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.]
I think James C may find financialsamurai.com to be a personal finance blogger whose values and active social life are more relatable than WCI’s values/priorities. How you spend your money is a reflection of your values and priorities and we are all allowed to have our own value system.
As a personal illustration of the prinples of early savings above, I’m 35. I make about $250K and save about $100k per year. Both numbers are pretax and I include mortgage principal and student loan principal payments in my “saving” category. I figure in 10 years when my student loans and mortgage are paid off and I have $1M in my 401k, I can easily afford to have a salary of $100K, which is good since that may very well be the direction medicine is heading (lower salaries). I’ll have already done all of the heavy lifting, so even if I never put another penny in my 401K after age 45, as long as I can generate an income of $100K for another 20 years (age 45 to 65), then my 401K will have grown to a reasonable nest egg and I’ll likely be looking at some reasonable money from social security. I’ll also be paying way less taxes if/when I’m making $100k/yr. I find it comforting to know that even if medicine isn’t paying the way it currently is in 20 years or even if I end up switching to a less lucrative career, I can still expect to be financially secure.
Exactly. It’s really all the same whether you spend your money on bottle service, a wakeboard boat, or 529s for your 15 kids.
…or on high-end Eurocarz or D-wade socks or on hot Latinas!! 🙂
Unsure. Yes, he has a nice lifestyle, but thats because he front loaded like crazy and was in the right field (finance). He drives a Honda insight because he cant stand to put money into a car, and even when he tried to go big on a recent international vacation he couldnt do it….
I realize reading this that when we started saving, hedonic nonadaptation or early retirement was less an idea in our minds, and this is 1990s when we got married and I started our wealth building. Our concern was socialized medicine arriving and that well before we retired we might earn only as much money as a high school teacher. I actually explained to husband back then that I wanted us to be able to switch to teaching at a high school if the pay was the same and the hours better. Hasn’t happened yet so we are able to retire in our 50s and the increasing drudgery of medicine (and military medicine for him- op tempo and deployments) as well as our options encourages us to do that. Sadly for society if I were poorer, more desperate, I’d work many more years than I expect to. Too bad for society we didn’t get into bottle service and new hot cars every year.
I am torn on how to split our next years savings. Basically we are looking at increasing part of a down payment on a house vs long term retirement investing. I am going into my first year out of residency and we will be building a new home likely costing around 700k (due to our fourth child, not starting my job). We will likely be able to save 50-70k this next year and there is a big part of my wife and I that would feel more comfortable putting it towards the house down payment (plus 100k+ from the current equity in our house). I think there would be more immediate satisfaction and less stress with a slightly lower monthly payment. Also I am in the national guard and if things overseas change and I get deployed we would be living on likely an army major’s salary for up to about 120 days (this also makes me lean towards paying off some more of the house upfront). I guess what confuses me is how much I will be losing long term by putting the money towards a debt/mortgage at 4.5% interest (approx) vs long term savings with compounding interest. (obviously building a smaller house is not very beneficial as our family will find it very useful and it is our only major expense as we are otherwise quite frugal) Any thoughts?
Make sure you have an emergency fund that will cover 4-6 months of house payments and adequate term life insurance. Then I would put it the remainder toward the house whether in down payment or just cash flowing all the hiccups that come with building. In our first house we took out a 30 year mortgage but added in a monthly principal payment equal to 1/12 of an extra payment annually. So, we were used to that amount in our budget from the beginning. It afforded the ability to cut back on our payment if needed and took about 7-8 years off the term. Any more toward early repayment depends on when the money comes in and where we think it is most beneficial at the time. When we were younger it usually went to investing, but we knew we had that extra principal going in the background. Thanks for your service and best wishes!
Ron,
A wise man (my father) once told me if we did everything based off of economic sense, then we wouldn’t do much other than work and sleep…you can’t always do things by the numbers.
