By Dr. James M. Dahle, WCI Founder
It is no secret that I think “front-loading” your savings is a good idea. The four most important words a medical student or resident can hear are “Live Like a Resident.” In order to front-load your savings and to get all the benefits that would provide, though, you must have a high savings rate early in your career.
6 Reasons Why You Should Have a HIGH Early Savings Rate
#1 Choices, Choices, Choices
Perhaps the most important reason to save early is to allow for more choices later. By getting a good-sized nest egg in place early, you will have the option to cut back on work or even fully retire early. You may wish to change careers or choose a less lucrative practice option. These are all options someone who waits to save does not have. It affects your investments as well. If you start saving early, you can choose whether to be aggressive or conservative in your investments. If you start too late, you may no longer have that option.
College savings is similar to retirement savings. If you start early, your kid will have additional options that might not have been affordable if you started late. That doesn't mean you have to send the kid to the fancy-pants school, but at least it's an option.
More information here:
7 Ways to Increase Your Savings Rate
#2 Less Hedonic Adaptation
It is no secret that, behaviorally speaking, it is far easier to avoid growing into your income than to cut back on your standard of living. Hedonic adaptation means that you are not any happier just because you spend more money. Studies suggest that there is little additional happiness to be had once income hits a reasonable living standard, about $75,000 per year in the US (up to $120,000 in expensive areas like Manhattan and the Bay Area.)
If you start off saving a big chunk of your money, you may NEVER reach the highest levels of hedonic adaptation. That allows you to accumulate a larger nest egg, and it also lowers the size of the nest egg that you need. This is easily seen in this chart:
This is a very simplistic calculation. I used a “net savings rate,” which means how much you save, adjusted for taxes (so using some theoretical discounted rate for tax-deferred accounts), divided by your after-tax income. But the point of the chart (and the calculation behind it) is clear—when you spend less, you save more and your need to save drops. You're burning the candle (years of working/saving) at both ends, so it gets short very quickly.
#3 Much Cheaper Insurance Costs
Despite what insurance agents would like you to believe, insurance costs, on average, are a net drag on your financial life. Since insurance is unlikely to make you particularly happy (kind of like utility bills), it seems silly to spend more than you need to on it. The key factors in determining your life and disability insurance costs are how long you will need it and the size of your expenses.
Agents like to sell you as much disability insurance as you qualify for. But if you're living on 40%-50% of your income, you hardly need to insure it at all. Plus, if you can become financially independent early in life, you can take advantage of “deals” like graded premiums, where your premium is low early and high later. Since you're financially independent, you simply surrender the policy before the premiums ever get high. Term life insurance is similar. It is ridiculously cheap for someone who doesn't need it after age 50, and you never even have to consider expensive permanent insurance.
#4 The Portfolio Does More Lifting
Even if becoming financially independent or retiring early isn't your goal, you give your portfolio the chance to do more of the heavy lifting if you start early. Less of your eventual nest egg will have to come from brute force savings.
Most readers of personal finance books have seen the example that shows if you save $10,000 a year for 10 years ($100,000 total) and then allow that money to compound for another 20 years without additional contributions, you will end up with the same amount of money as someone who waits 10 years to start and then saves $15,000 a year for 20 years ($300,000 total.) The examples are a little misleading since most authors don't make any adjustments for inflation. If you actually do that, a better example would be saving $10,000 in inflation-adjusted dollars a year for the first 10 years ($100,000 total in today's dollars) vs. saving $10,000 in inflation-adjusted dollars a year for the last 20 years ($200,000 total in today's dollars). Still, it's better than a kick in the teeth.
More information here:
From Fourth Year to the Real World (part 1) (part 2)
In slot canyons, just like with finances, you're often stuck between a rock and a hard place
#5 Avoid Hard Choices
Many investors struggle with deciding which types of accounts they should use to save. Others struggle with the pay off debt vs, invest decision. However, if you're saving a ton, you can just do everything at once. That's the whole point of “living like a resident” for 2-5 years after residency. You don't have to choose between paying off your loans, maxing out your retirement accounts, and saving for a down payment. You can do it all at once.
#6 Acquire Important Knowledge Earlier
The sooner you learn about how to manage your finances properly, the longer you can reap the benefits of that knowledge. I once chatted with a doc who came out of residency about the same time as me. He was frustrated with the underperformance and fees of his 401(k). We talked about how mutual funds, advisory fees, and investment costs work. It was all new information to him. It's great that he is learning it while he is still in his late 30s. But imagine if he had learned about that stuff in his early 30s—he might have twice the net worth, and over time, that knowledge could be worth $1 million or more.
It's yet another reason why you should have a high savings rate as early as possible.
What do you think? Do you think it is worthwhile to try to front-load your retirement and college savings? Why or why not? What other benefits or drawbacks exist to having a high early savings rate? Comment below!
[This updated post was originally published in 2015.]
fund your ret plan as early in the yr as possible
TIME , next to asset allocation, is the investors greatest asset
Learn the RULE of 72!!!
Nothing beats compounded interest and living off UNEARNED income in retirement or earlier
I would like more opinions on this. I have the opportunity to fully fund my 401k by midyear. Is this wise? What about dollar cost averaging?
Statistically, lump-summing beats dollar cost averaging-it’s more time in the market. If you have the money and no better use for it, might as well put it in the 401(k). I certainly wouldn’t hold out for some vague DCA benefit. You’ll be buying more shares next year and the year after that and the year after that.
If you’re getting an employer match, just be aware how it works. Do you receive a match with each contribution (usually monthly or twice a month)? You don’t want to miss out on the match if it’s substantial. Otherwise, front loading is the way to go.
FYI, your 1st paragraph says you will list 7 reasons.
I think he is building the suspense for a sequel…we can start calling him James “hollywood” Dahle
I’m going to have to talk to that editor.
Good stuff. I am a firm believer in Saving Early and often… With proper asset allocation let your money work for you and grow in the decades to come…
On a side note… folks starting out should hope for some market panic and a drop or bear market… I am as well… Stock sales are awesome especially when trying to establish or grow your capital assets.
