When to use tuition tax credits?

[NeuroD]

I've been reading/hearing that most people front load the credits in PGY1-PGY2, but to me it seems to make more sense to save it for when your practicing. Example calc with rough numbers for Ontario, assuming ~120,000 in tuition credits:

PGY1-2 pays ~60,000 which translates into ~14,000 in taxes at an average tax rate of ~24%. Applying the credits here will get you ~25,000
IM attending, after overhead, takes home ~300,000 (sorry if this is off, I'm basing it off the CMA/CHC) which translates into ~125,000 in taxes at an average tax rate of ~42%. Applying the credits here will save you ~60,000.

Big difference no? Am I missing something in my calculations? Or is the trade-off that people would prefer the extra cash-flow in early years, even if it ends up costing them 30-40k in the long run?

[ellorie]

First, you can’t save them. They apply as soon as you have an income. 

Second, they are applied at the lowest tax rate, not your tax rate. 

[distressedpremed]

We've had accounting sessions by the AMA/CMA/OMA. Accountants say there is no difference to when you are using it, due to the fact that they are applied to the lowest tax rate for a progressive tax system (income tax brackets). You can't save these credits...as soon as you have an income they have to be used. 

You're also saving interest on your LoC (depending how high it is) by using them during residency. 

[NeuroD]

7 minutes ago, ellorie said:

First, you can’t save them. They apply as soon as you have an income. 

Second, they are applied at the lowest tax rate, not your tax rate. 

Ah I didn't realize that. I thought you could chose when to claim them.

[rmorelan]

29 minutes ago, PhD2MD said:

Ah I didn't realize that. I thought you could chose when to claim them.

yeah no such luck

that being said since they have a set amount of value to you (a flat percentage of your tuition) there is no logical reason to delay using them anyway. 

[rmorelan]

52 minutes ago, PhD2MD said:

I've been reading/hearing that most people front load the credits in PGY1-PGY2, but to me it seems to make more sense to save it for when your practicing. Example calc with rough numbers for Ontario, assuming ~120,000 in tuition credits:

PGY1-2 pays ~60,000 which translates into ~14,000 in taxes at an average tax rate of ~24%. Applying the credits here will get you ~25,000
IM attending, after overhead, takes home ~300,000 (sorry if this is off, I'm basing it off the CMA/CHC) which translates into ~125,000 in taxes at an average tax rate of ~42%. Applying the credits here will save you ~60,000.

Big difference no? Am I missing something in my calculations? Or is the trade-off that people would prefer the extra cash-flow in early years, even if it ends up costing them 30-40k in the long run?

that logic by the way does work with RRSP - which is why some residents who are capable of saving there do wait to claim the RRSP payments until they do become staff. 

[la marzocco]

2 hours ago, rmorelan said:

yeah no such luck

that being said since they have a set amount of value to you (a flat percentage of your tuition) there is no logical reason to delay using them anyway. 

 

2 hours ago, PhD2MD said:

Ah I didn't realize that. I thought you could chose when to claim them.

The difference between tax credits and tax deductions. Tax credits, like tuition, textbook, and education amounts, are subject to a flat rate (15% federal) against your taxes payable. So there is no advantage to take those credit later because its benefit does not vary based on income level. Since tuition amounts have no expiration date, you may claim charitable donations first (since those expire in 5 years) before tuition. That's the typical ordering of usage of credits.

Tax deductions are things that reduce your taxable income. Taxable income is the figure upon which you levy the tax rate so the magnitude of the deduction is a function of your income level and the rate of the bracket. As @rmorelan alluded to, RRSP contributions are an example where it will directly reduce taxable income. Generally, I recommend people to max out TFSA before RRSP because you get a bigger bang for your impact when you are in the highest bracket (i.e., do not contribute to RRSP until you're an attending or have maxed out your TFSA contribution limit). And RRSP tax deferral only has an advantage when there is a big difference between pre-retirement income and post-retirement income. Assuming you're a physician and will have a steady flow of income throughout your life, the tax deferral benefit of RRSP is really not that significant. 

[rmorelan]

1 hour ago, la marzocco said:

 

The difference between tax credits and tax deductions. Tax credits, like tuition, textbook, and education amounts, are subject to a flat rate (15% federal) against your taxes payable. So there is no advantage to take those credit later because its benefit does not vary based on income level. Since tuition amounts have no expiration date, you may claim charitable donations first (since those expire in 5 years) before tuition. That's the typical ordering of usage of credits.

