We have a little tradition here at The White Coat Investor. Each year at Thanksgiving time we make a big push for you to do your annual Continuing Financial Education. As long-term readers will recall, I consider your initial financial education to be reading three or four books and then recommend you follow a good physician financial blog and read one good financial book per year.
Your Initial Financial Education
There are other ways to obtain your initial financial education. One is to meet regularly with a good, fee-only, fiduciary financial advisor and rather than have them do it for you, have them teach you how to do it yourself. A less expensive way to learn how to write up your own financial plan is to take our new online course, provocatively titled Fire Your Financial Advisor. But the old way works just fine too, it just requires a little more effort. I recommend reading one good personal finance book, one good investing book, one good behavioral finance book, and perhaps one good doctor-specific book. There are lots of good books in each of these categories of different lengths, flavors, and complexities, but these are my usual recommendations.
- Personal Finance: The Only Investment Guide You'll Ever Need
- Investing: The Investor's Manifesto
- Behavioral Finance: How to Think About Money
- Doctor Specific: The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
I felt so strongly about these books that I purchased 3 of the 4 of them for every attendee of WCICON18 last March and included them in the swag bags. More recommended books can be found here, but for less than $80, you can know more than most who call themselves “financial advisors” about managing your own finances. In fact, if you're really
cheap frugal, you can borrow these out from your local library. Reading a few good books, searching this site for topics of interest, and asking a few questions in places like The White Coat Investor Forum, Subreddit, or Facebook Group is sufficient to help most people reading this to become a multi-millionaire over the next decade or two. How do I know? Because that's how I did it.
Continuing Financial Education
Now, for those of you who have already completed your initial financial education and presumably have a written financial plan in place, the rest of this week is for you. The idea is to pick out a financial book to read between now and the end of the year. I'll be reviewing a handful of books over three posts this week AND we'll have a book review done by Whitney for your kids to read. If none of these look attractive to you, swing by Amazon or your local library and pick something else out. But read something.
Review of Your Money or Your Life
Your Money or Your Life, originally published by Vicki Robin and Joe Dominguez in 1992, has influenced thousands of people over the last quarter-century to take control of their finances. This was FIRE before FIRE became cool. Mr. Money Mustache, who writes the foreword for the 2018 edition, said
The standard money advice is too meek, claiming that we all have different personal values and we need to follow our hearts. If I love hundred-dollar dinners out and you love expensive cars, that's fine! You can spend on those things you love, as long as you budget carefully to afford it and work hard to make enough money for it. The reality is that most of this is nonsense….Most of us are tempted by the ideas of convenience, status, and luxury, and buying ourselves treats to satisfy these temptations. And we're really good at justifying some of these trinkets as our true passions. The only difference is in which things–and how many of them–we choose to justify. With just a few of the more expensive “true passions,” you can lock up almost any lifetime's income…
Like Mr. Money Mustache, this book falls a little bit on the hard-core side of personal finance, and that's why people love it. It is written in classic self-help book format, with 9 lessons to learn and apply to ensure your happiness and financial stability.
The purpose of the nine-step program in this book is to transform your relationship with money and help you achieve financial independence. The result is liberating your most precious resource–your time–to make room for more happiness, more freedom, and more meaning.
It promises “You'll flatten your debt and develop a natural resistance to spending more than you have for things you don't want to impress people you don't like.”
Step 1 Make Peace with the Past
And they call this making a living?…How many people have you seen who are more alive at the end of the workday than at the beginning?…For many of us, isn't the truth of it closer to “making a dying?”…We are sacrificing our lives for money, but it's happening so slowly than we barely notice. Graying temples and thickening middles along with dubious signs of progress like a corner office, a company car, or tenure are the only landmarks of the passage of time.
Your task in Step 1 is to find out how much money you have earned in your lifetime (hint, most docs can do this by checking their SS tax statement for “Medicare wages”) and then determine your net worth, i.e. what you have to show for it. I firmly believe this is the best place to start any financial makeover. You've got to know where you stand.
Step 2 Being in the Present- Tracking Your Life Energy
Money is something you trade your life energy for…The only real asset you have is your time. The hours of your life….Knowing that money is simply your life energy puts you in the driver's seat of your money life. How much of my life am I willing to sell to have money in my pocket?
Your tasks in this step are to establish the actual costs in time and money required to maintain your job, compute your real hourly wage, and to track every cent that comes into or out of your life. I think the “hourly wage” is particularly useful. We're talking after tax, after tithing, after the expenses of maintaining that job. You might be horribly depressed to realize just how little money you're trading your life for, and that's likely to make you a lot more frugal.
