By Dr. James M. Dahle, WCI Founder
There is a classic story in Genesis where Esau trades his inheritance to his brother Jacob for a bowl of soup. It demonstrates the high cost of impatience and immediate gratification. A large part of personal finance is encouraging delayed gratification, because far too many people stink at it. However, doctors and other high-income professionals may be the world's experts on delayed gratification, generally putting off any significant earnings until their 30s. This leads many people to mistakenly assume that the physician financial blogosphere thinks they should put off spending and enjoyment for years and years and years in pursuit of a mythical comfortable retirement. The idea often shows up in a question such as:
“When can I start enjoying my money?”
Or a statement such as:
“Living like a resident is stupid when you might not even make it to retirement age.”
The Answer Is Now
I refute the premise of the question. If the question is
“When is it OK to start enjoying your money?”
the answer is right now. Yesterday. Years ago. You should be enjoying it all along. There are five important money activities in your life:
You should learn to do them all well and learn to enjoy them all, whether the amounts are large or small.
However, if the question is really
“When is it OK to spend all my money without regard to my financial goals?”
the answer is never. And if the question is
“Will spending more money make me happier?”
the answer is, probably a little happier, but not as much as you think. And then you'll get used to it pretty quickly.
In Defense of Live Like a Resident
While I can't claim to have come up with the phrase, I have been telling physicians since the first month of this blog's existence to Live Like a Resident for 2-5 years after training. The idea behind Living Like a Resident is to actually get rich first before you get used to living like you're rich. It's an extremely reliable, reproducible method for physicians to kickstart their wealth-building activities without ever feeling deprived. Yes, it's simply delayed gratification packaged up into a phrase that is easily understood by doctors in training, but it works. Maybe it wouldn't have worked for Esau, but it'll work well for anyone willing to do it.
Here's how it works, at least in theory. A typical resident makes $55,000-$60,000 a year and pays a little money in taxes and perhaps saves a little for retirement. Perhaps the resident actually spends $50,000 a year. Then, after completing training, perhaps this doctor now makes $300,000 a year. If that resident will just continue to live that $50,000-a-year lifestyle, that frees up a LOT of income with which to build wealth. Without a doubt, that new attending will pay a lot more in taxes, probably more than was earned as a resident—perhaps $75,000 a year. But even after subtracting that out, there is still
$300,000 – $75,000 in taxes – $50,000 in living expenses = $175,000
to use to build wealth. It really doesn't matter what that $175,000 is used for. Some of it likely goes toward student loans. Maybe there is a private loan or credit loan or auto loan to take care of. Maybe some of it goes toward an emergency fund or a house down payment, especially in that first year. Some probably goes into investment accounts such as retirement accounts or HSAs. Maybe it goes toward buying a practice or buying into a partnership or surgical center. Who knows? It really doesn't matter. Every dollar of debt paid down increases your net worth just as much as every dollar invested.
In practice, it's a little different. Almost no one actually lives like a resident for very long after training. Most people give themselves at least a little raise. Maybe they buy a second cell phone or a second car, like we did back in 2006. Or they replace that car that somehow miraculously got them through residency. And maybe they go on an additional vacation every year. The truth is that most docs can give themselves a 50% lifestyle raise coming out of residency (50% would be huge in corporate America) and still get rid of their student loans, get into their dream house, and build a nice little starter nest egg—all in less than five years. A little lifestyle creep isn't going to kill them; it's the lifestyle explosion they need to avoid.
More information here:
The Average American Household Income
I'm flabbergasted every time I hear someone talk about how underpaid medical residents are. Sure, on an hourly basis, it's pretty crummy if it was just a job and not a paid apprenticeship. But it's like they don't even know that most dental residents don't receive a salary AND are still paying tuition. It's like they don't even know that the average American household lives just fine, their entire careers, on the equivalent of a single resident salary. That's right. Half of America lives on less than a resident salary. Live Like a Resident is not being sentenced to poverty. It's simply saying, “Hey, why don't you just live like everyone else for a couple of years even though you could spend more? It'll be worth it.”
When I hear someone say that they can't enjoy their money and build wealth, what are they saying about everyone else in America? That they're all terribly unhappy, impoverished serfs? Really? That's a serious lack of perspective.