Tax deductions are things that reduce your taxable income. Taxable income is the figure upon which you levy the tax rate so the magnitude of the deduction is a function of your income level and the rate of the bracket. As @rmorelan alluded to, RRSP contributions are an example where it will directly reduce taxable income. Generally, I recommend people to max out TFSA before RRSP because you get a bigger bang for your impact when you are in the highest bracket (i.e., do not contribute to RRSP until you're an attending or have maxed out your TFSA contribution limit). And RRSP tax deferral only has an advantage when there is a big difference between pre-retirement income and post-retirement income. Assuming you're a physician and will have a steady flow of income throughout your life, the tax deferral benefit of RRSP is really not that significant. 

No it isn't - our main problem long term is the limits on a TFSA as staff and even RRSP for that matter are really insignificant. There very likely won't be a question of TFSA vs RRSP if you are using them at all as you can max them both out relatively easily and go from there.  I find the main RRSP issue is that you have to actually have employment income to get the contribution room - well as a doctor that means you are going to be paying double the normally CPP to get that as you are both employer and employee of your own company. 

The RRSP can be useful though for things like maternity/paternity leave if it fits in or sabbatical - you would withdraw the RRSP in a lower tax year and come out further ahead. You lose the RRSP room but since the professional corporation is the main retirement vehicle that may not matter as much (at least if the rules stay the same). 

 

[NeuroD]

Thanks!

I'm still a little confused on whether you want to focus on the TFSA or RRSP in residency? Wouldn't it make sense to use the RRSP and save the deduction for when your billing as an attending?

[distressedpremed]

1 hour ago, PhD2MD said:

Thanks!

I'm still a little confused on whether you want to focus on the TFSA or RRSP in residency? Wouldn't it make sense to use the RRSP and save the deduction for when your billing as an attending?

I think what rmorelan is generally saying is to try to pay down as much debt first before thinking about a TFSA or RRSP. 

If you had to pick one, it would be the TFSA because of the flexibility in withdrawals. There are still a lot of expenses when you become staff (licensing, etc). The TFSA would allow you to withdraw some of that money without "penalty" compared to an RRSP, making it more useful in the short term (5-7 years). 

[rmorelan]

43 minutes ago, PhD2MD said:

Thanks!

I'm still a little confused on whether you want to focus on the TFSA or RRSP in residency? Wouldn't it make sense to use the RRSP and save the deduction for when your billing as an attending?

The reason it is confusing for many people is that the end outcome of putting money in either a TFSA or RRSP is exactly the same IF the tax bracket you are in when you put the money into the investment is the same as when you take it out. Yet that fact is not usually stated anywhere. By the same I mean the math general EXACTLY the same number for the same amount invested ASSUMING you also invest the tax refund for the RRSP - no using to go warm sunny beaches with it.

In our case during residency your tax bracket is lower than I would really suspect it would be in your retirement (ie I think if you do proper planning and saving which if you are already investing seems extremely likely) then you will earn more in retirement than than even a R5 resident. If you believe that to be true then you max out the TFSA right now which would be investing after tax dollars. 

Now as for what you are suggesting - first I have to say this is all personal finance - operative word is personal so it is always too harsh I think to say "this is the absolute right answer". There is a mathematical answer as to which would give the absolute most money in the end but that may not meet some of your other goals. For instance for many paying off the LOC which adds a shield against emergencies and raising interest rates may let them sleep better at this point, even if that results in less overall income.  That's fine.

Anyway the problem with filling the RRSP in a low income state (relatively speaking) is that when you don't take that tax refund you are basically loaning the government money for up to 5+ years - ie that tax return would be earning you money but you haven't used it. You can argue you would get a bigger tax refund in the end but you are still also paying the maximum tax rate on that money when you retire because it is an RRSP. When you do the math it is still slightly better to do the TFSA route now, and later as staff go RRSP if you are planning to hold both investments.  Sounds like you are the sort of person that would do that ha  

The difference is not extreme and if you are a solid saver early on as staff you will blast past this all (which I highly recommend - it has been fun watching some of the more senior people I have helped with some basic finance now 4 years out sitting on a nest egg - the market has done well over that time, and saving 1/2 of your salary or so kind of adds up). I am operating for most things related to finance that savers will be in a high tax bracket when retired because they will simply have the money to do so.

