[Editor’s note: The following post is by ESI from ESI Money, a blog about achieving financial independence through earning, saving, and investing (ESI). It’s written by an early 50s retiree who achieved financial independence, shares what’s worked for him, and details how others can implement those successes in their lives. He also has a free ebook, Three Steps to Financial Independence. We have no financial relationship.]
It's almost a cliché that doctors are bad at managing money. Just Google “why are doctors bad at managing money” and you'll get over 35 million results!
There's much debate on whether or not this is true (though below we'll add some facts to the argument), but even if we assume it is, most people would give doctors a bit of a break here. After all, many doctors became high earners not because they were greedy, but simply entered a high-paying career for altruistic reasons — they wanted to help people. So most would give doctors a pass even if they aren't the best money managers. They never set out to be.
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But you know who did? Business executives. These greedy little boogers are all about money. That's why they go to business school — to make money. They get MBAs to make even more. They climb over the top of each other to earn more. And almost none of them go into business for a higher calling other than to make a boatload of cash.
So it might surprise you to know that executives are bad at managing their personal finances. In fact, their finances are often in shambles. They deal with and manage money for companies on a daily basis and yet their personal finances are a mess. This is why I'd say they are worse than doctors — executives should at least know better.
How do I know this? Part fact and part experience.
As for fact, look no further than the book Stop Acting Rich, written by The Millionaire Next Door author Thomas Stanley. He conducted research comparing high incomes versus high net worths to see which professions were best at turning their salaries into wealth. Top of the list? Engineers and farmers. Executives (managers) were close to the bottom. The only professions worse were attorneys, chiropractors, and physicians/surgeons. Guess the doctor stereotype is true after all.
[Editor's Note: As discussed in The White Coat Investor: A Doctor's Guide to Personal Finance and Investing, remember that Stanley and Danko's simplistic formulas and thus the conclusions drawn from them are fundamentally flawed as they do not account for a physician's late start and debt load. That said, I'm a firm believer that their conclusions are right anyway!]
As for experience, I know because I lived among executives. In fact, I was one of them (MBA and all). For 28 years (20 at vice president level or higher) I worked at Fortune 500 companies all the way down to $10 million businesses, eventually becoming the president of a $100 million company. Along the way I made many friends who shared their finances with me (I always had financial books in my office, so it was a natural topic of conversation) and I can tell you I experienced exactly what Stop Acting Rich found — executives' personal finances leave a lot to be desired.
I'm going to share four (of the many) stories from my career that illustrate this issue. Then we'll take some time in the comments to chat about why a group that seems positioned to do well financially is falling on its collective face.
President With Cash Flow Issues
I was the vice president of marketing for a $300 million retailer. One of my projects was to create a company-branded credit card (BTW, a company-branded credit card is a gold mine — for the company). A key part of this process was selecting the bank that would issue the card.
I started out with ten or so bank options, then whittled them down to five. We had those five come in and present at our company headquarters. The meetings were attended by bank executives (three people or so — the stodgy, full-suit-wearing types you'd expect) and a group on our side (me, my director of marketing, and the president of our company.)
During one of the presentations, my president asked the bank representatives a question. The conversation went something like this:
President: Do you put inserts into your card statements?
Bank representative: Yes, we often include various offers we think customers will like.
President: How about those checks where a consumer can get cash and it's charged to their credit card? Do you have things like that?
Bank representative: Yes, we send those out maybe a couple times per year.
President: You know, I just discovered that those carry very high interest rates…
Bank representative: Uh…
President: Did you know that?
Bank representative (loosening tie): Uh, well the rates are in line with industry averages.
President: Well let me tell you this. I was having some cash flow issues so I filled one of those out. And I discovered how much those rates were when I was later charged for them. Very high. The rates are very high.
Bank representative (starting to sweat through his Brooks Brothers suit): Uh…
At this point I was trying to crawl under the table from embarrassment. I had spent months with this bank negotiating back and forth, creating a professional image for our company, and developing a solid business relationship and now my boss was looking like the Barney Fife of money managers.
