in these types of accounts, you can trigger taxes and they will cause harm sooner. There’s less or no tax protection, whereas with a Roth IRA or something, or even a 401(k). Let’s say you buy an investment in a 401(k) or Roth IRA. It’s just growing crazy, pays all kinds of dividends, generates all kinds of income, it just explodes in value and pays out income, interest, dividends, and all sorts of income. That doesn’t affect your taxes. Let’s say you sell that investment that’s grown a ton in a Roth IRA, 401(k), those sorts of things. It doesn’t affect your taxes. With non-qualified investing, that’s a completely different story. Same investment is growing crazy, generating interest, dividends, and spitting out income. Everything is theoretically going well. But each of those different avenues of growth will (in some cases) generate tax for you in the current year. You have to be much more aware of the tax impact of the investments you placed in the vehicle, and ideally it’s tax-efficient stuff. For example, real estate funds, when you just buy real estate in an investment fund. Generally, that’s not very tax-efficient. Just the income it kicks out is typically not as tax-efficient. So that’s not the best vehicle to own in your taxable investments. It’s not the worst thing, but you probably have a lien towards owning that, like a Roth IRA or a tax-sheltered investment, and would probably be a little less appealing to own it than just a non-qualified investment because it’s going to fully realize that tax hit. Even more of an extreme example, let’s say you have an investment account that you’re trading on E*TRADE or Robinhood or something like that, and you’re trading a lot. Let’s say you’re buying stocks here and there, and selling stocks here and there. You’re investing your money, so that part of it is good. But the problem with it is oftentimes, you’re kicking out short-term capital gains. If you buy an investment and sell it in a short period of time—let’s say a few months—if you only owned it a few months, that’s going to cause short-term capital gains, and they’re the least tax-efficient. If anything, you keep it for over a year and get long-term capital gains, those are much more tax-efficient. Ideally, maybe you don’t even trigger long-term capital gains. You just hold it for a really long time. Typically with taxable investments like non-qualified investments like this, you want to defer taxes as much as possible and avoid triggering tax now. That’s the general strategy. The more you trade or the more the funds that you even own trade, the more it generates taxation. Trading a lot is typically an issue with these kinds of accounts. Or even have them a broker. A lot of brokers have high turnover. Even the funds that they put you in are high turnover. High turnover means the stocks get traded a lot. That’s typically terrible for tax sheltering purposes. The key to non-qualified investing is you have to watch taxes. Taxes become an added expense. On top of normally paying attention to the expense of the vehicle itself, the tax it generates is an added expense on top of it all. If it’s managed well, you can be pretty tax-efficient with your non-qualified investing. You can pay attention to those investments that you own. Ideally, your tax laws harvesting, that’s another term I’ll throw out. I’ll link to a show where we cover that a little more. There are basically a list of things you can do to minimize the taxation on this type of an investment vehicle, knowing that it’s more sensitive to tax. The nice thing about a non-qualified investment vehicle is there’s no limit. You can put a ton of money into it. You don’t have to worry about the funding limits that you would typically see in all the other tax shelters. Also, it’s ultra flexible. There’s not really any limitation when you take it out. It might trigger a tax, but it’s not going to be penalized. It’s not like retirement accounts you have to hold it in there for a certain time, in a lot of cases to avoid any adverse tax penalties or whatever. With this type of investment it’s super flexible. That can be a solid alternative, particularly when you’ve already checked off those first two boxes, like you know you need to save more, and you know you’ve maxed out all the good tax shelters. That’s when this comes into play. So that’s non-qualified investing. The other thing I’ll throw out is a side note. I meant to mention this. If your goal long-term is saving for education, sometimes that can be an additional tax shelter that you might consider saving in an education savings account. If the goal is for education, you might explore that tax shelter as well. That can be a really fantastic vehicle to save into. First thing, figure out are you saving enough? Should you be saving more on top of your 401(k)? That’s when you consult your plan to see what that should look like and how much you should save. Second thing, look at all the tax shelters. Make sure you’re maximizing those. Third thing, if you still need to save more, look at non-qualified investing. The last thing I’ll throw out before we jump off, this often comes up, like what about getting into real estate, or I got this investment deal and my buddy’s doing, or syndications or whatever. I would lump those altogether in more active businesses. Even if they sometimes call them passive investing, when I say active I mean it’s going to require some effort on your part to screen or manage them. Let’s say buying/investing real estate. You’re going to have to be the one that decides which type of real estate