Your wish is granted, I hope you were able to take advantage of it yesterday
It’s not worthwhile if you’re a single bachelor in his late twenties/early 30s who just became an attending. Look, I want to live while I’m young. I won’t attract the same women I do now when I’m 55 and “retired early”. I want to drive a nice car while I’m young, travel while I’m young, and have a nice bachelor pad. I don’t want to drive my beat up Camry I’ve had since highschool or live in an small 1 bedroom apartment anymore. My paycheck just went up fivefold, I earned the right through 11 years of post-secondary education to spend this money and enjoy the next 5-8 years of my life. Maybe after I settle down, then I’ll consider thinking about retirement, but for now I can’t see how I can just live the rest of my 30s the way I lived for the past 12 years paying off my loans and building a nest egg. WCI you’re different, you’re Christian, you got married young, you have 4 kids, those things bring you happiness. The nest egg and early savings rate make sense for you because when you’re 65 the same things will make you happy. I’m the opposite of you, I don’t have a wife, I don’t want kids right now, what makes me happy right now is having life experiences which involves spending a lot of money. I just spent a week in Ibiza, the trip cost me $6000, would I trade that experience to put that money towards my loan or retirement and maybe go to Ibiza when I’m 67? NO. The 6 reasons to save are biased toward people like you and your budgeting and financial advice doesn’t work for the rest of us. Why would I want to save all this money to spend when I’m 65? Who knows if I’ll even be alive? And even if I do live until then and I am still healthy and agile, it won’t be the same driving my Audi TT when I’m 65 vs 32.
Please come up with a saving solution that makes sense for people without your Christian married dad life!
BTW I’m a year out of residency, EM attending in the Nashville area (I’m employed by a large group here), I carry $125k in student loans. A colleague told me about your site. And for the record I’m not against saving or the ideas of your website, I’m just making an argument against the idea of front-loading since I’m the type of person who you wrote the post for (early career). Front-loading is for those who don’t value spending money on experiences or material items while they’re still young and attractive. That’s all.
Nonsense. You’re an emergency physician. Presumably you make $225-350K. You can pay off your loans this year and still take 10 of those $6K trips if you manage your money well. But you can’t take 10 of those trips, buy a $75K car, buy an $800K house, and give your parents $50K. You can buy anything you want, but not everything.
Moderation is the key to all of it and I am glad you preach it.
Want a nice car? Why not buy a 3 year old luxury car. Just say you bought it when you were in residency and all the people you meet won’t know the difference.
Want great vacations? Plan them out early to save money or consider “travel hacking”
Want to eat dinner out a lot? Bring your lunch to work because who remembers lunch anyways.
Want to save 30-40+% money on taxes? Put money into your Traditional 401k
Doctors have the ability to paper over issues by just throwing money at them. I know a lot of these types of people who are broke as a joke. Why not save your money and just plan a little better and think of alternatives ways to get your desired end goal?
FWIW I would advise you similarly to my daughter who just started working in May. I am not opposed to front loading, but it was not our path.
1. Think of what you want in terms of hours you work not dollars. It will help you decide where to spend. You can have everything you want, just maybe not at the same time.
2. Put at least 10-15% into retirement savings. You will still have plenty left to spend however you want. Your 50 year old self will thank you.
3. Hold your increased spending this first year steady for a few years (as opposed to living like a resident) and apply future raises to debt reduction, savings, home purchase, etc.
4. If you’re not sure how interested you are in finance yet, start with reading The Millionaire Next Door and The Richest Many in Babylon. They are easy beach/vacation reads.
Best wishes finding your balance!
If the power of compound interest amazed Einstein it should amaze you! YOLO is going to get you in trouble. I think you may be disappointed with a woman who is interested in you because you are a Audi driving MD. Saving early and often will give you options in later life. None of us knows our lifespan we just have to make educated guesses. Most people want the option of cutting back or retiring fully at some point. I was able to quit Ob because I saved early and often. You may not like saving for retirement but just do it. It is the right thing long term.
I agree with your post, but for the record, there is no evidence that Einstein ever said anything about the power of interest, although compound interest is still quite impressive.
http://www.snopes.com/quotes/einstein/interest.asp
Interesting. Oh well. It was fun while it lasted.
James C. Print out your comment along with WCI’s reply. Place it in enevlope and save it for a decade. Then continue enjoying your life the way you are currently doing and don’t front-load your retirement and do not worry about your student loans. When you’re 42, bring out the envelope and read your comment again. See how you feel….only I would wish you will share it with us here at that time.
Oh, I wouldn’t pile on to him. MOST docs think this way. It’s the whole delayed gratification thing. He worked hard to get through training and DOES deserve to live a little. But the key is to control the “little.” He can double his lifestyle from what he had in residency and still pay off his loans in a year. But the slower you can grow into your income, the better off you’ll be.
I’m very much a believer in moderation, but the less moderate you can be in the beginning before you’re used to that high income the better. Unfortunately for James, it sounds as though he has grown into his entire income in less than a year after graduation. Cutting back in the future is likely to be very psychologically painful, especially if he ends up hitched to a woman who views him as a “rich doctor” because of that fancy Audi.
3 more years!
Can I ask what being Christian has to do with anything here? Honest question. I do not see how that attribute would change financial goals for a person. Married and a father – yes. Christian – not so much.
I wasn’t sure either so I ignored it. All I can think of is Christians tend to be a little more anti-debt and a little more pro-giving than others. But that’s a HUGE stereotype/generalization.
I think the Christian part has to do with the fact that right now he doesn’t want to get married….or even have 1 girlfriend, but more likely multiple girls and doesn’t really care if they like him for his money because he doesn’t really want to spend his life with them. I have many friends like this and they are very happy. Just saying, sleeping with lots of different women isn’t really the “Christian” lifestyle. I think that was probably his point.
I get James C’s sentiment.
I’m 37 married and with children now. There are things that are great about that, but there are also limitations as well. I don’t get to spend a lot of my money in a way I’d like to anymore.
I have stuck with the savings plan because more than anything in the world I’ve wanted to be retired… but not so much that I wanted to be retired into poverty.. which is why I still work.
But I think back to the time I had before I was married and working.. and although I had a lot of fun being single with a good wage… I could’ve done so much more if I hadn’t been focused on maxing out my 401k/roth ira, etc.