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Let me say that this man was very accomplished in his field. He was the president of a $300 million company. He was sharp. He had worked at Walmart in the early days with Sam Walton and had cashed out a good amount of Walmart stock years later. He had taken our company private, then sold it to private equity investors for a near fortune. Many executives made a bundle (before I got there) and his take had to be even bigger. Finally, his salary had to be good because mine was good and I worked for him.
And yet:
- He had cash flow issues.
- He didn't understand how to read an offer.
- He didn't know that credit cards (and associated products) had high interest rates.
Ugh.
If you're wondering how it turned out, the bank executives looked at me and I mumbled something like, “We should get back to the presentation.” After it was over one of the bank guys asked me in private, “What was that all about? Is he clueless?”
What could I say?
The Subordinate with Cash Flow Issues
Unfortunately, it's not just my bosses who have trouble managing their money. Of all the awkward conversations you can have with an employee, their personal financial situation is among the worst. But that's what I had to do with one employee. Twice.
We had company issued credit cards that had to be paid off every month in full. This was no problem since 1) we were only allowed to charge company expenses on the card and 2) the company reimbursed us within days of completing an expense report so we had the money prior to the credit card bill being due.
On two different occasions I was asked to come into my boss's office and told that my second-in-command, a guy making $90,000 a year in the 1990s, had not paid his credit card bill that month. The boss said I needed to talk it over with him. The first time it was more of a “find out what's going on” issue while the second it was more “tell him if this happens again the card will be taken from him” conversation.
So I went to my employee and brought up the subject, which was awkward in and of itself. Each time he said he had “cash flow issues” and just couldn't afford to pay it off. I asked about the reimbursement checks the company was giving him. Those were supposed to cover the card's charges. So what was the problem? He said he used the reimbursement money for other spending and couldn't pay the bill as a result.
I wanted to ask him if he was a financial moron. Instead I told him that if it happened again his card would be closed. It was never a problem after the second visit.
It should be noted that this guy handled our department's budget and he was very good at it. He saved the company a ton of money and could squeeze a nickel out of a penny. And yet at home he was having cash flow issues.
Living Paycheck to Paycheck (or Worse)
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Fast forward to when I was company president. I hired a high-powered consultant to help us with strategy and program implementation. He was very accomplished and had been for three decades. He consistently talked about how much money he made, the expensive trips he went on, and other aspects of living the high life.
I first met him 20 years earlier and we stayed in touch. So in addition to being a business acquaintance he was a friend. He was also a mentor, helping me as I confronted the challenges of being a first-time president. I actually had two money-related incidents with him, one personally and one through a very close friend.
The first was when the consultant and I were having a private conversation before a meeting. He said to me, “There's a rumor going around the company that you may only be here five years.”
I said, “Yep, that might be true.”
He asked, “Why is that? Is it because you have a boatload of money saved up?”
“Yep.”
He then proceeded to tell me how he could be retiring (he's about 10 years older than I am — in his early 60's) but this happened, that happened, and so forth. Basically he spent too much and made bad investments. But that was only the tip of the iceberg. I didn't know how bad it was.
A couple years later a close friend of mine was working with the consultant (I had since left the other company and I was no longer working with the consultant). The friend did some sub-contracting work for the consultant and was owed about $6,000. He had tried and tried to get paid, but the consultant gave him one excuse after another, then promised payment several times only to not pay. In the end the consultant told my friend that expenses were just too high to pay him (remember, the consultant had been paid by the company and yet hadn't passed that money to my friend). The consultant said he had to travel to Europe with his daughter, needed to take his wife on a tropical vacation, and so forth. As such, he just couldn't reimburse my friend.
Basically, the consultant was living paycheck to paycheck to fund an extravagant lifestyle. At this rate he'll never get close to retirement. No wonder his wife keeps working as well — she probably has to.
Executive Without $2k to Spare
Another executive was a really good friend as well. Our wives were friends too. We went out together several times, our kids played sports together, and we visited each other’s homes.
