[I contributed seven articles to Forbes last November. This was the first one and a bit of an introduction to why personal finance aimed at high earners is worthwhile and unique. I don't have to preach this to most of my regular readers who are well aware that financial blogs for docs are now a pretty good segment of the financial blogosphere.]
5 Barriers to Financial Success
# 1 A Late Start
High-income professionals start earning money significantly later than their high school or even college peers. A high school graduate may start earning at age 18, but a typical physician may not even begin her career until 30-35 years old. Four years of college, four years of medical school, and 3-7 years of post-graduate training is often combined with a master's degree, a gap year, or other delay in the educational process. Although residents and fellows do receive a paycheck, it is often 1/4 or less of their value as a fully trained physician. Pharmacists, attorneys, and veterinarians may also have extended educational periods delaying the onset of earnings. Compound interest requires time and high-income professionals have less time for it to work. The only solution to this obstacle is to simply save more money. Instead of a typical guideline like saving 10-15% of income for retirement, doctors and lawyers should be saving 20% of their gross income for retirement.
# 2 High Educational Debt
The median debt at medical school graduation is now over $200,000, but that figure has a very wide distribution. It is not unusual to see a medical school cost of attendance of $80,000-$110,000 per year. Borrowing enough money to cover that entire expense can easily reach $400,000, not including any money borrowed for the undergraduate portion of the education. Graduate school loans are no longer subsidized and rates are often in the six to ten percent range. $400,000 compounded at seven percent during a three-year residency and a three-year fellowship can leave a doctor starting her career with a student loan burden of $600,000 and an income of just $200,000. Under a ten-year payment plan, making those payments could require dedicating 57% of net income to student loan payments for the first decade of a career. It is difficult to build wealth like that. Solutions to this obstacle involve choosing the least expensive school you can get into, living frugally during and after the education and training periods, taking advantage of federal income-driven repayment and forgiveness programs, and refinancing loans when appropriate.
# 3 High Taxes
Our progressive income tax system has no “memory” of prior years. It doesn't matter that you are 35 years old and have never made a dime. If your income is high this year, you pay a high percentage of it in taxes. It is not unusual for a high-income professional to pay one-third of her gross income in payroll and income taxes, and that money cannot be used to build wealth. Solutions include taking advantage of all legal tax reduction techniques such as maximizing the use of tax-advantaged accounts like 401(k)s, Indirect (Backdoor) Roth IRAs, Health Savings Accounts and 529s.
# 4 Targeting by the Financial Services Industry
High-income professionals, particularly doctors, are often viewed by brokers, insurance agents, financial advisors and bankers as “whales” to be harpooned. When combined with a lack of financial literacy and business training and a taboo in the profession preventing the discussion of financial topics, it is no surprise to see doctors repeatedly fulfill their reputation as financial rubes. It is difficult to build wealth when an entire industry is focused on transferring your earnings from your pocket to theirs. The solution to this dilemma, of course, is basic financial education. This is beginning to occur in medical schools and residencies, but the primary burden still rests upon the individual professional. Doctors and lawyers who wish to eventually retire comfortably must either learn to manage money well themselves and/or hire someone to provide good advice at a fair price.
# 5 Societal Expectations
Chilling in the limo, picking out a hotel for WCICON20. Even living like a resident is temporary.
Doctors and lawyers face a surprising amount of social pressure to spend. This comes from friends, family, patients/clients, and even themselves. “You're a rich doctor now, why are you still driving a Civic?” a young physician with a net worth of negative $400,000 may be told. The solution to this dilemma is to “live like a resident” for the first two to five years out of training. By earning like a physician and living like the average American household, a doctor can rapidly pay off student loans, save up a down payment on her dream home, and catch up to her college roommates with retirement savings.
High-income professionals can overcome these five obstacles to building wealth, but it will not happen automatically.
What do you think? Why aren't doctors as rich as everyone thinks they are? What other barriers keep high-income earners from being financially successful? Comment below!
My first question is this: Is that a FISH TANK in your limo?
Good post, Jim. And it is all too true! This is why I think the behavioral finance aspect of building wealth is the most important. Trying to make this less taboo at my institution, but it takes time to change culture. Hopefully, by the time I finish, it will be normal to have conversations about personal finance and educating our future physicians.
TPP
That does look like a fish tank!
But nope, those are fancy glasses under florescent lights – vegas style. They are empty since Jim isn’t indulging in the booze. He is there for business and keeping his focus!
This is a rather flattering version of what I see. You are better at not offending your readers than I am.
Here is a lot of what I see too:
Complete lack of understanding of basic principles of saving and investing.
The overconfidence of investment knowledge and skill or any other area of expertise. “Hey, I’m smart. After med school everything is easy.”
A desire to rapidly build wealth through exotic investing and high returns rather than spending.
Bored by reading about retirement plans or tax laws.
Naive trust and confidence in other people to always look out for their best interest.
No ability to negotiate effectively. Embarrassment whenever they do try to negotiate.
Guilt about their relatively high income and a sense they benefit from income inequality.
Overly generous in trying to financially bail out friends, co-workers, and relatives before they themselves have their financial house in order.
What you call “Social Expectations” I call “Hey, you spend too much.”
Focusing on income and completely ignoring Net Worth.
Well, you get the idea!