And in many ways you never get your youth back again…. it’s hard for me to tell the guy not to go for it. I never treated myself to a week in Ibiza and I can only imagine the joy that would come from attending a major EDM festival there and enjoying the company of a few hot broads whilst I was there.
The only solace I get from having stuck to the savings grind is that I can say I’m a millionaire now and that because I wasn’t a free-wheeling spender with a hot car, i didn’t attract the kind of gal looking for a charmed life.
I say spend the money on the experiences like Ibiza all you want. Get a decent apartment, but drive a modest car and don’t attract some chick that’s going to take half your dough in 15 years.
But hey.. you only get one life.. I say if you read the site, look at the advice and say.. you know what I’ll just accept that if I go for it now that the latter years of my life might suck and involve working too long and not having that great of a retirement.. and if that’s ok… then hey, you’ve made your bed.
I disagree with your premise and that of James. Your premise is that you can either be reasonably smart about your money or you can have fun. I reject that. I say you can do both. Even if he doesn’t “front-load” his savings he can still do just fine financially. Let’s assume he’s making $300K. He’s single, so he’s got to pay a lot of taxes. Let’s say maybe even $100K. That leaves $200K. He has $125K in loans left. Let’s say he’s going to pay those down $25K a year so he’s done in 5 years. That leaves $175K. He should save for retirement. My usual figure is 20% of gross. That’s $60K. Maybe he wants to be on the “slow track” so he’s going to go with 10%. That’s $30K. So he’s still got $155K, 3 times his entire resident salary he can blow on whatever he wants. We went to Europe last year and spent money on whatever without even thinking about it. The bill for two weeks for two was something like $9K, including airfare. Let’s say it only costs him $6K. He can do that three times a year-$18K. He’s got $137K left to pay for nothing but food, entertainment, housing, and transportation. That’s over $12K a month. I’m sorry, I just don’t feel like that is some kind of impoverished existence that will keep him from living the good life.
It really is everything in moderation. I’ve been an attending for 3 years.
My SO and I love dining at Michelin Star Restaurants and we’ve taken multiple trips to Europe, Asia and South America, each costing round $10K. That’s our priority and we definitely enjoyed ourselves.
However during our first few years we looked for cheap housing and saved ~50% of everything we made. We bought a new car, but not a luxury car.
That’s how in 3 years we’ve paid off my student loans and am now looking to buy a house in an exclusive part of town because we have the downpayment.
Spend and save simultaneously prioritizing what is most important, its possible.
TC and WCI I didn’t mean for “Christian” to be offensive any more than “married” or “dad”. On an old post on the SDN forum, WCI listed his budget, in which he had “Charity $1990/mth” as a FIXED EXPENSE. I’m assuming a large percentage of this is going toward The Church of Jesus Christ of Latter-day Saints, however I may be wrong and completely off-base. Either way, if he’s not paying a tithe, he still donated $24K/yr, that sort of generosity happens to be a stereotypical Christian trait. The other point is that Christians tend to not indulge in the sort of things I might on vacation or elsewhere, which would save them quite a bit of money. A 35 year old married Christian dad is more likely to go rock climbing with his wife and little Johnny than get bottle service in Miami. Both activities make us equally happy, but mine happens to be a lot more expensive.
One other point I want to make WCI is that you can’t plug front-loading and moderation at the same time. Someone below commented that they’re going to put $200K/yr towards retirement for 3 years after residency, that by definition is NOT moderation. If I were to buy a Lamborghini Huracan for $250K 3 years after residency that’s not moderation, so neither is putting $250K toward retirement. Some hostile replies but look I just disagree with the post. I don’t think front-loading is worthwhile or ideal when you consider the sacrifice you’re making. If you’re married and have kids already then front-loading may make sense, you’re already tied down so saving for retirement and “financial independence” is the next best thing. If you’re a 30 year old single guy making a ton of money, how can you value “having choices” at 55 more than living it up today? I don’t want to drive an Audi when I’m 60, I want to drive it now, so I bought one. It’s not like I can’t afford it.
And for the record, I do believe in moderation like you WCI. Again, I was only making an argument against front-loading. The scenario you listed above is almost spot on to my current lifestyle (you’re about 10-15% off with those numbers, I made less than $300K, but paid way less than what you said in taxes and put a little less toward my loan, so it comes out to almost the same). That being said, front-loading and living like a resident until your loans are paid off and nest-egg established are not moderation.
It sounds like you’re really just quibbling with WCI’s word choice. If his proposed budget for you is more or less what you’re doing, there’s no philosophical disagreement. All you’re arguing about is what words you would use to describe it.
I think it was unclear from your first post whether you were arguing for a more moderate savings approach, or a NO SAVINGS approach for 5-8 years. I think the reaction was from people assuming you were saying you weren’t going to save anything for your first few years out of residency. I don’t see that as a moderate approach any more than saving $200K of a $300K salary.
I still think it wiser to have a less moderate, more extreme approach for 2-5 years out of residency, at least until the loans are paid off. But if you’re still saving 10-20% toward retirement with your moderate approach, you’ll still end up ahead of most docs.
And yea, alcohol is expensive.
I think an important point is conscious spending on what makes you happy while still staying within your means and avoiding the absolutely decadent and opulent. I’m still a resident, and make about 65k a year. I contribute about 14k towards retirement (21%) each year with a salary of $3500 per month post tax in California. I put myself through med school with 2 jobs, scholarships and then saved to pay off the rest of the loans after second year in residency. Now I spend $1200 towards lodging, using credit card bonuses (carefully) to finance international travel and I’m able to do multiple vacations every year…Spain this fall, first class to Thailand in February, have to settle for coach to Japan for Cherry Blossom Festival in April. I lease a BMW 3 series since I love the car and after careful consideration figured it was expensive but still “high value” for me personally ($700 payment, insurance, parking and gas a month). $458 a month towards maxing my Roth IRA. I eat really well mainly cooking at home and prefer $30-$100 bottles of wine at home a few times per month over bar nights out shouldering for a drink or bottle service at a club. That’s still about $1000 a month left over for miscelaneous expenses, eating out etc. That’s all on a 65k salary. Nice place to live (with roommates), exotic international travel, luxury car, saving well for retirement, good food. Moonlighting etc makes savings and discretional spending both a little higher. Life is good!