The Canadian master of all this (and the author of the first financial planning book I read when embarrassingly young and oh so nerdy - I am still oh so nerdy) is David Chilton. He wrote about this and here is a nice summary of it if you are interested:

https://www.theglobeandmail.com/globe-investor/personal-finance/the-wealthy-barber-explains-tfsa-or-rrsp/article1356709/

 

[rmorelan]

Just now, distressedpremed said:

I think what rmorelan is generally saying is to try to pay down as much debt first before thinking about a TFSA or RRSP. 

If you had to pick one, it would be the TFSA because of the flexibility in withdrawals. There are still a lot of expenses when you become staff (licensing, etc). The TFSA would allow you to withdraw some of that money without "penalty" compared to an RRSP, making it more useful in the short term (5-7 years). 

ha you beat me to the punch - I usually do recommend that simply because you are already as a med student and resident making a huge investment - simply put yourself. You are building a golden goose basically, and sure do other financial stuff but protect the golden goose against any and all things. LOC room is flexibility and flexibility removes stress and uncertainty. The process of becoming a doctor is not risk free and you have to be aware of that. Surveys often show money is about the 2nd largest stress factor in residency. 

Risk in my mind is the chance you need the money for something x the chance that the investment you made goes down. The latter is basically volatility in the investment (stocks go up and down like a yo yo - particular now that every time the US president opens his mouth it is a world level crisis). Investing now is relatively risky because the chances you need the money is relatively high (there are large unavoidable costs) and most investments people are looking at are volatile.   Paying off the LOC not volatile at all, makes sure that money is there if you need it, and the really investing phase is yet to come (and it will come). 

But again this is all personal - you have to be able to sleep at night  For some they just got to be in the market. 

side note - you never, ever want to withdraw an RRSP for some kind of emergency if you can at all avoid it. You lose the room in the investment forever unlike a TFSA where it is gone for just that year. That is.....bad

 

[Hanmari]

1 hour ago, rmorelan said:

ha you beat me to the punch - I usually do recommend that simply because you are already as a med student and resident making a huge investment - simply put yourself. You are building a golden goose basically, and sure do other financial stuff but protect the golden goose against any and all things. LOC room is flexibility and flexibility removes stress and uncertainty. The process of becoming a doctor is not risk free and you have to be aware of that. Surveys often show money is about the 2nd largest stress factor in residency. 

Risk in my mind is the chance you need the money for something x the chance that the investment you made goes down. The latter is basically volatility in the investment (stocks go up and down like a yo yo - particular now that every time the US president opens his mouth it is a world level crisis). Investing now is relatively risky because the chances you need the money is relatively high (there are large unavoidable costs) and most investments people are looking at are volatile.   Paying off the LOC not volatile at all, makes sure that money is there if you need it, and the really investing phase is yet to come (and it will come). 

But again this is all personal - you have to be able to sleep at night  For some they just got to be in the market. 

side note - you never, ever want to withdraw an RRSP for some kind of emergency if you can at all avoid it. You lose the room in the investment forever unlike a TFSA where it is gone for just that year. That is.....bad

 

Hahah I am one of those people who feel the need to be in the market. I pay my LoC interest and then pay down a small portion of the principal each month, treating my LoC as if it was the conservative portion of an investment portfolio; there are arguments both for and against this, but essentially I am treating my LoC as an investment vehicle that provides a guaranteed prime-0.25% return. Currently I allocate a small percentage of my monthly income to this. The rest is going into index stocks held in a TFSA. Essentially I am running an aggressive mix of equities vs. pseudo-bonds, although I might up the LoC portion soon as rates are going up and prime-0.25 is already far above bond yield levels. I've heard of staff running 80-20 and more with equities (which I'm not sure I would emulate) so I think I'm being relatively reasonable given a hopefully long horizon.

I keep a small stash of emergency funds to last me 2-3 months, and beyond that I am counting on my disability insurance kicking in if any severe needs arise. For mandatory costs like exams/fees I will draw on my LoC, as I have room left to cover all such foreseeable expenses. Of course in a real pinch I could take out the money in my TFSA, but I am treating that money as if it doesn't exist - I am throwing it into stocks and more or less forgetting about it. What I have in there is chump change compared to staff earnings and for me it is more about the experience of investing, learning its ropes and getting an idea of my risk tolerance levels during market fluctuations. What better time to learn this than when stakes are relatively low, during a time of global uncertainty?

