An interesting phenomena recurs when I work with physicians to makeover their finances. They almost never believe that overspending is the problem. They believe the reason their credit card balance is growing, and their large monthly income isn’t enough to pay their expenses can’t be due to their own choice to overspend. They always have a reason for the lack money:
They have huge student loans.
They have eight kids.
They are in a low paying specialty.
They are forced to put their kids in private school because of the poor public schools in their area.
Their health insurance is so expensive.
Housing is very expensive where they live.
These are a few of the many reasons I’ve heard that explain why physicians think they don’t have enough money left to invest or pay down their debt. Outspending their income seems always outside of their control.
Is it really? Many couples claim they don’t spend too much because they live in a modest house, so their financial shortfall has to be something else. Their perception is that since they don’t have an expensive house, or travel to Europe every month, or have a different color car for each day of the week, they don’t overspend. They live a modest lifestyle.
But what they don’t realize is they are paying a premium for everything they purchase. They preferred making their purchases at expensive stores or buying upscale, higher priced items. Following are some things I’ve noticed about these doctors’ purchasing habits:
When they buy cars, new or used, they purchase luxury cars, and usually the most expensive model.
When they shop for clothes that are “only the necessities,” they don’t shop at Sears, or Ross, or TJ Maxx. They shop at Nordstrom’s, or Saks or another upscale store.
Their kids don’t go to public school, they pay a lot for them to go to private school.
When dad takes his son fishing, it’s not to a nearby river or lake, they have to fly to a different, “better” fishing hole. They often could have driven to that “better” fishing hole but they chose to fly.
After reviewing their insurance policies, I often suggest they increase the deductibles from $100 to $500, or even better, $1,000 to save money on their premiums. I often hear, “But if something happens we will not have the extra money to pay the additional $400 deductible.” Yet, making the change will often save them more than that in lower premiums every year. Just how many auto accidents are they expecting each year?
Why can’t they see the contradictions? If there isn’t enough money to pay an extra $400 deductible if an accident occurs, why would they think they have the money to pay an extra $1,000 per month for private middle school? The reality is they need that phantom extra $400 deductible to pay for their overspending habit.
So what is happening here? There is a disconnect between what they think is happening and what is actually happening. They think they are saving money by buying a used car instead of a new car, but purchasing a luxury used car instead of an economical used car cancels out their savings.
They think they are saving money by waiting until their kids’ clothes wear out or are out grown before buying new ones. But purchasing new cloths at an expensive store instead of a middle or even low end store cancels out the savings from stretching out their purchases.
They also can’t figure out why, with their large income, they don’t have any money left over to pay for a vacation or pay down debt or put into a retirement account. This leaves them upset and searching for something to blame other than themselves.
I had this same issue once when I was trying to lose some weight. While traveling, my family stopped at a fast food restaurant for a quick dinner. Everyone ordered a hamburger except me, I ordered a salad. While we were waiting for our order, I saw a calorie chart on the wall. I decided to see how many calories I saved by eating a salad instead of a hamburger. Hamburgers were about 800 calories. My salad was 1,300 calories!
I cannot explain how mad I was at that moment. I had been absolutely sure I was saving calories with my food choice. If I had eaten that salad for dinner all week and got on the scale, I would have gained one more pound then if I had eaten the hamburger all week. Eating what I thought was the right thing to lose weight, but not losing anything, would have made me mad. Then I would likely blame something else. It is my metabolism, or I must have some glandular problem, or my knee was too bad to exercise, or dieting just doesn’t work for me. It cannot be that I ate too much.
My perception is that I am doing all I can to lose weight, by eating fewer calories than I am burning. When I don’t lose weight, it can’t be my fault. The reality is I am still over eating my caloric need. There are no special circumstances for me. The laws of physics are not different with me. If I eat fewer calories than I burn, I will lose weight. If I gained weight, the only logical conclusion is I must have eaten too many calories. Why can’t I see that?
It is the same with money. If there is no money left over at the end of the month, it is because I spent it all. It is because I am over spending my income. The math isn’t different for me than it is for anyone else. Physics have not been altered especially for me.
My grandmother, who didn’t use debt, once told me that you don’t need fancy calculations to see if you are living within your means. Look at your bank account at the beginning of the year and compare it to the end of the year. If your bank account is now greater than a year ago, you are living within your means. If not, you over spent your income. It doesn’t matter how you think you did for the year. The bank account tells the story. Just like if you are trying to lose weight, the scale tells the story.
So after looking at someone’s finances and discovering their net worth is decreasing, they should realize that they spend too much money. They just don’t want to admit it. We all want to say “it’s not my fault.” Yet, almost every time I point out that someone spends too much money, they have a good “reason” for why they think they do not spend too much money. Just look at the bank account. Is it growing significantly or not? It’s not rocket science. Just addition and subtraction.
