You know Dr. Jones. They live down the street in that beautiful, 10,000 square foot house, with three kids, all in private schools, seven cars, more expensive toys than you can count, a live-in nanny and housekeeper, multiple vacation homes, and a seemingly endless supply of financial resources.
And here you are – a physician making multiple hundreds of thousands of dollars annually, but still trying to figure out how the heck Dr. Jones got there.
Years ago, we met a dual physician couple we didn’t end up working with professionally. We may have helped a great deal if our values lined up, but they were so focused on the appearance of their money and status that everything else – even their family’s financial freedom, was ancillary. This couple had both been practicing specialized medicine clinically for almost 10 years at the time of our first meeting and were earning almost $700k combined annually. But they were functionally broke.
There is nothing wrong with wanting nice things, but you start to bang your head against the wall a little when you have to explain…more than once…why funding your children’s 529s are more important than buying a boat. And then watching them buy a boat anyways.
It’s not always so obvious when we make poor financial decisions though. There are many high-income earners still living hand to mouth and we see it more often than we’d like among physicians who have unique challenges – late entrance to earning, hefty student loan debt, high tax rates, and many insurance expenses, plus the intrinsic pressure of “keeping up” with wealthy colleagues, neighbors, and friends.
This couple fell into the “keeping up” trap, and early in their careers too. Not to be harsh, but after ten years of practicing and an annual income of almost three-quarters of a million dollars, they should have easily been able to afford both a reasonable boat and contributions to their children’s 529s.
I spoke with them more recently and learned some sad news. Their children, who are now in high school, have no college education funds, their retirement assets total only around $200k after nearly 20 years of contributing, and they can barely afford their mortgage and monthly insurance premiums.
How did this happen?! Simple – this couple continued to live up to their means each time their income increased, without thinking about the big picture. Consumption took over and suffice it to say, they’ll likely be working well into their 70s to continue to fund their expanding lifestyle and lack of savings.
This is clearly an extreme example of overspending and lackluster financial values, but it’s deceptively easy to fall into consumption habits that can sweep you and financial security away. That’s why our national credit card debt is $927 billion dollars1.
So how can you become Dr. Jones instead of just appearing to keep up? Better yet, how do you achieve financial independence and wealth without worry? Here’s some simple advice to think about early in your medical career.
- As a general rule of thumb, pay down your student loans as quickly as possible. They’re huge monthly payments that really drain your ability to save now and later.
- Get rid of that consumer debt! Same as above – if you’re carrying credit card debt or auto loan debt, take care of that quickly too and save yourself the monthly payment and interest.
- Don’t scale up your lifestyle after residency (or during residency). There’s finally a real paycheck coming. And the promise of a much higher income is just a short time away. But you’re already used to living a modest lifestyle through school – so keep it up! Not only will you position yourself to pay down debts and free yourself from excessive monthly bills, but you’re building the foundation of your lifelong financial attitudes and habits.
- Start saving for retirement. Like now. Compound interest is a magical thing over a couple decades, and as a physician, you’ve already got a late start to the saving game. Aim for at least 15% of your earnings initially, but the real target should be 20% of your income or more. (if tax-deferred options are available through your employer, like a 401(k) – contribute!)
- Don’t buy a house yet. There are probably options available to help you purchase a home using vehicles like a physician mortgage loan, but your home is your largest monthly expense and your mortgage will have a big impact on your monthly cash-flow. Consider setting some money aside periodically for a down payment instead while you get comfortable with growing expenses and lay your financial foundation. You’ll also have time to determine career plans for the next few years and make the wisest decisions about your location and living arrangements.
- Remember Uncle Sam. Your (future) gross salary sounds awesome, but you’re probably paying as much as 40% in taxes. Just because you make twice as much as your neighbor – doesn’t mean you take home twice as much (or should spend twice as much…).
Here’s the big lesson. Making smart financial decisions isn’t always glamorous. And sometimes, you’ll have to tell yourself no – to a vacation, a new car, that expensive watch, maybe even to the approval of colleagues. But the potential reward is financial freedom like Dr. Jones! With diligence, your sacrifices out of residency and early in your career can pay handsome dividends for years down the line.