Your feeling may be right in that from a numbers point of view you may be better off investing the money over the long run. However, I think your post may already show which way you may want to go…if you feel you’ll sleep better at night, you might want to listen to your gut on this one and put your extra money towards the house. Of course, given your potential to be deployed by the national guard, make sure you have a nice emergency fund built up. If you don’t, you may want to keep some of this money on the side lines (treasuries/FDIC insured laddered CDs, etc.) as a cushion.
Another way to look at it would be to play out the bad outcomes that my follow each scenario and see if you could live with them or not.
If you put the money towards your house/emergency fund, you will be much better prepared should you get deployed and you could handle that financial crunch better. Of course you will have the opportunity cost of not investing that sum of money right away, which may cause you to work a little longer or slightly increase your savings rate a over the next few years to make up for it. These two outcomes don’t seem horrible to me, but that’s just my take. Keep in mind that you may start paying your house off early in the future anyway and you’ll be that much closer to being done with your mortgage to free up more money to invest later.
If you invest the money, you will have higher monthly mortgage payments. You could get deployed. Would you be able to handle the higher mortgage payments under those circumstances? If the market falls and your investments are down at a time when you have a financial crunch you wouldn’t want to withdraw your money from those investments at a loss but you might be forced to depending on the situation and the size of your emergency fund at that time. The bad outcome here consists of family stain at a time you are overseas, potential inability to make your mortgage payment, or having to withdraw investment funds during a down market. Of course if you don’t get deployed and everything goes according to your plans, then yes you may be better off. But…I’m sure there are plenty of folks you know where life didn’t go according to plan.
A third option would be to split the difference. Put some money towards investments (provided your emergency fund is appropriate) and some towards the mortgage. May make you feel better knowing that you did a little of both. This is the approach I’ve taken as I used to think I wanted to pay my mortgage as fast as possible but with my interest rate so low at 3.0%, I just couldn’t shake the feeling that I should be investing as well. So…I split what I would have paid down on my mortgage each year between pay down and investing. It works for me, and I sleep like a baby.
It all depends on what you feel is right, what size of an emergency fund you have, how prepared you are for whatever life may throw your way, and what lets you sleep at night. Just my two cents.
Good luck.
I’m a big fan of having an early savings rate, for all the reasons WCI listed. However, I’m not totally following it. Not because I’m young and I want to blow my stuff on fun vacations and cars, but because I’m young and my kids are young and I want to spend time with them. We’re doing a 35% savings rate for now, but I’ve left about 50k on the table because I’m working part time-I work while my son’s in school, and that’s it. And in about 7 months we’ll have another kiddo and with any luck, I’ll drop to 8-15 hours a week for a year or two. We’ll have to cut back on contributions to the retirement fund temporarily (we’ll drop to a 15% savings rate during that time) but for me it’s worth it to have that time with my kids while they’re little. We’re able to make it work because we already paid off the student loans and we purposely bought a house that we could afford on my husband’s salary alone. I’m sure some people will think I’m making terrible financial decisions here (it would make much more financial sense to work full time and get a nanny, or just not have another kids at all) and others would not be happy in my situation, but I feel incredibly lucky to have the flexibility to choose a balanced life and one that looks EXACTLY the way I want it.
No, I think you’re doing it exactly right. A high savings rate early (i.e. 35%) so you have the freedom to do what you want (cut back at work to spend time with kids) later. It’s even better that you will still be able to maintain a 15% savings rate later.
Sounds like you’ve found the elusive and enviable personal spot of having enough! Congratulations and enjoy!
To Ron:
I don’t know how much you’re planning on putting down on a $700K house, but if it’s less than $140K, you’re likely going to end up with mortgage insurance or a worse rate, in which case putting an extra $50K toward your downpayment or whatever it takes to get you to 20% down might actually be a really good investment. Consult your mortgage broker about this.
I learned all about bottle service tonight: http://www.forbes.com/2007/11/02/vodka-clubs-bottle-forbeslife-cx_pl_1102bottleservice.html
All I have to say is I don’t want anyone making fun of my wakeboat any more.
Spoken like a true Christian married dad.
WCI, what wake boat are you looking to buy? I know they are meant for surfing and wakeboarding, are they good for skiing too?
