By Dr. James M. Dahle, WCI Founder
I've written before about the importance of playing both good offense (making money) and good defense (saving money). Lately, I've been thinking about life and where to focus your attention at any given stage. As the Preacher in Ecclesiastes said,
“To every thing there is a season, and a time to every purpose under the heaven: A time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted…A time to get, and a time to lose; a time to keep, and a time to cast away…”
I see a lot of people who are working on the wrong thing at the wrong time, and it is retarding their achievement of wealth. They would do better if they followed the Offense-Defense-Offense pathway.
Let me explain.
Offense-Defense-Offense
First Step to Building Wealth Must Be Offense
Imagine a teenager or young adult. She basically has nothing. No education, no income, no savings, no retirement accounts…nothing. What is the first thing this person must do to build wealth? Well, she has to make money. Offense must come first. You cannot save your way to wealth. It doesn't matter how many ziploc baggies you wash or paper towels you reuse. If you never earn more than the poverty line you're never going to build wealth.
Now, I know this seems obvious when you read it. But the fact remains there are millions of people out there trying to do just that—get wealthy on a low income. Getting wealthy on a moderate income is possible. It takes a long, long time and a lot of discipline. But on a low income? It just doesn't happen. So you have to take care of offense first. That doesn't mean you should waste money, but if you're giving financial advice to a young person, tell them to find something to do with their life that meets two criteria:
- Earns a lot of money
- Is reasonably enjoyable, or at least enjoyable enough that you can stick with it long enough to get rich (even better if it is something you feel passionate about, but that may not be possible for everyone).
As Jonathan Clements says in his excellent book How to Think About Money:
“When I talk to college students, I don’t tell them to follow their dreams. Instead, I tell them to focus on making and saving money. I even suggest that they might deliberately opt for a less interesting but higher paying job, so they can sock away serious sums of money. All this might sound deadly dull and horribly reactionary. Aren’t those in their 20s meant to pursue their passions, before they become burdened by the demands of raising a family and making the monthly mortgage payment? Underpinning this is an implicit—but rarely examined—assumption: that pursuing our passions is somehow more important in our 20s than in our 50s. I think this is nonsense. In fact, I think just the opposite is true.”
Want to get rich? Go make some money. What this means for a typical high-income professional is to bury yourself in your studies and extracurricular activities, make sure you get into professional school as soon as possible, make sure you get into any post-graduate training you may need to do your chosen career, and upon finishing, make sure you take a job in your field with a top 50% salary.
While you want to develop good habits and avoid unnecessary debt, you need to be very careful about being penny-wise and pound-foolish. Far better to pay application fees to 10 more schools or programs than to have to apply again next year. Far better to pass on that job as an MS2 and get a higher USMLE Step 1 score. Far better to live near the library so you'll waste less time commuting to study.
Second Step to Building Wealth Must Be Defense
This is where the process breaks down for most doctors, and the main purpose behind this website. Even perfect defense cannot win a football game without any offense, but everyone knows that defense wins championships. In the personal finance realm, defense means to quit doing dumb stuff with your money. What are the dumb things doctors and other high-income professionals do with their money that keeps them from being successful despite a high income? In no particular order:
Dad- “Hey, do a flip off the high dive and I'll put your picture on the website.” Maren- “Okay.”
Splat!
- Not insuring against financial catastrophes with term life, disability, health, property, and liability insurance
- Not saving 20% of their gross income for retirement
- Making poor management decisions with their student loans
- Becoming too comfortable with debt
- Paying too much in taxes
- Not taking advantage of all their available retirement accounts
- Not having a wise investing plan
- Getting bad advice or overpaying for good advice
Step two is to fix all that stuff. It's not that hard either. Far easier than the first step. By the time doctors come out of residency they've got 90% of what they need for success. It's like they're on the two-yard line. And when you're on the two-yard line with four downs to play, all you have to do is move the ball 18 inches per play, not fumble, and not put the ball in the air or on the ground. Attending physicians who haven't moved on to step two aren't going to be any wealthier by producing more offense. That money is just going to keep slipping through their fingers unless they learn how to manage it.
Moving On to Step Three – More Offense
Stay with me here, this is where I see many regular readers mess up. Let's review for a minute.
Step one is to get yourself a reasonably high income. This is an income high enough to pay for your lifestyle and still leave something to build wealth with such that there are no concerns about putting food on the table.
