I feel very passionately about helping doctors improve their finances. The worse the state of their finances, the more motivated I am to help them. Unfortunately, I seem to be most talented at helping those in the best financial shape and the least talented at helping those in poor financial shape. But I'm still trying. This post is an email exchange where I attempt to instill the X Factor into a physician. Details obscured to protect the innocent.
Q. I Make $320K, I'm In Debt, Don't Understand Investing, and Unable to Save for Retirement
I'm embarrassed to admit that I have an MD degree but my greatest weakness is finance. I'm struggling actually to understand some of the concepts. I have a financial advisor and am likely losing money with him despite him being very helpful so far. Combined, my partner and I make $320K and I feel like we live in a modest home but we have so much debt I can't seem to get to a place of investing so I can retire at a decent age and spend money on experiences rather than our cars, bills, loans, daycare, and shopping. I'm interested in learning but feel like I need more help than the average person! What are my next steps?
A.
Keep Using an Advisor
If the advisor is providing good advice at a fair price, it's probably a good idea to keep using him/her at least for now and maybe forever. But you're paying him/her a lot of money to answer questions like the ones you're asking me. How come you're not asking the advisor these questions? That's what you pay him/her for.
Live Like a Resident
The bottom line when you have a lot of debt and you're not making progress toward your financial goals is that you have to make more or spend less. So start doing things that do that. It doesn't matter how you invest if you're only investing $5K a year. You're not going to have a very nice retirement like that. My general recommendation is 20% of your gross income toward retirement, above and beyond whatever it takes to pay off all your debt except your mortgage within 2-5 years of residency graduation. That generally requires you to live a lifestyle that a resident could afford for 2-5 years in order to take the rest of your income and build wealth with it.
Get Financially Educated
You might consider taking the WCI Online Course, “Fire Your Financial Advisor,” together with your partner. It is our “premium product” and really helps you not only learn how to interact with your financial advisor but also draw up a written financial plan. For those who need more help than the book/blog, but don't want to pay financial advisor fees, I think this is the best option. It comes with a 7-day money back guarantee, so if you don't like it, just email back. You could also sign-up for the free monthly newsletter, which includes a free 12 step email course called WCI Financial Bootcamp.
Q. I Want to Fix the Problem But I'm Not Willing to Change Much
Thanks for the advice. I'm beyond 5 years out and in my mid-30s so I've missed the ball and can no longer afford to live like a resident. I am looking for someone to give me advice for someone who is more like 5+ years out of residency and has an established mortgage, ongoing debts, and a family. I feel like a lot of advice is geared towards early career doctors and I'm in a position that I'm not willing to change my lifestyle all that much.
I don't think we are frivolous. We have a modest home and modest cars. We don't buy fancy things or have expensive hobbies. Our family doesn't go without but at the end of the day I'm barely able to contribute 10% to my retirement and had to stop altogether the past two years when we welcomed another member to the family due to cost of daycare.
I'll talk to my financial advisor but I feel like I need individualized advice for my particular situation. It's not ideal. I make $250k, my partner makes $70K, we have $15K in credit card debt, still owe >$50k with our cars, and $140k on loans. We have $150k in equity on our home and I have about $135k in retirement savings.
So here we are…and here I am wondering how I fix this problem.
A. Only Dramatic Changes Will Make a Difference
You can't expect dramatic changes in your financial life without making dramatic changes. Making little changes around the edges isn't going to change the big picture.
Nobody thinks they're frivolous, including families making twice what you are but having the same issues. I have medical students over to the house every year and tell them “if you can't live on $200K you don't have an earning problem, you have a spending problem.” They all laugh because it is so hilarious to them that someone can make $200K and have financial problems. But guess what? Half of them later do. Meanwhile, you're making $320K and not happy about the progress you're making toward your financial goals. I became a millionaire 7 years out of residency on an average household income of $180K those 7 years (and was well under that the first four.) Ask yourself how that happened and you'll quickly figure it out. We spent very little, saved early and often, didn't pay unnecessary interest, and made sure our money worked as hard as we do. Anybody can do that at any stage of their career. Sure, it's easiest right out of residency before you grow into that attending income, but it's never impossible.
The big picture is that you need to dedicate a big chunk of your income to building wealth if you want to build wealth. Everything else is just details. So that's the place to start. Even if it is just dedicating 1% more of your income each year toward building wealth.
Good News
Here's the good news:
- You already have a positive net worth in your mid-30s.
- Your debt to income level is very manageable.
- You have a great household income.
- You know you need to make some changes. You have insight into the fact that there's a problem.
Bad News
Here's the bad news (and I'm going to be super blunt in an effort to help you):
- You think credit cards are for credit. They're not. Debt is an emergency.
- You buy cars on credit. That's not an ideal way to build wealth. Here are 15 reasons to pay cash for your cars.
- You are keeping your loans in the basement downstairs like a pet instead of obliterating them rapidly after residency before getting used to that attending income.