I got a nicely equipped Axis T23 I’m very pleased with. Wakeboards great, the surf wave is incredible and it skis surprisingly well. It’s not a 19 foot dedicated tournament ski boat, but at 32 mph and the boat pretty empty that wake is much smaller than I expected.
1)What made you decide to go with T23, rather than something cheaper like A22 or a20?
2) did you look at other makes like master craft or tige?
3) is wake surfing really fun or kind of so so?
1) Wife liked the traditional bow. When I realized the A20 wouldn’t fit in the garage either, I figured I might as well go big. Part of the reason for upgrading from a 17 footer was to be able to carry more stuff and take more people. Plus it throws a bigger wake.
2) Yes. Mastercraft was probably my third choice. Tige, further down. I really liked the idea of Surf Gate, so my first two choices were Axis and Malibu.
3) It’s really fun. It’s 40% of what we do on the boat, with probably 25% cruising, 25% tubing, and 10% wakeboarding/water skiing. It’s especially fun when you can set up in 2 minutes with the push of a button.
In his book “Stop Acting Rich and Start Living Like a Real Millionaire”, Thomas Stanley (who by the way died in an auto accident back in February) had this to say,
“What makes of motor vehicles did millionaires most recently acquire? Toyota emerged in first place with 10.9 percent of the millionaire market, followed by its luxury make, Lexus (mostly entry-level models), with 10.8 percent. Millionaires share something in common with other car buyers in this country: Most do not drive luxury makes of cars.”
In the previous ten years prior to his survey 75% had never owned/leased a Mercedes and 79% had never owned/leased a BMW. For the purpose of the book he defined a millionaire as having $1M or more in investments excluding primary residence.
Luxury car owners are not happier than frugal car owners – Springer
http://link.springer.com/article/10.1007/s12232-015-0223-2/fulltext.html
Maybe that’s because only the people who a luxury car makes happier buy luxury cars. Or we poor schmucks driving beaters are lying to ourselves.
I’ve been reading the comments with amusement. I am 3 years out of residency and had the fortune of landing the right job at the right time. After expenses and taxes, I make 900k/yr. Given my modest immigrant upbringing, I consider myself frugal for the most part and front load like crazy. After residency, my wife and I have been spending about 130k which leaves over 700k which we sock away, a 77% savings rate. I worry about this gravy train coming to an end, so I never take it for granted and don’t expect it to last forever (burning out, changes to partnership, politics etc). I am cautious about hedonistic adaptation.
We don’t feel deprived in any way. I got married at age 30. We’ve traveled the world before the birth of our 9 month old son. We are building a house presently, and have been renting a 1100sqft apartment since forever.
Despite the income, I drive an 11 year old manual transmission Mazda that I bought new in medical school. Other docs can’t believe I spent $4000 fixing rust on it this year. I love the car, and believe me, I’ve looked at Audi’s, BMWs, my favorite being the Tesla. But I can’t see myself being significantly happier owning a Tesla right now.
What keeps me and my wife on track is knowing that in a few years, we will be completely financially independent. We also have long term goals to focus on. So every time I think about buying a Tesla, I picture it getting in the way of our circumnavigation dream on our sailboat with the family.
I agree with everything that’s been said – basically you have to be comfortable with your lifestyle, spending/savings, and retirement plan. Given all the information, you have to make your own decisions and be accountable to yourself.
You make equivalent to 4 docs. Imagine cloning yourself 3 times and each making 1/4 of your salary. You must be in the top 0.01% of doctor salary. Infact your salary is equivalent to a lot of CEOs at mid size firms.
Kudos to you for making and saving so much. You will reach your goal, live an amazing life and still leave wealth for generations. I wouldnt leave this job either and milk it, unless you make even more some where.
Kind of curious what is your specialty and how are the average MDs in your group able to make so much?
[Never mind, I mistook you for someone else-ed]
Congrats on your success.
