Most of the time my blogging focus is entirely directed at physicians who are and plan to continue making the vast majority of their money from the practice of medicine. I want those docs to stay in practice to take care of me when I get sick or injured but I also want them to get a fair shake from the financial services industry. However, from time to time I try to write a post that might just lift up the curtain on an entirely different world out there- the world of entrepreneurship and the somewhat related concept of passive income.
In some ways, just owning your own practice is becoming so rare that it is somewhat entrepreneurial. But I'm really talking about doing something different from that. Somewhere along the line most of us were told or came to believe that “doctors are rich” and if you become a doctor you'll be one of the more wealthy people you know. In some ways, that's true. Your income will certainly place you into the top 5%, and for many, in the top 1%. If you are smart and carve out a large chunk of that income and use it to build wealth, your net worth will also eventually be in the top 1-5%. By the way, if you're not familiar with the data, an income of a little over $200K gets you into the top 5% and an income of $500K gets you into the top 1%. Those figures aren't too hard for docs to get to. The net worth figures are tougher. A net worth of $2 Million gets you into the top 5% and a net worth of $8 Million gets you into the top 1%. But if you make $200K and save 20% of it a year for 30 years and make 5% real on it, you'll get to $2.6M. The doc making $500K, saving 20% of it a year for 30 years and making 5% real on it will get to $6.6M.
Is There an Upper Limit on My Income and Net Worth?
Many times I've run the numbers and seen what I could get to from a physician income. After a while, the exercise bothered me a little bit. It wasn't that it wasn't “enough,” because it certainly is. It took me a while to put my finger on what bothered me, but what it turned out to be was that I felt capped. As an emergency doc, I love the fact that I have no idea what I'll be doing at work on my next shift. The suspense of not knowing the future is exciting to me. So you can imagine that being able to predict my financial future relatively accurately given my income, savings rate, and return took a lot of fun out of this little financial game. I mean, it's cool the first couple of times you do it. But after doing it a few more times, you realize the answer isn't going to change, and you get a little bored. Nothing wrong with that. You can go focus on those areas of your life that are more interesting- your patients, your family, your hobbies, your skills as a clinician etc. Investing is supposed to be boring, right? But then along comes this idea into my mind that maybe I don't have to be capped. Maybe there really isn't an upper limit on my income or net worth. This is America, right?
Trading Time for Money
I'm no fan of Kiyosaki's writings, but he gets a few things right. One of these is that if the only way for you to make money is to trade time for money, there will be a limit on your income and net worth because you only have so much time. This applies even if you are able to trade your time for money at a very high rate as high-income professionals like physicians, dentists, and attorneys can do. The professions just don't scale well. You can only do so many operations a day. You can only see so many patients a day. You can only bill so many hours a day. Sure, you can hire a few associates and slice off a little bit of what they generate, but in general, you're pretty limited.
But some things in life do scale. There is no practical limit to how many shares of a stock, bond, or mutual fund you can own. The more of them you own, the more income you get and the higher your net worth becomes. Likewise with rental properties. Once you have the systems in place to manage 10 doors, it is not a huge jump to get to 100 doors or 1000 doors. Books scale. No limit. Websites do too. The more pageviews you have, the more value the website has. How about if you design a fancy medical widget? If it is really practice changing, there is no practical limit. You can eventually scale up your manufacturing to make as many as the market will buy.
Aside from scaling, it is also exciting to realize you can make money even when you aren't working. You can make money while you're eating, sleeping, working at another job, or even while on vacation. You can even make money from the work of others. If you are lazy like me, that idea is very enticing. This concept is generally referred to as “passive income.”
Passive income has a technical IRS definition. Basically, the IRS views earned income as active and investment income as passive and allows you to not pay payroll taxes on passive income. But you can't go strictly by the IRS definition. For example, most would consider book royalties to be passive income, but the IRS doesn't. It's earned.
Passive income generally comes in two flavors. The first is capitalism, i.e. your capital (or money) goes to work instead of you. Your money can work in lots of different ways. You can buy stocks, bonds, mutual funds, investment properties, a franchise, an oil well, part of a friend's business and many other things. Then you go back to doing whatever you want to do, and from time to time the investment sends you some money. If things go well, it also appreciates in value so you can eventually sell it for more than you bought it for.
The second flavor is perhaps best exemplified by a book royalty. You put in a bunch of time and work up front to write, publish and market a book and then it continues to pay you a stream of income afterward. Many blog posts are like this. You write them and place some ad-serving code on them. Then, over years, that post makes a little bit of money every day or week. Get enough of those posts, and get enough eyeballs on them, and after a while, the income can add up to something significant.