When I am staff, I will need to handle staff level finances, so I want to put myself through what is essentially a financial residency. I understand that investing in residency seems like an undue risk during a time with lesser earnings (and therefore lesser returns) and proportionally larger expenses, but If I threw all my earnings into LoC and forgot about it, I fear that I would not put in as much effort to proactively learn what kinds of financial issues staff docs deal with. I would encourage any of my colleagues who are not severely debt burdened (with either high-interest debt or excessive LoC debt causing +++interest per month) to get into investing or at least start learning about it through the various blogs run by MDs, or books. It really doesn't take That much time to get started and I don't think I've been any less of a proper medical learner for it!

[distressedpremed]

^agree strongly above. Definitely believe in at least TRYING some sort of investment. 

I am sadly not at that stage yet - I started at around 115K for my LOC and reduced it to around 90 K ish in my PGY-1 year...I think once I hit a more solid 80-70K ish it'll be time to start looking at investments. 

[rmorelan]

On 4/7/2018 at 11:09 PM, Hanmari said:

Hahah I am one of those people who feel the need to be in the market. I pay my LoC interest and then pay down a small portion of the principal each month, treating my LoC as if it was the conservative portion of an investment portfolio; there are arguments both for and against this, but essentially I am treating my LoC as an investment vehicle that provides a guaranteed prime-0.25% return. Currently I allocate a small percentage of my monthly income to this. The rest is going into index stocks held in a TFSA. Essentially I am running an aggressive mix of equities vs. pseudo-bonds, although I might up the LoC portion soon as rates are going up and prime-0.25 is already far above bond yield levels. I've heard of staff running 80-20 and more with equities (which I'm not sure I would emulate) so I think I'm being relatively reasonable given a hopefully long horizon.

I keep a small stash of emergency funds to last me 2-3 months, and beyond that I am counting on my disability insurance kicking in if any severe needs arise. For mandatory costs like exams/fees I will draw on my LoC, as I have room left to cover all such foreseeable expenses. Of course in a real pinch I could take out the money in my TFSA, but I am treating that money as if it doesn't exist - I am throwing it into stocks and more or less forgetting about it. What I have in there is chump change compared to staff earnings and for me it is more about the experience of investing, learning its ropes and getting an idea of my risk tolerance levels during market fluctuations. What better time to learn this than when stakes are relatively low, during a time of global uncertainty?

When I am staff, I will need to handle staff level finances, so I want to put myself through what is essentially a financial residency. I understand that investing in residency seems like an undue risk during a time with lesser earnings (and therefore lesser returns) and proportionally larger expenses, but If I threw all my earnings into LoC and forgot about it, I fear that I would not put in as much effort to proactively learn what kinds of financial issues staff docs deal with. I would encourage any of my colleagues who are not severely debt burdened (with either high-interest debt or excessive LoC debt causing +++interest per month) to get into investing or at least start learning about it through the various blogs run by MDs, or books. It really doesn't take That much time to get started and I don't think I've been any less of a proper medical learner for it!

all perfectly valid - reinforcing the notion that personal finance is personal. One of the reasons I say that is so that you know some "advisor" that is setting out some locked down plan or one fit for all solution is wasting your time.  Or worse - wasting your money. 

You have covered all the bases, and prepared for emergencies. You found your risk tolerance and don't have any issues with the "pillow test" (you can sleep at night). You are learning, saving and not starving in the process.  A lot of people aren't so comfortable with such a plan yet, and that is also completely fine. 

FYI those staff at greater than 80% stock you can easily argue are doing the right thing. They have jobs that are basically locked in forever that more than cover their expenses (to the point they are saving heavily). That means the part of the risk equation related to need for the money is basically zero for them (and they have access to credit is the extremely worst case). Once a near zero is added to the equation their risk basically falls to nothing to worry about. They are only concerned with long term maximum return until they are close to retirement. Thus some are at 100% stocks. Bonds help smooth the ride but they don't care about the ride ha. Like you they are pretending the investments don't exist. 

 

 

[rmorelan]

1 minute ago, distressedpremed said:

^agree strongly above. Definitely believe in at least TRYING some sort of investment. 

I am sadly not at that stage yet - I started at around 115K for my LOC and reduced it to around 90 K ish in my PGY-1 year...I think once I hit a more solid 80-70K ish it'll be time to start looking at investments. 

It is good to hear people with all these variations. Everyone has a different comfort level. 

One thing I didn't mention but feel I should is if you are going to "try some investment" as practice then make sure you have learned enough to practice properly (say as I would argue index funds for instance over mutual funds). Our friends at MD financial for instance lately have developed their own trading platform and are encouraging residents to practice investing by starting now with small amounts (quite the sales pitch actually). Of course that means small amounts in their mutual funds, which is their product basically, with the long term hope that you will continue to use them as you move forward. Well there are a lot of arguments that going that way is learning the wrong approach and it is self serving for them (they aren't alone - many bank's investment branches are like that). 