How about you? Have you ever had the experience of a mismatch between your perception of what should have happened and the reality of what occurred? Math doesn’t lie. Physics don’t change. Your perception is the thing that is incorrect. Base your financial opinion on the facts, not on your perception, and you will understand your actual financial situation and be able to improve your outcome. Perception can be misleading.
I’m late to this conversation but I would like to point out a flaw in your grandmother’s saying. While I’m sure she is a very nice and well meaning lady, but it’s flawed to think that the only thing that matters is what’s in your bank account by year’s end. I actually does matter where that money went to. Did you spend $50k on investments or $50k on shoes and cars? Because regardless, your bank account is short by $50k but one is clearly a better deal than the other. This is the same as looking at the number on your weight scale by year’s end.
Looking at your weight and using that as a only number that matters could be a recipe for diaster. I would advise you look at how you feel, how much you can lift, run, cycle, whatever and see if there’s an improvement from last time. For me, I always wanted to hit my target weight of 170 lbs and getting there required extreme dieting and training regimen. I got there but lost strength and hated the dietary restrictions. Whereas, at 180 lbs, yes, I’m not as sharply defined but my lifts, cardio, and overall mood have never been better.
The financial equivalent of looking at your bank account is similarly flawed. Sure, more money in your account is always a good thing, but what is that money doing for you? For me, I like to put my money to work. So many years, I’m “poorer” since my account balance is lower than starting but my networth is higher as my 401k and Roth IRA maxed out, I used money that would be sitting in account to buy rental property that is cash flowing plus other investment strategies. This, to me, is the financial equivalent of a “bad” weight scale” but my overall performance is off the roof.
Also, what kind of salad is 1300 calories lol? Potato salad haha?? ProTip: skip the dressing. In my opinion, salads taste much better without the dressing.
Any ways, great article!
PharmAssist, thanks for your response. Yes the issue has many more factors than she presented, but they were the only factors for her, so her math was very easy. The salad had two big strikes against it. The meat was breaded and deep fried and the salad dressing was chocked full of fat.
I used to wonder why I couldn’t save on a specialist income. In fact, I used to go around telling people I couldn’t save because of many of the same reasons listed in the post. A very valuable exercise for me was to literally write down every penny that went out the door in a month. It was tedious, but I could see where all the money went and where I needed to cut back. Same goes for time management as well. Once I tracked how I was spending my free time, it was obvious what activities needed to go. Your perceptions rarely match reality.
Yours is a common story.
The salad revelation particularly resonates.
My wife’s grandfather, a die hard meat and potatoes man, moved to Florida in his later years. He boasted to my wife that he’d changed his ways, and was eating exclusively from the salad bar.
My wife went to visit and noted that he served himself exclusively deli meats and egg salad from the alleged salad bar.
The devil is in the details, whether calories or cash.
Appreciate your observations,
CD
Salads can be very different depending on what you put on them.
The bulk of my current wages go to taxes, retirement savings, mortgages, and school tuition. All taxes (federal, state, local, SS, Medicare, property) are about one in three dollars that come in. Retirement savings has been the next chunk (averaging $70,000 a year in my 50’s). That’s half my cheese gone.
Add in current college savings, college and private school tuition with one in a state college in the fall, and two in a secular private college prep school. Various insurances (home, life, disability, auto, umbrella) and car expenses (wife’s leased Mazda CX-5 and my 2013 JEEP) come next, adding in another chunk. That’s 85% of my cheese.
We somehow spend the rest on clothes, fuel, food, restaurants, entertainment, vacations, internet, cell phones, and such. These days I can’t figure out what we did in 1994, when I made “only” $175,000 and had $120,000 in combined student loans, but the higher taxes, higher retirement savings, double mortgage (one is a retirement home), and school expenses are the bulk of the difference. At least my retirement savings stays at number two.
YourHuckleberry,
Just goes to show you there is no amount of garage you cannot fill, and there is no amount of income you can’t out spend. We tend to increase our expenses as our available income increases. Then we wonder, “where did all that money go?”
I’m having that same issue now with my time. I wonder how I got so much done back when I was working full time as a surgeon. Now with all that extra time, I don’t seem to get as much done.
I also feel that everybody knows that doctor’s are not good at finances and easy targets. I recently had a lawyer quote me an absurd some of money to help me safeguard my wealth in event of malpractice judgement. He said that average malpractice judgement is 3.9 million. I did research and found that average malpractice for Internal medicine is approx 300K.
The biggest takehome from this post justifies my core belief, that salad is bad for you! Yup, I’m sticking to hamburgers for sure now. 🙂
It is true there is a disconnect between what people think is being frugal/saving and what actually occurs.
Your grandmother was a wise woman. It essentially is seeing how your networth behaves with time. If it’s going up you are doing the right things. If not you need to reassess (unless a large market correction is the culprit of the loss)
Xrayvsn,
Yes my grandmother was a wise person. I track my net worth quarterly. If it goes down, I should be able to see a good reason for that. Otherwise I expect it to go up every quarter.