By Dr. Jim Dahle, WCI FounderI tell new attending physicians (and their equivalents in other professions) to live like a resident for 2-5 years after they finish their training. The meaning of those four words is that if you can carve out a massive difference between your newfound high income and your lifestyle, you can build wealth rapidly. You can max out retirement accounts, pay off student loans, save up a down payment on a dream house, build an emergency fund, upgrade that beater, and pay off your consumer debt all at the same time.
Within 2-5 years, your net worth may swing from negative $200,000 to positive $500,000. At that point, you can mostly grow into your income (still saving 20% of gross for retirement) and have a financially awesome life. The easiest time to “live like a resident” is right after you have HAD to live like a resident. You're already used to living on $50,000-$60,000 (the average American household income). It's really not that hard to do it for a little while longer.
However, the truth is that almost no white coat investors live exactly like a resident. Most inflate their lifestyle a little. A little lifestyle creep is probably OK. Heck, give yourself a 50% raise. What you're trying to avoid, however, is a lifestyle explosion. If your spending quadruples when you leave residency, you blew a golden wealth-building opportunity. And it's really hard to go back. I've met a few who have done it, but they're pretty rare.
What Does a Lifestyle Explosion Look Like?
Some of you have probably wondered over the years whether Katie and I COULD spend more money or WOULD spend more money if we had it. I confess that, at times, I had my doubts, too. She's naturally frugal, and I'm downright cheap. Over the last few years, we have pushed each other to deliberately spend on everything that we thought could possibly make us any happier. Our “budget process” over the years has gone from a very strict budget (20 years ago, we might have only had $20 to spend on ourselves in a given month) to basically just cash flow tracking.
We know what we spend, but we do not put any sort of limits on that spending. If we spend more in a given month, we just save/invest/give less that month. As you might expect, that sort of mindset has led to a relative lifestyle explosion that I thought people might find interesting to see. [AUTHOR'S NOTE: If not, forgive the personal nature of this post and skip over to the next blog post on the site. This one is not for you. As with everything at WCI, take what you find useful and leave the rest.]
One result of this increased spending is that I understand a whole lot better how hard it is for you spenders to spend less. It really is not all that difficult to spend hundreds of thousands of dollars in a year. Housing-wise, we live in a moderately expensive part of the country, but property taxes are still pretty low. We don't have any payments. No car payments. No mortgage payments. No student loan payments. We don't have daycare or private school costs. Our health insurance costs are paid for by WCI (20% comes out of our paychecks, I suppose, but we didn't count that). And yet we now spend so much—it's certainly the majority of a typical full-time emergency physician income.
Now, without further ado, here is the evidence of our lifestyle explosion in the last few years.
One of our goals was to learn how to spend more money. Mission accomplished! And it's not quite as bad as it looks. Some of this is just inflation. Using CPI-U, $161,000 in January 2020 is the equivalent of $192,000 by the end of 2023. There is also a bit of an anomaly in September 2023. That truck I ordered way back in December 2021 finally arrived. A Super Duty truck can cost over $90,000 now. If you subtract that out, 2023 is actually a step down from 2022. But look at what is not in there that we actually did pay for:
- Income and payroll taxes
- Charitable contributions (aside from small amounts, < $20,000 per year)
- Health insurance
- Savings/Investing
- That big home renovation in 2019-2020
Plus, the expenses that many doctors have that we don't:
- Mortgage
- Student loan payments
- Car payments
- Private school
- Childcare costs
- College costs (Yeah, we had one kid in college during this time period, but the little bit we contributed came out of her 529.)
This is just spending—on things and experiences and insurance and utilities and subscriptions and groceries and eating out and kids' activities and traveling and gasoline and car repairs and boat expenses and all that stuff. For many people, the vast majority of their income goes toward things that are NOT included in these numbers.
If we had lived anything like this right out of residency, we would have never built any wealth at all. I'd be asking if I could have your shifts (and a loan) because we'd be in debt up to our eyeballs. There might be a time to YOLO and live it up, but that time is almost surely not in the first five years out of residency. We were living in a little townhome back then with a drug dealer two doors down, driving a $1,850 1997 Mazda 6 with 4/40 air conditioning (me, not the drug dealer. His car was much nicer.) Our household income that first year out of training was $120,000 ($186,000 in today's dollars). We couldn't live like this on that even if we had wanted.
How can we live like this now? Well, we earn a lot more. While this spending level is no longer covered by my 0.4 FTE all-day-shifts clinical income, it is more than covered by the combination of my clinical income and the investment income from our taxable investing account. Thus, like it always has been, the profit of WCI still goes entirely toward taxes, charitable giving, and savings. OK, and one really big home renovation.
Lessons to Be Learned
There are a few lessons that I've learned and that maybe you can learn, too, from our lifestyle explosion.
#1 It's Not That Hard to Spend More Money
If you're a cheapskate like me and worried that you'll always be a cheap/frugal/thrifty person who cannot enjoy his or her wealth, let me reassure you that, with just a little bit of effort, you can spend more money. With only a very reasonable amount of care, you can probably spend it mostly on things that actually make you at least a little bit happier. So, if that's your problem, rededicate yourself to it. I know you can do it.
