Too many doctors today believe that their income is what determines their level of success. This is a fallacy that is hurting way too many doctors. We hear things like “Become a specialist so you can make the big bucks” or “Now that I’m an attending, I can afford the payments on a new Tesla” or “I’ve lived in an apartment too long, now is the time to get my doctor mansion.” It’s as if these items would define success.
Many doctors today leave residency with an enormous amount of student loan debt. They make the minimum debt payments, while ignoring the balance they owe, as they start living it up on their new attending income. Fifteen to twenty years later, they start thinking about retirement and suddenly realize that they are making a lot of money and have nothing to show for it. Many of these doctors call me seeking help to turn their financial lives around and begin saving for retirement.
Unfortunately, they have missed a great opportunity to have the time value of money work for them. The fifteen or twenty years of compound interest they have lost is very hard to recoup at this point in their lives.
As an example, let’s take a look at two doctor families that I know personally. Both families have a physician earner and a stay at home parent. Family A has been out of residency for 20 years. Their average take home pay since residency was $200,000 a year, with an additional $40,000 per year retirement plan contribution. Today, family A has a net worth of $5,000,000. In addition to the office 401(K), they channeled a portion of each month’s income into savings or investments. They lived a nice life while taking several vacations a year. They paid cash for their cars and drove them for at least ten years, they vacation at family friendly destinations, and the only household help they hire out is yard care. They are debt free and have achieved early financial independence. Most would consider them wealthy, if they could see behind the scenes of their finances. This doctor retired at an age in the mid 50’s with a nice lifestyle.
Family B is just waking up to the fact that they have been letting a lot of money slip through their fingers over the twelve years since leaving residency. Family B earns $750,000 a year from a very lucrative specialty practice. Yet after all this time, their net worth is hovering around zero. The good news is they have paid off all their student loans. Even though family B has a stay at home spouse, they employ a nanny, a cook, a house keeper, and a gardener. They also drive very expensive exotic cars, travel on very expensive vacations, and they go out on the town to high class social events three nights a week, leaving the kids at home with their nanny.
This couple lives an incredibly lavish life style. They bought an 8,000 square foot house directly out of residency, spend $3,500 a month on household employees, $3,000 a month in car payments, $1,000 a month on wine, and when they travel they pay $1,000 a night for hotel accommodations. But they have nothing set aside for retirement. Besides their significant amount of consumer debt, they also owe the IRS for back taxes.
They are currently spending all of their $30,000 a month net income on a lavish lifestyle, which leaves nothing for their future. Their retirement accounts have not been funded. Success is defined as the ability to spend a very large amount of money each month, while not putting much consideration into net worth.
Now they are thinking about when they will be able to retire. The answer is never, if they stay on their current path. Imagine going from spending $30,000 a month while employed down to $4,000 a month of social security income at retirement with no savings. Talk about a culture shock.
What would Family B’s financial situation be like today if they had lived on less than what they made? What if they had only spent $20,000 a month and saved $10,000 each month for the last twelve years? Most people would feel that spending $20,000 a month would lead to a nice life style. The average family in America spends about $4,000 a month.
Saving $10,000 a month for 12 years at 8% interest would total $2.4 million today and by the time they reach the 20 year point that Family A has been out of residency, they would have just short of $6 million saved. I doubt they would see much difference between a $20,000 a month lifestyle and their current $30,000 a month lifestyle. That one change would have given them a huge jump in their accumulated net worth and their future retirement lifestyle.
What can you do if you find yourself in Family B’s position, needing to start saving for the future midway through your career? Since you do not wish to spend your retirement in relative poverty compared to your working years’ lifestyle, now is the time to make the necessary spending changes. Realizing there is a problem is the first step to a brighter future.
Take a hard look at where you spend each dollar. There are usually areas you can cut back on that will not noticeably affect your lifestyle. Simply paying attention to what you spend will make a huge difference in your future wealth.
Cutting back your lifestyle will be essential. You can choose to make the cut backs now, or you will be forced to make them later. Which do you feel is the better option? Most people would pick making the choice themselves now before it’s too late.