That sounds like the chapters of the WCI book. Looks the the Forbes article was toned down a little. We do not want to offend the internet 😛
It was shocking to me at least that out of the Millionaires surveyed, I believe teachers were in the top 3 professions and doctors were way below it. It shows that anyone can achieve wealth if the money earned is focused with intentional spending and saving (something that doctors who typically have had no financial training do not do very well).
As medical reimbursements continue to decline and educational costs rapidly increase, the margin of error has starting to get dangerously low. In the past you can make several big financial mistakes (I am a prime example) and because of the large salary you can brute force your way back to wealth.
Nowadays you might be able to get away with one or two, and certainly not a big one like a mid career divorce, if you want to retire in your 50s or earlier.
The proliferation of doc financial blogs (courtesy of you leading the way) shows some promise that people are getting and spreading the message. We get a little biased thinking the whole doc population thus is improving because we deal with the people who visit the sites only, but there are far more than either have never heard of these sites or know of them but still neglect to take action (lead a horse to water comes to mind)
Your not kidding about the social pressure bit. My wife and I are trying to buy a home and we were talked out of buying a modest house that was “only” 3x bigger than our current 600sqft apartment.
We are literally sleeping on the floor in the living room so we don’t wake up Baby Kpeds and some how that mansion wasn’t good enough!
The amount of disapproval and disappointment from our parents was impressive.
The pressure to confirm is a big hurdle!
my ent is now doing options and covered calls and think its a no brainer
typical doc thinks he is smarter than wall st
As an immigrant Physician, I wanted to highlight the social pressure from family members here in the US and back home. As much as it often stings, it’s not that easy to ignore or turn down repeated cries for help from back home. It’s always difficult to explain the illusion of your being the “rich Doctor” to those back home. Their condition back home is often truly deplorable and they regard u as a beam of hope. The demands come non stop and for the most parts, u often just have to let the relationship go south. One strategy that has helped me is paying myself first once my paycheck arrives (send to my savings, retirement and brokerage accounts, setting up a charity fund to control the cash flow and learning to use the most powerful word on earth “NO!”
These points are the reasons why a 34% of physicians have a net worth less than a million dollars by age 50 despite 2 decades of high earnings. With sites like yours Jim, TPP, Xrayvsn, and wealthy doc…maybe we can reverse the culture and decrease doc burnouts/suicides.
as a dentist and seeing 500k in private schools, at what point do dentists and physicians look to other fields
and we knw the hi cost of buying a practice or opening a new facility plus undergraduate education, a home, car, etc
very happy I was able to pay for full freight for my daughters medical education; more so as many females work pt
When I first became an attending we were rich!
Extra money every month for vacations to Europe, Luxury cars, Expensive wine, Nice dinners out almost every night… And still plenty left to fill a 401k, invest for kids college and extra cash investments for early retirement.
Then it all ended – We bought a house.
Down payment, repairs and renovations plus unexpected excess exterior maintenance as well as constantly increasing tax bills just eradicated much of that free cash flow. Don’t forge the need to furnish the entire home and the significantly higher heating and cooling costs (and cable for TV’s in every room). At least we were debt free with significant investments before we did that. We still do the obvious things, the 401k the 529s etc., but now much more budgeting has to happen to ensure that gets done. Housing is something you might want to add to the possible obstacles…
Excellent point and one I have made many times. Can’t put everything into every article though.
The secret is not to delay profligate spending for a few years. One should “delay” this permanently. When we got started, we bought a house we could easily afford. The disappointed real estate agent promised us we would upgrade to a doctor’s house in a few years. We lived there for almost two decades. Moved when we left town. Our neighbors were more likely to be public school teachers than doctors. The high paid person was a long haul commercial pilot. The fanciest house, by far, was owned by an entrepreneur who went broke and discovered he could not sell this big fancy place in that area.
So our kids grew up with friends from families of modest means. Our friends were from this same demographic. We never got to thinking we “needed” expensive cars or vacations. We have never gone to fancy restaurants or bought expensive clothing.
Once I discovered thrift shops and eBay came along my already low clothing expenses plummeted. “$5 for a tie? Who do I look like, Warren Buffet?”
By never developing an expensive lifestyle, we had more money to invest. We appreciate the effect on our networth. Since we never wanted the expensive stuff, we don’t see ourselves as having sacrificed anything.
Great Comment! So true!
So many of the things we consume just don’t affect overall happiness. Are you really happier for having gone to Fiji, when a mediterranean cruise for 1/5th the price would have been fun? Do you really need a $150k Porsche?
So many of these things are just superfluous and we risk losing our financial independence and security just to attain them! It’s especially true of younger physicians who have debt – and many of them make the mistake of taking out huge mortgages early in their careers.
I’ve cruised the Mediterranean and I’ve been to Fiji. Both can be done relatively affordably. The Med’s great, especially at the end of the season, on a smaller cruise ship (Celebrity is excellent) or on MSC when you get a deal where up to two kids travel free with two adults.
If you are flying down to Australia or New Zealand, you can fly with Quantas (good), American or United (not particularly good), or fly Fiji Air or Air Tahiti Nui. If you fly one of the latter two carriers, it will be cheaper if you have a layover of a couple days or more in Tahiti or Fiji respectively. While I wouldn’t make a point of spending the high season Christmas break in Tahiti or Fiji, it’s pretty killer to spend 2-7 days in the South Pacific if you already are going to a continuing education course in Oz or Kiwiland.