- You have a financial advisor but you don't feel like you're getting individualized advice. That's the whole point of a financial advisor. If you don't like the one you have, here is a list of ones I recommend.
- You're in such a tenuous financial situation that a childbirth somehow ate up $30K a year. Some families live off of $30K a year.
Trying To Help
So I'm sitting here thinking, “What can some guy on the internet say in an email that is going to change your financial life, motivate you to take control, and give you the hope you deserve as a member of the most honorable profession?” So here's my best shot:
# 1 You Need to Get On a Written Budget
Every dollar you earn needs a name. There is no way you're not wasting a ton of money right now. It's going somewhere and neither you nor I know where. The only way to find out is to write down where every dollar went last month. Then you look at that list/spreadsheet/budget and ask yourself, “Does my spending reflect what I value most?” And then you start cutting back on the stuff you don't value (like driving a fancy car or eating out or vacations or whatever) and move that money toward stuff you do (getting out of debt, saving for retirement, vacations, cars, daycare, whatever). It really is that simple. Not easy. But simple. It's very hard to cut back on lifestyle stuff. But you telling me “I want to fix this problem but I'm not willing to change my lifestyle all that much” is like an obese patient telling his doctor that “I want to lose weight but I don't want to eat less or exercise more.” Well, there's no gastric bypass for your finances. If you want to lose the financial bloat, you've got to cut the calories. Step one is to find out where the calories are coming from.
# 2 You've Got to Really Want This
This isn't easy. If it isn't really important to you, you're not going to be able to do it. You've got to get sick and tired of being sick and tired. I might suggest listening to the Dave Ramsey podcast on your commute. It isn't geared to the high earner like my podcast, but he might be the best person in the world at getting people motivated to get out of debt.
# 3 Consider Making Drastic Changes
Drastic changes include:
- Taking a better paying job
- Moving to a lower cost of living area or a tax-free state
- Downsizing to a cheaper house
- Selling the expensive cars and buying $5-10K cars with cash
- Cutting up the credit cards
Chances are you will need to do one or more of those steps to fix this problem. Maybe not. Maybe getting on a real budget will be enough, but I think you'll need a little kicker to that.
# 4 Start Keeping Score
In personal finance, your score is your net worth, everything you own minus everything you owe. Right now it is $285K-$210K = $75K. What do you want it to be by year end? What will it take to get you there? What do you want it to be in 5 years? How about when you turn 50, or 60? Set some goals, then work backward to see what it would take to reach them.
What do you think? How did I do? What should I have said? How can one diplomatically point out someone's spending is out of control? How can you transplant the X Factor? Comment below!
no need for written budget
pay yourself first by maxing out pension contributions; then invest in in divid ual tax free munis
then educate yourself on investing by reading bogle, malkiel, Bernstein and swedroe and C AN the advisor
a\if you are not educated on finance how the heck do you know if the advisor is up and up
MAKE SURE ADVISOR IS A FIDUCIARY
“If you want success, figure out the price, then pay it.” — Scott Adams
These are words that give me a good punch in the face when I need it. This works for all areas of life. Want health? Eat well and exercise every day. Want wealth? Save 20%+ monthly, invest it well, and wait. Want knowledge/wisdom? Read/study/learn every day.
This person sounds like a med student that might say, “I want a top USMLE Step I score, but I’m not sure I like spending much time studying since I’ve got lots of other life priorities (I’m 5 years+ out of college). Can you please give me some personalized advice about how I can still score a 240 or above without spending as much time studying?” Sorry, dude. There’s no shortcut.
Change of attitude is most important before any of these solutions will work. If this couple feels defeated and doesn’t see a way out, they will never be financially independent. It will not matter how much money this couple makes, it will never satisfy their desires.
On another note: Are both partners in this together? I receive inquiries month after month from desperate husbands who are earning a good living (mostly in the 250k – 350k range). They have no idea why they don’t have a savings account for emergencies and or college. They are frustrated and do not know what to do. Most never seek the professional help because they cannot get their wives or significant other on board. To be clear, this scenario happens in both straight and gay marriages.
I am confused. How did the dog get in the basement? Is this a same sex couple? Five years out is pretty darn young. If they want FI then there is no tie like the present to get started. Learn, budget, track, Rinse and repeat for 30 Years.
Jim,
I’m sure your ability to listen and counsel without harsh judgment is also an asset in the ED. I can only imagine how many folks solicit you to plug an awfully big hole in their finances with your finger. For better or worse, all bleeding eventually stops.
Assuming you only get limited follow up, what do you figure your rate of financial saves is for every Sisyphean exchange you engage in?
Thanks for taking time with folks like this.
CD
I’d be happy if I were batting 0.100, but I bet I’m doing better than that.
$150k in equity, but what is their mortgage principal? I’m assuming the $140k in loans was for school only.
I don’t recall.
I have a question regarding 401k self match.
