[This is one of my regular columns written for ACEP Now and can originally be found here. Believe it or not, basketball star Shaquille O' Neal is a great example of someone who figured out how to turn income into wealth. This column discusses some of the ways he did so, as well as reveals the true secret to becoming wealthy.]
What are the keys to long-term financial success?
Achieving financial independence is remarkably simple: make a lot of money, don’t spend a lot of money, and make the difference between what you make and what you spend work as hard as you do. Believe it or not, a great example of this method is basketball great Shaquille O’Neal.
You Can't Spend it All
Shaq, like many incredible basketball talents, left college early to start playing in the NBA. Although well-known as a terrible free-throw shooter, he was a prolific scorer and won many awards, including Rookie of the Year, league MVP, and 15 invitations to the NBA All-Star Game, in addition to four championships. However, if you listened to him on TV after a game, you wouldn’t be surprised to learn that he spent a million dollars within 30 minutes of joining the league. This led to a call from his banker, chastising him and warning him he would end up broke like so many other NBA athletes if he kept it up.
Learn About Finance or Be Broke
Shaq apparently took the advice to heart and decided to learn about business and finance. He went back to school, finished his bachelor’s, and then did an MBA. In 2012, he finished a doctorate degree. That’s right: he is now Dr. Shaq. More important, he applied those lessons and turned his high income into a high net worth by purchasing hundreds of businesses, including 172 restaurants, 150 car washes, 40 fitness centers, a shopping mall, a theater, and some nightclubs. I suspect he now earns far more money than he ever did as an NBA star.
Physicians have a lot in common with successful artists and athletes. All three groups enjoy a high income due to unique talents and skills rather than any significant business acumen. All three groups are also well-known to end up broke despite earning millions of dollars over their careers. This is not a coincidence.
Continuing medical education (CME) is a mandatory part of being a physician. There is another type of continuing education you should be doing: continuing financial education (CFE). This is far easier and requires much less time than CME. It can be as simple as forcing yourself to read a financial book once a year, following a financial blog, or meeting frequently with a good advisor who educates you. The vast majority of physicians find personal finance, investing, and taxes incredibly boring and painfully dry. However, if you recall, so was organic chemistry, but you forced yourself to learn that because you had to. You also have to do CFE, or else it may cost you hundreds of thousands, or even millions, of dollars over your career.
Most physicians would love nothing more than to be able to pay a fair price for good advice and have their financial expert take care of all of these financial chores. As I have previously discussed in this column, it is perfectly fine to use a financial advisor, but that does not exempt you from doing CFE. First, it requires a certain amount of financial education to pick a qualified financial planner and/or asset manager among the many salespeople out there masquerading as advisors. It also requires some knowledge to identify a fair price for those services. Second, and more important, your advisor cannot do the most important financial tasks ahead of you, like spending much less than you earn, without your help.
Convert Your High-Income Into Income-Producing Assets
Dr. Shaq might have blown his first million in a half hour. But after he wised up, he became quite good at converting his high income into income-producing assets. Physicians who wish to become financially independent someday must do the same. That means you cannot spend it all; you must carve out a significant portion of your income and dedicate it toward building wealth by paying off debt; funding retirement accounts; and purchasing income-producing assets like stocks, bonds, small businesses, and real estate. If you aren’t sure how much you should be saving, start with 20 percent of your gross income.
Any time you have a lump sum of money, you are faced with a choice. You can spend the lump sum now, or you can invest the money and instead spend the increase from the investment. Your choice isn’t $20,000 now or $20,000 later. It’s $20,000 now or $2,000 per year (or whatever return you achieve) for the rest of your life. The best part about investing (at least successfully investing) is that the original $20,000 is still there. If you change your mind, you can always blow it on a boat later after it produces some income for a few years. Successful personal finance is a lot like weight loss. It is the cumulative effect of thousands of tiny decisions. It is simple but not easy. Just as weight loss follows the first law of thermodynamics, continually spending much less than you earn eventually leads to wealth and, more important, financial freedom.
