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August 9, 2018 | The Doc

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The Doctor is IN!

Ashley’s an MD living the swell life in BC. Got it all. Nice house, new truck, new kid, good hubs, big income. But Ash is vexed. Is all this peachiness floating on a sea of debt?

First the suck-up: “I have enjoyed reading your blog for years and really value your expertise. My father and father in law both read it, so I’ve had some great family discussions from this. I try to take in as much as I can about finance and am slowly dipping my feet into creating an investment portfolio. BUT first I must pay off all my debt… right ?! I am unsure. As I read your post today I thought why not just ask for some advice?”

Why not? This is an equal opportunity blog. We heal the doctors. We lift the deplorables. We pity the moisters and spank the wrinklies. Together we seek that holy grail. Balance. So, doc, what’s problem? Who are you?

“I am 30, married, have one child. I am in my 2nd year of practice as a family doctor, coming out of school with $400 000 of debt from international school (200k to a LOC and 200k to my parents). In 2015 we bought our first house with the additional help of $20 000 from my parents, $655k for a detached house in Burnaby, BC at the time I was still a resident doctor in training. 2016 I opened my practice, enjoyed holidays, bought a new truck and had a kid. 2017 I was off for my 6 months of unpaid mat. leave. I returned to work in late 2017 and decided to take a deeper plunge into debt….we sold our house for $1.2 and upped our mortgage for our dream house (purchase price $1.8. I am not fearful about the real estate market/mortgage rates at this time because I have no plans to sell in the next 15 years and it is within our affordability.

”My husband’s annual income is 100k and my 2018 gross will be approx. $275k with ~ $70 000 in true office expense. Our investments (RRSP, TFSA and RESP) total $26,000.”

Hmm. Let’s summarize. Personal, variable-rate educational debt of $400,000. A mortgage of at least $1 million (assuming you bought the first house with 20% down). Liquid assets piteous, at barely more than twenty-five grand. Household income of $300,000, pre-tax, or three times the Van average. What’s the plan?

“So, my question is….what now? What do I do with my pay cheques? Do I worry about diversifying and investing now or do I focus on debt reduction?!  So far it’s been putting everything I can into the LOC (my father preaches debt reduction), the folks at MD Management have encouraged RRSP contributions and investing….

“I am very type A and like to have a clear plan of exact amounts into specified accounts….also need to plan ahead for kiddo numero 2. The medical profession doesn’t get near enough business and financial education they need to make big decisions from a young age. This debt makes me really nervous, but everyone reassures me its a “good debt” for education and real estate. So, how do I best plan my 30’s to set up my 40’s and later years??

“Feel free to share this general info on your blog.”

Ashley, forget your dad. He grew up in another age. Forget MD Management, the financial outfit which loves sinking its talons into the flesh of unsuspecting baby-doctors. You and your husband need to determine if the risks you’ve taken are reasonable, given your circumstances.

Of course, they’re not.

Net worth looks like only $300,000, of which over 90% is in one asset – your property. And, yes, you bought at a dangerous moment in history – mid 2017 – when peak house was with us. Worse, it was in one of the most delusional places on the planet – suburban YVR – about to be overrun by Comrade Premier Horgan’s orange rabble. The Dipper tax crusade against real estate and ‘rich’ people like you has only started to take its toll. Expect consistent equity declines in the future.

So you now have the better part of $1.5 million in debt, most of it against an asset with a high potential of declining in value. You want another kid – which will mean more months of unpaid maternity leave. Then, with two toddlers, you’ll face high daycare costs ($3,000 a month?), or be tempted to stay at home for a few years, radically affecting income. But with such a steaming load of debt, that might be impossible – so past decisions will have real consequences on your life going forward.

Without a doubt, you lack balance. You’ll be trapped in your work for years to come. Plus, if you are getting investment and tax advice from you-know-who, your miserable and inadequate portfolio is likely sitting in crappy, expensive MD mutual funds. You might even be making the classic mistake of paying yourself in dividends instead of salary, and accumulating capital inside your professional corp.

So, Ash, maybe you’re an aggressive Type A lady, but you’re also self-indulgent, hedonistic and cruising for trouble. The house will likely decline. The costs of your floating debt will rise.  The debt is elephantine. Your hormones are pesky. And your question – do you invest or pay down some of this obligation – is the wrong one. Hate to tell you, Ashley, but you can’t have it all. They lied.

Step back. Sell the house. Trash dangerous debt. Focus on building up investments (you have no pension). Stuff the TFSAs and RSPs. Dump the mutual funds. Get a real advisor. Do a budget so all that income doesn’t fritter away. Delay the next child. And, sheesh, learn to wait for stuff, like a regular person.

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August 9th, 2018

Posted In: The Greater Fool

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