We spend a great deal of time on this blog discussing the minutiae of personal finance and investing. Examples include trying to decrease your portfolio expense ratio by 10 basis points, how much DFA access is worth, which riders on a disability insurance policy are worth the price, how best to invest in real estate and whether or not to tilt a portfolio to small and value stocks.
But the truth is that people who are having financial difficulties aren't worried at all about these kinds of issues. Folks who read financial blogs tend to be “maximizers” rather than “satisficers.” A maximizer will pay every penny of tax he owes to the IRS, but refuses to leave even a 1 cent tip. A satisficer isn't going to keep track of his charitable miles just to knock $50 off his tax bill.
The truth is that in personal finance, there are only a few things that really matter a lot. In this post, I'm not only going to be presumptuous enough to state what those things are, but I'm actually going to rank them from most important to least important.
1. Get Married and Stay That Way
The single worst thing you can have happen to you financially is to get divorced. Not only do you lose half of your assets, but a typical physician usually loses a huge chunk of their income for at least a few years afterward. Staying single isn't a bad second choice, and two don't live as cheaply as one (they do live as cheaply as 1.4 however), but studies generally show that married people are happier, are wealthier, and live longer than single people. One house, one spouse, happy wife, happy life and all that. We all know people who are financially mismatched. A spendthrift spouse has prevented many a high-earning, frugal investor from becoming financially secure.
2. Make a High Salary
People often like to downplay the impact that a high salary has on your personal finances. While it is true that a high-earner can be just as broke as a low-earner, the fact remains that those with high salaries are far more likely to build real wealth and enjoy financial freedom. In many respects, doctors have already won the money game by virtue of their high salary. They have a number of factors working against them, but don't discount this big advantage, even for a modestly paid physician.
Likewise, don't discount the benefit of being a doctor making $500K a year instead of $150K a year. While both are nice salaries, they're really not in the same class with respect to spending power and eventual wealth accumulation. Even within your life, whatever it may be, you have significant control over your salary. It may require you to move to another city, work longer hours, or take more call, but income provides the raw material with which to build wealth, and boosting it never hurts.
3. Ensure Career Longevity
More important than your peak earnings, is how long you can maintain them. Longevity is a buzzword in my burnout-inducing field of Emergency Medicine. While busting your tail for 15 years for $350K a year is one option, it turns out that working for $200K for 30 years is a far better option for many reasons. You earn more money for one, and pay less in taxes despite earning more money. You also leave more time for your money to compound, and less time on which you need to live on it (enabling you to spend more in each year of retirement.) You also end up with a much larger social security benefit. Figure out what you want to do most days for the rest of your productive life. If it is something you would do for free, so much the better. But even if you are like most of us, and wouldn't practice medicine for free, practicing it in a way that ensures you career will last as long as possible will help build wealth.
4. Insure Against Catastrophe
One of the dumbest things you can do in personal finance is to carry inadequate insurance. Malpractice, personal liability, disability, and if people are depending on your income, term life insurance are absolute musts. Lots of financial devastation occurs due to failure to insure.
5. Live Well Below Your Means
This, the cardinal rule of personal finance, comes in at a measly number five on my chart. You may have noticed I have inserted an extra word into the phrase that isn't usually found there. Living below your means doesn't build wealth, at least not at any kind of a reasonable rate. The key is to live well below your means. I throw out the number 20% of gross income toward retirement a lot, but the truth is that 20% is just a ballpark figure. If you're 15%, you'll probably be okay. But making $20,000 a month and spending $19,800 of it isn't going to cut it if you want to get serious about building wealth. I know lots of wealthy people, but I don't know any who didn't follow this rule. Housing, as most people's largest expense, is the biggest culprit. Limiting your mortgage to 2X your gross income will make a big difference.
6. Don't Sell Low
One of the biggest tragedies I routinely see is a doctor in his 50s who encounters a bear market, panics, and trades all of his stock for bonds. Investor behavior trumps so many of the other important aspects of investing, including keeping expenses low, asset allocation, and tax-efficiency. Especially if done late in your career, overestimating your risk tolerance will sink your wealth faster than Joe Hazelwood's bartender.