Bump the salary up to 300k, move to a lower cost of living location, and join forces with another medical professional making 150-200k a year and I imagine saving 200k a year won’t be hard at all and likely won’t involve many sacrifices. There are many ways to spend huge amounts of money very quickly. 50 Cent was supposed to be worth more than 100 million a year ago, now bankrupt. But I can easily see saving heavily, living very well with conscious spending on things you value- and then tapering off on the saving to live even better. With a little good luck, good health, and a good spouse, medicine seems to be providing an opportunity for a good life overall.
James. This seems like a dangerous path, and one that so many of my friends/recent residency grads tend to go down. So may new attendings (and even new residents) feel this sense of entitlement or that they deserve all these great things because of all your recent hard work and sacrifices, but frankly, life is not about what you deserve. You don’t deserve anything. The world dose not owe you anything. I don’t have kids, I am in my last year of EM residency, and I am not religious; I do, however, find comfort in the building a financial future knowing the freedom and security if offers down the road. Do you really think that you are not going to want a fancy car, nice house, and exotic vacay when you are 55+? You are rationalizing your expenses. “YOLO” and “I want to enjoy this while I’m young”, ect.. This type of financial rationalization is behavior that can persist throughout your life/career. It will get you in trouble. I am not saying that you should not enjoy your life and spend some of the fruits of your labor, but be careful. You don’t want to be the attending in your 50s, 60s or even god forbid in your 70s working 20 shifts a month to meet your expenses. If you don’t want to start saving now, then when do you want to start saving? Are you really going to cut back your lifestyle in 10 years to start saving aggressively so that you can retire someday? Married, not married, christian, athiest, kids, no kids, young, old… Carving out 20% of your income to put aside for the future is a pretty universal concept. It’s simply dollar and cents… you can make your money work for you or you can work for your money. Best of luck.
Lol.
“I’m living it up while I’m young, baller style.” And yet, you bought an Audi TT. Are you sure you’re not a middle aged librarian?
Underrated zinger. Nice.
My comments are….get out of debt as soon as possible,. That may not give you the greatest rate of return based on todays interest rates BUT once you don’t have debt payments YOU now get to choose where your money is spent or saved. Debt = obligations, debt free = choices.
+1
being debt-free gives you all sorts of choices, not the least of which is incredible peace of mind.
I wish #5 was true. I am 2 years out of training. I live on 22% of my gross. I am relatively debt averse and have been working hard to pay down $270K in student loans. With >$100k of pre-tax space available I spend literally hours each day contemplating what to do with my money (debt vs savings) knowing that early savings does the heavy lifting and my student loans are at a low interest rate.
I flip back and forth between maxing my pre-tax savings and paying minimum on low interest debt VS ignoring retirement for 1-2 more years and annihilating the student loans. Maybe a balanced approached would be best, but what does that mean?
I know this should NOT be an issue in 2-4 years since debt will be gone, but during these years my choices literally keep me up at night.
Simplify until you can sleep. If you put 10% to retirement and the rest to loans when will they pay off? If you put 15% to retirement when do loans pay off? And 20% to retirement? Which time frame lets you sleep?
First world problem. Count your blessings that you have so much tax-advantaged space available to you. Most docs don’t! I have a similar issue. I have some attractive taxable investments available to me but with so much tax-advantaged space, I hate to give that up in order to invest in these other investments.
Thanks Dr. Mom & WCI. I will give both comments a lot of thought.
I think my unsettled feeling ultimately originates from not wanting to make a mistake and my desire to do the BEST possible thing with my money/time for my future self.
I have read really valid comments on both sides of the discussion (savings vs debt pay down). For example, two “financial experts” have completely different advice for my situation: Dave Ramsey vs Ric Edelman.
I am in search of the ultimate golden answer, but I’m realizing that one may not exist.
Going forward I will try and find a balance & keep in mind these are first world problems.
Because you can’t predict the future, you can’t know for sure which is the better option so don’t obsess. Both are great options, so do both. Redirect your mental energy from this personal conundrum to more fruitful endeavors. I would submit that maybe it is time to loosen your spending a little, maybe from 22% to 25% gross? Use your ability as a physician to make much more important decisions with often imperfect or incomplete information to help you now. You can always change your mind from saving to loan pay-down if the future unfolds differently than what you thought when you made your initial decision.
+1
Don’t let “the best” plan be the enemy of “a very good, enviable” plan. You can’t go wrong.
One thought, though, should you have dependents. If, God forbid, you died in 2 years, your dependents might have little to show for all your hard work if you only direct all your savings toward debt now (which wouldn’t even have been transferred to them). Guess this is an argument for adequate disability and life insurance more than a suggestion about debt payment vs savings…
James C there is nothing inherently wrong with your attitude towards women and material items/vacations.
You are just out of training. Work is fun, exciting and something to look forward to. But I do promise, you will reach a stage where working overnight shifts, weekends, 12 to 18 hour days will lose it appeal. Can’t tell you when you will happen to you, but it will James. That is the time if you have “financial independence” you will be much better off. You can work less, trade off nights, weekends or holidays.
You are correct, who knows if you’ll be alive at 55 or 65. But you have to plan for the scenario you live to 85, unless you want to be picking up overnight shifts in the ER just to live. I have always believed in moderation, spend some, and save some.
As an aside, you see to fixated on youth, as if middle age is a dead end rut. Not at all james. Middle age is great, with increasing years, maturity and wisdom you will feel more empowered and in control. That air of confidence and maturity will attract all kinds of women.
It’s amazing how soon that can happen to. I’m working on a post now (that won’t run for months) about what to do with “extra” money after all my savings goals are met. The more I think about it the more I think I’d rather work fewer shifts than have the extra money at all!
So true.
I’m so much happier taking a less lucrative pivot in my 40’s. Wouldn’t be possible without savings.
I agree. I actually did that by leaving private practice and entering academia in my late thirties. No regrets about the voluntary pay cut.