So sure practice - but make sure you learn the basic rules of the game first  Otherwise you are just reinforcing bad habits. 

 

[rmorelan]

and just for transparency I am a 5th year resident who has made significant (ha in my mind at my level) stock investments over the past 5 years which I have balanced against some LOC repayment (actually am one of those people at 100% stocks). I also have purchased an investment property as well during residency in first year with hopes of expanding there. I also have full disability insurance, ample room on the LOC and now home equity credit line to shield myself in case something comes up, but that seems unlikely with my current relatively high savings rate. 

Points is that is the plan that works for me and helps me further learn what I wanted to know. It is what I personally figured works for me....and yeah I sleep like a rock (while when I am not on call )

 

[distressedpremed]

8 hours ago, rmorelan said:

It is good to hear people with all these variations. Everyone has a different comfort level. 

One thing I didn't mention but feel I should is if you are going to "try some investment" as practice then make sure you have learned enough to practice properly (say as I would argue index funds for instance over mutual funds). Our friends at MD financial for instance lately have developed their own trading platform and are encouraging residents to practice investing by starting now with small amounts (quite the sales pitch actually). Of course that means small amounts in their mutual funds, which is their product basically, with the long term hope that you will continue to use them as you move forward. Well there are a lot of arguments that going that way is learning the wrong approach and it is self serving for them (they aren't alone - many bank's investment branches are like that). 

So sure practice - but make sure you learn the basic rules of the game first  Otherwise you are just reinforcing bad habits. 

 

Completely agree - only problem is that the interest rate increases are quite painful...like hanmari said, I treat my LoC as similar to buying low risk bonds. As my LoC is higher and I also have car payments, it's just a way to "redeposit" money that I can quickly draw upon if necessary. 

For instance, tuition (which I don't understand why we have to pay to a school we are working for...) I didn't have enough left over for this month. So I just took it out from my LoC easily and it won't affect the interest payments that much...I'll have the money next month and then I continue to hammer away.  My reasoning is similar to this: http://www.moneysense.ca/save/pay-debt-or-invest-how-to-use-your-tax-refund-this-year/

The BoC is scheduled/predicted to raise rates again, and it's an extra $20-$30 more each month last time they raised it. Definitely rather get to a low number where the interest payments are no problem to me at all before starting with Wealthsimple (or TD series, or whatever....maybe just throw it all into that new combination index fund) and at least build/start the TFSA strategy. 

By the way, I'm proud to say it but man was it hard saving up like $20K in PGY-1. Not fun at all 

[rmorelan]

1 hour ago, distressedpremed said:

Completely agree - only problem is that the interest rate increases are quite painful...like hanmari said, I treat my LoC as similar to buying low risk bonds. As my LoC is higher and I also have car payments, it's just a way to "redeposit" money that I can quickly draw upon if necessary. 

For instance, tuition (which I don't understand why we have to pay to a school we are working for...) I didn't have enough left over for this month. So I just took it out from my LoC easily and it won't affect the interest payments that much...I'll have the money next month and then I continue to hammer away.  My reasoning is similar to this: http://www.moneysense.ca/save/pay-debt-or-invest-how-to-use-your-tax-refund-this-year/

The BoC is scheduled/predicted to raise rates again, and it's an extra $20-$30 more each month last time they raised it. Definitely rather get to a low number where the interest payments are no problem to me at all before starting with Wealthsimple (or TD series, or whatever....maybe just throw it all into that new combination index fund) and at least build/start the TFSA strategy. 

By the way, I'm proud to say it but man was it hard saving up like $20K in PGY-1. Not fun at all 

You aren't working for the school, you are working for the hospital. It is still stupid. At least before with the old tax credits I didn't mind as much - I paid 700 so was a full time student, and then got another year of tax credits with was more than the tuition all said and done so came out well ahead in the end. Now it is just another hit as they dropped those credits. At least I made it to 5th year under the old way. 

I view the LOC in a sense the same way - it is one of the reasons I don't have any bonds right now. "Investing" in the LOC is the same as buying a bond with the same after tax interest rate (which in my tax bracket is like finding a bond with something like a 5% return guaranteed). Not even a low risk bond - it is a zero risk bond ha. Similarly if you are investing as a resident in bonds and yet still have an LOC then the math doesn't make sense (although again you might be doing for just the practice side of things I suppose....err I still think it wouldn't be logical)

Nice work by the way on the savings. That rate, in that year, is quite impressive. As you mention the BOC is hoping to raise rates - the original goal was twice more this year. A lot to medical students/residents are going to start feeling the pain if they get much higher - one of the reasons paying down on the LOC is not a bad idea.