Step two is where you put a “system” in place. Your system is how you will manage money. It includes your insurance plan, your asset protection plan, your investing plan, your debt management plan, your spending plan, your giving plan, and even your estate plan. After a while, it's pretty much on autopilot. You don't need six different reasonable ways to invest. You only need one. You don't need to buy disability insurance or some new trust every year. Most of this stuff goes on autopilot eventually. But what you have created with these systems is a funnel that directs any unspent money exactly where it needs to go. Improving that funnel quickly puts you up against the law of diminishing returns. More and more work and sacrifice for less and less benefit.
It's time to move on to Step three.
Step three involves pouring more money into the funnel. At this point, the way to build wealth/reach your goals faster is NOT to continually work on more and more defense. If you're already saving 30%+ of your income for retirement, college, down payments, and other goals, you don't need to spend more time on frugality and FIRE blogs. Tweaking your asset allocation isn't going to make a huge difference (and will probably hurt). Switching credit cards isn't going to move the needle. At this point, the path to more wealth is not more defense, it's more offense. This is for you if you've optimized the heck out of step two already but still want to do something to reach your goals faster.
You may not care. The truth is that a doc who has done a good job at step one and step two will reach “enough” eventually. If you're fine with that (or if you already have “enough”), go enjoy your practice, your family, and your hobbies. But if you're not fine with that and want to put in your effort at the place that will make the biggest difference in reaching your goals, it's time to work on income.
That might mean taking a higher-paying job. It might mean taking more call or working more nights. It might mean changing your payor mix or your procedure mix. It might mean starting a side hustle or some type of entrepreneurial pursuit.
What it doesn't mean is spending hours trying to decide whether TIPS should be 5% or 10% of your portfolio, reading yet another personal finance book, harassing your spouse over a $50 charge on the credit card, or trying to determine whether you should DCA or lump sum a minor windfall.
Since you have all your systems already in place, none of the additional income that comes into the top of the funnel is spilled and it rapidly increases your wealth. My personal example is when WCI started making real money 3 or 4 years ago. All that extra income landed in hands prepared to take advantage of it. If my main goal was to increase my wealth I would be far better off doing more WCI work than trying to figure out how to trade options. Prior to WCI, the answer to step 3 was to do some moonlighting (which I did).
Offense-Defense-Offense.
That's the key. Recognize where you are at in your financial life and focus on what will make the biggest difference now in your situation. If you're a med stud, that's step one. If you're a new attending who just found this site last month, it's step two. If you've been reading for years and still don't have enough, it's probably step three.
What do you think? Have you found this offense-defense-offense focus to be beneficial in your life? In what ways do you see docs working on the wrong thing at the wrong time? Comment below!
Up late preparing for an IME tomorrow as an independent contractor. It took four years, but I finally managed to add some 1099 income to supplement my employed W-2 income. Cheers to dumping more into the funnel.
I hope you were pre-paid for all the time you put in. Don’t let them take advantage of you.
Man, the Seahawks are going to live in infamy for the rest of history for that play-call. How dumb. You’ve got Marshawn Lynch in the backfield…
I think step 2 is really where docs [mess up.] They can’t get themselves out of the way and they turn into their own worst enemy. They take the step up in pay when they finish training, and this is like having two of your five (skating) players in the box when playing ice hockey. At that point, you probably feel like the goal keeper….you cannot make any progress and are always working on stopping shots.
Or to use your analogy above, it’s like getting two holding penalties in a row from the 2 yard line. Now it’s first and goal from the 22. Now that third step of earning more offense becomes a need instead of a desire.
I’ll keep working on Step 3 for now!
TPP
I forwarded this post to my 24 year old college graduate daughter who works two jobs (waitress in a posh restaurant and a direct care worker at an AFC home at $11 per hour) and made about $37,000 last year. Unfortunately, her degree is in English.
She is maxing out her Roth IRA and wants to retire to a “tiny home” at age 40, but does not have enough offense to make it happen.
I’m giving her a bit of time to realize she may have to go back to school and get a degree that guarantees a wage above $50,000. I was thinking a Masters in Education, but alas the average teachers salary across the country is about $50,000…
Too bad she did not like anything in the healthcare field or anything in business or computers.
Perhaps she could start a blog on how to monetize a blog…
There are many jobs and businesses where one can make more than that as a college graduate without additional degrees and education debt.
Name a dozen that don’t involve business, computers, selling things, or the medical and healthcare fields and I’ll forward them.
Everybody is selling something.
Most skilled trades after apprenticeship. Construction managers. Many engineers. Some teachers (not Oklahoma). Police in most states. HR. Some of these require training or some more education but generally not substantial debt.
Hmmm…
I can’t recommend a police job due to safety issues on and off the job. I had hoped she could build on her English and Creative Writing degree. I don’t like HR jobs for her either based on my few experiences with HR across my career.