Great Post. These basic topics are critically important and deserve this kind of attention. Agree with all of it. Some may misinterpret the chart though. I became financially independent in less than 15 years even though my savings rates averaged much lower than the corresponding level. I think the explanation is I saved what I could early on (15-20%). As my investments produced income and as I grew my practice or earned bonuses I threw that extra money into investments. The growth on growth grew without me having to save 40-50% of income. I still lived on more each year so I didn’t feel deprived at all. I just didn’t spend anywhere near my whole income. Essentially the difference is my savings percentage increased over time without being deprived. This chart assumes a fixed savings per cent. I tell our residents to live like a resident when they start as an attending. That is what I did. What it meant to me was live on slightly more than you made in residency. We rented an apartment then rented a small house when starting out. We had inexpensive used cars, etc. Many of our current residents already have high end cars and large houses though so I’m not sure they get what I’m trying to tell them. I don’t think they are “living like a resident” now since they are beyond their means already.
The assumptions for the chart were stated. If your returns were higher than the assumed returns, you would get to your destination faster. Paying off debt also adjusts it forward.
True.
Another version of this concept is at MMM:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
I too will admit that having some financial security early in my career was the best thing saving early has bought me. I now have choices. Currently I choose to work just a little less and enjoy my life so much more.
FYI,
I have had a very nice Getman car when I became an attending. It was used. I have always traveled but now I get to travel more luxuriously.
James C,
Don’t flaunt your money to find a wife. By doing so, you risk being destined for a life of not enough money. there is a huge difference between a guy who is wealthy and I guy making a lot of money. Don’t be the guy making a lot of money who is broke being forced to work extra shifts just to keep up your overpriced lifestyle. That is a future of hating your job, burnout, poor patient care, and sometimes even suicide.
Save 200k a year for 3 years after residency (something I think I can do with a two person professional income) and then even if no more is saved should be enough for a comfortable retirement at age 65. Awesome idea to get the “safety net” out of the way early and then start to inch up. Great fundamental ideas here.
One interesting thought that I’m still working on: I plan to start work in a no vs low income tax state, but would probably retire in California. A lot of the pre tax vs post tax retirement savings calculation are based on the idea that one would likely be in a lower income tax bracket at retirement. But with a heavy retirement contribution rate and an expected large nest egg it might make sense to use more after tax and Roth vehicles? It’s amazing to think that as a couple making 450k in Texas or Washington would be in the same marginal tax bracket (State plus Federal) as a couple making 80k in California.
Yes, that’s correct. If you’re a supersaver who will move from NV to CA in retirement, you should favor Roth a lot more than someone who doesn’t have those characteristics.
I agree if he makes that much he can do both. I guess that’s the benefit of shift work.
In dentistry I started out making very little although more than a resident until I built my business.
When you make under 100k you can’t save the max, live large, and goto ibiza.
with int rates at historical lows, OVERSAVING worked just fine for me
exceeded by goal by 20% and that allows me to keep $$$ in equities and have nice fixed income as well with long term corporates and 10-12yr cds
This post is so spot on it inspired me to comment for the first time ever. It’s succinct but enough to catch the eye of even the most financially illiterate young professional if they’re willing to spend a moment and engage it. I also love that James C made his comment to provide such a nice contrast, and to illustrate how short-sited and ultimately unfulfilling it is to spend so extravagantly and live above one’s means.
WCI, you captured in this post some of what I was trying to communicate in the essay I submitted for the scholarship, though as a medical student, I focused on how important it is for medical students to figure this stuff out as close to the beginning as possible. Unfortunately, I think most of my classmates fall into the “James-C-immediate-gratification camp” for the moment, and it’s even more painful to watch when they’re doing it on loans.
Also, I must say, this post had a bit of a Mustache feel to it, and I mean that in the best way possible.
I’m not living above my means, I’m living to my means. I made TWO HUNDRED EIGHTY THOUSAND DOLLARS (you have to say it out loud to grasp it) last year and I’m 30 years old, I don’t have kids or a wife or a house. That is a s*** ton of money and I can afford a $50K Audi TT and a trip to Ibiza. Just because I’m not dumping it into my loan and a nest-egg doesn’t make me short-sited. I don’t want to start a flame war, but maybe you just need to get out more. At the end of the post WCI states: What do you think? Do you think it is worthwhile to try to front-load your retirement and college savings? Why or why not? What other benefits or drawbacks do you to doing this? Comment below!
I’m telling you what I think. I’m telling you it’s not worthwhile to try to front-load your retirement and college savings. The reason: because you sacrifice the remainder of your late twenties/early 30s doing so. Youth has no price tag. The drawback is you can’t do the things you can do in your late 20s/early 30s when you’re 40, or 50, or 60. It’s the same as when people say going to med school is a sacrifice, you sacrifice those prime years of your early 20s to the grind. Living like a resident and front-loading, all that does is continue the grind, AND FOR WHAT?! I know the odds are I won’t be able to retire as early as someone who dumped $50K into their loan and nest-egg and continued to drive their beat up Camry with the cracked windshield until they’re 45. To me, I value living it up NOW and “loosening the purse strings” as WCI instead of reaching that ridiculous milestone of “millionaire” before age 40 which means nothing. You don’t get a plaque when you hit a million. You just have a million and no experiences to show for it. I have a savings rate, it’s just lower than yours. Don’t hate on me for that.
A couple of comments.
First, many docs burned their entire 20s in training. I came out of residency at 31, then spent 4 more years making around $120K a year. Then two more years as a prepartner before I really started making the kind of money you’re talking about. You seem to have this idea that there is something I could do at 28 that I can’t do at 40. I can’t think of anything. Stay in shape and you might be surprised what you can do in your 40s, 50s, and 60s.
Second, many docs don’t feel like they’re making some sacrifice to only live on $100K a year. I mean, that’s twice the national household average.
Third, many docs don’t get any additional happiness from driving an Audi than a Camry.
Fourth, I’m 40 years old and can quit medicine without a significant impact on my lifestyle. Will you be able to say the same at 40? Was it worth sacrificing a bit in my 30s in order to get into that position? Absofreakinglutely! I have half my life ahead of me. That kind of freedom is worth a fair amount of sacrifice in my book, especially since I never really felt like there was some huge sacrifice I had to make. Still went on international trips. Still skied 30 days a year. Never worked more than 15 shifts. Yea, I have kind of a beater car and yea I just had a starter boat for 5 years, but geez, seems pretty minor to be independent of medicine at 40.