Wealthsimple is actually an interesting alternative to traditional banks etc. One one hand their fees are so much lower (about 40% of the banks or even better). I like that - and robo investing fits in with index approach. On the other hand that is still 10x higher than directly buying the index funds and doing the work yourself once or twice a year (which takes about 15 mins to do at most). I also don't fully understand why people won't just use wealthsimple to get the portfolio combination and then just use that information to build there own (except for the convenience factor). Regardless it is still massively better than buying mutual funds. 

Ha if I am not careful people are going to think this is a financial blog - We are still here to help people get into medical school and so forth

 

[j17f]

9 hours ago, Hanmari said:

Hahah I am one of those people who feel the need to be in the market. I pay my LoC interest and then pay down a small portion of the principal each month, treating my LoC as if it was the conservative portion of an investment portfolio; there are arguments both for and against this, but essentially I am treating my LoC as an investment vehicle that provides a guaranteed prime-0.25% return. Currently I allocate a small percentage of my monthly income to this. The rest is going into index stocks held in a TFSA. Essentially I am running an aggressive mix of equities vs. pseudo-bonds, although I might up the LoC portion soon as rates are going up and prime-0.25 is already far above bond yield levels. I've heard of staff running 80-20 and more with equities (which I'm not sure I would emulate) so I think I'm being relatively reasonable given a hopefully long horizon.

I keep a small stash of emergency funds to last me 2-3 months, and beyond that I am counting on my disability insurance kicking in if any severe needs arise. For mandatory costs like exams/fees I will draw on my LoC, as I have room left to cover all such foreseeable expenses. Of course in a real pinch I could take out the money in my TFSA, but I am treating that money as if it doesn't exist - I am throwing it into stocks and more or less forgetting about it. What I have in there is chump change compared to staff earnings and for me it is more about the experience of investing, learning its ropes and getting an idea of my risk tolerance levels during market fluctuations. What better time to learn this than when stakes are relatively low, during a time of global uncertainty?

When I am staff, I will need to handle staff level finances, so I want to put myself through what is essentially a financial residency. I understand that investing in residency seems like an undue risk during a time with lesser earnings (and therefore lesser returns) and proportionally larger expenses, but If I threw all my earnings into LoC and forgot about it, I fear that I would not put in as much effort to proactively learn what kinds of financial issues staff docs deal with. I would encourage any of my colleagues who are not severely debt burdened (with either high-interest debt or excessive LoC debt causing +++interest per month) to get into investing or at least start learning about it through the various blogs run by MDs, or books. It really doesn't take That much time to get started and I don't think I've been any less of a proper medical learner for it!

Why not put it all into WEED and go to the moon (rocket emoji)???

[Hanmari]

19 minutes ago, Jfourn said:

Why not put it all into WEED and go to the moon (rocket emoji)???

Ha I am keeping a small cash stash (separate from emerg funds) with which I am actually toying with the idea of throwing into high risk stuff, so your joke goes right over my head and indeed, to the moon

Great points above from rmorelan and distressedpremed, I'll just throw this brief discussion by Physician on Fire (US-based blog but relevant) for the arguments for and against treating student loans as investment vehicles: https://www.physicianonfire.com/student-loans-asset-allocation/   I think interesting arguments on either side worth considering and I agree with rmorelan that in the end the correct answer likely depends on individual tolerance and situations.

[Lactic Folly]

1 hour ago, rmorelan said:

Ha if I am not careful people are going to think this is a financial blog - We are still here to help people get into medical school and so forth

Well finances are certainly a vital part of the process 

[distressedpremed]

8 hours ago, rmorelan said:

You aren't working for the school, you are working for the hospital. It is still stupid. At least before with the old tax credits I didn't mind as much - I paid 700 so was a full time student, and then got another year of tax credits with was more than the tuition all said and done so came out well ahead in the end. Now it is just another hit as they dropped those credits. At least I made it to 5th year under the old way. 