Anyway, she is happier than I am and will figure it out on her own. I’ll give her investment advice, but on second thought I might stay out of the career decisions. I originally steered her toward anything that took about 4-6 years of training and paid enough to have a “good offense”.
My husband is a public school teacher. Yes the salary is “only” 55k after almost 20 years of teaching. However, I actually looked at his w2 last year. There is an additional 22k of health benefits that cover the whole family. This is not taxed and so is not usually considered when people look at teacher salaries. In addition, teachers in NY seem to get like 80 sick days and a few personal days off every year. They also have summers and all those vacation days during the year. Most teachers, including my husband, seem to have a side hustle or side job that they do during that time off. Additionally, they get a nice pension after about 20 years. That is just icing on the cake of the amount we are saving in 401ks, taxable accounts, etc. But it is really very nice icing. The point is that I would not dismiss teaching as a career choice due to concerns about the salary unless you also consider the benefits.
Fair enough. I’ll tell her.
Teaching is a great option to develop a side hustle… those 3 months away from the class room provide solid time to do that!!
This is a fantastic post. Inadvertently, my life has followed this.
1. Offense- my job, check.
2. Defense- saving and investing, like dieting, always room for improvement, but check.
3. More offense— from the bench.
Our second offensive surge came when my attorney wife, who worked part time, on a contract basis when the kids were young, took a corporate job about ten years ago. Since then, the income, including some generous bonuses and stock awards, has dropped onto our balance sheet and boosted our nest egg substantially.
+1
Lived like a resident for first couple of years of my attending career while spouse was finishing residency and fellowship; developed good saving and investing habits; then added the second attending income. Lifestyle and spending could increase, but basically lived on one income and saved the second. Offense, defense, offense.
Great post WCI. I kind of feel like if step #3 of more offense is tied to your main Job step #1 (i.e. moonlighting, taking more call), it should be used to help expedite step #2 (i.e. getting out of debt, student loan etc). Basically increase your offense as soon as possible to improve your defense. That is what I did to get student loans paid off ASAP all while continuing to save and invest. Now that my defense is more sound, my offense does not have to be as aggressive.
Great blog although it seems like you are understating defense. I have been focused on my defensive phase for four years (in my spare time, maybe one hour per week average) and it’s still not quite done. I’ve switched to diversified index funds, built an estate plan, opened hsa, started donor advised fund, started planning for Roth backdoor conversions, simplified/closed multiple brokerage accounts, fired my mom’s wall street advisor, put many relatives on the right track, built a binder for wife, etc.
I now really enjoy and understand the importance of the defensive tasks and will probably continue to fine tune them throughout my life. I hope others realize you can never completely abandon the defense. It must be monitored and improved continually.
98% of this blog covers defense. Hardly understated. But once it’s dialed in, you’re better off with more offense than trying to cut 2 basis points off your investing expenses.
Great post whitecoat! Without any offense it doesn’t matter how good your defense is. Very much agree with the comments above about pursuing a career that you can make a decent living on. I hope to help guide my kids in understanding that.
Excellent synopsis of wealth generation and management. I especially like the quote from Clements. This will be forwarded to my graduate student/son and my residents.
Great post and well said. Fortunately for most of us, Step 1 and 2 will be enough if you start early enough and make reasonable choices. Step 3 can definitely accelerate things but it is the balancing act of deciding whether time vs money is more important and can only be answered individually. Since I was an oversaver, I value the extra time over money. I could retire financially, but I enjoy my job and my youngest is three so I will keep working for the next 15 years or until the job is no fun. It is important to me to model for my children that you do have to work for a living.
Also, thanks for a great conference. I am glad I was able to attend. I am sure it is an understatement when I say it must have been a lot of work for you and your staff to put together and put on. I would definitely come again if you decide to put on another one. Thanks again!
I first learned of this analogy from Stanley’s The Millionaire Next Door. I assume that is where you learned it from too. They pointed out that if you are a doctor (or other high-income professional) making 200K or more, you already won the game of offense. They said what will determine your net worth will now be your defense. I agree with them. I did both and became quite affluent as would anyone who does that.
I agree that tinkering around the edges of investing won’t add much. I guess I’m in the “enough” category though. I’m FI and I live a rich and meaningful life. Starting a new round of offense may allow me to exceed $10M sooner or give my adult children extra unearned wealth, but why bother? To each his own. I admire that level of ambition in others. In me: I’m not sure if I’m more truly living my values or if I’m just lazy?
Absolutely agree. Gotta get some offense first in order to knock out the debt and execute the game plan.
Exactly right and well put WCI. Most will do just fine if they do step 1 and step 2 correctly. Step 3 is extra credit for those with an entrepreneurial spirit and passion for some type of business venture. After doing the first two steps, I realized peak income comes only a few years into an attending job. If you want more, you have to work more or do something on the side.