Choosing to become debt free and to stop any future borrowing is crucial. You are already living above your means, and borrowing even more above that is a disaster waiting to happen. So you must begin a plan to become debt free.
You may need to cut back on some frivolity. With a stay home parent, does Family B really need to spend $3,500 a month on household help? Is a $1,000 a night in hotel accommodations really that much different than a $250 a night room? Is $1,000 a month spent on wine going to get you the future you want?
Let’s look at the lifetime cost of a $1,000 a month wine habit. If Family B were to reduce their wine budget to $100 a month and save the other $900 a month for an entire lifetime, what is the effect? Assuming this plan lasted from the time they got out of residency, say age 30, until their death, say age 80, that would be 50 years of investing. If the money grew over its lifetime at 8%, it would grow to over $7,000,000. One little change made early can make a huge impact on their future.
The high income we physicians make should be consider potential wealth, not actual wealth. Even the low paying specialties are making a relatively high income compared to the average American. But if we spend it all, it will not help our net worth. Many of us do not take advantage of the opportunity this high income offers us. Family A took advantage of their high income and lived a modest but very nice lifestyle and retired with a higher income than they were spending during their working years. Family B, if they don’t make some changes, will be in for a rude awakening when they reach retirement age.
Which family are you? Or are you something in between? Do you spend all of your money now and leave nothing behind for the future? If so, are you ready to make a change?
Have you ever had a change of heart in regards to your spending rate? If so, what was the tipping point and how did you make the change. If you wish to get a new attitude about your money, pick up a copy of The Doctors Guide to Eliminating Debt and get started on boosting your net worth. If you want to get the right start after residency and begin your career on the right foot, pick up a copy of The Doctors Guide to Starting Your Practice Right and enter your employment as an attending with the right plan for a great future. Make this your turn around year for a fabulous financial future.
I grew up in a neighborhood where several Dads were doctors with high income specialties. They’re all deceased now ,but I can remember one of them painting his own house , and the others doing their own yard work. Another one remodeled his kitchen and bathrooms himself. I doubt it was “beneath” their wives to drink a 15 dollar bottle a wine or that their families were offended by staying in a 250 a night hotel room . I also never knew of their many accomplishments during WW2 until after they died .
Paula, Thanks for that great story.
Yes, but your blog is oriented towards high-income professionals.
Cleaning person is not “lavish.” It may be an unnecessary luxury, but I would submit that it’s not wanton and indiscriminate spending on a luxury item, at least in the eyes of many busy professionals.
And good luck having two employed spouses (this isn’t 1950) with no child care. We use high quality daycare to save money, but get sick constantly, give up hours of our lives dealing with the logistics, and probably save about $1000/month over the cost of a nanny. If you have a family in which both parents work, a nanny is far from a luxury, but costs as much as two Teslas.
I’m not arguing that there isn’t a difference between a “want” and a “need,” and you can debate the intricacies of what distinguishes one from the other in a family with two busy professionals, but let’s not pretend that $3500 per month would pay for a household staff that sounds like it is straight out of Downton Abbey. Or that paying for a nanny is reckless.
Why do financial bloggers always dramatically understate cost of real life?
A full time (M-F 8a-5:30p, no weekends) nanny costs about $3,600 per month in a medium cost of living city. This does not include babysitting until 1am 3 times a week while you go out to fancy social events (most nanny’s would quit, promptly, if asked to do this). Professional cook 3 times a week, when I looked at cost of this once, is about $4-$500 per week. Landscaper is about $300. House keeper is $280 per month for two 3hr visits. I would argue that the cook is a true, unnecessary luxury, and maybe if family A can make all of that money (you did say $200k take home) with a stay at home mom, then nanny isn’t necessary, but most doctor’s wives don’t really want to scrub the baseboards behind all of their toilets if they can avoid it.
Your points are well taken – no one needs his and hers Beemers at 33y/o, and $1k per month on wine is silly, but a reasonable, non-lavish lifestyle is way more expensive than you are making it sound.
The average family is making it happen on $60k a year.