7. Buy and Hold a Reasonable Portfolio
I'm continually surprised to see how many people hold an unreasonable portfolio. Most of these are a collection of investments, some individual stocks here, some mutual funds that were hot a few years ago there, and over in the corner a couple of privately traded REITs. There is no overriding plan or asset allocation. Sometimes people aren't taking on enough risk, with their money all in bank accounts, CDs, or whole life insurance. Other times they're taking on way too much, with their entire 401(k) in company stock or with heavy investments in hedge funds, penny stocks, or even a few “blue chips” like Enron or Worldcom. It is so easy to have a reasonable portfolio, it just seems silly not to have one. If you're not sure what a reasonable portfolio looks like, take a look at these 150 portfolios better than yours.
8. Be Uncomfortable With Debt
This one is a little bit of a pet peeve of mine. I am often contacted by residents who owe $450K in student loans but seem to act like it is no big deal. Almost invariably, these residents are in pediatrics, psychiatry, or another relatively low paying field and plan on living in an area like NYC or the Bay Area. Another common thing is a doctor who is carrying mortgages on his big fancy house, his second home, and his cabin.
The most important things.
While some debt is necessary, and a little leverage can be helpful at times, all of the financially secure people I know have a healthy respect for debt, and most of them freed themselves from its shackles years ago. It is a big deal to owe $200K in student loans at 8%, much less $400K. It is a big deal to owe $500K in a mortgage, much less $2 Million. It's not okay to buy cars on the installment plan, much less appliances. Credit cards aren't for credit. Get uncomfortable with debt and become wealthy.
9. Minimize Educational Costs
On a similar note, I see very few people who become wealthy while paying the highest possible price for their own education and that of their children. Don't get me wrong, education is great, and as a general rule, the more you learn the more you earn. But I don't know of anywhere in life where there is such a low correlation between the quality of the education and the price tag on it (well, except mutual funds, but that's an inverse correlation.) Today, in 2014, the education at George Washington University (ranked #52 by US News and World Report, tuition of $47,343) and Trinity University (#36 , $47,510) simply isn't ten to forty times as good as that at Brigham Young University (#62, $4,850) or Berea College (#76, $1,070).
Likewise, I was dumbfounded to discover that it is routine to pay $30K a year for private elementary school in the Bay Area. It is $8-10K where I live, and for most kids, no better than the excellent public school system. Housing might be the biggest expense, but education, done improperly, can be right up there. Imagine, if you will, that you want to send your 5-year-old to George Washington ($47K per year) followed by an expensive medical school ($82K/year). Even if you pay for no expenses other than tuition, tuition stays flat (ha!), and you earn a real 5% on your money, you will need to save $2400 per month (per kid), in addition to whatever you're paying for his private kindergarten. It's even worse if you don't do it. How do you think these medical students are coming out of residency owing $500K?
While you might be a maximizer in many areas of your life, I encourage you to be a satisficer when it comes to education. We all know that your education has a whole lot more to do with what you put into it than the name on the front of the administration building.
10. Pursue Inexpensive Hobbies
There are lots of fun things to do in this world. Some of them are a lot cheaper than others. The ideal hobby is a job you love so much you'd do it for free. Then you get paid to play every day of your life. I'm not sure that job is out there for most folks, but a hobby that pays you is a nice second. Take this blog, for instance. I could have taken up wakeboarding instead ($120K boat, plus $2-5K in maintenance and operation costs each year), and perhaps I would have even made more friends (actually, that's pretty unlikely given that 80K people come by this site each month.) Hobbies like flying, boating, antique cars, and horse racing are going to put a far larger drain on your resources than knitting, mountain biking, basketball, or bridge. If there are two things you like to do equally well, do your wallet a favor and choose the cheaper one.
Well, what do you think? Did I get the top ten? Did I get the order right? Sound off about what I missed in the comments section!
I would say that if you did have children that simply being a great parent could be a great personal finance decision… and being a poor one could cost you money
A problem child could range in costs anywhere from legal fees to defend them if they get into trouble… to needing continued support, housing, and resources post high school/ college if they don’t get adequate guidance on a career that sustains you… to having a child before they are financially capable of caring for it which could also sap your resources.