Relative Frugality
Frugality is the cornerstone of personal finance. The great thing about frugality, at least when applied both to Shaq and the typical doctor, is that it is all about relative frugality, not absolute frugality. Doctors don’t have to wear secondhand clothes or clip coupons in order to spend much less than they earn. Following a simple, reasonable budget will do. I often receive inquiries from residents wondering who they can borrow money from to meet their living expenses. I try to gently remind them that their resident salary alone is the equivalent of the average American household income. Half of the people in our country live on less than a resident salary; there is no reason they should not be able to do so for a few years, even in a high-cost-of-living area. However, they can’t expect to put their four kids into private school, own three cars, have two smartphones with expensive data plans, and still live within their means. You can live like you are rich or you can be rich, but very few will ever be able to do both.
You might not be able to learn much about shooting free throws from the example of Shaquille O’Neal, but you can certainly learn a lot about properly managing your finances. Educate yourself about personal finance, investing, business, and taxes by regularly doing CFE. Convert your high income into wealth by carving out a portion and dedicating it to wealth-building pursuits. Minimizing financial worries will enable you to better care for your patients, your family, and yourself. As Dr. Shaq says, “It’s not about how much money you make. The question is, ‘Are you educated enough to keep it?’”
Why do you think doctors make the same mistakes as professional athletes, entertainers, and artists? Why are doctors, on average, so terrible at converting their high income into wealth? Comment below!
Photocredit: Steve Lipofsky Basketballphoto.com
Another great post by the WCI! My observation is that most MDs would rather live rich than be rich. The first trap is the big house that he/she cannot afford to furnish followed by the leasing of two S-class Mercedes. Soon he/she is skiing in Austria all the while neglecting to begin to save money. When he/she reaches the 40’s the realization that his/her peer who is living in a smaller house driving a less showy and owned car has a much larger net worth. It is really crunch time when the surgery load slows down or the practice overhead jumps and Doctor Spender has trouble making all these life overhead payments.
We all need to treat ourselves a little after residency but just be careful about “I deserve this” thinking.
I personally find that as I get older and am finically secure that I tend to view people who are wearing
expensive jewelry and driving luxury vehicles as people who are probably financially insecure.
http://financialjuneteenth.com/shaq-spent-his-first-million-in-30-minutes-when-he-joined-the-nba/
His education and investments are pretty well publicized. His real skill is diversifying. NBA, rapping, moving, real estate, restaurants. He insulated himself from financial doom that plagues many athletes. The formal education was after his accomplishments and more for his enjoyment.
Don’t forget video game licensing. Nothing like a good round of Shaq-fu
Great article! I am indebted to the financial advice my father gave me when I started my residency. He said, “You can be rich or look rich but you can’t do both. If you decide to be rich, someday you can do both.” Twelve years out of training, I am blessed to have a net worth of several million dollars and live a comfortable life that allows me to give generously. Make the decision early and that can make all the difference in the world. Thanks Dad.
I hope our kids look back on our advice with the same appreciation. Good son. Good Dad. My question to you and your Dad, if you don’t mind, is the following: What is or was the right amount of financial help to give your kids when you are able specific to preventing student loans? I see the value in more help with the idea of building generational wealth. My husband sees less help with the idea of dignity in the struggle. The kids are in the middle. They appreciate our help but as they get older are wanting to do more themselves even if it means some student loans. Would appreciate your opinion having been there and come out in way that sounds like we hope our kids will. Thanks!