Yes, it’s a weird career cycle for docs isn’t it- negative income for years, then low income, then a rapid rise to peak income and for many, a decreasing income over their careers. Very different from a typical corporate job.
I think lots of Docs do not realize that peak earnings are subject to lots of factors outside their control. I also think it is very hard to keep performing at a “peak” level year after year. This is where save early and often comes into play.
I agree. I think my “peak” earning years are behind me, and I am trying to cut back my hours now. Unlike corporate jobs, where those high in the ranks can delegate tasks and take on more supervisory executive roles, as a clinician, I can still see only one patient at a time.
This is also why it is so important to have a frugal lifestyle the first few years out of residency. Really maximizing the savings, paying off any student loan debt and generally getting one’s financial house in order early on can pay enormous dividends (literally and figuratively) 10-15 years down the road.
Step 3 is the key. That’s how you supercharge your wealth. People look at me funny and ask why I work so hard. Step 3.
Results of current poll are truly sad if accurate
Great article. One caveat: sometimes the best defense is a great offense. Always could use more offense.
You’re on point with this WCI. I’m not exactly sure why most doc can’t get step 2 right. (Other than the fact that they haven’t read The White Coat Investor book and blog yet!) I know part of it is a perceived sacrifice and delayed gratification during medical school and residency. But maybe it’s also more prevalent nowadays with new attendings feeling pressure to keep up with old Dr. Jones who has made a lot of money during the glory days of medicine. Not sure.
I loved your pathway to financial wealth. This is pretty much what I did to reach FI. I would suggest that another step should be added. In other words once you have reached FI, it’s time to go for an additional form of offense, which is to say enjoy your wealth. This is what you get to do when you have done the first three steps correctly. After decades of delayed gratification, it is time to enjoy the fruits of your labor, whether that is spending it, giving it away or simply enjoying more leisure time. I am and I am loving it.
And thank you for putting on a great conference.
It was a great conference. Thanks for helping to make it so.
I vote Maren gets hazard pay for that shot.
Oooh…hazard pay. Good idea.
[Comment about crude comment removed.]
I get the point of the second round of offense. You’ve talked about your desire to pursue a side hustle partly due to your discontent with Physician income ceiling. For me it’s more like – Offense – Defense – Bench me and put in the second string.
I was top of my Med class and excelled in training and my early career. I’ve done tons of research and treated way more than average amounts of patients. I’m basically FI in late 30s. Like Bernstein says, I’ve won the game.
Not bragging becuase it took a lot of work and sacrifice. Started a family later than planned, missed out on some events due to research and study, moved away from home for geographic arbitration, and also became burnt out 2 years ago still recovering.
Personally, I’m not convinced I want to trade my time for a second round of offense. Although recovering from some burnout may color my feelings, I am trying to find my “enough” and optimize work life balance.
I’ve batted around the idea of a side hustle business with my architect and artist sister, but I wouldn’t do anything that took more than a few pleasurable hours a month.
While no offense is meant to this, ER is THE classic side hustle specialty. We had a new doc come through to visit the cancer center the other day and my nurses said I think he is one of the specialties that always has a second job, like ER. The other nurses nodded in agreement. And hey, that’s cool. You probably planned for that.
Point being, it’s not as easy for some specialties to have a second round of offense because we are full time with our first round and scaling back a few shifts isn’t an option without hirin a new doc or Locum, which can be tough.
Nothing wrong with a doc stopping at step 2. The point of the post was if you want to move beyond where that gets you, best to move to step 3 rather than try to someone crank down harder on Step 2.
Wealth is a term that is most often given directly to monetary accumulation. I like this blog topic of offense, defense, offense especially when the side hustle reaches after another area of life that gives more passion then the first practical career. Retiring from what we have to do and entering what we want to do is a concept that I will develop and hopefully start early in my 1st career. We all need something to move on to after we end our practical pursuit for financial independence/security. The wealth that the side hustle provides might go further than simply financial gain but also a passion for which you spend your time and gaining new relationships and character that the first career lacked. Serving others with excellence and passion leads to more work but work that opens up a new wealth of variety in life and character.
Sometimes you come across a post or book that says everything that needs to be said about a subject. This is all that needs to be said about personal finance for high income professionals.
Seeing that Russell Wilson INT was tough. The next Patriots Super bowl win was even tougher I don’t know how the Falcons could blow that lead. If only they just ran the ball the rest of the game….
Well said. Personal finance for docs is extremely simple. Almost everyone plays excellent offense. They do not even need to play excellent defense. Some/ any defense would aid many of them.