Fifth, almost all of the best experiences I have had weren’t particularly expensive.
But hey, it’s your life. Run the numbers and if they look reasonable, do the consumption smoothing thing instead of the front-loading thing. If you’re saving something you’re way ahead of most docs!
“Third, many docs don’t get any additional happiness from driving an Audi than a Camry.”
I’m sorry, I know you’re just trying to make a point but that is a ridiculous comment.
Camry: uncomfortable, unimpressive, underpowered, blasé, hedious, generally awful
And an Audi offers no additional happiness in comparison?
It may be that I am in a specialty where I abuse my neck and back, and I prioritize comfort, but I feel the VAST majority of everyone would enjoy the Audi more. You can SACRIFICE that to save more, but let’s not pretend there’s no difference.
Anyways, I otherwise agree with everything else you have said in the article and comments that wasn’t ridiculous. I am on pace to be financially independent by 35.
I have a Mercedes and a pontiac G6, and I prefer driving the G6. To each their own.
Spilled drinks, food crumbs, mud, dog hair, kid’s vomit, dents from grocery carts…all look the same on both cars. But, are far less painful to me in the least expensive version.
Not me. I once drove an Audi and HATED it.!!!!!!!!!!!! It was a gas hog, high maintenance POS. I traded it for a Ford Focus which I enjoyed much more.
I’m not gonna lie. I’d rather have the Audi than a Focus, although I bet it is higher maintenance.
WCI is correct on this one too. I own a Camry Hybrid and love it. This “basic” car is better than luxury cars 1-2 decades ago. I could buy any car I want with cash but I would rather buy assets (that produce income). I am very happy and changing to a more expensive vehicle would not budge that needle any higher.
I don’t doubt the Audi is a better car and will make some, perhaps even the majority, of doctors at least slightly happier. But there are still plenty for whom it won’t increase happiness, especially in comparison to other uses of the money.
The less time I spend in a car, the happier I am.
” many docs don’t get any additional happiness from driving an Audi than a Camry.”
Spot on. I get no happiness from riding around in a vehicle. My wife does not care either. It holds no fascination or appeal to us at all. Our cracked windshield minivan with mud and dents is for functional purposes only.
The only ridiculous part is acting like an Audi TT is so super sweet car…it shares a platform with a VW golf.
That’s the problem with buying luxury goods…there’s always something nicer.
When I read your comment, from near 60 with chronic ailments, kids, parents, dog, all the things you haven’t (yet, in 2015 anyway) acquired, I think what I wish I’d splurged on in my 20s is TIME OFF FROM MEDICAL TRAINING! I ask myself why didn’t spouse and I enjoy all the crazy things my kids do- skydiving, mountain climbing, foreign travel- then think Oh yeah 2-4 weeks off a year max and 1-3 of those weeks needed to recover from training and call duties (or deployments since military as well). Guess if I’d spent all of my student loans on private drivers and private planes and vacations I’d have fit in more of what I wish I’d had. But a gap year or two with only a little more money than I had at the time I would have taken one, that would have been nice, and maybe before the kids…
James C., I’m still unclear as to why you feel starting a savings program earlier in life and enjoying a nice lifestyle are mutually exclusive. They’re really not!! It’s very possible to start saving/investing AND enjoy trips to Europe and a dream car if you do both smartly.
I, too enjoy travel, and have taken many overseas trips (some to coincide with conferences so as to provide a tax break).
Instead of dropping $50k of after-tax hard-earned money of a car that depreciates quickly, one can just as easily buy a 2-4 yr old one costing thousands less, and let some other sucker take the depreciation hit. These are but two examples of how you CAN indeed enjoy a fun lifestyle while saving for the future. Always think of passive vs active income source, as others have alluded to above.
Perchance, do you know of a certain hospitalist in St Louis with legendary swag who might have ‘inspired’ your thinking? :)) (some posters on here will recognize the inside joke).
Btw, the term is short-sighted, not short-sited 🙂
Make….is that you?
lol Make… it’s not him no talk of swag, dwade sock, and gucci loafers, and creeping
P.S. I mention the legendary hospitalist since you brought up that you enjoy bottle service in Miami in one of your posts above, as does he. He claims his choice of brew (Ace of Spades) costs $10k/bottle. 🙂
I don’t know if anyone is interested in this info, but I just want to provide a little window to the other side…
Bottle service is very dependent upon location and timing. Location not only in terms of the city but also where you want to go in that city. The hotter the spot, the more you’ll pay. Chicago > Pittsburg, Las Vegas > Chicago …talking about the club itself. Tryst > Oak, Marquee > Tryst
In terms of timing, did Mark Cuban just crash the place after winning the NBA title? (This was the case with LIV in 2011). You can now expect to spend an entire year’s income if you want to stay at LIV and keep your table with bottle service. To a lesser extent, is it NYE in Vegas? The price of everything just tripled in comparison to any other weekend.
Keys to the game: Go in the “off-season” when the prices aren’t being driven up. Want to do Vegas big? Go the weekend AFTER New Year’s Eve. It’s slow and the city isn’t overrun by college aged drunks. There are still plenty of options for women as there is always a steady influx of tourism from Cali… Miami? Go to Mansion on a weekend when there’s only a DJ booked. Lil Wayne might be nice club concert, but it’s not worth double the bottle service and the women who go to a Lil Wayne concert usually aren’t my type anyways.
I’m about 6 years post a similar situation of starting my career thinking like James C, except that I was already married when I completed residency, but in the same vein, I was not a dad and I’m not religious.
Less than a year into my attending job, I bought an 80K Range Rover, and a 400K house. My mindset at the time was to find a way to spend every dollar that I made, I had no thought whatsoever of retirement. Literally didn’t give it a second’s thought in my first year of attending work. When they talked to me about 403 and 457 options during my recruitment for employment, I pretended I was interested so as not to look stupid, but had no idea what they were talking about and just ignored it.
Now at age 36, I have two kids ages 4 and 3. I soon dove right into the conservative dad lifestyle, yet I still have close to a negative net worth. I’m a Family Doc and make about 250K per yr. My wife is a PA and makes 90K per yr, we spend 1300 a month on daycare for the kids.