My wife is an ER physician and is completing her first year out of residency. The hospital that she works at contracts through a national ER staffing group. Since she is a contractor, I believe she should be eligible for self match.
The staffing group has setup a 401k as a benefit with a match of 60% up to 6% deferred (they claim it to be a company match but it is taken out of her pay). This only allows her to contribute ~$30k total, but the max contribution should be $55k.
How do we go about contributing the additional $25k to save the ~$8k in taxes? Can we open a separate 401k (solo or otherwise) to contribute the additional $25k?
Is she a contractor or a partner? If she is a contractor, why is she eligible for their 401(k) at all?
She is in a LLP, but I believe she is still considered a self-employed individual. She has the ability to contract outside the partnership and is fully responsible for self employment tax payments, social security, etc.
It sounds like my partnership, where we’re paid on a K-1 and have to use the partnership 401(k), not my side gig where I am truly self-employed and get 1099s and have my own individual 401(k). Why a partnership would design a 401(k) you couldn’t get $55K into is beyond me.
I once worked in manufacturing where the Engineering department was reluctant to change drawings. We had a response if you won’t change the design you don’t want to improve very much. If a person wants to stick to their current life style and spending they don’t want to change and therefore won’t improve. A strict budget with only those things you need and very important to you things (like say children’s education) will work. If you live in a very high cost of living area moving might be required.
Saying that there’s no gastric bypass for finances seems almost to imply that the gastric bypass is a guaranteed painless way to lose weight…
Which it really isn’t, as evidenced by the unpleasant symptoms that result if you stray outside the diet, as well as the failures when people still overeat anyway.
I feel like drastic measures you’re advocating IS the gastric bypass. After all, like the gastric bypass, it’s proven to be effective, and going to require a lot of pain and continued dedication (living like a resident again ≈ postop pain/dietary restrictions) to stay effective.
I really like KFM’s ‘disaster budget’ concept. We took a more optimistic name for it- ‘single income in case one of us wants to stay home with kids budget’- but it covers (somewhat) for divorce, death, disability. And we actually set up our retirement savings plan certain that socialized medicine would be here in the 90s and we might decide we’d get better pay/shorter hours teaching high school than doctoring.
What I hated for the folks with houses foreclosed upon, and for widows etc. whose family income drops with a family member’s death, is having to move house because of $ same time you suffer that loss. But when I think about it more in depth I ask myself of the foreclosure victim “Why were they so confident that their salary could only go up and up and up and that they’ll work in the job til retirement age?” Doctors aren’t the only ones in a stagnant or dying industry which doesn’t justify buying more house than you can afford at the moment thinking you’ll have pay raises throughout life. And for the surviving family members, “What crappy spouse doesn’t plan to ensure the widow can stay put after their death?!?” and of an adult who’d been living in Mom’s house but she died, “Why does one man need a 3 BR house now his mom is gone? And why hadn’t he moved out earlier anyway? and did his siblings get a fair inheritance?”
I think having tangible goals for this person would help. Take where he/she is today, as measured by net worth ($75k) and make it a clear goal to have 20% ($64k) savings this next year (automate it!)….I suspect that nearly doubling their net worth in a year by a combined debt reduction and investments would be a success.
I have a 401k safe harbor retirement account and I am maximizing my contributions personally and my corporate matching. But maximum I could do was $29k. I have my 401k with Vanguard , and according to their calculations, if I wanted to increase my contribution, I had to go for a profit sharing plan. But I noticed that tax expense is somehow offset by the high profit sharing that I had to put for the staff.
What are the options to increase my contributions to 55k maximum permissible? Thank you
If you have employees, you should get professional help to do a study of your practice and what is best for you. There likely is no way for you to get to $55K without giving a lot more to your employees.
As my wife is a physician, I can understand the challenges and troubles of having a young family, especially one just out of residency. There’s student loans (and massively-sized-ones-at-that), childcare expenses, mortgage payments, and oh yea, groceries and everything else too.
I think for us, we tend to respond to the things often, since there are so many voices yelling at us to do things: gotta buy a house, gotta get new shoes for the kids, gotta buy milk and eggs at the store, etc etc… And for a while, we weren’t saving as aggressively as we should’ve because no one was crying for us to save! (I mean that quite literally, having three young kids in the house).
I highly recommend that they just start saving. Just do it.
Change your 401k, your 403b, whatever it is, and max it out to $18.5k a year.
You’ll quickly change your habits once your checking account isn’t getting as much money. This is a way faster technique than sitting down and writing a budget.
On top of that, consider investing in a post-tax investment account. Just sign up and figure out however it is you need to do automatic investing. Fidelity will let you do it (I know, we use them) and set aside whatever amount you want. Same thing for the kid’s 529 plan.
Once it’s automatically set up, it’ll happen every month without your intervention. I’m willing to bet there’s some room in your finances for saving, you just haven’t found it yet because you’re too busy keeping up with life.