2 of us are in internal medicine specialties providing cardiac, renal, internal med and critical care services to a hospital catchment of around 150,000 people in Canada. Similar sized practices I’ve found employ roughly 6 docs for equivalent services, so the 2 of us do the work of about 6 I’d estimate. While I think the city is beautiful, it is underserviced, so that helps reduce doctor supply. I think all docs, including GPs, surgical specialties, are working flat out in this area and bill higher than average.
But with more grads, this is changing. Next year a 3rd will join our group, and we’ve increased our hospital physicians by 33% since I’ve started. With this scenario, and new family, it is inevitable that I see myself slowing down. So back to the topic, I’m front loading for a more flexible future.
wow, that is some productivity, two people doing work of 6. Do you think working those many hours is safe for patients? or safe for yourself driving back home.
Some weeks I am on call 6-7 weeks on straight. If I have a bad week, its pretty hard, otherwise not so bad. you deserve that much if you are working crazy hours I think.
On a different note, some of my Canadian MD friends say, reimbursements are lot better in Canada than USA. Makes me wonder if top level executives make more in USA or its pretty same
I sympathize with James a little more than the rest of you. It’s a long road to attendinghood and while we all recognize that “I deserve it”is a terrible reason to spend, living like a resident is a better buzzword than real plan.
The answer is to allow your standard of living to inflate by enough to create a sense of well-being without blowing all your money. James isn’t a pediatrician so that should be readily do-able. In fact, WCI’s plan does just that (but it isn’t really living like a resident, how many residents are taking $10g European vacations outside of military physicians). IMO, the key is not to allow it to continue to inflate and you’ll still save enough to retire by 58 (my personal goal).
Let’s be clear on the WCI plan. The plan is to live like a resident (or somewhat fairly similar, certainly not more than 2X resident salary) for 2-5 years after residency. I am 9 years out of residency. Thus, I no longer live like a resident. Now I buy fancy wakeboats and European vacations. But I also have no debt except a 0.5X Salary mortgage, and am nearly a multi-millionaire. So I spend when it makes me happier to do so. But I did not do that straight out of residency, and I’m glad I didn’t.
I think your idea about allowing your standard of living by just enough to create a sense of well-being is spot on.
Those are all good points. I do agree starting ASAP with that first paycheck is key, if your practice or hospital offers a 401k/403b jump on it immediately and get the full match. I always love the “once I pay off my Med School loans I’ll start saving.”-or the Dave Ramsey approach BS. What I have seen happen is you have an extra $4,000/month and they then buy that beach house, a new car, a bigger diamond for your wife. They never save it-plus they’re 8-10 years closer to retirement. Saving is a habit- and good habits are never formed easily.
I save 20% of my income off the bat, my wife does too. Out of residency I debated paying off my student loans very quick and met with a Financial Planner to discuss. He showed me the value of saving and paying, but not omitting one for the other. My loans will be paid off in two years freeing up almost $2,800/month, which I will continue to save and invest! I drive a truck, and we have a modest house with a very manageable mortgage. I have friends and colleagues who went and bought the $750k house with their first job choice, and now complain about property taxes, etc. It’s a rat race!
Compound interest is the 8th wonder of the world- let an extra 10 years of compounding work for you. The big debate is tax-deductible, tax-free, etc?!?! I say take advantage of all of them.
There are days when I sympathize with James C. and just want to live it up more, but I’m now in my mid-thirties and almost have a networth of $1m excluding home equity and 529 plans (older kid fully funded for state school all in cost, baby off to a great start). I still travel as much as my work and parenting schedule allow, ski and bike a lot, and see lots of live music. I make less than James C. but still a high salary, and also have child care costs and 529 savings, which I don’t include in my personally savings rate because I view the contributions as a completed gift. I’m also in better shape now than I was in my 20s because I work a little less. I certainly don’t regret saving right out of school because at 40 I’ll have flexibility and peace of mind knowing that retirement and college savings are set. I plan to be very active in 40s with travel, sports and parenting.
Also, the older you get, the harder it is to work really long hours to make the salary that you can more easily make today. As they say, make hay while the sun is still shining.