You Can Have It All, Just Not Right Now
As near as I can tell, despite living like a resident (OK, a resident + 50%) for four years and then slowly growing into our income over another few years, we haven't missed out on anything. We didn't get to have it all immediately, but we got it all eventually. Consider the list:
- Big fancy doctor house. Check.
- Brand new expensive cars. Check.
- Bought the latest gadgets. Check.
- Provided every opportunity to our kids. Check.
- European vacations with the whole family. Check.
- Fancy kitchen remodel. Check.
- Eat out any time we want. Check.
- Fancy, brand new boat. Check.
- Go on vacation every month. Check.
- Drop night shifts/call. Check.
- Cut back on days at work. Check.
- Go heli-skiing. Check.
- Give lots of money to charity. Check.
- Be outrageously generous with family, friends, employees, etc. Check.
I don't get it. I don't feel like I missed out on anything. It turns out that a lot of that stuff is just as enjoyable in your 40s as it would be in your 30s. Did we get all that the year I finished residency? Of course not. But we got it eventually. Is it possible I could have died before I got all that? Of course. There are no guarantees in life. But if you live your 30s like you won't make it to 40, then 99% of the time you're going to be sharply regretting it in your 40s, 50s, 60s, and later.
More information here:
Learn from the Stoics
If you want to try to spend your way to happiness, I assure you that you can eventually try. However, chances are good it isn't going to work anyway. While there are ways to spend money that will make you happier (shared experiences with people you care about are usually at the top of the list), trust me when I say the law of diminishing returns will rapidly kick in. The Hedonic Treadmill is far more likely to make you less happy, not more happy, especially if you get on it too soon.
Some Practical Guidelines for Enjoying Your Money
Enough discussion of vague philosophy. Some people really like to have clear, concrete guidelines. Let me attempt to give you some.
#1 Spend Enough to Avoid Feeling Impoverished
This guideline applies even in medical school when you are living on loans. It's like successful dieting; if you're hungry, it's not going to work. You need to spend enough that you don't feel like you can't spend anything. Now you can use that to justify any amount of spending, but be honest with yourself and make sure you always spend just enough to make sure you don't feel impoverished.
#2 Live Like a Resident
A 2-5 year period of intense financial concentration after you finish training is wise. If you're an orthopedic surgeon making $700,000 with $110,000 in student loans, two years is probably plenty. If you're a PM&R doc making $190,000 with $400,000 in student loans, you're probably going to need to go a full five years unless you've got Public Service Loan Forgiveness doing a big chunk of the heavy lifting.
#3 Save 20% for Retirement
After the Live Like a Resident period, you still need to save something for retirement. You can never spend it all. My general guideline for attendings is to save 20% of your gross income for retirement. If you're going for a very early retirement, you'll likely need to save even more.
#4 Spend the Rest
Part of putting together a written financial plan is to determine how much needs to go toward each of your goals in any given month. Perhaps it's $5,000 for retirement, $1,000 for college, and $2,000 toward a short-term goal. Once you have paid yourself first, you should feel free to spend the rest on whatever you like.
#5 Paying Cash Shows You Can Afford It
My favorite gauge of whether I can afford something is whether I can pay cash for it while still meeting all of my other financial goals. If I have to borrow for something, or even if I consider borrowing for it to invest the difference, maybe I shouldn't buy it at all. It's a bit similar to the famous Jay-Z saying:
“If you can't buy it twice, you can't afford it.”
#6 Moderation in All Things
If you find yourself in an extreme position, where you are either spending nearly everything or saving nearly everything, perhaps you ought to reconsider your balance. Moderation in all things is a good motto to live by. It helps you to minimize the regret of spending too much and of saving too much.
If you find yourself asking “When can I start to enjoy my money?” remember that the answer is either “right now” or “never” depending on what you mean by the question. But don't forget to loosen up the purse strings eventually. Your hearse won't have a trailer hitch, and if you don't fly first class, your heirs will.
What do you think? How would you answer the question? How and when did you decide to spend more and save less? If you lived like a resident, have you ever come to regret it? Comment below!