6 yrs later, I STILL have 120K in loans (down from 180), have only about 25K in the bank, have about 100K in retirement accounts that I only starting contributing to in 2012 (probably lost about 25K in matching funds by not contributing for the first 3 yrs) when I found this site.
One problem I know is that I’ve sold 2 houses in the past 6 yrs on which I’ve taken about 10K and 15K hit on realtor/transaction fees. I HATE the costs of selling a house and it is a mission in life of mine to avoid getting burned on this again.
I have never been to Europe/overseas, took one trip to Atantis Resort in the Bahamas that cost about 10K total due to late planning.
The one thing I can say from experience is when you are married and start having kids, the money goes FAST! I feel like I don’t even know where half of it went in the last 3 yrs, probably to taxes/retirement and raising kids.
For most of us reading this site, the day to day costs of not buying that $5 coffee or $20 Blu-ray movie are largely insignificant. Its the large 1k costs or over that will get you. Man do they ever add up! I just spent $775 last month on the yearly oil/service change and maintenance costs on the damn Range Rover!
Unlike a lot of others I see comment here, I don’t have plans to retire early. I can see myself working well into my 60s and I think I will enjoy it. But I love the tax breaks of using my 403b and I get a great match of nearly 14K per yr on the 18K I can put into it. (employer contributes 4% of my yearly salary and 25% of what I contribute). Plan on having a nice nest egg at 65 and I will start my Roth (backdoor) this year.
Yes I have “lived it up” in my own way, but I know now that the time for that is over, and I suspect James C will see that in a few years from now as oppose to 10-20 yrs from now.
James C, this is your future talking lol
Guess we will never convince the “james C’s” of the medical profession to save more early in career.
But, on the other hand, I guess I am glad there are docs like James C. They take my weekend call and weeknight call as they absolutely need the money to sustain their lifestyle and attempt to fund their retirement in their 50’s.
[Ad hominem attack deleted.]
First of all, let’s assume you made 280k, after taxes, that’s about 190k. Let’s say you saved 18k in 401k and 30k-35k in taxable/roth. That’s about 140k to live your life. That’s over 10k a month. If you can’t drive an Audi, have a nice apartment, and go on trips, then YOU ARE [ad hominem attack deleted.] After reading this incredible blog, saving about 50-60k off a 280k income shouldn’t be too difficult nor should you even notice it. Heck, work an extra 2 shifts a month and you’re there. Your mentality is the reason why the majority of docs are in their 50’s still TIED to their job……………….complete foolishness and stupidity in my book………WCI, another great article………some people just don’t get it!
It is a classic Dr. South vs. Dr. North. Also of note is that a 3.5M portfolio would easily spin off 140k per year. He wouldn’t ever have to work if he aimed to create that. I think this relates more to personality than math though. I have always liked Warren Buffett more than Donald Trump.
P.S., I agree with your sentiment, but I don’t get the negative attitude toward someone working in their 50’s, and continuing to contribute to retirement accounts, especially with the catch up provisions allowed at that age. This isn’t high finance where we are trying to scam people out of their money so we can all sip Mai Tai’s on the beach the rest of our lives. Isn’t there some pride in working to an older age as a physician, having job security even into our 70s if we choose because we worked hard and made a good career choice, feeling like we still make a difference with our brains when others who are in their 50s and 60s can’t work because their bodies are broken down from manual labor for the last 40 years. I’m all for a good vacation, but I don’t want to be on vacation for 300 days out of the year when I am of able mind and body. I would just get too damn bored. I think I’ll know when it’s time to retire, but I don’t really want to try to pick that exact date twenty years in advance.
I was listening to the radio last week, and a “financial expert” was questioning whether you needed to replace your FULL salary in retirement. Her argument was that you are going to be traveling a LOT in retirement and probably want to take your extended family to exotic beach locations on a regular basis and this is going to cost a lot of money, so you better be planning to have your full salary in retirement. I hate to break it my extended family, but I don’t plan on taking any of them on a vacation more than once every 10-15 years if at all and it better be a really special occasion. It should not be in any reasonable budget. I’ll take WCI advice and plan on living on about half less in retirement and I think I’ll do fine.
And to WealthyDoc, a 3.5 m portfolio is not just going to appear out of thin air, that’s going to take YEARS to accumulate. By the time most get to that level, they will be ready to retire based on age alone. WCI and others may get there much sooner based on side businesses, but for me and others living on 200-300K salaries alone, we’ll be fortunate to get there.
I googled “psychology of financial sacrifice” and this essay was close.
She addresses the psychological rebound after sacrifice of both money / food in dieting. We are tethered to biological needs which trump willpower.
–When you leave desire to fester you may need much more to satisfy it.
–“controlled hedonism”
–identify “passing fancy vrs. deep desire
–need for immediate relief
Ooops. Here the link:
http://www.themoneyprinciple.co.uk/about-delayed-gratification-and-why-i-call-bs-on-it/
Thanks for the laughs James. I’m not sure which was more amusing, that you think $280k pretax is a ‘$!#/ton’ of money or that a TT is a super-sweet car (let’s be honest, it shares it’s platform with the VW Beetle, a favorite of high school girls). It’s interesting that someone who works in an ER and constantly encounters the ills that befall those who live for the moment would choose a similar path.
In his defense, he also gets to see all the 40 year olds with brainstem gliomas (that was a fun conversation for me last night), the 35 year old accidental drug overdose codes (I do one of those a month it seems,) and the 45 year old MIs.
And what’s wrong with a Beetle platform? I knew a guy who raced a “Super Beetle” with a Porsche in it on the ice in Alaska. 🙂
I’ll presume James C.’s comment about using his income and youth to attract women has tripped the envy and regret buttons for male commentators.
For women readers ( like me, age 58 , female) it trips the “not fair” button. Single male docs, age 30s, have a longer biological window of options. Women docs, age 30, have dwindling ovaries and fading beauty. Life is not fair.
In retrospect, I unknowingly made good choices with marriage age 25, MD age 26, children at ages 29,31, and 34. Spend your money on experiences and family, not things.