Strategy that works best for me psychologically is to set up automatic paycheck (or bank account) contributions for taxes, maximum retirement savings, and student loans (if you have them), then live it up with whatever time and money remains. Car, Ibiza, bottle service, whatever makes you happy. I like doing it that way because you still feel like you can “blow” whatever remains
My dad (who saved enough to put me and my siblings through undergrad and post-grad and also live a great but moderated life along the way) told me at graduation: “it’s your choice whether you want to have an easy life now and a hard life later, or a hard life now and an easy life later.” I chose getting the hardest part done when I was younger (as did my siblings), but I still had fun along the way, and have no regrets. And I am so grateful to my parents for saving for our education – they haven’t supported us in any other way as adults, but wow, what a generous and wonderful thing they did for us, and I certainly feel responsible to “pay it forward” to my own kids. James C. might feel the same way some day in the more distant future when he holds his newborn baby, which is all the more reason to save and invest now.
I just read through this discussion, and while I’m sympathetic with James’s perspective I think he misses the broader point. I quickly crunched some numbers on ways to spend James’s $280k salary (before I remembered a similar analysis from PoF here: https://www.whitecoatinvestor.com/a-tale-of-4-physicians-the-impact-of-lifestyle/) and looked at three possibilities (Big Spender, Big Saver, and Goldilocks). I assumed James is single and works in a moderate COL area with no state income tax (like Dallas), as an independent contractor, starting with a $125k student loan at 6.8%. Medical costs, health and disability insurance, and groceries were held constant at $11k/year. Investments earn 6% real.
Big Spender
Income/FICA taxes: $92k
Savings/loan payments: $0
Savings rate: 0%
Apartment: $48k (that’s a super-nice apartment anywhere)
Car: $36k (enough for a high-end German sports car)
Restaurants/bars: $20k (regularly going out to high-end restaurants, and bottle service)
Clothing: $12k (filling the closet with designer labels)
Travel: $36k (that’s a $6k vacation every eight weeks)
Misc: $25k (enough to support an expensive hobby, on top of everything else)
After five years, net worth will be -$174k (note the minus sign), as the loan interest compounded, and no savings or investment accounts.
Big Saver
Income/FICA taxes: $72.5k (tax savings due to 401k contributions)
401k: $55k
Backdoor Roth IRA: $5.5k
Student loan payments: $69k (enough to pay off the student loan in 2 years, with the payments being redirected to a taxable account after the loan is paid off)
Taxable investment: $11k (bumping up to $80k once the loan is paid off)
Savings rate: 50% (25% investment and 25% loan payments)
Apartment: $21.6k ($1800/mo still gets you a nice 1- or 2-bdr apartment, especially outside SF/LA/NYC)
Car: $10k (still enough to make payments on a nice CPO BMW 3-series)
Restaurants/bars: $6k (two dinners/month in normal restaurants, one dinner/month in a high end restaurant, and a $50 bar tab every weekend)
Clothing: $2k (hitting up the outlet mall)
Travel: $8k (two $3k vacations and two $1k vacations)
Misc: $8.4k
After five years, net worth will be +$618k, with the loan paid off after 2 years, 401k balance of $310k, IRA of $31k, and $277k in the taxable account. I can understand why James thinks this is excessively frugal, and it’s certainly more frugal than necessary, although as you can see you can still have a plenty comfortable lifestyle with a German sports car, dinners out, alcohol, and vacations, plus be debt-free in two years and get a big jump on retirement savings. It’s understandable why many readers choose this option, especially right out of residency.