I view the LOC in a sense the same way - it is one of the reasons I don't have any bonds right now. "Investing" in the LOC is the same as buying a bond with the same after tax interest rate (which in my tax bracket is like finding a bond with something like a 5% return guaranteed). Not even a low risk bond - it is a zero risk bond ha. Similarly if you are investing as a resident in bonds and yet still have an LOC then the math doesn't make sense (although again you might be doing for just the practice side of things I suppose....err I still think it wouldn't be logical)

Nice work by the way on the savings. That rate, in that year, is quite impressive. As you mention the BOC is hoping to raise rates - the original goal was twice more this year. A lot to medical students/residents are going to start feeling the pain if they get much higher - one of the reasons paying down on the LOC is not a bad idea.

Wealthsimple is actually an interesting alternative to traditional banks etc. One one hand their fees are so much lower (about 40% of the banks or even better). I like that - and robo investing fits in with index approach. On the other hand that is still 10x higher than directly buying the index funds and doing the work yourself once or twice a year (which takes about 15 mins to do at most). I also don't fully understand why people won't just use wealthsimple to get the portfolio combination and then just use that information to build there own (except for the convenience factor). Regardless it is still massively better than buying mutual funds. 

Ha if I am not careful people are going to think this is a financial blog - We are still here to help people get into medical school and so forth

 

Yeah - completely agree with R on this one. Ultimately I'm being a bit of a wimp haha, when I could be doing more. 

However, my rationale is that eventually the money will need to get paid.  I don't mind spending 5-10 K on investments in residency to learn (that is ideal). But I think the BoC will push prime up to around 4% (so around 3.75%) and I could have saved more (like 30 K this year) if there wasn't so many unforeseen expenses. For instance, equipment is so irritating - our faculty/program won't offer any help in regards to that, so that was around 5K gone. Then the LMCC exams and the tuition fee for basically nothing. Then conferences with no external funding. Then study resources...US exams...etc. Ultimately it's good to have cash growing, I know time in market is key, but day-to-day sometimes things come up that are just tough to get around. My magic number is that when my LoC is 80K then the amount due per month to the bank just to pay down interest won't significantly impact my lifestyle and training costs, where if it went up now it would hurt it significantly.  Have to save for fellowship applications and electives as well. 

Rmorelan, for the area highlighted above - I thought that wealthsimple was better for low investment amounts (ex. small TFSA for learning) compared to using Questrade directly? I mean you could throw it all into the new Vanguard fund and it could be the same, but I remember reading somewhere that for amounts less than 500K it's generally better to just use a roboadvisor to start (and you can transition to vanguard/questtrade later as staff). Not sure and would love your opinion. 

[rmorelan]

16 hours ago, distressedpremed said:

Yeah - completely agree with R on this one. Ultimately I'm being a bit of a wimp haha, when I could be doing more. 

However, my rationale is that eventually the money will need to get paid.  I don't mind spending 5-10 K on investments in residency to learn (that is ideal). But I think the BoC will push prime up to around 4% (so around 3.75%) and I could have saved more (like 30 K this year) if there wasn't so many unforeseen expenses. For instance, equipment is so irritating - our faculty/program won't offer any help in regards to that, so that was around 5K gone. Then the LMCC exams and the tuition fee for basically nothing. Then conferences with no external funding. Then study resources...US exams...etc. Ultimately it's good to have cash growing, I know time in market is key, but day-to-day sometimes things come up that are just tough to get around. My magic number is that when my LoC is 80K then the amount due per month to the bank just to pay down interest won't significantly impact my lifestyle and training costs, where if it went up now it would hurt it significantly.  Have to save for fellowship applications and electives as well. 

Rmorelan, for the area highlighted above - I thought that wealthsimple was better for low investment amounts (ex. small TFSA for learning) compared to using Questrade directly? I mean you could throw it all into the new Vanguard fund and it could be the same, but I remember reading somewhere that for amounts less than 500K it's generally better to just use a roboadvisor to start (and you can transition to vanguard/questtrade later as staff). Not sure and would love your opinion. 

uhmmm huh - I have no idea where that is coming from. I mean first off 500K is a huge investment amount speaking overall, so although the population would be biased here (ie future doctors) relatively few people have 500K invested in the stock market. So that is almost saying wait until you are rich until you start doing it right..........I say do it right so you become rich. 