you want to invest in. Especially if you’re directly owning property, you’re going to have to manage it and make sure you get tenants. That can be a pretty intensive business. It often comes up like, I heard that it’s worthwhile to invest in real estate as an alternative. That can be fantastic, actually, but I would look at that as more of a business. It’s an investment, but it’s more like a business you’ll have to be active in, depending on what business it is at varying levels. I don’t think that’s for everyone. I would definitely not do that or go that route just because of the tax benefits or because people said it’s a good thing. You need to have good reasons to do that outside of all of those things. Maybe for example, you have a passion for doing real estate or you really are interested in it, and you enjoy building something. Ideally, you have some solid reason for doing it that’s independent of all this stuff. In that case, it can be a fantastic thing, but you have to look at it differently. It’s not for everyone. That’s the last thing I wanted to throw out. I hope this has been helpful. As always, I enjoyed chatting with you today, and I will look forward to catching up with you next time.

What are some of the behavioral tendencies we all can run into that affect our decision-making, and ultimately cause some big mistakes? What do big areas or behavioral tendencies look like? In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about investing behaviors that will wreck your financial plan. Knowledge and awareness are needed to avoid behavioral finance mistakes. Topics Discussed: What is behavioral finance? When people make errors, mistakes, and biases Why? People are not rational or self-controlled and don’t identify tendencies Overconfidence: Common idea that you know more than you actually do Self-serving Bias: Attribute good things/outcomes to skill, bad outcomes to luck Hindsight Bias: You know more or knew more than you really did in the past Confirmation Bias: Focus on what confirms beliefs, ignore what contradicts them Recency Bias: Hone in on short-term and overemphasizes that importance Refer to your financial plan and remind yourself of your financial goals Anchoring Bias: Relying and latching onto too much pre-existing info Loss Aversion: Overly fearful of losses and pull to avoid losses Herd Mentality: Suffer from fear of missing out (FOMO)? Links: Confirming Fund Managers Overconfidence - SSRN Behavioral Finance - Charles Schwab Asset Management What To Do When Your Investments Start Tanking How Market Downturns Look and Feel The Power Of Diversification Investing During Wild Markets with David Blanchett Free DIY Financial Planning Guide for Physicians Predictably Irrational: The Hidden Forces That Shape Our Decisions Thinking, Fast and Slow The Psychology of Money: Timeless lessons on wealth, greed, and happiness The Big Short GameStop on CNBC Contact Finance for Physicians Finance for Physicians Full Episode Transcript: Hey, guys. Hope you’re having a great day. I am excited to talk about investing, and this is the third in our series of three shows, talking investing. In the first, we talked a little bit more about how to navigate scary downturns in the market. The second, we talked more about how those looked historically, some of the numbers, returns and that kind of thing. Today, we’re going to be talking about some of the behavioral tendencies we all can run into that can really affect our decision-making, and ultimately can cause some big mistakes. We’re going to get into that today. This is a big topic, behavioral finance is what they call it. Behavioral finance is a monster topic. It’s one of my favorites to get into. Today, we’re just going to hit some of the high points of some of these behavioral tendencies that are out there, and hopefully give you some baseline knowledge and awareness so you can start to see them and other people and yourself, and ideally avoid some of the mistakes that can come into play as a result of them. So we’ll jump into that now. We’re talking behavioral finance. This is a fun topic. It’s one of those things. It’s a little easier (probably) to identify it in other people. We had to see it. It’s one of the fun parts about my day job. We work with people one-on-one all day long, so it’s really one of those things that we can typically see before sometimes people see it in themselves. Often, by pointing it out, we can really help people a lot, so that’s the fun part about it. Now, on occasion we can’t help, so that’s unfortunate. But it is one of those things. Like anything, behaviorally, it’s sometimes harder to self-identify these things, but it’s not something that you cannot self-identify, especially as you gain some awareness around it. We’ll be talking through some of the big areas or behavioral tendencies that I have seen come out, what they look like, and how you can potentially avoid mistakes around them. Behavioral finance is this whole study of people and how they’re not quite as rational or self-controlled. They’re ultimately prone to errors, mistakes, and biases. We’re going to talk about (like I said) some of the big areas that behavioral finance has identified. The first one that I want to talk through is called overconfidence. You might already be thinking the right direction on this. It is what it sounds like. Overconfidence is this idea that I know really more than I actually do. It’s really common. There’s been a lot of studies on this and they seem to say the same thing. There was one I was looking at recently, looking at investment