If you're really struggling, put some additional incentives in place. Make a spending budget. You HAVE to spend it all or you lose the money. Maybe it has to go to your favorite charity or your least favorite political party if you don't spend it.
More information here:
The Lifestyle of Doctors Worth About $50 Million and How They Made So Much Money
How Much This FI Physician Family Actually Spends in a Year
#2 If You Don't Budget, You Will Spend More
Take away the constraints on your spending, and you will spend more money. If reaching your financial goals involves spending less money, put some constraints on your spending. What happens naturally is exactly what happens to most doctors when they leave residency. They rapidly grow into their entire income.
#3 Variable Spending Is Just That
In our (almost) monthly money meetings, I showed that chart above to Katie to get her thoughts on it. Her response? We could spend A LOT less if the situation called for it. That's true. Most of that is variable spending. We've eliminated just about every fixed expense from our lives that we can. We're done saving for retirement and college (additional savings is all about legacy now). All of our vehicles and toys are paid off. We don't have any debts. We didn't buy a second home. The biggest chunk of our spending these days is on travel. We've got “status” on Delta Airlines for a reason. Thank goodness we don't live at a Spirit Airlines hub.
But look at the month-to-month variation in our spending. Throw out the truck month, and it's $7,000-$44,000. Even if you only look at 2023 and throw out the two highest and two lowest months, it still ranges from $16,000-$35,000. Your spending plan needs to account for that kind of volatility. That means you cannot let those fixed expenses become too large of a percentage of your income.
#4 It's OK to Spend
Money is not the end. It's not the goal. It's a tool. It's there to be used. So use it. Sure, use some of it to do good for other people. (We still give away far more than we spend.) But use some of it to do good for you. If that's hard for you, have your spouse or employee sign the check at the restaurant or pay for the vacation. I actually have more fun when I don't know what something costs.
More information here:
#5 Inflation Is Real
I can't believe what we spend on food. In college, my grocery bill was $100 a month. Now we spend $100 just on breakfast stuff. And it doesn't even last the whole month. You used to get a fast food combo meal for $5 a person. Now, a milkshake costs more than that, and I'm swiping my card for $80 when all five of us are there. And forget about a real restaurant. A steak dinner starts at $30, and it can easily be over $100 a plate. If your financial plan does not include inflation, it's going to fail. You (and your financial plan) must assume that your nominal spending will increase over time, even without changing your lifestyle.
More information here:
WCI Travel Club: Meaningful Trips to Half Dome, Thailand, and Alaska
WCI Travel Club: Magical Trips to Peru, Portugal, and Disney World
#6 The Good Life Is Out There
In the original White Coat Investor book, published in 2014 just after we became millionaires, I defined The Good Life as
“. . . a life free from financial worries, a career where you make a real contribution to society, a few luxuries along the way, the ability to help others financially throughout your life, and a comfortable retirement at a time of your choosing.”
I think we've achieved that, and you can, too.
What do you think? Have you ever had a lifestyle explosion? What did it look like? Did you ever think you'd spend what you spend now? Why or why not? What are you doing now to avoid a lifestyle explosion?
A young entrepreneur that I know started making lots of money very quickly after graduating from college. He said he was making over 100k per month. He bought a couple of expensive cars and spent money with abandon, racked up 6-figures of credit card debt, and got into major financial trouble. His seven figure income did not prevent him from growing an increasing negative net worth. Ouch!
We have gradually increased spending most every year for 25 years. We also lived well below our means all those years. For us, that was a more enjoyable route than increasing spending 500% out of residency and then struggling to maintain it.
I recommend loosening the belt slowly.
Thank you Jim! I love it when you share your personal stuff. I would assume that you set your financial independence “number” based on 25X of your annual spend. As your spending increases are you also increasing your FI number to reflect that? Also, would you be willing to share how much you have accumulated over the years using your formula of 20% investing rate (not including value of WCI of course).
Thanks!
Thanks Jim! I appreciate when you share your personal stuff. I’m assuming that you calculate your financial independence “number” by multiplying your annual spend by 25X. As your spending increases like you have shown, are you recalibrating your “number” to account for that since you probably want to have the freedom to spend like that in retirement if desired. Also, would you be willing to share what you have been able to accumulate over the years by following your formula of investing 20% of gross income (not including WCI valuation of course).
Thank you!
Yes, at least informally. Don’t worry, we’re still okay. 🙂 I tell Katie what our number would be now and she’s always “Well, we could just spend less if we had to.” People are so adaptable. Maybe we overestimate how hard it would be to dial back our lifestyle when it starts in such a great place.
We haven’t published our net worth in a long time on this blog for various reasons including I don’t want our kids to be kidnapped, it changes drastically year to year when including any sort of valuation for WCI, we want the blog to focus less on us, and it makes me less relatable to most of the audience which has a much lower net worth. People think it’s cute when bloggers publish their six figure net worths. They don’t feel the same when those net worths move into the 7+ figures. We have “enough and to spare”. We’ll be able to buy whatever we like, our children will get a nice inheritance, and hopefully if all goes well, charities will get even more than our kids do.