I hope these two examples are for effect. They’re both extreme in their own ways and I’ve always believed balance lies in the middle. Spending 1k a night on a hotel and 1k a month on wine seems excessively wasteful. Being a physician who subjects his family to a $250 a night hotel and himself/spouse to a $15 bottle of wine is excessively cheap. The truth is the idea of never retiring is frightening per example B; but so it would be equally frightening to drop dead suddenly as in example A amassing wealth and never enjoying the finer things in life. I’ve taken the middle road; enjoying spoiling my family with wonderful experiences without winding up destitute either.
Rafael, the examples were not just for effect but represent real physicians and their spending habits. Some of us have gone to the extreem and a better balance is needed. Thanks for commenting.
“Subjecting their family to 250 dollar hotel rooms and 15 dollar bottles of wine is excessively cheap”. I would respectfully disagree. I certainly don’t think I am too good for either of these things. We have enjoyed many rooms for 250 or less. And a bottle of josh cab certainly is delightful…
1000 Bucks a month on wine, sounds like they better start putting some away for a future liver transplant, geez! Unless of course, that’s only one bottle of wine?? Anyhow, Great post!
The wide swing of the lifestyle pendulum between these two families drives home the point dramatically. You have to live on less than you make in order to win financially.
Great post. The wine story is classic. Little expenses do matter and Add up
I get your point, high income alone won’t save the crazy spenders no matter the amount. But I do maintain that on the list of measures of success, your income versus your peers is one of them for the vast majority of us. I lived frugally, retired early, drive older cars and still live in my first and only modest house in spite of making high wages and saving millions. But I won’t deny I enjoyed making good money even though I invested most of it. It was just one way of measuring success, not as important as the mentoring I did, the life I saved or even close to what marrying well and raising solid kids means. But it still meant something. It was a fun accomplishment for this engineer.
Steveark,
It sounds like you played the money game well. Great job. I agree with that marrying well bit. It made a big difference in my life.
That wine math is sobering! (Pun intended 🙂 ) When I went to part time office only practice (with my husband’s retirement on the near horizon) one of the first things we realized we could cut back on was our wine budget. No more $40 -50 Amarones… and I can honestly say I don’t miss it a bit! (Lots of great bargains in the $15 or less range IMHO). Just think how much we’ll save during “dry January”! 🙂
Our next cutback: dropping our second car when he fully retires (and planning to milk my 2012 CRV for all it’s worth!) It all adds up…and when that math gives you freedom to work fewer hours, I can’t imagine anything more valuable than that!
Kristina,
Great story. Yes those little things we do really add up to a lot of money over time. I love your wine pun. Great job on getting to part time. That is a big step.
Outstanding post Cory.
Unfortunately if you look at all the doctors in America, most people are living closer to Physician B’s lifestyle rather than Physician A.
Physician A got it and got it early on and is therefore way ahead of the game compared to Physician B even though making 1/3 as much a year.
Income does not equal wealth. That is why you have multimillion dollar a year paid athletes going broke a few years after the gravy train dries up.
By the way I just put out on my blog a review of your book today, Guide to Starting Your Practice Right
Xrayvsn, Thanks. Physician A & B are real life examples of Dr. Timex and Dr. Rolex who I track in my book, The Doctors Guide to Starting Your Practice Right. I probably should have used those names here. But in the book they are fictional. These were real doctor families. We all need to be a little more like Dr. Timex and a little less like Dr. Rolex if we want to reach retirement with a decent lifestyle.
I agree.
Too many doctors think they are “rich” because they have a high income. Half the people in one of my physician talks couldn’t even tell me the formula for Net Worth. Only a couple of the attendees know and track their net worth.
I told them their name should be HENRY
High Earning Not Rich Yet
That got their attention.
Wealthy Doc, it seems there are a lot of doctors named HENRY out there. Maybe you and I can change that!
There is nothing sadder than someone in the top 1% of income still living paycheck to paycheck and unable to retire.
High income is meaningless if it’s paired with high spending. The sooner doctors realize this, the sooner they can buy their freedom.
Well said Side Hustle Scrubs
I suppose it is still a good to live a lifestyle within or below your means.
That was good advice 1,000 years ago and it’s still good advice today.