Passive income is awesome, even if the amount of it pales in comparison to your active income. It's not just awesome because you can be lazy and still get it either. It's awesome because of what it allows you to do. Imagine a doc making $200K a year. Now she figures out a way to get $20K a year in passive income. What can be done with that? Well, if this doc were following my 20% savings rate recommendation, she was saving $40K before. Now she can save $60K a year. Plus she needs less from her retirement portfolio. She moved her financial independence date from 30 years away to 21 years away. Now, what if she came up with $40K a year of reliable passive income? Knock another 6 years off. Now she's only 15 years away. Or perhaps she loves her work and doesn't want to retire early. Instead, she can take her family to Europe each year. Or buy a new car every 2 years. Or start a scholarship fund. Or make major donations to local charities. Or cut back to 3/4 time. Lots of options. You don't have quite as many options as if you were already financially independent, but you have a lot more than what you had before!
There Is No Formula
Every few weeks someone contacts me and asks me how to build a successful business (usually a blog.) They seem to think there is a formula or a prescription they can follow to ensure success. While in any business field there may be some “best practices,” there is no formula that leads to entrepreneurial success. Successful entrepreneurs either do something that has never been done before, or they do it better or cheaper than the existing companies doing it. But this isn't flying a plane or even taking out a gallbladder. You can't just go down a checklist and be sure that when you're done, as long as you followed all the steps, that you'll get to where you wanted to go. It's risky and turbulent and the truth is that most people fail. They fail because the idea was a bad one in the first place, because they ran out of money before they could start making money, because they lacked sales skills, or simply because they found a better use for their time. Doctors in particular fall into this trap because of the way our career path is set up. If you get into the pipeline, and keep your head down and work hard for a decade, you are nearly guaranteed to come out the other side of the training pipeline with a job that will pay you hundreds of thousands of dollars. That sort of guarantee doesn't exist for most fields and certainly not for entrepreneurs.
If you are a physician or other high-income professional and wish to feed your entrepreneurial spirit, here are a few recommendations:
#1 Don't Quit Your Day Job
The biggest issue with an entrepreneurial pursuit is that it fails most of the time. The best way to make sure it doesn't fail is to give it enough time and money to allow it to succeed. Where do you get money? You can either get it from investors (who want to see a return on their investment sooner rather than later) or you get it from work. What would make you run out of time? Mostly it occurs because you run out of the money you need to live and keep your family happy. But if you still have a very good job paying you a very high income, you can use that income for any financial needs a business of pretty decent size may have and you don't have to worry about where the eating money is going to come from. You can stick with it far longer than someone else who doesn't have a good day job, increasing your chances of success.
#2 Minimize Cash Outlay
The less your business costs, the more likely you are to make enough to cover those costs and turn a decent profit. If you can run it out of your home, at least for a while, great! Not only do you get to avoid a major rent expense, but you might even be able to claim the home office deduction if you use that space exclusively and regularly for your business. Sweat equity has an opportunity cost, but at least you can pay it with pre-tax dollars. Many things are far less expensive than you might think- publishing books, starting a website, or registering a business. Bootstrap that business!
#3 Minimize Your Time Outlay
Most successful businesses were started with a lot of blood, sweat, and tears. But be on the constant lookout to make sure you're using your time in the way that is most profitable. For a high-income professional, there is always a high opportunity cost. You can't afford to do stuff that won't eventually have a pay-off, especially if it isn't so fun you would do it for free.
#4 Find Resources for Entrepreneurs
There are Society Of Physician Entrepreneur (SOPE) groups all over the country. Many towns have “incubators” that will provide you office space and mentors to help you succeed. Angel investors provide not only money but experience. The business world is one of connections. Start making some!
#5 Throw Stuff Against the Wall
Throw stuff against the wall and see what sticks. Run it up the flagpole and see who salutes. Throw it in the well and see how big a splash it makes. This is one of the best parts of being an entrepreneur. Sometimes you have no idea what your business will look like in a year or five years. When I started WCI, I really had no idea how I was going to make any money. So I tried to make money in A LOT of different ways. Guess what? Most of them didn't work well. What were once my two biggest revenue sources now account for < 5% of my revenue. The next decent one that came along is also now a tiny contributor to WCI income. Almost none of the things I tried worked well enough to justify taking time away from a profitable practice to do them. But I just kept throwing new stuff against the wall. And eventually, maybe once a year or so, something would stick. A light would pop on and I'd be off to the races with that income source. A year later, I would have another financial win. But in between, there might have been ten things that didn't work. If it doesn't cost too much time or money, give it a try!
What do you think? Do you think doctors should embrace their entrepreneurial spirit? Why or why not? What percentage of doctors do you think have what it takes to start a business? Tell us about your entrepreneurial successes and failures. Comment below!