That’s good stuff, and wise to boot.
What is your financial independence number, ballpark, like Grateful MD asked? Is it annual spend x 25? What if that changes for family reasons, meaning you go from single to married w/ kids?
Did you see Suze Orman come out and say people need at least 5 million now? That seemed like a Peter Schiff move of engagement farming …
Annual spend x 25 is certainly a reasonable ballpark number. Some people do need $5 million. In the first financial plan we drafted up in 2005 or so, it was $2.7 million.
Thanks, that’s helpful. I think the market will run another 1-3 years as inflation goes up, then we’ll have bond market problems. You know I’m a big BTC guy, so I see that skying over the long term. By the way, I switched from my bearish ways at the start of the year, so I will change opinions if the realities are there. And thankfully so, as BTC has gone up quite big since the ETF launch and more …
Your point about fixed expenses is a big deal. I think it’s so much easier to let expenses get out of control with fixed expenses. Especially interest payments on houses and cars. Even if you can afford it, it feels more stressful.
Spending more on variable expenses, especially travel and experiences feels a lot better and a lot easier to cut back in times of market drops.
Not enough people talk about this but I think it’s a big deal.
Things can also be variable expenses. While there is a cost to maintain and insure, if you pay cash for a boat or expensive car and bad economic things happen to your family, you can sell those items and use the cash to help with the economic crunch. Big one time expenses are mostly variable.
9/2023 must have been an interesting month. That’s probably an average month for a NBA player. 🙂
If you pay cash, shows you really wanted the truck.
Are you able to share what categories have driven most of the increased spending, and any reflections on how well that “investment” has returned with respect to increasing your and your family’s happiness (and reducing any unhappiness)?
That sounds like a GREAT follow-up post. It would be a lot of work though since we stopped really categorizing our spending a few years ago. It would be fun info to know though. I’ll chat with Katie about it.
You should do a follow up on how the Fed hasn’t been successful on inflation, either … and it won’t be moving in to next year, sadly.
I guess it depends on how you define success. I thought they did a great job getting it down rapidly from 9%. Not such a good job letting it get there in the first place of course. I’d like to see it a little lower than it is now, but so would they. It’s a tough balance and I’m happy not to have that job.
Ha, even the drug dealer was living like a resident I guess!
dominating performance on the spending Jim! have you guys felt much happier loosening the purse strings? Or do you feel that extra couple of hundred thousand of extra spending a year didn’t really increase happiness much?
Some increase, but the law of diminishing returns/marginal utility definitely applies. It really does get pretty flat in the six figure range in my experience. I just spent a week canyoneering with a cath lab tech, a handyman apprentice and others that is a trip that anyone can afford. Besides personal gear and gas to get there, the cost of the six day trip is about $200 a head. It was a whole lot of fun. Probably just as much fun as taking the kids to Machu Picchu for Spring Break which obviously cost a whole lot more than that.
They are trapped, indeed. The debt levels are crazy, and the treasury is having increasing difficulty with their bond offerings, and that will continue. I see yield curve control sooner than later, but I think they can postpone it for a while, as the debt to GDP trick of inflation has always been the way to “extend and pretend.” I think Jerome Powell means well but he can only do so much when the profligate spending and a broken, grifting DC won’t ever really change …
You actually don’t spend that much for a family of 6. I see that when you bought that nice truck, the month before and month after had a much lower spend.
You inspired me to do the same and I spend a whole bunch more than you and it is just me. I did include everything but taxes, tax deferred, and dedicated savings. Like you, I don’t have a mortgage or debt of any kind. And, like you I just track my spending each month to keep an eye on my spending habits.
2020- 3607/month
2021- 4456/month
2022- 6354/month (new roof and Hvac)
2023- 5343/month (ill brother)
Contrast that with 2017 where I spent 3480/month. This included about 1000/month for my mother who was destitute and dying of cancer.
The reason I’m doing this is because I want to use my “tool” for something fun and not because of obligations or fixing other’s money woes. I want a Maybach!!! I want to make sure I can handle the added expense without hurting my future.
Thanks for sharing your experience.
It’s not clear to me why you think you spend more a month than we do. It seems like you’re spending a lot less but maybe I’m missing something.
Sort of muddled through early years but we decided to put our selves on a salary which we continued for 10 plus years and any left over invested or occasional trips. At age 55 stared taking from IRA (combined a pension plan and profit-sharing plan) the allowed fixed amount and then at appropriate time started with RMD(Never did anything excessive(airplane, large boat,2nd house,etc) We were able to travel for educational meetings with no trouble. Was able to work part time and gradually phased out to about age 70. I had lots of hobbies(wildlife watching,
photography, travel to odd places’
I am 86 and the account is about the same as when i started the phase out and that included several marked downturns which surprised me !
I would not changed a thing but hard t look back when my wife gives me the “should haves” but a lot f this was to give her security as we aged.