Goldilocks
Income/FICA taxes: $72.5k (tax savings due to 401k contributions)
401k: $55k
Backdoor Roth IRA: $5.5k
Student loan payments: $30k (enough to pay off the student loan in 5 years)
Taxable investment: $0 (use credit cards, IRA, family as “emergency fund”)
Savings rate: 32% (22% investment and 10% loan payments)
Apartment: $30k ($2500/mo gets a single guy a luxury apartment anywhere)
Car: $24k (enough to make payments on an $80k luxury car)
Restaurants/bars: $12k (regularly visiting expensive restaurants and bars, with occasional bottle service)
Clothing: $5k (shopping at higher end department stores)
Travel: $15k (a couple splurge vacations, plus a few cheaper ones)
Misc: $20k (another ~$1700/month un-allocated play money)
After five years, net worth will be +$341k, with the loan paid off, 401k balance of $310k and IRA of $31k. No taxable savings, but an additional $30k/year after-tax just got freed up for more consumption, 529 accounts, saving for a down payment, or any number of other valuable things. Take-home pay is not that much less than Big Spender due to tax savings on the 401k. This is probably what James should be doing, and frankly, it aligns very well with what WCI has been saying all along. Pay your loans off within 5 years of residency. Save 20% of your gross income for retirement. Take full advantage of tax-advantaged accounts. Spend the remaining money on what makes you the happiest.
My summary comments are:
1) Most importantly, if you’re tempted to be the Big Spender for five years out of residency, think about the hedonic treadmill and what will happen when those five years are up. It’s very psychologically painful to scale back your standard of living. You will quickly adapt to your level of house and car and I promise they will become “normal”, no matter what you spent on them. When you decide it’s time to start paying down the loan and funding that 401k, you’ll need to trade down on both and it will feel like deprivation. Many docs become Big Spenders right away and never change their ways because of the impending feeling of deprivation. I know a 65 year old doc who did this, who has a net worth of NEGATIVE half a million, with no good options. The best way to avoid this is to grow into your income while you let your finances gain some momentum.
2) Remember that there’s a decreasing marginal utility to consumption spending. For every extra $10k you spend on a car, you get less enjoyment for it. Same goes for housing, vacations, etc. Are the clothes you buy from Rodeo Drive that much nicer than from Nordstrom? Nordstrom plus financial security is a better option than Rodeo Dr and being buried under debt for your whole life.
3) Likewise, there’s decreasing marginal utility with savings, with a big value while you fill up your tax-advantaged accounts and pay down higher interest debt, and decreasing thereafter. #2 and 3 suggest the best solution is to balance savings and spending; take healthy advantage of tax-advantaged accounts, pay loans aggressively, and spend the rest on the stuff that makes you the happiest.
4) Remember you get a real return on invested money, meaning that it outpaces inflation. Saving and investing (especially with tax-advantaged accounts) doesn’t just defer enjoyment of money later in life. It gives you LOTS more enjoyment later in exchange for only a little now. As WCI said, if you’re reasonably healthy you could easily be rock climbing, back country skiing, flying a private plane, racing a race car, etc at 60. Your 60 year old self will want to spend at least as much on consumption as you do now, likely even more if you become accustomed to a high standard of living now. After 5 years, Big Saver will be earning an extra $50k/year from his investments, whereas Big Spender will be *spending* $12k/year on loan interest. That difference of $62k/year for 35 year old James can go a long way.
5) Regardless of where you are in life, have a financial plan. I’m sure you could save less and spend more than Goldilocks and still have financial success. But make sure you know your numbers and have at least a rough plan of how to arrive at a comfortable retirement, and track your progress. If Goldilocks refinanced his student loans to a lower interest rate and paid them off over 8 or 10 years, and only put $30k into the 401k instead of $55k, it probably wouldn’t be catastrophic. But it will limit his options later in life, committing him to a lower standard of living and/or working harder. If that fits your plan, OK.
6) Some parts of James’s post seemed to hint at conspicuous consumption. In my opinion, that can be particularly harmful and is a very slippery slope. While James thinks his salary is TONS of money (and it is by most standards), even in just these comments there’s a doc taking home $900k/year AFTER taxes. Unless you’re Jeff Bezos there’s always someone out there with more green than you, and if advertising your wealth is a priority then you’re guaranteed to be outgunned. Conspicuous consumption is dangerous because it’s very UNlikely to make you happy, which is the opposite of what your consumption spending should be doing. See how good you feel about buying that brand-new show-off Porsche when you drive past a Lamborghini and a McLaren half an hour later. Also, conspicuous consumption is super easy to do. There’s no shortage of cars, jewelry, houses, fur coats, hand bags, etc with outrageous prices, made to be sold to people who want everyone else to know they paid outrageous prices for them. I’m not big into eastern philosophy, but I think the idea of working for yourself and trying to avoid comparing yourself to others is a more reliable pathway to happiness.