One day we were chatting at lunch. He said he wished he could make some simple remodeling changes to his basement that his wife really wanted. I asked why he didn't. He said they didn't have the money to do them.
I asked what the cost was and he said “somewhere around $2,000.”
First of all, this doesn't seem like that much money to me, especially for a vice president of a company who's probably making $150k a year (20 years ago too!)
Second, I knew he had just gotten a large bonus since our entire leadership team did (from the credit card deal I talked about above). He had probably received close to what I did, somewhere around $15,000.
“What about your bonus?” I asked. “Why don't you just use part of it?”
“We can't,” he responded. “It's part of our budget to cover basic costs.”
At this point I was surprised that he even had a budget, but I asked, “So you count on earning your bonus to make your budget balance?”
“Yeah,” he replied.
“And you don't have $2,000 saved to do what you want?” I asked.
“Nope. Don't have any savings at all,” he responded.
Ugh.
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BTW, this guy's job dealt with products, margins, and sales EVERY DAY. He was a master of making things work financially, getting good deals, and meeting or exceeding his financial goals. At work. At home, not so much.
So What's Going On?
Why are executives in this mess? Why don't money principles they learn on the job and apply every day seem to filter into their personal lives? Granted, the financial issues aren't exactly the same, but many of them translate (balance sheet = net worth statement; income statement = cash flow plan/budget; budget = planned expenses). The principles are pretty close to being the same.
I'll offer a couple suggestions, then leave it open for comments below:
It's likely due to the same issues that plague all those who suffer with money issues. As our own Dr. Dahle commented on Investopedia:
“The common reasons that most people struggle with money apply to doctors. These include, a lack of financial literacy, poor financial discipline and a lack of long-term perspective.”
I'm guessing it's the same with executives. Despite having plenty of opportunities to connect the dots, somehow they don't apply their business skills to their finances. Maybe because they see them as two distinct issues? Maybe they think because they are high earners that things will be fine on their own? Or maybe they just get caught up like much of the rest of America and want it all (and then some).
Of course a few simple money tips could straighten them out in no time. This money stuff isn't rocket science, after all. It's common sense mixed with a bit of knowledge and a lot of discipline — all qualities executives are supposed to have in abundance.
But for now, dear doctors, rest assured that you are not alone in the “don't know how to manage money” camp. Your neighbors, the executives, who should know better, are there to keep you company and deflect at least part of the ridicule.
As for the attorneys, they're probably hoping that someone dares to try and ridicule them. 😉
What do you think? Would you have guessed that many business executives can't manage money either? What is it that keeps otherwise intelligent people from being able to do this? Comment below!
Some people just have to keep up with the most irresponsible (or perhaps wealthier) people that they know. Some don’t know how to say NO to their family, and some are just stupid. I bet that there are plenty of MBA’s who have good control of their finances and investments. This is a great take to caution people not to make the same errors.
As a former chiropractor, I have at least 2 (also former) colleages that read this blog.
I laughed out loud when I saw that chiropractors were attempting to be as extravagent as an attorneys, physicians and the big dog surgeons.
85% or more of chiropractors can’t open a practice due to $200,000+ student loans.
The vast majority make under $60,000 as a salaried employee so attempting to ‘act’ like someone who is has material wealth is a fools errand.
I’ve already passed this along. Great work! Keep the pragmatism coming…and stay out of the chiropractic field, it has been a terrible business to be in for a long time now with a terrible ROI.
Thank you!
Some folks take a while to catch on to real life.
I work all day with Executives of a Fortune 100 company. I can tell you they are incredibly smart people…. but there are different kinds of intelligence. One has worked in Economics for about 3 times as long as I’ve been alive and is sharp as a whip, but he cannot do the most basic things with technology. I think the same thing can be said about their personal finances as well, although most of my execs seem to be on top of that kind of thing. It is interesting being around them and seeing how they live their lives with money being no concern. Second vacation homes, trips to exotic locals for Christmas, nice cars, and supporting their adult children are just some of the things I’ve noted so far.
