By Phil West, WCI Contributor
There’s a simple way to think of net worth: Take your assets, subtract your liabilities, and you’re left with a number that helps you understand how financially stable you are. But when you’re a physician, it can be a little more complicated than just adding and subtracting those numbers—you want to be thinking about expected net worth as well as net worth.
As we discussed in a prior article on figuring up net worth, a formula found in The Millionaire Next Door “discussed a rule of thumb to determine if you were an average accumulator of wealth, an under-accumulator of wealth, or a prodigious accumulator of wealth.” But we also wrote about creating a better and more representative indicator of net worth tailored to physicians, so let’s start there. That formula is:
Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income x Years Since Training x 0.25
As we previously wrote:
“A family doctor averaging $150,000 a year for 10 years since leaving residency should have a net worth of $188,000-$750,000. An orthopedist averaging $500,000 for five years since leaving residency should have a net worth of $313,000-$1.25 million.”
Most people—including some doctors—have a sizable portion of their net worth in their homes. That’s obviously an important component of people’s lives, but it shouldn’t necessarily be where their net worth is concentrated. As Dr. Jim Dahle previously pointed out, “In my experience, the wealthier you are the less of a difference the value of your home should make. That's because, in many ways, a home is generally more of a liability than an asset.”
Stocks, bonds, retirement accounts, investments like land or other real estate assets, and cash holdings (like checking and savings accounts) can make up one’s net worth.
Why Net Worth Matters
We’ll go ahead and state the obvious . . . the greater your net worth, the more comfortably you can live in retirement and the more worth you can (eventually) pass on to your heirs.
There’s at least one advantage that comes from having a high net worth that you might not be aware of. As Investopedia noted, “Investors with a net worth, excluding their primary residence, of at least $1 million—either alone or together with their spouse—are ‘accredited investors' in the eyes of the Securities and Exchange Commission (SEC), and, therefore, permitted to invest in unregistered securities offerings.” Think of an accredited investor as a person with a doctor-like income who is allowed to buy investments, particularly in real estate, that aren't available to those with lower salaries or less net worth.
That’s definitely a “caveat emptor” situation—and just because you can invest in these types of offerings doesn’t mean you should. But it does widen the range of possibilities for where you can put your money.
What Does Knowing Your Net Worth Inform?
As you work on developing your net worth, you want to think about a few aspects of your assets and your liabilities that might inform your future investments and spending decisions.
First of all, you might be working now, but there will come a time when you’re not. There are the expected times—when you retire—and the unexpected times, when you might need disability insurance to help you through an illness or injury. You need to build those retirement portfolio assets for after you stop practicing, and you should invest in insurance or some other backup plan (as we’ve discussed, disability insurance is a good way to deal with the reality that affects one in seven doctors at some point in their careers).
It also helps you ascertain which debts are most important to pay off, so you’re not carrying those liabilites long-term, and what assets to invest in. It’s also helpful for thinking about where your assets are placed—which are stable vs. risky and liquid vs. illiquid.
The closer you are to retirement, you may want to move more toward the stable and liquid ends of the spectrum, but that’s also going to depend on how much net worth you’ve amassed.
Simply put, the more net worth you have, the more flexibility you have.
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