fund managers. Seventy-four percent of them said they’re above-average and 26% said they’re average, and then basically 0% of them said they’re below-average. Everybody thinks they’re at least average or above—which is not possible—so this is reinforcing the whole overconfidence thing. Not everybody is subject to this and it can depend on the topic or how much you know about it. Sometimes, it’s most common when you know enough to be dangerous. You’ve heard people talk about that. What people say when they’re overconfident—because usually, you can acknowledge that people tend to do this—say something like, I know everyone says they’re above-average but I really am above-average. It’s one of those things you’re like, no, I’m not overconfident, but then, I’m sure there were times when you were. At least I can think of times where I was overconfident. Maybe not in all areas of my life. Definitely not in all areas but in certain times. Like I said, it’s usually when you know enough to be dangerous. The problem with overconfidence is confidence gives you this feeling of being in control. You’re less likely to exercise caution. It makes you way more prone to mistakes, all along the way considering yourself maybe an expert or more knowledgeable than you really are. This shows up with investing. Say you’re buying investments, particularly individual investments. Say you bought cryptocurrency in GameStop or whatever individual stocks. You started doing that (say) 2015 or something like that. From 2015 to 2020, everything’s going up. Your stuff, your trading, your investment choices have done exceptional. You’ve started to see the balances go up, have built up some confidence, and maybe it’s gotten a little in overconfidence level. What happens is you start to feel like you’ve got it figured out. With investing (at least), inevitably it always goes the other direction. This is where the mistakes often happen. The mistakes can happen when everything is going up, but usually, when everything’s going up, everything is going up, so it’s hard to not make money with general investing. But when things go down, that’s often when the big mistakes happen. When you have this overconfidence, you don’t really recognize that and you’re prone to those mistakes. They can happen really fast, especially when things go down. The problem with a lot of these is they’re difficult to self-identify. Ideally, this is where it’s helpful to get another person’s view. This is going to be true with a lot of these. Whether it’s a knowledgeable friend or if you work with a financial planner, this should be something you’re asking them about, especially if you’re pulling the trigger on certain things with your investing. It’s good to get others’ input on this and then listen to it because they might say something that you don’t agree with. It’s important to remember especially if they have expertise, like they probably know what they’re talking about and it’s probably easier for them to see some of my flaws, and maybe they have a point. So at least be open to other people’s input on this kind of thing. Even your spouse. If you know enough to be dangerous in that territory, that’s oftentimes where it happens. Sometimes, it happens when you say you know more than enough and you’re an expert—but you’re really not—so that’s probably even more dangerous at the time. Oftentimes, say the spouse that doesn’t really know much at all, can be bringing up really good points. We ought to get someone else’s opinion because this is not what you do. You don’t spend that much time on it. You’re so busy doing this other thing that you have going on or job or whatever. Sometimes, they can be the voice of reason. Sometimes, it just takes listening to them. That’s overconfidence. That’s a big one that can come into play. I think it’s most common probably in younger people that have had some experience investing but not a ton of experience. It seems like these big, huge market downturns will teach people some of these lessons through that mistake. So that’s overconfidence. That’s a big one. Self-serving bias is the next one that I wanted to talk about. Self-serving bias is where you tend to attribute good things or good outcomes to your skill, and bad outcomes to luck. If it’s a bad situation or outcome, you’re going to be like, oh that’s not me. That’s not my fault. Now if it’s good, you’re going to be like, pat on the back. For self-serving bias, I like the example of school because everybody can relate to this. If you get an A+ on a test, you’re going to be like, wow, I must’ve done so well with my studying. I’m a naturally smart person and I’ve got lots of skills. So, nice job self. Versus imagine getting the same test score back and you’re like, oh, I got a D-. Then you’re like, well, the teacher didn’t teach what they needed to teach and the books are lacking. There’s no direction. You’re just coming up with excuses. It’s not my fault. It’s external factors. That’s self-serving bias, and everybody has a little bit of it in them. It can become a major problem with investing especially if you’re involved in pulling the trigger and making decisions. It’s the same as the test score. You’re going to pat yourself on the back when things are good, and when things go bad, you’re going to look for excuses and blame other people, when in reality it’s probably not quite that way. With investing, when things go really well, most of the time it’s not you. It might be a little fraction of you, but most of the time it’s not you. Even when they go poorly, it’s often not you. I think