Regardless of profession, the “American Dream” and keeping up with the Joneses has been screwing people over. I personally have known far too many financial advisors, mortgage brokers, and bankers whose own personal finances were in shambles. Over leveraged and always having to buy the bigger house and newer car. Perhaps marketers have done too good of a job of selling people stuff they don’t need.
So true!
My domain just happened to be executives but it’s probably true that many people in most professions have these same problems — because most Americans have these problems.
That said, I wanted to write this piece because 1) doctors get stereotyped as being bad with money when they certainly aren’t the only ones with these challenges and 2) you would think that business people (who deal with budgets, financial statements, spending, etc.) all day would have a better clue!
It’s like your fat diabetic doctors who smoke and don’t take care of themselves at all. Their lifestyle and their work is a complete dichotomy.
I worked with a family doc who was ~5’10” and easily over 300lbs. He’d always tell me “I was skinny like you once!” Or he’d say to his patients “you need to lose some weight, but hey, I can hardly talk”
Exactly! I cold not agree more. As president of an $80 million firm I see such behavior on a regular basis. Granted, I made many of the same mistakes as a younger man. However, as a voracious reader and child of depression era parents the lights finally came on. The key was 20 years ago and the date I picked up POA responsibilities for my parents when my mother became terminally ill. I started paying attention. I saw how someone who earned $100 a week in the 70s and always worked a second job ended up with a sizable net worth now as a 90 year old. He still drives a 20 year old van though I could buy a new one for him. He still lives in the house he moved in 50 years ago this month. (Still pink tile in the bathroom!)
No one needs a new car or a show-off vacation. I drive a three year old Camry Hybrid and an eight year old truck and enjoy simple and accessible vacation spots. Truth is that our kids would likely appreciate in the long term more family time at nearby cabins or campsites in the mountains.
Getting over the need to compete with friends and neighbors is essential in order to develop financial stability. Talking with family members about what is really important and why decisions are made as they are in regard to finances can bring a financial house in order and have the marvelous side effect of strengthening family relationships. More talk. Less needless spending.
SOME of these cases may be marital in nature. Case history: economics professor. High IQ high social IQ pretty crappy common sense IQ but other family members have kept him out of trouble. Married to a fellow farmer’s kid for 20 years until she ran off to California. SHe had always complained he was tight with money- he’d never even let her buy a new couch. Fast forward, he remarries. A city gal with some bad luck who’s lived on relatives and even food stamps and welfare for some time, ex-husband bad with child support. SHe thinks she has married a rich man! And relatively speaking, she has.
The first set of kids are astounded and angry that they spend plenty of money on her kids but he can’t afford to travel to the older kids’ weddings. Oldest kid gives him an old car and soon after he’s buying his stepkids parochial school and cars of their own (never happened for the first set). Older kid helps him make a budget- it’d work except for about the amount he can’t possibly quit spending on the deluxe cable plan and cell phones with data for everyone even the preteen kid. All in all the new wife mothers differently than the first one and it takes more money than for his first set of kids, and he doesn’t stop it. And he reaches 80 without losing his house or going hungry, so who’s to say he’s made a mistake? But the bank will no longer raise their home equity ceiling and he may leave his much younger widow living on social security only as they’re tapping his TIAACREF to empty it before he hits 83.
Older kids eventually decide they aren’t going to change, but they won’t finance it. And when they run out of money step kid knows and expects they’ll have to move in with her. Older kids might send her some money after they feel like she’s repaid all the money dad spent on her that he never spent on them.
That story doesn’t sound very hypothetical.
Thanks for sharing the stories. It honestly makes me sad to hear all of these people bumbling around financially. I did it for a few years too. I suppose if you do not have an aha moment, then maybe you will be stuck spending more than you earn for ever. It takes a real mindful and directed approach to cut spending and start saving.