Also being healthy… if you are unhealthy it is going to cost you personally in terms of medical bills down the road, physical therapy, etc.
Money is great… but as people in this industry know… if you don’t have your health, you don’t have anything.
I agree with you on almost all points except for number 9. I agree that GW is not 10-40x better than Berea. In medicine, it doesn’t really make a huge difference where you go to undergrad/medical school………..however in other fields such as finance, for example, IT’S ALL ABOUT WHERE YOU GO. The Ivies are priced that high for a reason, and people who go there aren’t exactly ‘uninformed’ of their choice to go there. In fact, the opportunities that these students have are not available to ‘regular school/average students.’ Most top finance firms recruit exclusively at schools such as Harvard, Yale, MIT, etc. Thoughts?
This is true if you are at the right school for the right reasons.
Look at the law profession… if you’re not in a top 10 law school your odds of getting a good job out of the gate are fairly poor.
I’ve got a cousin that got a law degree from an average law school and is unemployed.. even the worst doctor from the worst school is probably employed in some capacity.
The top 1-3% of universities are probably worth the tuition if you can even get in.
Then there is a huge segment of middle-ish overpriced schools that aren’t worth it.
And there’s a an even bigger segment of crap colleges that are cheap and still aren’t worth it.
I agree about overpriced mid-tier colleges but the law school comment is not accurate (at least not when my wife finished law school a few years ago). You may need to graduate top of your class at a top ten law school to have a shot at clerking for a supreme court justice, but outside of that it doesn’t hold. My wife spent $5k a year for law school and had the same summer associate and job offers in Atlanta as people who were spending 50k a year at Harvard or 30-40k at Emory. The difference is that you are more likely to have opportunities as a middle of the pack student at Harvard or UVA whereas at lower ranked programs you need to be at the top of the class.
I’m with WCI on #9 — with a couple of caveats.
I sat down with my kids before they looked at colleges and explained to them that there are certain careers that probably require going to a certain college or set of colleges. Want to end up as director of the CIA? Maybe going to Eastern Kentucky State is going to make that path a lot harder than if you go to Yale.
But I told them that unless they had one of those kinds of specific aspirations and could come to me with a fairly detailed career plan, they were going to need to go to a state school or to a private school where they could get enough scholarship money (not loan money) to put it in a state school ballpark.
If a doctor’s kid goes to an Ivy, he is going to be around a lot of kids from families who have REAL money, and who don’t need to have a laser-like focus on making that high-priced education pay off. The effect can be corrosive. I remember a child of a fellow physician who went to a highly respected high-dollar college on the east coast who, while there, developed career dreams (delusions?) Sad, but life isn’t fair — there are some careers that you just are very unlikely to make it in unless your family can afford to spend $200K on college and then support you through years worth of unpaid internships and entry level jobs in extremely expensive places to live, and maybe even not then unless your family also has the right social and business connections.
And don’t let guilt about “maybes” make you spring for an Ivy education. There are alternative career paths if your kid decides he wants to do something that “needs” an Ivy admission ticket. My oldest went to Humble State U., and by nailing everything he did, ended up at the top grad school in his field with all but a pittance covered by fellowship funding. An Ivy ticket at a state university price. Did he have to work harder than if he had started at an Ivy? — absolutely. Did he need to catch a lucky break or two? Yup. But I think he appreciates it more, and has zero sense of entitlement. I like that. I’ll bet there are similar stories about kids who started out at Humble State U. and then got the bug to do finance at a top level — and who figured out how to make it happen.
I caveat my comment with saying that if you go to an ivy, you have to be focused and pick a major that corresponds with your career goals. If you go without a focus and hang out with the “rich kids that don’t care” or you take a “philosophy” major rather than economics, you may not see the same return on your money. Or you may have the best education possible without any results.
My experience in an ivy was very different. I caveat that with the fact I took an economics major. My classmates, though some from very wealthy families, were also all very ambitious and valedictorians. I know a couple of billionaires kids that have done very well for themselves running family companies since. There was almost a competition to see who could land the best internship/job/grades out of school.