You knew it was coming. Here's where you make a budget.
Step 4 Three Questions That Will Transform Your Life
The three questions are:
- Did I receive fulfillment, satisfaction, and value in proportion to life energy spent?
- Is this expenditure of life energy in alignment with my values and life purpose?
- How might this expenditure change if I didn't have to work for money?
The idea behind this chapter is to really think about what you value and examine whether your spending is in alignment with your values. Most will probably discover that it isn't, and thus spend less (and get to financial independence faster).
Step 5 Making Life Energy Visible
At this point in the book, you're likely getting bogged down a bit. You're already 170 pages in or so. The good news? If you walk away now, you may feel a bit like a failure, but you also got 95% of the value of the book already. The idea behind this chapter is to keep your finances in front of your eyes and in front of your mind. You're actually supposed to make a chart of your monthly income and your monthly expenses, put it on the wall, and maintain it with new points on the graph each month.
Step 6 Valuing Your Life Energy–Minimizing Spending
This is where the book goes hyper-frugal. This chapter is full of all kinds of ways to save money. I've never been a huge fan of texts on frugal living. The truth is a typical reader of this site doesn't even have to be frugal to be financially successful. You can spend the entire income of a typical American household and reach financial independence in less than a decade. But somehow we've made out “living like a resident” to be some huge sacrifice. Maybe docs should read a frugality book or blog to realize what an average earner has to do to become rich. If nothing else, you'll be dramatically more grateful for your income. At any rate, if you can't imagine how somebody lives on $20-30K a year, this chapter alone will be worth the cost of admission. It includes a list of eleven sure ways to save money.
- Stop trying to impress other people
- Don't go shopping
- Live within your means
- Take care of what you have
- Wear it out
- Do it yourself
- Anticipate your needs
- Research value, quality, durability, multiple use, and price
- Buy it for less (i.e. bargain or get it used)
- Meet your needs differently
- Follow the nine steps of this program
Step 7 Valuing Your Life Energy–Maximizing Income
I like this chapter because it focuses on breaking the link between work and wages. It points out there are multiple reasons to work:
- Earning money
- A sense of security
- Time Structuring
As I've reached financial independence and dramatically lessened my needs for the first two purposes, the others have become much more meaningful to me. But your task in this chapter is to increase your income by exchanging your life energy for the highest pay consistent with your health and integrity. I am so happy to see this chapter in the book because I think way too many people, including finance bloggers, give increasing income way too little time. Having doubled my income over a dozen times in my life, each time I've been surprised by how easy it has been to do. I assure you it is far easier to get rich on the income I had in 2018 than the income I had in 2008 or 1998.In the summer of 1996, I had a job mowing lawns making about $1000. The next summer, I did a research gig and mowed lawns and made about $5K. The following summer, I made $13K. Yes, I had to hustle for tips and work a ton of overtime on a train in Alaska, but I did it and reaped the rewards. In medical/graduate school, my wife and I made about $20K a year. As a resident, it became $40K. Upon joining the military, that increased to a little over $100K a year. After two years, I started moonlighting and nearly doubled my income. Four years later, I made partner in my group and doubled my income again. At that point, I developed a completely separate source of income, which has basically doubled annually for the last 8 years. I keep expecting it to stop eventually, and trees don't grow to the sky, but so far so good. I think most people dramatically underestimate their ability to increase their income. The first step to doubling your income is believing you can actually do it.
Step 8 Capital and the Crossover Point
The idea behind this chapter is to track the money your capital is making. The crossover point is when your capital is making as much as you're spending. This line also goes on that monthly tracking chart on the wall.
Step 9 Investing
This is definitely not the most important part of this book, nor is it even particularly well done. I think there is way too much focus on investing in treasuries and socially responsible investing, but it does mention index funds and real estate–my two main investments. But I do think something needed to be said about investing in the book, so here you go.
If you've never been exposed to the ideas in this book, this will be well worth your time. It isn't super entertaining, but if you aren't already financially independent or on a steep trajectory toward it, implementing the ideas in this book will put you on the right path.
Review of The New Millionaire Next Door
The Millionaire Next Door was published in 1996 and became a classic of personal finance. Its message is so important, particularly for my readers, that I basically dedicated an entire chapter of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing to reviewing the most important parts of it. The book has received tons of criticism, the most frequent of which involves the fact that the “studies” it contains simply show correlation and not causation. It has also been accused of being somewhat sexist since most of the examples in it involve men. The latter criticism was somewhat remedied by the follow-up book Millionaire Women Next Door.