I think for many doctors the “aha” moment is getting out of residency, realizing it’s time to pay off all those med school loans, and trying to figure out how to make that work- cash flow, expenses, how to prioritize loans vs retirement accounts, etc. At least that’s when I started reading more about personal finance
We are our own worst enemies. MBAs, PhDs, MDs – all bright people who cannot get the behavioral angle right.
I believe Fidelity has done a couple of studies and have come to the conclusion that their best performing accounts belong to dead people. Once we get ourselves out of the way, investing is easy.
KJF
I think most have concluded that said study was apocryphal as no one ever seems to be able to locate it.
These comparisons between professions are pretty much worthless. The truth is most people in most professions are poor at finances. We only hear about the doctors and such because they have so much more to lose. I have tons of friends who dont make much money and all of them are just as bad. There is a subset of all professions who “get it” and make good financial choices. Additionally the fields that make lots of money have people preying on them pretending to give good advice so they actually are at a disadvantage.
I agree, it is the shock value of someone making a large amount of money and still ending up broke that we hear about and makes for a more entertaining story. Broke athletes (see ESPN 30 for 30 “Broke”) are a great example.
I also witness similar stories of excessive spending with no real savings plan for the future in my friends and own family. They are hard working middle class people. While they lack education about the detailed financial topics discussed on this blog, they totally understand the advice about saving for retirement. Mostly, the issue is silently ignored and never talked about. Like a form of denial. If the topic is brought up, they just reject it and don’t care. They live for today. They tell me that when they are old and can’t work anymore, that they’ll be in the nursing home sitting right next to the guy with a million dollars in his bank account. He’ll pay for his care and they won’t.
Makes you wonder if the “denial” is so illogical at all, doesn’t it?
Well, maybe not entirely. Somebody with a million dollars could fund 24/7 care at home for several years, as presumably they’d have no other expenses.
So maybe, this Ramsey guy, who preaches that finances are mostly behavioral, is onto something after all.
Thanks for sharing your stories here, ESI Money. I think the moral of the story is that you’ll have under-accumulators of wealth (UAWs) pretty much anywhere you might find the possibility to obtain wealth.
Even the professions better known for earning, saving, and investing wisely (engineers & farmers) will have plenty of anecdotal stories of high-income earners living paycheck to paycheck. What makes these stories stand out is the fact that it is essentially the job of the execs to grow and manage corporate wealth. One would think that would give them a leg up in their private lives.
Cheers!
-PoF
“What makes these stories stand out is the fact that it is essentially the job of the execs to grow and manage corporate wealth. One would think that would give them a leg up in their private lives.”
EXACTLY!!!!
Thanks for getting to the heart of the matter. 😉
Speaking of farmers, the saying goes “The bigger the hat, the fewer the cattle.”
This saying is a reflection on exactly what we are talking about here- those who spend more on frivolous things like attempting to show off will accumulate less wealth.
So true…. I once had a boss, VP Marketing, probably making $250K or more, showing off his Breitling collection, driving 911, dine and wine. He scoffed at our marketing executive when it came bonus time, saying that although the bonus is not much, but it could help her with a few car payments. She was driving a Lexux ES that she paid in cash, brand new. She told him, she had never carried a car loan, she paid cash. He was muffled and asked how can anyone have that much cash!
Well… the joke is on him….. never liked him!
As a marketing executive who’s met many other marketing executives this story made me smile.
I’ve met several people like the VP you describe.
HAHAH
I visit San Antonio TX a lot- though any big city may be the same- and often envy the lovely perfectly coiffed women in big SUVs probably living in the lovely sprawling homes with plenty of trees in well manicured lawns and gardens. Got over myself (sort of) when I recognized that I certainly could also have all that- if I got a mortgage costing 1/3 our prior max pay and bought my cars and paid my gardener on time, requiring us both to keep working full time forever instead of retiring around 50 as we have- and that some of those I envy are one divorce, illness, or bad sales month away from losing it all.
Then I thank my lucky stars I know (financial) freedom is worth a lot more than any material thing I see there.
Completely agree, the only thing I have a strong desire to buy at this point is my freedom.