Junior and senior year of college, a whole host of brand name companies started coming to campus. It was the only time in my life I had that kind of access to those companies. It was recruiting after recruiting session and informational talks at your feet.
Having had a career in finance, my starting intern class were all from top universities. There was the one or two that weren’t but they had to network alot harder and also get much much better grades. Some of them had a small chip on their shoulder about their school. There are alternative ways into that world but you’re going to have to be much much scrappier.
Life since my ivy undergrad, the connections have helped. As stated, my previous job and my current job some of why I got them were attributed to my school. After awhile, your business performance matters, but that is also based on which companies you worked at. My ivy undergrad translated to a brand name company translated to other companies that liked my work experience. Even now I take my husband (who is the physician) to networking events where we meet other people we normally do not have access to (prominent medical researchers)
Of course this career path is irrelevant to physicians – an ivy college does not matter as much in that sense.
Thanks for a perfect example of how to do an Ivy education right. Had one of my kids presented me with that kind of plan, I would have been very supportive and come up with the cash to pay for it (as long as they stayed doggedly on track). And the payout wouldn’t necessarily have to be financial — maybe one of them might have wanted an academic career in one of the liberal arts and needed an Ivy pedigree to go along with their drive and determination in a highly competitive field. But there has to be a reason and a plan, in my book, unless you are wealthy enough that a spare $200K here and there doesn’t affect your long-term financial goals.
I also certainly did not mean to imply (just in case you thought I was) that rich kids goof off and spend all of their time drinking and hooking up while at their Ivy, while poorer kids are always virtuous and hard working. Hardly. My experience with rich kids were that they often worked harder than anyone, but often kept it hidden behind a verneer of pretending that their grades came effortlessly. A bit of advanced gamesmanship that the uninitiated often don’t figure out…
And you are right that sometimes graduates of less prestigious schools have a chip on their shoulder, but it has usually been placed there by someone from one of the “right schools” at some point.
I have a particular interview at an Ivy League med school in mind, where I was told by a faculty member interviewing me that most of their students came from “good schools” like Harvard, Yale, an Princeton, but that they occasionally found that an outstanding student like me from a non-Ivy (my MCAT scores were significantly above the average for students that they admitted) might make a better med student than a C student from Harvard College (I’m dating myself, since nobody gets C’s at Harvard anymore). I didn’t get in, and every time I look at my healthy assets sheet and remember how happy our family was living in our low-cost midwestern city during med school and residency, I thank God that I didn’t get in to one of those med schools in New York or Boston.
Some people have the self-confidence and phlegmatic personality not to let those things bother them, and some don’t. I shrugged it off, didn’t look back, and have had a career that I wouldn’t trade for the world. It is productive to be scrappy, determined, and hard-working, knowing that you are running hard toward first base when others have started out on third and are strolling toward home plate — but it is never productive to be resentful. My guess is that those fellow non-Ivy interns you knew eventually figured that out for themselves.
I agree that the institution granting your terminal degree matters. For docs, however, that’s your residency. For someone seriously going into finance, it’s probably your MBA.
I agree. Depending on a certain field you want to go into, an ivy may be the right choice. Finance and consulting firms directly hire from mostly the ivies and a select number of other colleges.
Silicon valley places such as Google love hiring from Stanford. I’m 8 years out from my undergrad ivy college and my previous two jobs I’ve leveraged my undergrad name and connections to get them.
You really need to understand what profession you want to go to and pick your major carefully. (E.g. where you went to school really does not matter in medicine, but it does matter elsewhere).
I think we would all agree that private non-ivy caliber schools are not worth it AT ALL compared to state schools but I’m not sold on Ivy either. Have you ever heard of the Ivy League Earnings Myth? Basically says that kids who got into ivy league schools but didn’t attend end up doing just as well as the kids who got into ivy league and do attend.
I do think Ivy’s help a ton with networking and getting a job in the beg of your career. Since like you mention a lot of the big boys really care about where you went to school if you’re 30 or under. But once you’ve got 5-10 years experience or more I think companies could care less where you went to school. By then, it’s all about your performance right?