It’s a tough balance isn’t it? I hope to strike at a point where the kids have to work summers and in school, and yet finish school without debt thanks to 529s, their own efforts, scholarships, and my then current earnings. I’ve blogged about it here:
https://www.whitecoatinvestor.com/how-my-children-will-pay-for-their-college/
Dr. Mom, I am not sure what the right amount of financial help should be provided to children for their education. I do feel one should secure your own retirement first. We have invested well and our retirement should be secure. I am planning on providing the resources for my children to get their education if they are serious about their studies. I think they should work as hard financially and academically as they can and we plan on making up the difference so they won’t have to accrue debt. I plan on doing this because my parents did this for me and it has been an incredible gift that has made an huge difference in my life. I thank my parents almost every time I see them. At one point, like your children, I questioned why they were doing so much for me but they told me that this is what they chose to do and that my education was their gift to me. I have never forgotten that conversation and that is why I thank them often and feel like I need to pay it forward to my children. I also have to sacrifice less to do this for my children than my parents did for me. On the flip side, my wife got her bachelor’s and master’s without financial help from her parents and there were some benefits from doing that. I do think she would have appreciated some help if it were available. She was the only one who worked during her master’s program and some of her professors took that as lack of dedication. Fortunately, she still graduated near the top of her class and was the first to get a job. I don’t thing there is a right or wrong answer but I appreciate the help my parents gave me and hope to provide that to my children. Good luck!
Thanks so much for your perspective and thought process!
It is a juggling act to balance funding retirement and college education. We like RL consider education as a gift to the children. (Interestingly 529 plan contributions are treated as gifts under tax law). One view point is it is the best gift as investment in education reaps down stream rewards – ‘gift that keeps giving’ as they say. On a philosophical angle, the last dress we wear has no pockets. We leave everything behind. Wouldn’t it better to give money to our children provided one has planned and can afford, (as in college expenses not free spending money) as ‘earned income’ through good grades, motivation to study further etc, rather than passively leave behind to be inherited by them as heirs and blow it all up.
I’m in the boat of helping the kids with school. I love the idea of generational wealth, but as I think about my parents, if they live to be 85, which so far every one of my great and grandparents, except one, have done, I could be 65+ before I get anything, my kids would be 35-45, and probably done with school. So, if they leave me, or my kids, a bunch of money when they go, it will be great and I will enjoy it, but it would mean a lot more now than in 30 years. This is why my wife and I are planning ahead for college, my goal is a good balance. We plan to match what they get through scholarships, work etc., sort of like the “401 Dave” from Dave Ramsey.
I remember my mom getting a $5,000 inheritance from my great grandmother. She was talking about it with me and was grateful, but said it could have helped so much more when they were in school etc. Sadly, now that they are in the position to help, they are relating more with my great-grandmother…. Oh, how time changes the perspective, which is one more reason to write it down so you have a visual goal and it’s not based off of emotion.
Thanks Ricky. I see your point but mine wasn’t about building generational wealth to leave them later. It was helping them now so they leave school including post graduate with zero debt to build their own wealth faster than we did with big loans hanging over our heads. I am very debt averse after living through it. I would rather spend on their education now than leave it later. My husband feels that letting them take some student loans, even if not needed since we can afford to help, teaches some personal and financial lessons. They split the difference between us. They appreciate our help but pull more than their weight with scholarships and jobs. They are at the point (late college) of appreciating what we have done but resisting more. One is headed to med school. The other is entering the workforce as a chemical engineer and could end up back in grad school. I am crazy proud of them both!
Sounds to me like you guys did a good job.
I agree that an inheritance would be most useful in your 20s! Of course you might not have the maturity to use it right until your 40s!
I told my kids that they would get 4 years of college and a car that would last them until well into their first earning years. I don’t think that spoils a kid if you’ve raised them right (and if you can afford it in addition to retirement savings).
They still had to live like “poor kids” because they didn’t get the spending money that some of their friends got from their parents. My jaw dropped when my wife told me what professional friends of ours gave their kids as an allowance in college over and above paying for all of the direct expenses of being in school.
Knowing that the clock was ticking motivated them to work hard and get done in 4 years, because they knew anything extra was going to be on them.
Also, the kinds of loans that the children of doctors can get tend to be loans under very poor terms. It didn’t strike me as sensible to make my kids take out market rate, non-subsidized loans when I could help them pay for it. I would also point out that I set a dollar limit on how much their college could cost and I had them work for me in a family business as a way to help them meet the costs.