with investing, people often attribute success with their investment too much to their own intelligence. A good way to counter that is to—same thing with overconfidence—getting others’ input; that’s going to be common in these. Also, maybe comparing to more objective comparisons, like how the overall market was doing. That’s always a good wake-up or benchmark check-up on this sort of thing. So that’s self-serving bias. Hindsight bias is the next one. I’m sure you’ll recognize this. It’s where you think you know more or knew more than you really did in the past. I hear this all the time with people talking about big events. In 2008, we had the housing bubble crash, and everybody that was around then probably remembers that. Everything tanked. What happens is you start to get people reflecting back on that. A lot of people—not everybody—would talk, like maybe they saw it coming, the writing was on the wall, it was inevitable and everybody knew it’s going to eventually crash. You create this belief in your head that at that moment in time you did see it coming, but in reality you look back to actual what was going on in the moment before that crash. Nobody knew that that was coming. That’s just not reality. In fact, if you actively knew it was coming, people would make fun of you. That was the least likely thing for people to be bringing on up. One in a million people knew that thing was coming. There was a movie made about the one dude that knew 2008 was coming. The Big Short. If you haven’t seen that, that’s a good movie. That’s the movie about the only dude that knew 2008 was actually coming, maybe a few more guys and gals. 2008, a lot of people looking back think they knew it was coming but really didn’t. What happens with this hindsight bias is you start to give yourself more credit than is due, and it goes along with these first three. It leads to more overconfidence, pat yourself on the back—I’m pretty awesome. A lot of these are related. Confirmation bias is a little different. It’s paying close attention to information that’s confirming your belief and ignoring information that contradicts your beliefs. My favorite example of confirmation bias is social media. Social media has completely figured out how real of a bias this is. Social media is programmed to put in front of you that’s in line with your values and beliefs, and not put stuff in front of you that’s against those. This totally makes people feel good about this. This is in line with confirmation bias. The same thing with social media. When you’re investing, if you only take in information in the area of the thing that you believe. Let’s say, you have just gravitated towards this idea. I’m going to go with the one that actually happened lately. GameStop stock was super popular. A lot of people talked about it. It was in the news for a while. They’re buying the one stock and it got crazy. Say around that time, you really just bought into that idea. The people you hung out with or the [...] were online in this group that all talked about it. That was what you were hearing all day long, and all the news stories you got were that. Even your social media started to pop up stuff just on that story. That’s just really pushing you down the same path you’re already going and confirming these beliefs you already have, which causes you to do more of it. What’s happened with GameStop, for example, it skyrocketed. Then it went way down and went back up. But since that huge skyrocket when it was big on the news, it’s been on a steady trend down. That’s often what happens with these. Even if it does pretty well, the problem with this is it leads you to be less open to other ideas. This can be any idea, but with investing there are all kinds of good ideas that are out there. Just because you’ve already committed to whatever given ideas you already have being great, that doesn’t mean they’re always going to be great. Or maybe even you’re wrong, and it’s good to consider the other side of the coin. This is one that it’s good to just force yourself to open up to other ideas or alternatives and have that open mind. Recency bias, the next one, is the one that’s actually similar to hindsight that I was thinking about as I was talking about it. Hindsight bias and recency bias are both looking at the past. But recency bias is honing in on short-term and really overemphasizing the importance of that. The short-term—which we talked about in the past couple of episodes—in the investing world should not be the focus. It’s a long game. There’s this tendency, though, for people to really just hone in on that. Let’s say the market tanked. The news says the worst loss in eight million years, everything’s going down, everything’s blowing up, and it’s based on this one-day drop. You’re going to have the tendency to be like, argh. This is a problem because it’s fresh. But if you go back and look at history, there’s actually been a whole bunch of days like this before. Many, many days like this before, if you look at it objectively. In reality, this day is not important. This is a good one where it helps to refer back to your financial plan and remind yourself of the goals, and the dollars are tied to those goals which should be long-term. You have to have a long view. Recency bias is about having a short view and having a pull towards that. Everybody has a pull that looks at what they recently had happened, but with investing it needs to be a long view. You have to pull yourself away from that, even though there’s that natural tendency. Anchoring bias is the next one. Anchoring bias