“I think we would all agree that private non-ivy caliber schools are not worth it AT ALL compared to state schools ”
Thats a pretty broad statement actually. By “worth it” I assume you mean just monetarily. I went to a private non-ivy school. Granted I had a scholarship to help with some of tuition but I have no doubt that my education was better than that I would have received at a public school. My largest class had 80 people (Freshman Biology) and my average class size was about 20. That is about 3-5x better than you will find at most state schools. I would estimate that my school cost about 5-6x what a state school did back then. It was a great investment.
Private schools in general have higher graduation rates, higher performance on standardized testing, and higher career outcomes on average. They aren’t 10 times better but many do provide a better education, it just a question as to at what cost.
It is my understanding that the general consensus on Divorce is that it is
so expensive because its worth it.
Please don’t tell my wife I wrote that.
Really? A former divorced boss of mine once said “It would’ve been cheaper to keep her”.
I’d have another zero on my portfolio if I hadn’t divorced.
And I wouldn’t go back for 10 zeroes.
It’s no coincidence that most of the top executives and CEO’s of major companies (ie fortune 500) are basically ivy grads or ‘near ivy league such as Stanford, MIT.’ Ivy league eduction is worth it’s weight in gold in my opinion as long as you don’t study history or the like. Example:
4. Insure Against Catastrophe
I am sure you meant to include health insurance.
Definitely should have.
#5 is the most important for people who don’t have a tragedy. I acknowledge that it’s hard to tell who will avoid tragedy and who won’t.
I believe numbers 8,9,10 are almost a subset of number 5.
Just my 2 cents.
Really liked point #3. It’s great to have you blogging, you work in a high stress job with a good income so the things you say are really poignant.
I might quibble slightly with the order, but you pretty much nailed it. I realized how blessed I have been in my life by the fact that every single item on your list was advice I received from my father, another close relative, or an attending (usually an attending in private practice rather than ones in academic practice.)
I would add an important corollary to making a high income — choose any practice situation very carefully. Just as getting divorced is very expensive, so too can changing practice situations be very financially and emotionally costly (although in the age where almost all new grads are employees and not in private practice, less so than it used to be). And if you make a mistake, don’t drag your feet on cutting your ties and starting over.
Here are some of the prime pieces of advice that I got from primary practice attendings when I was a residency:
1. Know the economic impact that your presence will have on the practice your are joining — this doesn’t just mean what the MGMA “going rate” for your specialty is (although you need those kinds of numbers, too), but rather how much money you will be bringing into a hospital or group in direct fees, hospital services, and ancillaries. Many hospitals and groups don’t want you to think that way — or even know the numbers involved. But it is vital for you when when you are negotiating and comparing practice opportunities. Don’t underestimate how much money you will be bringing into the organization.
2. Anytime a prospective employer or partner gets cagey or vague about money, or anytime you are told that “money isn’t the important thing for us here,” — cross that place off your list. Money is almost certainly the MOST important thing to the people you are talking to, and someone is planning to make a great deal of money off you. People you should want to work for/with will be transparent about financial issues, unfazed by your asking very specific financial questions, and not threatened by it (as long as they are convinced that providing top quality care is paramount to you). They will be just as determined as you are to make as much money as they can — legally, ethically, and while providing top quality care. The best places will appreciate the fact that you are coming in with your eyes wide open and are being realistic — you have a better chance of having longevity with them if there are no surprises for either side.
3. If you enjoy practicing (insert name of specialty) as a resident, you will likely enjoy it all your life, in almost any place or situation you choose to practice it in. What will cause hard feelings, resentment, and cause you to “divorce” your practice will almost always come down to feelings about money and whether you feel fairly treated in that regard.
4. As the flip side to #1, don’t go to the extreme of overestimating your worth, or imagining that you will be the beneficiary of that magical fairy dust known as “other people’s money.” Often residents unduly focus on things like having their CME, or malpractice, or whatever, provided “free” by the group or hospital. Sure, negotiate the best deal you can, but never forget that nothing is free. Trust me — you will be paying for all of those things yourself by the sweat of your brow. Part of having a right understanding of your financial worth is understanding that if you are going to be highly paid, you have to work to make sure you are financially worth what you are being paid — generating direct and indirect revenue that covers your salary, benefits, practice expenses, signing bonuses and student loan repayments — plus some extra “for the house.”