7) As a non-religious single guy about James’s age, I can understand the desire to use one’s income to improve his dating life. In my experience, most girls don’t care very much about displays of wealth, and the ones who do are probably best avoided. Certainly, having a decent and well-kept home and car are important, but beyond that, the marginal benefit for most girls drops off sharply. They will care way more about your personality, confidence, sense of humor, that you take care of yourself, have an interesting lifestyle, have a solid group of friends, etc, than whether your BMW is one year or four years old and whether it has an “M” in the model name. The difference even between Big Spender and Big Saver lifestyles isn’t enough to move the needle much with most of the quality women I know. Besides, when they find out you’re a doctor the difference in what car you drive will matter even less. Maybe I’m biased because I’m attracted to independent women, but I really think failing to fund your 401k to use the money to try to attract more girls will be a losing plan.
Wow! That’s quite a comment. Might be longer than the original post.
Started rereading the comments, and thinking about hedonic adaptation. It isn’t just that you won’t be as happy in a Hyuandai as in a Lotus now or in the future, it’s that if you buy a $3million home when a $300K home would suffice you have another anchor (debt) that requires you to earn a large amount for 15-30 years of the mortgage and ever after enough to pay property taxes presumably higher than the mortgage payments on the much smaller home. Not to mention if you bring kids into that home all their neighbor kids go to private schools and have new cars every year, and it will be real tough to move them into the $300K home if you get ill or burn out or die.
So part of James C’s risk is that he’ll get stuck with one or more of those gorgeous women and they’ll be much higher maintenance than any he might meet- gorgeous or not- without the Audi and the trip to Ibiza. But if he sticks with one car longterm the repair costs might someday be lower than the payments on mid/high range new cars, and if he avoids paying for but not owning a few doctor’s houses for exwives, he’ll do alright. The other ridiculous fantasy of youth is that you won’t want stuff when you’re older! Let me tell you from the heights of my 50s that to me YOLO is danger and discomfort of adventure travel. As I approach 60s and 70s (and as airlines shrink seats even more) I’ll be glad to have money to spend on first class. But would someone please explain to me the appeal of bottle service? Is it just liquor or is there a gorgeous server attached?
LOL, I had the same question about bottle service! I guess I just don’t drink or party much.
It’s the VIP experience. You frequently get an actual table and chairs, usually clearly visible from the main club, so everyone knows you’re a high roller. Attractive, well dressed women (and occasionally men) know to drop by bottle service tables for a high chance of free drinks in exchange for sitting with their hosts and making that table a flock of beautiful people.
Huge hit with extroverts and people who really enjoy that feeling of giving a bunch of people a “best night ever” experience.
Looks like I missed quite a debate the first go-around… haha!
We are enjoying a high savings rate during residency. It obviously helps to have two people working, no debt, and living in a low cost area. Last month we hit 51% savings of gross between retirement + taxable (savings rate has been at least 35% for a while now). Potential house purchase and practice buy-in in the future ought to be no issue. Of course saving as an attending would easily beat our current selves, and I’m sure we will have some lifestyle creep, but I think saving early has established our habits and overall expectations for the future.
It’s been five years since this was originally posted. I wonder if James C is still singing the same tune today that he was five years ago?
I was wondering the same thing. Once you start running on the hedonic treadmill, getting off is usually quite painful. I’ve only heard of a handful of people from any walk of life who spent everything they earned for years and later ramped up their savings rate to a significant level.
OK. So now I know that bottle service is an extremely expensive way to consume a fatal dose of alcohol- half to 2/3 of a quart of vodka per person?!?!?!