is relying too much on pre-existing info or the first info that you come across. It’s latching on. For example, I’ve seen this with people we worked with one-on-one in the past with their planning. Maybe it’s like my parents lost lots of money in the market. Therefore, I’m going to lose lots of money in the market if I do it, so I’m not going to do it. They’ve latched on to this information that their parents have passed on to them, and they’re adopting that themselves. Or maybe it’s like, my buddy that I hang out with has done really well with real estate investments, so I’m going to do really well. The problem with it is it’s not adequate information. You’re latching on to a limited, tiny slice of the information, and potentially making huge decisions on that small, tiny information. With the parents example, maybe they had no idea what they were doing. Or maybe they didn’t lose as much money as they thought they did. Or who knows what happened. Maybe the timing was bad, which is a mistake in itself. There are a lot of things that could’ve happened. It’s impossible to draw a conclusion from it without knowing the entire story of not only the parents, but also, you should probably look at it like what the alternatives could have been for them. The problem with this is not doing a full, adequate analysis. Loss aversion is the next one I want to talk through. This is where you are just going to be overly fearful of losses. It’s just the pull to avoid losses, kind of like all cost or at greater cost. The research says if you’ve experienced prior losses, you’re going to have an increased chance of having this issue come up in the future, which makes sense. Or maybe other people around you, like the parents example overlaps with this. Maybe you’re pulling in that loss they’ve had and attaching to it. In down markets when investments go down, it just naturally brings more fear into the equation for everyone. Everyone has that little bit of this. You just see it when you hear people talk about investments a lot more when they go down. This is in play for all of us to a different extent. Some people are painfully fearful to the point where they can’t take any action on anything with any risk. Insurance companies actually leverage this. They have annuities with floors. They have a cap and floor. They limit the downward exposure. It’s basically capping the losses that you can have. But they come at a huge cost, typically. They basically sell these overpriced products a lot of times in order to help people address this behavioral tendency. I think a much better approach is to work through that and have some understanding of where the fear is coming from, a little bit of understanding of how markets work—that can help—and understanding how these downturns typically play out, and reminding yourself about the purpose of the dollars and consulting your plan. What’s the money for? Is it a long-term thing? It should be. If so, then this short-term loss is really not a problem because I’m not going to need it short term. The last one I want to talk about is herd mentality. This is the common one that comes up. It’s like the FOMO—fear of missing out—ties in with that. The tendency for people to follow the masses as opposed to doing their own independent analysis. Examples of this lately are cryptocurrency, GameStop, I bonds especially lately. This is probably one of the most often ones we see, just snippets of it from people we work with one-on-one. Typically, how it comes up is like, I’ve heard from several of my buddies that XYZ is a good place to put money right now, or something along those lines. I think it’s different if you work with a financial planner versus if you’re doing it yourself on a lot of these, especially this one. These people that are bringing up to us are doing the right thing. What I would tell you to do is bring it up to another person. Or if you’re doing it yourself, you could bring it up to another person, but they need to know what they’re talking about. Or you need to be doing your own independent analysis. If you’re putting your entire net worth into cryptocurrency, you really need to understand it backwards, forwards, understand all the risks, and how to fix your planning. It’s important to avoid that pull to go with what the people around you and the masses are doing. That’s where bubbles get created and then they blow up. Not to say any of these are necessarily bubbles, but you don’t want the herd to drive your decisions. It will pull you behaviorally, like this is what all this research is about. Behavioral finance is the fact that we all have these pulls either way. You don’t want it to pull you so much that it’s affecting your decision-making and causing you to make big errors. With herd mentality, think about the decisions, where it’s coming from. Are you running it by someone else? If you’re not running it by someone else, are you doing an independent analysis? Or are you just going with what the herd is doing? Thinking through those points (I think) will be helpful. All right, so that’s behavioral finance in a quick nutshell. This is one of those things, like I said, there’s been huge books written on it. You can dig in a lot on this. I’m happy to get into some of these areas more. Like I said, I enjoy this subject. However, I know it can get pretty intense. Let us know anytime if you have areas within this or other areas that you want us to dig into in the future, and we’ll definitely plan to do that as we hear from you. Hope you have a great rest of your day and good catching up as always.