This is excellent advice. We “run the numbers” every month at our partnership, down to the donuts… The average family physician at full operation has a $2,000,000 impact on their referring hospital yearly (higher than any non-surgical specialty) with very little cost to the hospital. If you are employeed by the hospital you need to know your impact. If you aren’t employed and joining a group you need to understand your revenue streams. If you are generating $500K in revenue and making $120 your being ripped off.
One thing that appealed to me about my current job is income is exponential. I work hard to make my salary but once the bills are paid I get a much higher return on my work. (Hence why I enjoy the start to flu season…)
Great example of a group that takes these things seriously. The best reimbursement setups generally have the kind of stair-step approach to reimbursement that you describe. One doc generating $500K for a practice is worth more than two docs generating $250K apiece, and the reimbursement should reflect that fact.
I think a lot of docs have no idea that their economic impact to a hospital more than likely is in the millions of dollars. And if you as a doc manage your practice patterns to maximize revenue for the hospital, your impact will be even higher. I think of myself as being a partner in my hospital’s financial health. I thought that way when I was in private practice, and I think that way now that I am employed. And it is completely reasonable for me to expect that sense of partnership to be reciprocated.
NVMD just wanted to give you a shout out for #2. I had a job interview recently (EM) where I asked the boss about salary and he immediately said, “that’s not something we generally discuss the first time we meet you.”
Well, then there isn’t going to be a second.
If you want to see some wide eyes tell a story like this to your friends who work in law, finance, etc.
All very reasonable. I would say in all this, if a decision doesn’t feel right then it probably isn’t. Trust your gut! So important to understand the financial implications to all these topics.
The education piece is something that stands out to me. Recently talking with someone and they are ultimately going to pay 1M for k-12 education when the public school system is excellent around them! Another case 600K in school debt for a single dentist coming out. After the fact he said maybe he should have picked different schools or profession. The financial education in the US is dismal at best. Recently read an article that says only 13 states require some type of financial class to graduate high school.
I strongly agree with 1-9, but I take a pause at #10. I think if you are following the advice in 1-9, a single(1)expensive hobby is perfectly fine. What you can’t do is multiple expensive hobbies and try to keep up with all of the Joneses. For example, just because Pete gets his pilot’s license doesn’t mean you have to, while you are buying that mountain cabin to keep up with your cousin and season NFL tickets to match your brother-in-law. If you want an expensive hobby, be it wakeboarding, cameras & lenses or world travel — be smart about it (buy a used boat for under $120K) and enjoy!
Great list and supporting comments. Regarding #9: when I went into practice in 1980, student loans were fairly unusual. Now they are mainstream and it’s very scary for kids when the reality of a 6-figure loan sinks in. However, the pendulum is starting to shift. I believe we are going to see a big move to low-cost internet learning opportunities over the next 10 years while community colleges and trade school educations become even more mainstream. There will be less emphasis on liberal arts and 4-year degrees and more on focused education costing less time and money. I believe many who are setting aside big bucks for a traditional education will be pleasantly surprised when the time comes.
I hope you’re right. I certainly don’t see that trend showing up yet.
I don’t agree with the $350/15y vs $200/30y argument. Money now is worth more than money in the future. I really don’t know a single doctor who plans to only work 15 years. Yea I agree it’s not worth burning out. But money now is worth more than money in the future and working those first 10 years hard, then backing off pays more than coasting the whole way
Here is an interesting article (I found it after posting above comments, by the way). Chuck Jaffe is one of the more sensible financial writers.
http://www.marketwatch.com/story/college-will-be-cheaper-in-20-years-than-it-is-today-2014-05-30
Wakeboarding is great on a MUCH less expensive boat than 120K! The kids love it. Keeps our two college age ones coming home with friends on holidays!
That’s what my wife said when I told her I wanted a new Mastercraft X2.
She sounds wise. Ever think she would be willing to post a blog from her perspective on your family’s financial journey?