I think a big difference between James and me is that it won’t take too long for my investments and side businesses to be throwing off what James is spending. I’ll have choices to spend like crazy, cut back on work, retire early, travel for weeks in foreign countries, or whatever if I so choose.
You can either work hard now, spend it all, and keep working hard to maintain, or you can save moderately now (not like a Scrooge I can assure you), enjoy the finer things in moderation, and in a few years live much larger than James does while working less.
My thoughts are…early on you can either act wealthy or become wealthy. The thing is…on a physician salary you don’t have to be miserly or, as it seems James implies, give up everything to put a plan in place to become wealthy. The difference is, though, that in a few short years (I’m in my 30’s), I will be able to both act and be wealthy.
I choose to let my investments and side businesses work for me so that I won’t have to. Rates of return, compounding interest, and side business income, go a long way. I will be able to spend like James, and it will be considered “conservative,” because I will be earning more ON my money and through business partnerships than James earns working FOR his money.
To reference the Millionaire Next Door, James is all hat and no cattle, and I’m on the fast track to have the big hat and a lot of cattle. This isn’t a judgement or a slam towards James. It’s just my view about our chosen paths. We are all adults and James is making his choice. WCI just wants to make sure that the information is out there so that folks understand the choice they are making.
Since James knows the information presented by WCI and continues with his current choices, then that’s fine. He’s having a blast, which works for him. He doesn’t concern himself as much with growing his wealth for the future, which again is fine. He seems intelligent and knows what he’s doing with his life so we shouldn’t judge–maybe he’s got all he wants and doesn’t mind working for years to maintain it. That’s his choice, and it’s a valid one. I’m just pointing out my choice and offering the opinion that with some tactical planning, one can live a “moderately extravagant” life (sounds funny to say that given the sums of money we are discussing) and still save and plan for the future.
Btw, I take a good number of trips a year, drive a gently used loaded SUV (my wife drives a gently used loaded BMW), spend weekends cruising the lake and hangin with friends, etc. I spend plenty on fun. With all of this spending, though, I still save, invest, and build side businesses. My spending will likely fly past James’ over the next 5-10 years, but as a percentage of my wealth it will only be a fraction of what I have or bring in a year. That is the plan I have chosen. That is the plan I would recommend. But to each his own. James will likely have “a bit” more fun than me over the next 5-10 years and that’s what he wants. I would just point out that in my opinion it’s not worth it for the sacrifices he will have to make compared to me in the future. That’s just my take. That’s why I make my choices. To each his own. Listen to what WCI presents and make your life choice. As long as you understand the different scenarios, you will likely be happy with your decision. I know I have no regrets.
I am 6 years out of residency, and over the last 6 years I saved as well as spent. Every year I always maxed my retirement account $50K+ as well as a nice chunk into a taxable account. I traveled every 3 months and drove a used Audi which I bought for under $30K and still have today.
Over those 6 years I have noticed how my job is getting more and more difficult to do. Government regulations are making me less efficient. Hospital documentation is requesting of me to spend more and more time on every chart. I am much less efficient at work today as I have been 6 years ago. I need to work harder to make the same amount of money. I can’t imagine what the environment will be like when ICD-10 comes around in October. I find myself getting tired. I am tired of the extra hours, I am tired of the overnights, and I am tired of the documentation creep I see pushed on us every few months.
Luckily I have over $1 million invested and I have a choice. I can easily cut my schedule by 50% and still have enough money to live the life I am used to while letting my investments do the rest of the work for me. After a nice vacation coming up, if I continue feeling this tired, I will begin cutting back.
Life has been very good to me. I never felt I deprived myself of fun. And I am glad I made the choices I did early on. James C, you don’t realize it now but one day in the future, you will be working your 4th overnight shift for that month, tired and frustrated thinking that maybe you should not have wasted some of that money on crap that probably bought you very little happiness.
Nothing sweeter than reaching financial independence
Graduated dental in 75 and had 4 million in liquid assets at age 50 plus home , vacation home, snd share in a tennis facility
And I did not make big bucks but lived well and saved and was rewarded by the wild stock mkt in that period
Having a boatload makes your life so much EASIER but most physicians live too high a lifestyle and want immediate gratification rather than sacrificing for a solid retirement
You WILL NOT need to replace your salary in retirement, 50-70% plus SS should do it
I think too many are being too hard on “James C”…
I understand his opinion and it sounds like he is saving. Probably not as much as most people reading this blog would suggest, but there is definitely reader bias here.
For me, having kids is the best thing that could have ever happened to me. He states above, he probably never wants to have kids. That is perfectly fine. He will not have to pay 2 grand a month in child care, 1 grand a month in formula, diapers, baby food. Another ungodly amount over the next 18 years in activities/sports/music instruments etc. Not to mention the 1-2 grand a month into a 529 account for college savings! My only point is that some people actually love medicine and the work they do. They are ok working until they are 70, especially if they get to take “great vacations”, drive “cool cars” and live life without any attachments keeping them tied down.
At times I am jealous when I see my single friends still in their 30’s heli-skiing, taking trips to the World Cup in Brazil, or Ibiza. However, in talking to them, I know sometimes they are jealous that I have 2 wonderful children and a wife that loves me. We have very different lifestyles, but we are both happy. I would prefer to load up early so I have the option of retiring later in life. They don’t really care if they retire at 50 or 65 because they love the work they are doing and have far less “stress” in doing it.
The big gamble I see is that they are counting on the money in medicine to continue. I don’t know if that will happen over the next 20-30 years. But, if they enjoy the work then it doesn’t really matter.
2 Grand a month? Where are your kids going to school? That’s almost a half million in contributions alone for each kid!
Are you asking about the 529 or the daycare? The daycare will trickle off after age 6 but at 3.5 and 6 months they are putting a world of hurt on right now. Daycare in metropolitan areas is expensive! I pay enough in taxes to send my kids to the good public schools in the area! As for the 529, maybe I am front loading and will taper down once I have enough saved, but 500-750 per kid per month doesn’t seem like to much to start.
529s, not day care.
Oh I see. You’re talking $1-2K for ALL THE KIDS. That seems more reasonable. I thought you were saying $24K per kid per year. Or $430K in savings alone.