Second the overall fees for wealth simple are around 0.7% (0.5% up to 100K, and the underlying funds in the portfolio also have fees of about 0.2% if I am recalling correctly). So on your 500K investment you are spending 3,500 in fees yearly. I mean it could be worse - the bank or MD would charge you twice that (I remember laughing when MD financial made this big marketing push when they dropped their MER to less than 2% like they were doing some amazing thing. Their fees were still 10-40 times what I was paying). Still 3,500 is a lot (I could eat out at my favorite all you can eat sushi place every other day all year long with that. Yes, I evaluate purchase decisions sometimes on equivalent purchase and joy of eating good meal(s). It works for me)  

I mean when you are starting off a robo advisor can be convenient  and comparatively low in fees compared to traditional things. You also don't have to re-balance anything, and ignore all trading costs (the 9.99 I pay every time I buy stock - which is roughly 4 times a year. Now is 40 dollars a year (to put it in perspective on 100K investments you would pay 40 dollars as well for vanguard's VTI fund in management fees so the fact that I have to buy the stock that way is effectively doubling my costs in that situation. Of course with wealth simple I would be paying 700 dollars on that same 100K investment in fees so I still think I am out ahead). 

Now I am also a very simple investor - I don't understand having 20 different mutual funds in your portfolio with weird percentages of your assets in each. I do not understand the point - the data shows that makes less than simpler index funds, and I have no idea (and no one else does either) exactly what percentage you need in emerging markets or any other arbitrarily constructed part of the investing market. I mean take a look wealth simple's main portfolio for growth:

Your portfolio will be invested in the following funds:

iShares Core MSCI EAFE	IEFA	Large, mid, and small cap stocks in developed Europe, Australasia and the Far East	15%
iShares Core MSCI Emerging Markets	IEMG	Large, mid, and small cap stocks in more than 20 emerging markets	10%
iShares Core S&P/TSX Capped Composite Index	XIC	250+ Canadian equities representing 95% of the Canadian equity market	22.5%
iShares Canadian Short Term Corporate + Maple Bond Index ETF	XSH	Exposure to variety of short-term Canadian corporate debt securities	12.5%
Vanguard Total Stock Market	VTI	3800 large, medium, small and micro-cap companies mirroring the US equity market	20%
BMO Mid Federal Bond Index	ZFM	Mid term debt securities issued or guaranteed by the Government of Canada	7.5%
Vanguard US Total Market ETF (CAD-Hedged)	VUS	Diversified companies mirroring the US equity market with hedged currency exposure	12.5%

 

The MER of this portfolio is 0.1% and the management fee of this portfolio 0.50%

The indicated dividend yield of this portfolio is 2.32%

Ok first off I see some of my old friends in there (VUS is the Canadian dollar traded version of VTI, and oh look there is VTI as well - It is 30% VTI basically. Then for some reason they have XIC for 22% - which is the total Canadian stock market - ok but why would you want to own almost as much stock in the same Canadian market as the ENTIRE US market - which has vastly more international exposure as well as most major US companies are international. Someone didn't read the diversification and long term market performance of the US vs Can part of their economics book. They got their 20% bonds in there for fun, and 25% in international funds and emerging markets. How did they pick all of these various percentages - well no one is exactly sure ha). 

Since that fund was started it has made 27.8% (aug 20, 2014) (source https://help.wealthsimple.com/hc/en-ca/articles/214187018-How-has-the-Growth-portfolio-performed-)

VTI has performed 35% NOT including dividends - which are another say 7% for 42% (compound interest is a wonderful thing). Of course it has been a good period of time for stocks though (we don't have the lower bond yield, the lower Canadian stock performance, and the 0.6% MER off the top.)

to be clear I am not trying to sell VTI stock (ha Vanguard doesn't have salespeople really - I love the fact that a 4.2 trillion dollar investment firm doesn't actually try to sell anything). Just to make it very clear how wealthsimple works - they take your money, then use it to buy index funds which other companies run - still pass the costs of those index funds on to you (that is the MER of 0.1% above - so low I might add because again VTI is only 0.04%), and charge you a middle man fee of 0.5% for basically running a website, and making up some portfolios (which are similar to the ones you get for free at Canadian couch potato). You can see why they are advertising like crazy right now - they are making money for basically no effort at all, and their costs are fixed so the more people that do it after a point - pure profit. They have oh 1.9 billion in assets, 75 employees and if that asset count is correct they have a revenue of about 100 million a year. Clearly enough money for all those adds appealing to millennials

and yet I am still not as mad at all that as I am at more standard investment firms. They are saving people 50% relatively. 

 

 

[distressedpremed]

Not going to quote that amazing bit of information. Many thanks to you, good Sir R - for the advice and wisdom!! 

So basically if you could, you would just start off with vanguard through Questtrade then - buy and hold, don't need to rebalance 

For instance, Vanguard Growth -> set to maximum, and make regular contributions if possible.