Can someone explan who or what the following are:
Oak, Tryst, Marquee, Mark Cuban, LIV, NYE, Lil Wayne and Mansion? I presume from the context that they are all expensive. Are the other alcohol consumption practives? Other drugs, legal or not? Fancy cars?
All of this seems to be based on the notion that being seen to spend large amounts of money on entertainment makes one happy. I feel sorry for those who have fallen for this lie.
On cars, at least the ines I know about, I did not realize anyone thought of Audi as making aspirational models. Maybe an S class, a Bentley, a Ferrari or things more expensive than that. I thought Audi made nice all wheel dribe cars and SUVs but nothing special. Do they even cost $100,000, let alone get up into fancy car prices?
Am currently looking at $1K cars, so I think “fancy car prices” start at a level far less than $100K!
Some of the comments above seem to suggest that physicians in their 50’s are too old and frail to have a good time. That isn’t necessarily true. This year, we went skiing in Norway and soon, we’re off to go sailing in the Adriatic. Professionally, we’re the senior members of our respective groups, and just way more comfortable in our skins than we ever were in our 30’s.
I have several partners in their 50s who still climb, kayak, backcountry ski etc. The ones I’ve had who are in their 60s (and retired) are still running triathalons etc.
While lots of people are in terrible shape by 30, I also canyoneer through some pretty tough terrain with several in their mid 60s and some in their low 70s. Age is not just a number.
First time, long time. I feel I’m a good case study for the front load early advocates. I grew up in an upper middle class household in the North Texas area, and although my parent’s didn’t discuss their finances with my brother and I, I could always tell it was their choice to lead a modest lifestyle, and my Dad retiring at 55 confirmed my belief. I say this to point out how they led by example. I also knew that I didn’t have the same academic gumption as them, but knew at a very young age that providing a similar lifestyle to my future family was important to me. So as early as age 12 I saved. Money for Christmas. Saved. Money for my birthday. Saved. Started mowing lawns. Saved. At 18 I opened my first IRA and would put as much into it as I could while working through college. I understand my parents paying for my college was a HUGE help, but I’m just speaking about the time value of money. I also had the benefit of maxing out my IRA during a recession. I’ve ALWAYS loved to save. I’m now 32 years old. My wife (31, married for 8 years) and I will gross $160,000 in combined income this year. We’re not in high income earning professions, but we have a combined $225K+ in retirement savings. It’s just such a great feeling to know we have that money working for us, and will for the next 30 years. I’m not sure if I’ll get to retire at age 55, or if I’ll even want to, but I do know the financial choices I’ve made in the past and will continue to make going forward will give me the financial freedom to do what I want.
I don’t by fancy cars, or new cars, and would not buy an Audi.
But I though if one want to impress people that you had an expensive fancy car, you needed something like this
https://www.koenigsegg.com/car/jesko/
Or this
https://www.bugatti.com/chiron/
Driving around in something like these is real proof of manly accomplishment, or whatever people who buy these cars are trying to prove. Of course, a truly manly man would have (at least) one of each. And such an alpha man would laugh at someone trying to impress him with an Audi.
One of my favorite classic WCI posts.
I laugh at someone who thinks 280
Is a big salary. That shows incredible lack of financial sophistication. I make four times that and most specialists I know in Otho ortho etc make twenty times that. I drive a Porsche. I might get a Ferrari. I take 50,000 vacations to places much nicer than Spain. I also save 500000 a year. Starting by loading more than his salary into a cash balance plan. I know I can’t retire like this on one million dollars. This kid is a naive fool. Reminds me of many residents I trained with who came from less developed countries. They had Mercedes’ as residents. Stupid. That they leased. My business leases my car as I travel from a home office llc that generates write offs to my other place of work. This kid is so naive. Bragging about Ibiza and a 280 salary. Watch out for monkey pox my friend. And call us when you make at least 600. My plumber makes more than you and so does my wife’s hair salon owner
You know orthopedists make 20 times $280K? That’s $5.6 million. There cannot possibly be many doctors out there making that from their clinical practice in any specialty. In fact, I’m skeptical you know even one. If so, please send them my way. I’d like to feature them on the blog or podcast.