The original book was written by Thomas Stanley and William Danko. Stanley died in 2015 and Danko in 2018. So who wrote The Next Millionaire Next Door? Well, the listed authors include Stanley and his daughter Sarah Stanley Fallaw. Given that Thomas died 3 years before publication, I'm going to give her most of the credit. She says:
My father never wanted to create a second edition of The Millionaire Next Door, a book that has become a classic since its publication in 1996, partly because he preferred to create new works for his readers that offered different (or fresh) viewpoints on the topic of affluence and building wealth in America. His follow-up works included The Millionaire Mind , Millionaire Women Next Door, and Stop Acting Rich. The research and development for this book began in 2012 in anticipation of the 20th anniversary of the publication of The Millionaire Next Door in 2016. The original aim was to examine trends over time related to some new topics, as well as to include comparisons to the data collected for my father’s prior works. Together, we decided to take another look at millionaires in the United States to examine what (if any) changes could be seen 20 years after the original publication of The Millionaire Next Door , as well as years after his other works. Our objective was to re-examine the key behavioral traits of millionaires next door while also considering what building wealth looks like today.
So, he didn't want to create a second edition, but that's pretty much what they did. That's good. It needed to be updated. I thought it was also improved. This is the premise of the book:
The research revealed that wealth could be achieved via our own behaviors; there were no preconditions such as privileged birthright or ethnicity. Despite sensational headlines to the contrary, it is still possible today to build wealth without a lump-sum inheritance or a lucky lottery ticket. So long as the freedoms that we enjoy exist in the United States, there will be individuals who will build wealth, not because of luck or the color of their skin or their parents’ success, but because of the goals they set, the behaviors they employ to reach their goals, and their ability to ignore distractions and naysayers along the way.
It was nice to see the first chapter give a shoutout to FIRE bloggers (and Mr. Money Mustache in particular):
Today, more than 1,700 blogs related to FI/RE can be found ranked on Rockstar Finance (a sort of directory for the FI/RE community). Most involve some variation of a similar theme: a focus on saving money and being able to do what you want with your life as soon as possible. Many bloggers in the community reference The Millionaire Next Door as a transformative work in their journeys.
I don't know that I'm a FIRE blogger, but I certainly am both FI and a blogger and I agree the original work had a significant influence on my life. Not that I really enjoyed the book; it's no Harry Potter. I once suggested it to Cindy, who works here at WCI and is now well on her way to FI. She read about half of it, bogging down somewhere in the chapter on the cost of the watches millionaires wear and said, “I get it. Rich people don't act rich. Do I have to keep reading the rest?” The answer, of course, is no. That's the point of the book. Wealth is what you don't spend, not what you do. Wealth is what is left over after the spending. Income is not wealth. For most of us wealth is what you carve out of your income and grow through the magic of compound interest.
- 61 years old.
- Male (87%).
- Married (69% on first spouse, 25% on second.)
- 80% believe their spouse played a critical part in their success.
- Median income $250K.
- Median net worth $3.5M.
- 93% have a college degree and 60% have a graduate degree.
- 20% retired. The other 80% average 45 hours of work a week.
- 90% are self-made, reporting no gifts or inheritances from relatives.
- 70% know what they spend on clothes, food, etc. and 60% have “always been frugal.”
- 77% haven't been inside a store on Black Friday in the last 5 years.
- 70% say they know more about investing than the average person
- Only 1/3 use a financial advisor.
The second chapter discusses the “myths” out there about millionaires. If you've ever listened to a Dave Ramsey Millionaire Theme Hour episode, there won't be any surprises here. The overall attitude of this chapter and the book as a whole (aside from a few minor caveats) is that if you really want it, you can do it.
The third chapter discusses influences on wealth, and gives the advice “Never tell your children you're wealthy” and “Being Frugal is the cornerstone of being wealthy. Like the original, the rest of the book alternates between statistics about the wealthy and anecdotes from real life wealthy people. If you're like most readers, you'll find some inspiration there. One funny part of the book is the list of occupations of millionaires. As you might expect, physician, nurse anesthetist, and dentist all made the list. So did orthopedic surgeon. Yup. That's it. The only medical specialty specifically named on this list of 69 professions. Take from that what you will. Perhaps Sarah doesn't think orthopods are real docs. Or maybe they do so well financially she felt they deserved a special mention. Dunno.
Overall, I think the book is a significant improvement from the original, not just an update. Katie and I are putting together a list of financial books we expect our kids to read before leaving home. This book will be on it. In fact, either one of these two books reviewed today could easily substitute as the “personal finance” book in your initial financial education.
What do you think? Have you read the new Your Money or Your Life or The Next Millionaire Next Door? What did you think? Comment below!