All these executives are dealing with their company’s money.
At home, it’s Personal Finance.
Personal Finance is 90% about personal issues and only 10% about finance
BIngo! I like your quote!
I worked in institutional finance and the dirty little secret is that the smart guys had Vanguard accounts. We sold Active, but bought passive. 🙂
if only investors could be led to a few good short books on personal finance they would digest this stuff in a minute
I once had a cash flow problem, too. I once let $400,000 pile up in our checking account, not quite knowing what to do with it.
There are definitely first world problems to have. I think I’ve got more than that right now, but the vast majority of it is earmarked for something (mostly taxes but also business expenses like the scholarship and conference expenses) and I’m just not comfortable investing money I know I’ll need in a few months in any manner that isn’t very safe.
“a lack of financial literacy, poor financial discipline and a lack of long-term perspective”
Just speculating here, but I think many highly compensated professionals suffer from the second issue of “discipline”, especially those whose jobs involve budgeting: it’s hard to explain away lack of financial literacy or lack of long-term perspective with them.
Assuming the theory of ego depletion has merit, this becomes readily more understandable. After working long hours and disciplining and applying oneself to one’s profession, it might become all too easy to fall into the trap of splurging.
The growth of index funds and the increased participation in them is proof that Americans are getting educated. Think about 40% of mutual fund sssets are in index funds
This isn’t directly relevant to the post, but it resonated with me in a different fashion. I obtained my undergraduate degree in business, but it was going through those classes that convinced me NOT to pursue it as a primary career.
I had long had medicine as a career option in the back of my head (I’m from a family of doctors) but had mostly rejected it as I had this desire to do something “business” related (without a clear plan of what that meant).
However once I more routinely collaborated with business professors and students in class, I realized I had a different worldview, and I often did not enjoy interacting with them on a personal level. I enjoyed learning the material and the classes themselves, but I couldn’t imagine them being my future co-workers. Our short and long term motivations and worldviews just seemed to different for me to enjoy having them as future co-workers and bosses.
So I finished the business degree while also completing pre-med classes and went into medicine instead. I do wonder if I should have obtained an MBA (a decade ago — probably will never do it now) so I could have more aggressively pursued some healthcare related entrepreneurial projects. Still possible without the MBA (look at WCI), but perhaps would have led me down a different path.
Interesting. Thanks for sharing. I agree that I prefer interacting with docs than the business world (although that’s fun too in different ways and very refreshing at times), although I find doctors’ lack of financial and business sense bewildering at times.
Attorneys are even worse, because most make similar or less money but at the same time hold themselves in higher regard, higher prestige, with a commensurate higher lifestyle.
And then for the attorneys running their own firm, their income peaks and troughs severely as the work comes in (or doesn’t), damages are awarded (or dismissed), etc.
This post made me laugh, as I sit on my porch at 10am on a Friday morning drinking my coffee. As a 52 year old, former business executive and Vice President in the Pharmaceutical world, I can tell you first hand, that the business world is full of executive personal financial failures. I happily retired earlier this year after 25 years in the industry. I was always saver, and also invested heavily in the rental real estate market on the side. I’ve had hundreds of conversations with co-executives and employees over the years, trying to help them correct their personal financial situations. Few listened, and most are still working and will continue to work for the foreseeable future. Sadly, most are just one paycheck away from utter financial ruin. It’s visible in the simplest areas of life. For example, I still continue to drive my ten year old (bought used) Ford F-150, that allowed me to invest the last ten years worth of car allowances in rental properties, while my friends drove BMW’s, Mercedes, and Porsches, all the while complaining about car payments and bills. It never ceased to amaze me how bad business executives were with their personal finances. It’s not financial illiteracy IMO. It’s simply a lack of discipline. It goes back to the study of small children given marsh mellows. Most eat them immediately, very few had the discipline to wait… Those children grow up to be executives, doctors, lawyers, etc.. I’m going to go enjoy my second cup of coffee now…
It’s funny that I read your comment while also enjoying my coffee at 10 am. 😉