Don’t Build Your House Upon the Sand

In the book of Matthew, there's a parable that goes something like this:

Everyone then who hears these words of mine and does them will be like a wise man who built his house on the rock. And the rain fell, and the floods came, and the winds blew and beat on that house, but it did not fall, because it had been founded on the rock. And everyone who hears these words of mine and does not do them will be like a foolish man who built his house on the sand. And the rain fell, and the floods came, and the winds blew and beat against that house, and it fell, and great was the fall of it.

This parable is obviously not about houses, much less finances. But today we're going to pretend it is. If you build your financial house upon a sandy foundation, it isn't going to last when the inevitable bad things in life happen. Have you ever wondered what that fall might look like? Wonder no more! Several months ago, we received the following flyer in our mailbox:

It's a little hard not to make fun of this, but I'll do the best I can. I presume the flyer isn't lying and that all this stuff used to belong to a “prominent plastic surgeon.” If this is your life that has recently imploded, I'm really sorry. But let's keep you anonymous and use you as an example for all those other doctors out there.

You Really Can Spend It All

Some people can't imagine spending a seven-figure amount per year. Heck, a lot of medical students don't understand how anyone struggles to live on the average physician income of more than $300,000. But I assure you that it can be done. It appears that this surgeon was successfully spending quite a sum throughout their career. Let's see how it was done:

• Fancy house
• Fancy car
• Fancy art
• Fancy watches
• Fancy jewelry
• Fancy carpets

There was probably a lot of expensive travel, bottle service, and other fun stuff along the way, too, but that can't be sold for dimes on the dollar in an auction. What there does not appear to be, however, is a lot of

• Retirement accounts
• Investment properties
• Mutual funds
• Stocks
• Paid-off properties

If there had been a lot of that stuff, this doc would not now be fire-saling all of this bling.

More information here:

10 Reasons Doctors Spend Too Much Money

How Much This FI Physician Family Actually Spends in a Year

What Happened?

This poor doctor had several bad things happen:

1. Health issues crushed the ability to make money
2. Divorce
3. Bad business decisions

All of these are common. While disability can be insured against, it's tough to buy enough insurance to sustain a lifestyle that involves fine art and payments on McLaren GTs. Disability insurance also generally only pays until about age 65. So, if you develop a health issue at 63 or 67, it's not going to help all that much. If you develop a lifestyle that can only be sustained by working very hard as a successful plastic surgeon who spends all of his or her earnings, it's going to be very hard to build a nest egg that can sustain that sort of lifestyle. It requires tens of millions of dollars. Don't assume that you can maintain your current level of earnings indefinitely. Don't build a lifestyle dependent on your highest level of earnings.

Divorce will typically cut your income and your assets in half. That's a pretty huge financial blow, but lots of doctors recover from it all the time—especially if the divorce results in jettisoning the big spender from the relationship.

There's no reason why two surgery centers should have to close because a single surgeon can no longer operate. That is an indication of either way too much leverage (likely) or an inability to attract other surgeons to work in the surgical center. This surgeon should have known that the surgery centers would have to be sold to someone eventually and that they would be much more valuable if they were not mostly dependent on that surgeon's income.

What's Going to Happen to This Doc?

I have no idea, but I suspect that everything raised from this auction is going to creditors. Neither the surgeon nor the ex-spouse is going to be enjoying a particularly comfortable retirement, especially compared to their prior lifestyle.

More information here:

Doctors Need to Budget, Too (With a Few Examples)

A Tale of 2 Budgets

How Can You Keep This from Happening to You?

There are a few lessons to learn from this extreme example.

#1 Buy Disability Insurance

Docs get disabled all the time. Put a floor under your potential lifestyle by buying a solid individual, portable, specialty-specific disability policy.

#2 Save for Retirement

You can't work forever. When you can no longer earn money and when disability insurance no longer pays benefits and if you have nothing else, you'll be like the 40% of Americans who live on nothing but Social Security. The good news is that your Social Security benefit will probably be larger than that of the average American. The bad news is that you probably aren't going to like living on just that. From the time you get out of training until you stop earning, save at least 20% of your gross income, and you'll never be in this situation.

#3 Buy Assets, Not Liabilities

A fancy house, car, rug, or piece of art is generally a liability, not an asset. Assets pay you money. Liabilities cost you money to store, insure, and maintain them. Yes, sometimes you can sell consumption items and speculative investments for more than you paid for them, but you often still don't come out ahead. I'm not the world's biggest fan of Robert Kiyosaki's Rich Dad, Poor Dad, but he got this one right. Buy the assets first, and then you can buy some consumption items. Get rich first.

#4 Pay Cash and Pay Off Debt

When life gets really bad, you might have to sell something you own. If there is no debt associated with that particular item, selling it can be a real blessing in your life. My boat is far from a wise financial investment, but at least if I sold it, I could get a mid-five-figure amount of cash that would sustain my family for months. If I had a note on the boat, all selling it would do would be to eliminate my boat payment, and that's not nearly as useful. The same thing applies to cars and houses. If it isn't a need, pay cash. Pay your mortgage off early.

#5 Take Care of Your Health and Relationships

The old credit card slogan says, “There are some things that money cannot buy; for everything else, there's Mastercard.” While it's hard to think about anything but money when you don't have enough for your basic needs, once you have enough (like this doc surely did), focus on more important things like your health and family.

 

While I feel really bad for this surgeon, I hope white coat investors can learn from the mistakes of others rather than making all of the mistakes themselves.

What do you think? Why do some doctors spend so much? Have you ever had to cut back on your spending?