After a debt-free college education, harsh as it might sound, I’m of the mindset that you only give to kids who you know are going to make something of it. That means that you are often giving the most to those who already have the most. But to give money to kids who aren’t smart with money isn’t an act of fairness, it is an act of needless waste.
Eh… While they don’t always do it, its quite easy to make money when you have a lot of it.
Also pages of sports history are full of athletes that invested in small businesses only to go broke down the road. Personally I think the sportsman in them “gambles” by taking to much risk on. Glad to see that hasn’t happend to Shaq, but it general restaurants are often not good investments (50% fold in the first 5 years) and commercial real estate can be risky if you don’t have a good person managing it.
Of course one can argue about the actual investments, but the point is he didn’t spend it on a mansion and a 50 person entourage.
True. Also I saw that his “restaurants” are all “Five Guys and Fries”. Historically fast food restaurants tend to do pretty well.
70,000 sq ft is not a mansion or we exclude that? 🙂
http://www.starmap.com/shaquille-oneals-house-in-orlando-florida/
Its not “that” big….
And who DOESN’T have a cigar room.
😉
It’s all about relative frugality, no? Is it okay for a doctor to buy a 4000 sq ft house? Probably? A 10,000 sq ft house, perhaps not. For Shaq, maybe a 70,000 sq ft house is just a cottage. 🙂
I knew I could count on my regular readers for some good feedback!
Since Shaq is 7’2″, he easily needs all 70,000 sq ft….
And based on that math I require about 59,000 sq ft.
Hmmm, something to work toward, although that’s way to many bathrooms to clean. I will just stick with my 4000 sq footer and try and build my wealth and one day own a bunch of Five Guys or Subway’s 😉
You really think Shaq is cleaning the bathrooms?
I don’t have kids so I can’t comment on saving for their education. What I can tell you is that I came to this country at age 18 with $2500 in my pocket. Working about 50 hrs per week during college and maintaining a high GPA to maintain scholarship was no easy feat but I knew it was that or go back home. It taught me lessons about financial management and life skills that make me the person today. Now I am in the second year of practice but still manage to live off on about 20% of post tax income while aggressively paying off loans and saving for retirement. Do I splurge every now and then and buy a few luxuries? Yes. Would I have learnt such careful financial planning if my family had paid my way through school? Probably not. There were times, when working the umpteenth hour at my job, where I wished that I could be like the local kids who had everything provided for them. Now that I look back on things, I realize that the thought of starving or being penniless, forced me to learn financial management to such a degree that I succeeded in graduating with zero loans from undergrad whereas also saving some cash for med school.
Thanks for your perspective!
My parents instilled at a very young age about financial responsibility, saving, and expectations. They were immigrants from Europe in their early twenties; came here with nothing and worked hard for everything.
I grew up in high-middle class area where my family was probably on the “lower” end of the spectrum, however, we still went on family vacations and were able to enjoy life well.
My parents always said whatever we decided to do with our lives they would support us as long as we maintained grades. They felt that paying for our education and giving us a “debt free” start in life was paramount to success and to alleviate a lot of headaches. My parents bought my sister and I both cars and paid for college. They also helped as much as they could with medical school and now I’m in residency with <$60k of debt (when my co-residents have debt up to $400k).
Do I think I was "spoiled?" Absolutely not. I believe it has more with how you are raised and expectations set forth. I worked from the age of 15 through college. This was my spending money (ok, parents gave some spending money also..but we had to work and maintain grades.)
One of the best things they did for me was get a credit card (co-signed) at the age of 14-15. It was used to build up my credit only and used for "emergencies" or "approved purchases" (ie. go to the grocery store or go get gas for the car). Cause of this, my credit score is 790 per my last discover card statement. (Thanks parents!) 🙂
Thanks so much for your comment! Our families also immigrated here from Europe in the last 1-2 generations and stressed education very much which is partly why I feel so strongly about helping our kids with med/grad schools.